Firms strive for economies of scale

For most consumer companies trading throughout the European Union, the revolution has already come.

Development of the single market conceived in the mid-1980s by Mr Jacques Delors, then European Commission president, means that few in this class of companies now maintain separate organisations in every EU state. The bigger multinationals have long been reorganising their supply chains across European borders.

That strategic restructuring has been driven by supply-side, cost-cutting, considerations. Monetary union, however, will introduce a new demand-pull stimulus: suppliers that continue to operate differently from state to state will find themselves at a competitive disadvantage. Why? Because a single currency allows customers to compare prices more easily. They will buy from the companies that offer the lowest prices throughout the EU, in most cases those that have restructured on a continental scale to achieve the greatest economies of scale.

"The euro will completely change the environment in which consumer companies operate," says Mr Francois Charriere, a partner with Andersen Consulting in Paris. "We are heading for a price war."

For the big food, drink and household goods companies, it is the wholesalers, distributors and big retailers that increasingly operate outside their home states.

Most do not currently source their supplies on a pan-European basis, says Mr Michael Littlechild, a consultant with KPMG in London. But the euro will make EU-wide purchasing inevitable, simply because those retailers that fail to do it will end up at a price disadvantage.

"Some are already writing to their suppliers asking for details of the prices they charge in different countries for certain items," says Mr Littlechild. "That's a frightening letter for some companies - and not just because they often find it hard to answer. For the first time, they realise the euro is more than just an operating currency."

Many of the larger consumer groups have anticipated this demand and have begun working to reduce differences between their prices in different parts of Europe.

"Retailers and wholesalers have every right to buy from us at the cheapest rate - and they are exercising that right," says Mr Stephen Maizel, EMU project director for Allied Domecq, the drinks group. "We recognise we will eventually have to offer a single price across the EU."

Achieving that is not always easy. Many consumer products have been differently positioned from state to state - such as Stella Artois, which has been painstakingly marketed as a premium lager in Britain but is often a more workaday drink in other European countries.

"There will be arbitrage opportunities for retailers," says Mr Michael Rayner of McKinsey, the business consultants. "But these could erode brand values."

In some cases there will be sufficient differences between products in various markets to make it hard to ship goods from low-cost countries to higher-cost ones. There are substantial differences between soap powders in Spain and Germany, for example - in fragrance, performance and packaging.

But the distinguishing feature of many highly branded goods is that they are identical across the globe, says KPMG's Mr Littlechild. The European market for a designer T-shirt, for example, cannot easily be segmented.

Pressures for single European pricing - moving towards the floor rather than upwards - will force consumer companies to examine every part of their supply chain and rationalise it to reduce costs. "Even the large multinationals which have rationalised their production have asset bases which are too large," says McKinsey's Mr Rayner.

In some cases, it will make sense to abandon market positions in some countries - to raise prices towards an optimum European level rather than cut all prices to the lowest. In others, hard decisions will be needed to concentrate output at plants that can minimise costs and maintain margins while prices fall.