Zara Case Studies
Maltese Consumer Preference of Fast
Consumer preference is an important element in business. With the congested and very competitive marketplace in the world today, companies must know their consumers and their preferences to be able to survive and even have competitive advantage. The situation in Malta is that consumers seem to prefer foreign made fast-moving consumer goods (FMCG) than local ones because Maltese consumers seem to believe that local products are inferior to foreign goods. However, due to levies attached to the said products, the prices of the foreign FMCG were high which therefore made local consumer goods more popular in the market. The advent of the European Union (EU) membership of Malta removed the levies paid on foreign manufactured FMCG because of the policy of allowing free movement of goods which means both foreign and local brands would have the same opportunities in the market. Thus, many believed that this would cause local FMCG to lose market share. However, in some sectors, local products still retained popularity.
Consumer preferences by the Maltese people certainly imply the reality of any brand knowledge that will determine how these consumers thinks about a particular good/brand (Keller, 1993) and how they will responds to different stimuli regarding a brand. Research has focused on a wide range of issues, such as the relationships between brand perceptions and purchase intentions (Laroche, Kim and Zhou, 1996); marketing activities and brand perceptions (Dodds, Monroe and Grewal, 1991); country of origin effects and brand perceptions (Lee and Brinberg, 1995) as well as the relationship between consumer images and cultures (Zinkhan and Prenshaw, 1994) and between self perception and goods image (Fournier, 1994).
1.2 PURPOSE AND IMPORTANCE OF THE STUDY
The purpose and importance of this study is that it can have a direct connection among Maltese consumers through the use of a survey that will serve as a research tool in getting and collating relevant data and information needed in realizing the study in determining consumer preferences between local and foreign goods. This research will cover whether Maltese consumers prefer foreign or local FMCG as well as the impact of the removal of levies on foreign products. This research intends to conduct a study on the consumer preferences in Malta in fast-moving consumer goods, focusing on local products vis-à-vis foreign goods. Alongside this issue is the effect of the removal of levies on foreign FMCG.
1.3 STATEMENT OF THE PROBLEM
The rapid transition of fast moving consumer goods in Malta could possibly invite a quick turn of events regarding its business and market sectors due to a change and shift of the consumers attitude and preferences when it comes to foreign goods and that sometimes the local goods being produced in the country were set aside because foreign goods are of high value to consumers and of quality standards as compared to local goods that can possibly be of low materials used and lacks brand quality that the researcher believe to be the crucial factor that a consumer should look for in those goods. There may have problems also in the fast pace of the situation but it is the responsibility of the business companies and respected management to always plan and design for something better that will easily fit to the lifestyle of the Maltese so as to keep the longevity of the goods and services in the business market wherein competition can serve as a constructive threat to such companies selling similar goods and products content amicably.
1.4 RESEARCH QUESTIONS
The study intends to answer the following research questions specifically:
- What do Maltese consumers prefer in terms of fast-moving consumer goods: the foreign or the locally manufactured products?
- What are the perceptions of Maltese consumers on foreign manufactured fast-moving consumer goods (FMCG)?
- What are the perceptions of Maltese consumers on locally manufactured fast-moving consumer goods (FMCG)?
- What are the effects of the removal of levies on foreign fast-moving consumer goods (FMCG)?
- What are the marketing activities done by local manufacturing companies to protect their market shares against the effect of the removal of levies on foreign fast-moving consumer goods (FMCG)?
1.5 AIMS AND OBJECTIVES
The research aims to explore Maltese consumer preferences in FMCG and the effect of the removal of levies on foreign FMCG. The researcher will start on preparing the survey questionnaire after the approval of the proposal and the subsequent changes made if there are any. The form would then be submitted again for approval along with the request letters to the CEO and the supermarket managers. The researcher will also start finding two research assistants who are capable of conducting a survey. The study also aims to give a clear emphasis on the needed aspect of the topic in gathering coherent evidence for the validity of research information and findings integrating Maltese consumer preferences with regards to the fast moving consumer goods as well as the effect of the removal of the levies and that the study aims to discuss and explain theories and concepts involved for the overall study.
The focus objective of the study is to be able to freely execute a fact finding ways of providing researchers appropriate and suitable research sources and materials to be used in the methodology and to give a detailed and justifiable analysis of related data and information as a part of the successful handling and realization of the dissertation process. The objective also needs to achieve the following three important points that must be included and done as the study goes on:
- First, there has to be an application of the survey technique that caters to determine the preference between local and foreign goods among Maltese consumers respectively
- There needs to have a sales data information from supermarkets for various sectors and
- An interview with at least two Chief Executive Officers of local manufacturing companies to provide their respective views on the issues
1.6 SCOPE AND LIMITATIONS OF THE STUDY
Research requires an organized data gathering in order to pinpoint the research philosophies and theories that will be included in the research, the methodology of the research and the instruments of data interpretation. The descriptive research method uses observation and surveys. In this method, it is possible that the study would be inexpensive and time-efficient. Thus, this study will use the descriptive approach. Descriptive method of research is to gather information about the present existing condition. The purpose of employing this method is to describe the nature of a situation, as it exists at the time of the study and to explore the cause/s of particular phenomena. The researcher opted to use this kind of research considering the desire of the researcher to obtain first hand data from the respondents so as to formulate rational and sound conclusions and recommendations for the study. This study employs quantitative research method, since this research intends to find sound evidence. These quantitative elements does not have standard measures, rather they are behaviour, attitudes, opinions, and beliefs. The researcher will conduct a survey on consumer preferences on foreign and local FMCG. The data obtained from this would help in determining the factors which guide Maltese consumers in their buying behaviour regarding FMCG.
Moreover, the researcher will conduct in-depth interviews with two CEO of local manufacturing companies of FMCG on the effects of the removal of levies on the market. This will be supported by the sales statistics for various products in different sectors from leading supermarkets in the span of 4 years, from 2002-2005. This data would be data obtained by the researcher through contacting 3 major supermarkets and doing a comparison of prices and sales of various products in the specified period of time indicated. The biggest limitation of the study is the gatekeeper of the statistical information of the sales of the various products of the sectors needed for the research. The gatekeepers would be the management of the supermarkets. To overcome this limitation, the researcher has to include in the letter that information disclosed would be kept confidential. Although that would mean that the tables would not be available to the public, the advantage of having that information would offset any possible disadvantages. Another limitation would be the consent of the interviews with the CEOs of the chosen local manufacturing companies. The researcher has to assure them, as with the previous limitation with the supermarkets’ management teams that any information given which will be indicated vital to the company, would be kept confidential. The last limitation involves logistics. There are many data gathering methods which needed to be executed that lack of both time and money is possible constraints in accomplishing the tasks. There would be a need to hire research assistants to conduct the surveys in different areas.
1.7 APPLICATION OF THE STUDY
This study is beneficial for determining the preference of Maltese consumers. It will help in the design of marketing activities for both foreign and local manufacturing companies of FCMG to be able to gain substantial market share in the country. This will also give further insight on the perceptions of Maltese consumers on foreign and local FCMG which is important in formulating marketing plans. According to the CIA World Factbook (2005), Malta has transformed itself into a freight transhipment point, financial centre and tourist destination since the mid-1980s. In May 2004, Malta became a member of the European Union. This seemed to be a promising alliance for the country because the more open policies of the EU accommodates Malta’s economic dependence on foreign trade; manufacturing specifically electronics and textiles and tourism (CIA World Factbook, 2005). Changes were made in policies of key areas to adapt to the EU. Among these changes concerned the economy, in the form of the Community Acquis which entails a free movement of goods among member nations of the EU (Europa, 2004). Community Acquis refer to the elimination of measures which restrict trade, from customs duties and quantitative trade to equivalent, protectionist policies.
This is a development of the adopted timetable of the Maltese government on the removal of taxes on non-agricultural products which will eliminate levies on imports from the EU. With the progress of legislation of the country for its complete economic integration to the European Union, it can be seen that the main focus of economic policies would be to remove all customs duties or levies which would allow free movement of goods which will impact the market of different products including the focus of this study. According to the World Economic Outlook (2001), the projections for Malta in terms of annual percent change is from 2.9 percent 2000 to 4.6 percent in 2001. This projection was done for all countries and Malta was included with the Middle East and Turkey as part of the block of developing countries. This is true for candidates such as Latvia and Hungary, for the European Union accession at that time. The report also indicated that Malta’s consumer prices have not changed from 1999 to 2002, keeping at the level of 2.5 percent during these three years. This indicates that prices of goods in the country have remained stabilized; however, Dudikova (2005) reports that although predictions of the 4.6 percent annual growth are true, it is not yet affecting the lives of many Maltese citizens and that of other new members of the European Union. This information might be critical factor in the research as consumer perception on products both foreign and locally made would be studied.
1.8 OVERVIEW OF THE STUDY
For this research study, the researcher will first use the survey to gather information. It will be the most appropriate tool since it is inexpensive and quick. Survey questionnaires will be prepared to gather the data needed. Questionnaires will be of a non-threatening nature and can be completed within 30 minutes. The respondents will grade each statement in the survey questionnaire using the Likert scale with a five-response scale wherein respondents will be given four response choices. The results will then be tabulated and averaged to get the strengths and weaknesses of each question in the survey. According to Saunders, Lewis and Thornhill (2001), the use of the interview is to help the researcher gather valid and reliable data which are relevant to the research questions. The in-depth interview would be the second data gathering instrument. Although this type of interview does not need to have a pre-determined list of questions to be asked during the course of the interview, the researcher opted to have a standard set of questions to be asked. This would make the interview flow easier as well as the forms to be filled out during recording more manageable. With this type of reasoning, it can be argued that structured interviews are more appropriate; however, it does not permit to deviate from the list of questions such as to ask follow up questions regarding a response of the interviewee which in-depth interviews more than allow to be done.
FAST- MOVING CONSUMER GOODS
It is said that fast-moving consumer goods (FMCG) are those products that move off the shelves of retail shops quickly, which therefore require constant replenishing as these consumer goods include standard groceries that are sold in supermarkets as well as records and tapes sold in music shops. (Dictionary of Business, Oxford University Press 2002) It is widely believed that the FMCG sector is not affected much by inflation as consumers continue buying essentials. But rising inflation forced consumers to downgrade their preferences, which in turn put pressure on the FMCG companies’ margins. Companies like P&G Hygiene and Healthcare recorded dismal top-line growth, but continued to show double-digit profit growth. On the other hand, their depreciation charges saw an upsurge. This is an indication that these companies were making new investments, underlining and their confidence in the sector’s future growth potential to cut their operating costs and improved their operating margins.
Traditional consumer products like pastas, soaps and toiletries are facing a glut and consumer down trading. New types of consumer products like shaving equipment, household care products and cosmetics, which have lesser penetration, saw volume growth. In order to survive the slowdown in growth, companies should look at becoming more cost-efficient by pruning debt burdens at investing more money into new business streams and distribution networks for volume growth, it is clear that the consumerwants to see a wider variety of products and only those companies which can spend on research and development to develop new products and optimally use their resources will gain in the long term. FMCG industry will enjoy something of a renaissance and attract the best candidates back because so many ventures in the new economy have not lived up to expectations. The researcher agrees that FMCG people have frequently taken their years of experience and moved into technologically driven companies enjoying continuous growth and offered on-going opportunities to the loyal consumers, as grocers have increased the need for category management, having more opportunities for these people in FMCG companies and support businesses, such as consultancy companies has benefited for the process of responding to the needs of the consumers.
In response to the industry’s constantly changing needs, some professionals dedicated to the FMCG industry practice create real value for clients through their established worldwide networks and leading-edge approach to advisory services through leveraging international and local teams to lend insight and best practices and to offer valuable industry-focused ideas as FMCG’s indulge into the process of retail goods as a result of high consumer demand or because the product deteriorates rapidly. FMCGs include meats, fruit and vegetables, dairy products and baked goods are highly perishable. Goods such as alcohol, toiletries, pre-packaged foods, soft drinks and cleaning products have high turnover rates. Moreover, sales staff visit wholesale and retail businesses promoting and selling FMCGs and that supply chain managers are responsible for getting the required goods from the suppliers and into the stores as marketing managers’ research consumer behavior, examine sales trends and prepare marketing strategies to suit target markets. The FMCGs sector offers opportunities from production through transport and distribution to wholesale. There is also strong demand for information systems that can cope with and provide management information on high volume of transactions that occur in those sectors – crucial for sales and stock control strategies and means that there is an ongoing demand for consumer preferences factors relating to the FMCG in Malta. Furthermore, retail industry representatives suggest that the FMCGs sector is a great entry point and training ground for those interested in marketing, companies are competing by offering flexible working arrangements, quality leadership and management programs and challenging roles. Fast Moving Consumer Goods is a classification that refers to wide range of frequently purchased consumer products including: toiletries, soaps, cosmetics, teeth cleaning products, shaving products, detergent and non-durables such as glassware, bulbs, batteries, paper products and plastic goods. ‘Fast Moving’ is in opposition to consumer durables such as kitchen appliances that are generally replaced less than once a year. The category may include pharmaceuticals, consumer electronics and packaged food products and drinks. Thus, levies which are taxes on products that the country import, need to be removed if the people are to join the EU and it can also be removed if they do not join the EU or if the Maltese opt for a free trade area. During the year 2004, Malta has joined the EU which is one single market, as the country cannot continue to apply taxes, such as levies, that treat differently products that are produced in the EU from products that are produced in Malta. The removal of levies started in 1999 when a legal notice published a time frame for the gradual dismantling of levies over a three-year period ending last January 2003. It applied to all products that we import except for agricultural products and agro-food products.
REMOVAL OF LEVIES
On the other point, some levies were already completely removed on a few products as of October, during the year 1999 – things such as diaries (25 cents per kilo), nougat (Lm2.25 p/kg) and computer tables (Lm1.60 per kilo). Last January 2000, levies were also completely removed on another small range of products – toilet paper (40 cents p/kg), insect spray (77c p/ltr), exercise books (25c p/kg) and shirts (Lm1 per shirt). Products covered in this range include furniture, paint, granite, marble but also limited food and drink items such as savory snacks, fruit juices and nectars and soft drinks. As a result of the gradual removal of levies under this program, taxes on imported products obviously started going down. Prices for consumers should also have correspondingly gone down although the real impact should be more visible after next January. But of course, the consumer’s gain may have well been the local producers’ loss. The removal of levies has forced competition not just among imported products themselves but also with locally-produced products. As a result, local manufacturers must now compete with cheaper imported products and to do so they have had to embark on a restructuring exercise to help them shape up for competition and stay in business but some businesses may well find it hard to compete against cheaper imports and would have to change their line of production, scale it down or even stop production altogether, some may find it easier to simply change their line of business to importation. Whereas others chose to get together in order to be in a better position to compete. This “forced” competition must also necessarily lead to a shift in investment patterns since the local business community is now less likely to go into business areas which have so far been protected from competition for the simple reason that protection is no longer there. Instead they are likely to engage in other investment in other types of business, generating new economic activity. Now that the 1999 levy-dismantling program is on track, attention has turned to food and agricultural products, where levy protection had so far remained largely untouched. Aside, from the month of July of the same year, a similar program for a gradual removal of levies has started on agricultural produce and agro-food products. This is being done under a scheme which is different from the 1999 program because it will couple the gradual decrease in levies with a direct financial assistance to farmers and with a reduction in the price of local products. The first products targeted for lower prices include eggs, pork and chicken. In this area, levies are at times so high and prohibitive that no competing goods are imported at all, leaving the local market all for the local products at times at prices that are hardly a deal for consumers. However, because this time-frame overlaps with the expected date of EU membership, it will need to be negotiated with the EU during the ongoing negotiations process. In particular, the time frame for the removal of levies will be a sure bone of contention. But equally, Malta will be making the case that the EU should help pay for the financial package, whether in whole or in part rather than the tax-payer having to foot the bill. The removal of levies is a condition for free trade with the EU, which is a key component of membership, but also of any form of free trade agreement. Clearly the removal of levies exposed local furniture-makers to competition with foreign firms and this presented both risks and opportunities. The European Union is one single market. This means that you cannot have any obstacles, such as levies, when selling from one EU country to another. A levy is a tax that is paid by the consumer so that the price of imported products is more expensive than local products. It is therefore, a way of protecting local manufacture. Although levies protect local producers, they tend to reduce competitiveness because they reduce choice, quality and at times, also retain high pricing for local products. This is because, protected by the high prices of the imported product, local producers had less incentive to improve efficiency. On the other hand, the removal of levies exposes manufacturers to competition because it removes protection. As a result, manufacturers would need to adapt to the challenge of competition. This required a thorough restructuring exercise and new thinking on which products to produce and which markets to tap. No one is forcing to team up with others, but experience in the EU and elsewhere, has shown that when small entrepreneurs work together, without necessarily merging, they reap greater benefits from their markets because they can each specialize and combine their work to present a more competitive finished product that better protect the industry’s interests such as when dealing with government, trade unions and consumer associations. Associations brought about sharing of information, especially technology and innovative design, resulting in more efficient production. In Malta, teaming up has also made sub-contracting by larger firms easier, resulting in more work for the smaller entrepreneurs. The FOI believes that Government is clearly making concessions to the European Union by embarking on a program of removal of protective levies starting from September 2002, without getting from Europe any immediate gain for industry in Malta. Local manufacturers do not even have the comfort either of technical and financial assistance, whilst the European Union has not as yet granted ‘tariff-free’ market access to Maltese industry on the same products listed in the schedules appearing in the Legal Notices that have partly removed protective levies on competing imports from the EU.
To aggravate matters further for Maltese industry, EU manufacturers currently exporting products to Malta that are similar to or substitutes for local food, beverage and tobacco products, obtain export subsidies from the EU and are able to afford to lower even further the prices of their products in the Maltese market. As a result of the reductions of protective levies, these EU manufacturers will be able to further intensify their unfair competitive edge they currently hold in Malta. Until a few months ago the Federation was given to understand that the removal of levies with regard to certain products falling within the Agro Industry would take place after accession to the EU. The time frame now being proposed by Government for the removal of levies is inadequate and unrealistic when viewed in relation with the time-frames required for enterprises to receive the promised technical and financial assistance and to implement their restructuring plans. There is also hardly any time allowed to permit gradual market entry into the EU countries, and for any brand introduction exercise in the EU single market, which is already a tough proposition given the economies of scale and massive branding strengths of EU competition encountered both in EU countries and in the Maltese market. The recent Legal Notices issued relating to the levy dismantling programs on the Agro-food sectors do not appear to have considered the structural problems caused by Malta’s insularity and double freight costs on exports.
Preferences of the Maltese Consumers
The most suitable element for defining the market in such case appeared to be consumers’ preferences. The consumer preferences is an ubiquitous reality as it appears to be connected in some way to the ideal experience as consumers over consumption, consumer culture, consumer behavior and consumer rights which reflects a world undergoing rapid change. The FMCG may entail such effort to take one step to consider in constituting consumer society and that the society appears to be more well entrenched than it ever has been before as it may changed through which human beings relate to a world of consumption which is, at one and the same time, both constraining and enabling, individualizing and conforming (Miller 1995:1). The individual consumer is disaggregated as they are found, not to find some clear coherent cultural imperatives, but often partially connected, partially formulated and quite contradictory sources of value and desire. (Miller 1995:53) As Gabriel and Lang describe the contemporary consumer as unmanageable. What they mean by this is that the nature of consumption is becoming more and more spasmodic and ad hoc. It is very difficult to understand consumers if consumers are inconsistent, unpredictable and contradictory, ‘today, there is no single entity, the consumer’ (Gabriel and Lang, 1995 p. 191).
The experiences that consumers have are so divided that consumers are indeed ‘unmanageable’ or ‘uncontrollable’ as FMCG have efforts to push aside on approaches that see consumption as entirely liberating to construct as to what it actually means to consume. In addition, prices and the intended use of goods, the decisional practice of the Office for Fair Competition and that of the Commission for Fair Trading show that both institutions perform other tests related to the demand side to delineate the relevant market. In the Beverage Companies Decision, 10 the OFC pointed out that, as regards the market for the retail of beverages off premises, the retail of beverages through supermarkets, grocers, or discount stores were to be seen as separate from the market for the retail of beverages through cash and carry outlets. Since purchasers do not enter supermarkets, grocers, or discount stores with the aim of purchasing exclusively or primarily alcoholic beverages, but in most cases to buy food items, the latter stores were not a submarket of cash and carry outlets for beverages, but instead constituted a separate market.
The removal of levies on FMCG had a major impact on this business sector various changes occurred in the market which effected various players. However this was not the first time in recent years where there was a complete upheaval in the market. Back in 1986 following a change in government, the new nationalist government had changed the commercial laws thus allowing free trade and no importation restrictions. Prior to this Malta had been adopting the bulk buying system for several years. Imports in the FMCG sector were controlled by the government. The system had been put in place to protect the local industries and control inflation. The bulk buying system meant a very limited choice for the consumers. Examples of this were having very few brands to chose from when it came to products not having any local manufacturers locally. Products like canned tuna, corned beef and various others were bought through a bulk buying system controlled by the government. Most of the times the brands imported were low priced with quality matching the price. The government also prohibited importation of products competing with those manufactured in Malta. On the island only local choclate, biscuits, pasta, milk and others could be found. This meant that big brands like Cadbury, Mars, Barilla, Bahlsen and Danone amongst others were absent from the market. The Maltese were ‘hungry’ for consuming such brands especially when on foreign TV stations, which were viewed locally, the brands could be seen advertised but the Maltese consumers could find them nowhere in the supermarkets. In 1986 these barriers to importation were removed. At this stage importers and distributors found the opportunity to expand their business. Various new companies were also set up. The turnover of these companies exploded during the years to follow. Finally there was freedom of choice for the Maltese consumers to purchase FMCG. The market was now flooded with brands produced all over the world especially from Europe. Did this however mean that the local manufacturers for FMCG were to collapse? In order to protect the local industry the government introduced levies on most of the imported FMCG. This meant that most of the foreign brands in the market commanded a premium to the local competitors. The levies on FMCG varied from one product or sector to another, depending on the level of protection which the government wanted to impose. High levies were placed on milk, pasta, poultry and tomato products. As an example local milk was sold at approximately Lm0.26 per litre whilst foreign milk was priced to consumers at around Lm0.68 per litre. Even though these foreign products with high levies were available in the market their market share was close to nothing since the premium charged was enormous.
The government had succeeded to protect the local industries. May 2004 brought along the second major change in the FMCG sector. On Malta joining the European Union all the levies, which for several years had been protecting the local manufacturers, were removed. This meant that all products being imported from the EU would not be charged a duty on arrival to Malta. For the first time foreign products started to compete on the same level playing field as the local products. The products in the FMCG sector which benefited from the removal of levies was endless. At this point the questions amongst politicians, businessmen and consumers were also endless. How were the removal of levies going to effect the local manufacturing companies? Were the jobs of their employees at risk? Was it now a reality that local brands would collapse and lose market share or were the local brands strong enough to face foreign competition? After all the Maltese had been consuming these brands forever. Would the foreign brands be cheaper than the local brands? The Maltese consumer was eagerly waiting. Well, ultimately it was the consumer who was to decide and provide the answers to all the questions being forwarded. The perception around had always been that the Maltese consumer believed that foreign products were of superior quality to the locally manufactured products. One of the reasons for this was probably as mentioned previously, the Maltese had access to satellite TV which advertised various big foreign brands whilst advertising of local brands had so far been very limited. On the other hand some argued that the Maltese would patriotically continue consuming local product to protect their interests.
After nearly three years since the removal of levies we now have a more clear picture of how the market transformed itself. We now have the answers to most of the questions which had been asked. The foreign brands had an explosive success during the first few months following the removal of levies. This was expected for various reasons. Firstly the marketing held by the entities in favour of the E.U., who had been preaching that prices of various foreign products would decline drastically and become more accessible, had pumped eagerness into the Maltese consumer to consume these brands. The consumer wanted to try out these foreign brands some of which had been previously available at very high pricing. But besides these brands in May 2004 the market was flooded with new foreign brands. Brands which previously had not been available. The reason being that due to the high levies the sectors for foreign products was a niche one in most areas and few importers risked importing these brands. But as mentioned once the levies were removed new brands appeared in all departments. The question now was not only will the local brands struggle but also how many of the imported brands will survive? After a year following the removal of levies the market started settling. Some foreign brands survived while other pulled out. Surprisingly in some sectors the local brands remained strong whilst in others they lost market share.
However it was only in very few sectors that local brands completely collapsed, as was the suspicion of many. In some sectors local brands lost market share but remained brand leaders. In other sectors like milk, the local produced milk remained by far brand leader but somehow the sector grew. The researcher will be looking at the development of different sectors following the removal of levies at a later stage. First it is important to analyze the consumer, local manufacturer and importer behavior which led to the present day situation.
The assumptions made by many that once levies were removed consumers would shift to foreign brands were proved wrong by the consumer himself. What happened in the post-levy scenario was that the Maltese consumer tried what was available, compared and then decided. The choice was vast. Comparisons were made over a prolonged period. However, Maltese consumer did no only compare price but also, if not mostly, quality. Quality was taken for granted in the assumptions previously made. But in fact the consumer gave great importance to quality when faced with comparisons and choice. This survey conducted for the purpose of this study definitely proves this. When those answering the survey were asked “What do you look for when buying a product?”, 59% answered “quality” whilst 41% answered “Both quality and price”. In fact none of the consumers surveyed answered that they only look for price advantages when buying a product. Another alarming statistic which came out of the survey carried out was the following when asked: “What would entice you to change the brand you usually purchase?” 97% answered quality and only 3% responded that they would shift brand for price advantages. Furthermore when asked “If a product manufactured locally was of equal quality and with the same price range as a foreign product, which would be purchased?” 64% answered local, 26% answered foreign whilst 8% had no preference. Finally when asked whether they “prefer local or foreign products” the results were quite balanced or rather undecided. 32% answered local, 26% answered foreign whilst 41% had no preference. The results from the survey illustrate that the majority of those interviewed have no preference to the country of origin of the product. It is also clear that the Maltese consumer gives great importance to quality when choosing a product. Quality along with a price advantage would determine their choice, but never price alone. The answers from the survey conducted, indicated that the Maltese consumer, after trying various different products, made their choice which was probably a balance of quality and price. In fact as we will see later on when analyzing different sectors, most of the brands offering inferior quality products at very cheap prices did not survive.
The Maltese Manufacturer
Long before Malta joined the E.U., the local authorities had started encouraging local manufacturers to start gearing up for what was referred to as the “E.U. challenge”. There were various areas in which manufacturers for FMCG in Malta had to improve on. Firstly it was a well known fact that various local manufacturers would launch a product of excellent quality but as market share would increase, the quality would start to decline. Also various manufacturing plants were not up to E.U. standards and also possessed outdated equipment and machinery. This was mostly evident in the packaging of most locally produced goods. The packaging both in quality and design of various local products in the market looked mediocre when compared to foreign products. However following the continuous advise given to these companies different companies took a different approach. Some companies started to gear up for the EU challenge. They started investing heavily and upgrading both their facilities and their products for the tough times ahead. Others did not react or their efforts were minimal.
Two interviews were carried out as part of the research for this study. These interviews involved two CEO’s from two major companies in Malta. They come from two totally different sectors, namely the processed tomato products sector and the paper products sector (toilet paper, napkins etc). The CEO from the tomato products manufacturing company explained how joining the E.U. was initially regarded as a threat but it finally turned out to be also an opportunity. The brands his company had been producing for several years had become brand leader locally. They had invested over the years and their company was ISO certified. Admittedly he stated that for several years the products they produced were successful not only because of the excellent quality they produced but also because they operated in a protected sector due to the levies imposed. In fact the levies on tomato products were very high at around Lm0.80 (€2) per liter. Despite being one of the few companies with a plant comparing well to other plants in the E.U., the company was well aware of the consequences of joining the EU. Their strategy to face reality was to tackle two areas. Firstly was to continue producing high quality product. More importantly was, according to him, marketing. For about three years before joining the E.U. the company continuously invested in advertising by promoting their brands. The message in most of their advertising was that Malta produces superior quality tomatoes to their neighbors abroad.
One of the company’s advertising campaigns even consisted of a consumer in Florence Italy with two plates of tomato products, one produced in Italy and one being one of their brands. Italian consumers on this TVC were asked to blind taste both products. The Maltese product came out victorious. The massage was “Italians (well known for their excellent tomato products) prefer the Maltese tomatoes. The CEO continued by stating that the removal of levies would obviously effect the market share of the products which his company sells. But the big question was “To what extent?” He stated that despite losing market share he is satisfied that although the market has become fragmented with foreign tomato products, the local tomato products have remained brand leader in this sector. Finally he stated that the E.U. also presented an opportunity to his company since various contracts with large supermarket chains especially in the UK were acquired. At a later stage the tomato products sector will be analyzed to see how this sector developed over the past four years. Another CEO interviewed, from the paper products sector demonstrated a different approach. The CEO explained that on paper product the levies were actually removed before joining the E.U. In fact these were removed in 2001. However, funnily enough the effect of the levies had only started having its effect in 2004 when all the levies were removed. As a company they also knew the threat from the removal of levies. Unlike the other CEO interviewed, the CEO from the paper products admitted that their plant was not as efficient as other mega companies abroad. Also whilst the mega brands such as Foxy, Scottex and Kleenex were constantly advertising and investing heavily in promoting their brands, the budget for advertising the local paper products brands was minimal. Also this limited advertising was only carried out following decline in sales. Once again this sector will be analyzed in detail later on. The local manufacturer had ample time to prepare himself for the E.U. challenge. It is evident that if the necessary preparations before joining the E.U. and with the right strategies local brands were able to take on the competition offered by foreign brands at competitive prices. It was only those companies which fail to wake up or woke up two late which collapsed or registered high declines in turnover and market share.
In Malta there is a good number of companies whose business is the importation, distributing and marketing of brands in the FMCG. As mentioned earlier these companies bloomed back in 1986 when the market was open. It is important to note that these companies had a variety of successful brands in the local market. One has to keep in mind that levies were not present across all the board of FMCG or in some sectors the levies were very low. This allowed the importers of FMCG to compete in the local market sectors where no levy or low levies were present consisted of canned tuna, chocolate, milk modifiers, coffee, tea and various others. The removal of levies in 2004 now presented an opportunity to expand their portfolio of brands and obviously their turnover. Some importers had for a number of years before the 2004, started fishing for possible new brands. Some launched foreign brands at high prices, their strategy being to be first in the market. They were aware that sales would be on the low side with the high pricing but being a first entrant in the market is always an advantage. In other sectors, an example being yogurts, the quality of foreign yogurts like Danone and Muller was much superior when compared to local yogurts. So even at high consumer prices these brands established themselves locally.
Other importers adapted a different strategy by launching brand before the levies were removed at post levy prices. They did so to enable them to achieve market share before competition. Obviously by doing so they registered low MU or even sold at a loss. But this was a cost they decided to incur with the long term objective of reaping the benefits in the post levy situation. Once the levies were removed the market was invaded with new brands. Some importers decided to take the price route by working for low mark ups and try to match and sometimes beat local prices. Others charged a premium to local brands and invested heavily in advertising and promotions. However despite the success of foreign brands in the first months the market then started to settle. Some consumers reverted back to local brands whilst other stuck with the foreign brands. When one looks at the whole picture of the market following the removal of levies various observations can be made. Local manufacturers who invested in equipment to enable to compete with foreign brands stood a better chance of surviving. Also those who prepared themselves for Malta’s entry in the E.U. by advertising before the event had an advantage over competition. Importers who instead of focusing on low prices invested in advertising and promotions also seemed to grow at a faster rate. But ultimately it was the consumers’ behaviour which commanded the market.
The Maltese consumer does not seem to have a preference for foreign brands over the local brands. Price and quality were the fundamentals for a successful brand but the Maltese consumer seems to give greater importance to quality but competitive pricing also has its important role. It is however important to analyze different sectors and study the behaviour of the supplier and the consumer in the specific sectors. The sectors which will be analyzed are toilet paper, tomato products, pasta and dairy products.
Levies on toilet paper were removed four year before Malta joined the E.U. In fact the levies in this sector were removed in the year 2000. The local brands at this stage completely dominated the market. From the sales statistics of four major supermarkets it is evident that local brands had 94% market share. Until then the price difference between local and foreign brands was substantial, with foreign brands being sold at a high premium. When the levies were removed mega brands like Foxy, Kleenex, Andrex and Scottex reduced their consumer prices. The average premium charged by these mega brands reduced from an average 80% premium to an average of 25% premium. Also the market experienced mew entrants of unknown brands which matched the prices of local brands. Whilst the mega brands offered superior packaging along with better quality, the unknown brands offered more or less the same as the local brands. However despite all this no major changes occurred in the market. Local brands remained for the next four years brand leaders by far. In fact market share(MS) for the local brands only declined to 80% over the four years. This was a surprising result for two reasons. Firstly it was expected that local brands would suffer dramatically especially since the market became flooded with foreign brands. About forty new brands had appeared in this sector over the four years. Secondly the local toilet paper manufacturer had not geared up for the EU challenge. This is evident in the interview held with the CEO of the only manufacturing company of toilet paper. One has to note that in Malta only one paper products factory exists. This company has two brands which it sells through its sales force whilst another three brands which are manufactured for a sales marketing company. In the interview with the CEO, he admitted that no major investments were made to combat the foreign imports. Until 2004 no marketing activity whatsoever was carried out to promote the local brands. No major investment in equipment was made to upgrade the local products.
However the worse was yet to come. Funnily enough in 2004 foreign brands started gaining MS dramatically. By the end of 2004 MS for local brands dropped to 65% in 2004, 60% in 2005 and 57% in 2006. This probably occurred due to all the euphoria that foreign brands in general would decline in pricing after Malta joined the EU. So even though levies on toilet paper were removed four years before the effect was only felt in 2004. It was only at this point that the local brands reacted. However, I must comment that the effort was miserable. Asked about how his company reacted to foreign brands the CEO stated that in 2005 a marketing campaign was launched over a six month period. This consisted of prices awarded (in the form of a lottery) for consumer of two of the local brands with the prices being a car, holidays abroad and others. This campaign was not even backed by TV advertising which is considered as the strongest marketing media in Malta. Another strange strategy (according to me) was that this local manufacturer started importing a foreign brand to combat the other foreign brands.
By 2006 the brand reached a MS of 6%. Another interesting statistic is that in the consumer survey carried out for this study 36% of those interviewed said they preferred foreign toilet paper brands. So in a nutshell 64% of Maltese consumers prefer local brands and yet the market share for local brands declined from 94% in 2000 to 57% in 2006. In my opinion this result is not a bad result and when one considers the poor efforts made by the local manufacturer to gear up for the E.U., I would have expected less. This probably occurred due to the fact that the quality difference between products in this sector is not so noticeable and quite minimal. As mentioned earlier the Maltese consumer readily switched brands for superior quality. This was clearly evident by the 97% of the consumers interviewed.
Pasta was the sector in which local brands were expected to suffer drastically. The reasons being the following: Firstly big foreign brands had already been present in the market since 1986. Despite a levy of 60c per kilo on foreign pasta the main two foreign brands Barilla and Agnesi had achieved encouraging market shares and high distribution in the market. The premium charged by these foreign brands was about 100%. Barilla and Agnesi was 58c for 500g of pasta whilst local brands wee selling at 29c. At this time local brands were clearly dominant with 80% market share however foreign brands charging double the price achieved a respectable 20% market share.
The Maltese consumer was aware of the high superior quality of Italian pasta when compared to local pasta but at that stage the price of foreign pasta was too high. Above all foreign pasta was heavily advertised on Italian TV stations which are viewed regularly in Malta. Maltese consumers wee surely to switch to the mega brands once levies were removed. In fact this happened instantly when Malta joined the E.U. In May 2004 sales of foreign pasta shot up alarmingly. Maltese consumers did not expect the prices of Italian pasta to decrease from Lm0.58 to 28c. Local manufacturers’ only defence was to lower their prices to 24c.
However a 4c premium on 500g of pasta was a premium which the Maltese consumer was ready to pay for a far superior quality, both in taste and packaging. Also new entrants in the market with Italian brands were taken the low price strategy and their pricing was lower than the only so called Maltese survivor “Le Rose”.
Market shares changed as shown in the table below:
|Local||2003||2004 Levies removed in May 2004 but market share are calculated on a full year.||2005||2006|
The above shows that market share of local brands declined from 80% in 2003 to 9% in 2006. It not surprising at all since in the consumer survey carried out 78% of those interviewed stated that they prefer foreign pasta to local.
Prior to the removal of levies local brands had the total market under their umbrella. In fact 99% market share belonged to the local brands. This was not surprising for two reasons. Primarily the quality of local tomato products was excellent and secondly the sector was protected by means of an 86c per kilo levy on foreign products. This meant that few importers risked importing foreign brands with such a steep levy. Only a handful of foreign brands were available. The 1% market share was at such a pitiful result for the foreign brands since the Maltese consumer had an excellent local product at half the price of the foreign products. However as the CEO of a local manufacturing company explained following the removal of levies a drop in market share and sales was inevitable. The question was to what extent would the drop be. The local companies started to prepare for the EU challenge long before Malta joined the E.U. The CEO explained how his company invested in advertising and promotions years before 2004. Besides advertising their own brands they also joined forces with other tomato product manufacturers as local farmers promoting heavily the excellent quality of local tomatoes when compared to foreign tomatoes. He explained how heavy campaigns on TV, billboards, bus shelters and various other media helped to convince consumers that Maltese tomatoes were of the best quality. This seemed to have worked since from the consumer survey 85% of those interviewed believed that local tomato products were of superior quality to foreign.
The real test however arrived in May 2004. Foreign brands were imported like mad. This was by far the sector in which the number of foreign new entrants increased most. Foreign brands were all over the market. Various price points were evident however the majority of the foreign brands were selling at high discounted prices when compared to the local products. The CEO explained that at this point local producers had to lower their prices but still maintained their brands at a premium to the imported brands. Their strategy was to maintain a premium and continue to advertise heavily. They also promoted their products occasionally by utilizing on pack promotions which did match foreign prices, but these offers were sold for very limited periods. A clever TV campaign was one were a TV personality carried out blind tests in Florence asking Italian consumers to compare the taste of Italian tomato products to the local. The result was predominantly a preference to the local products.
However as mentioned earlier consumers shifting to foreign brands was inevitable. In fact below one can observe the decline in market share for the local brands.
|Local Tomato Products||98%||65%||87%||82%|
|Foreign Tomato Products||2%||36%||13%||18%|
It is evident from the above statistics that in 2004 Maltese consumers were tempted to experiment in trying foreign products. In fact market share for foreign increased from 2% to 36% to the expense of obviously local brands. This also occurred since towards the end of 2004 various foreign brands were discounting heavily to avoid expired stocks since they had projected higher sales and imported high stocks. In 2005 the Maltese consumer shifted back to the local products. The advertising campaigns had succeeded. Surely the local manufacturers are satisfied with the drop. Unlike other sectors, mainly pasta, the market share for tomato products declined from 98% in 2004 to 82% in 2006.
Another bonus for the major manufacturer who was interviewed was the fact that since Malta joined the E.U. they have succeeded to enter foreign markets. He stated that they had been awarded contract for the Tescos and Sainsburys of this world. All in all tomato product manufacturers have managed to maintain if not increase their production since 2004. Besides the successful advertising campaigns carried out one must finally mention that local tomato product manufacturers have constantly invested in modernizing their factories to E.U. standards which enabled them to compete with the EU giant manufacturers.
Dairy Products (Milk)
The battle for market share in this sector following the removal of levies was quite interesting on to a certain extent unique. The levies on milk were the highest with a levy of ___ per litre. In the Maltese market only one brand of milk existed selling at a very low price of 26c per litre. No one dared to import milk and no one can blame them. Who would succeed to sell an imported brand of milk at mort than four times the price of locally produced milk. However once the levies were removed all importers knew what a great opportunity existed due to the enormous size of the market. One important factor was that the local milk was only available as fresh with not more than a three day shelf life. This was obviously not very convenient for the consumer.
All around Europe UHT milk proved to be popular due to the convenience of storing the product at room temperature with a long shelf life. Also local milk was poor in quality and this was evident in one of the clauses which Malta had accepted on joining the EU which was that local milk had a time period to improve the quality and during this period it was not permitted that local milk would be exported. Once the levies were removed a handful of UHT brands were imported and started competing on a same pricing level as local milk. As predicted the Maltese consumers went all out to purchase foreign UHT milk. In fact may importers faced out of stock situation initially due to the great demand. At this stage an advertising war started. The local producer advertised “Fresh is better” whilst importers advertised “Convenience”. The situation of this sector was earlier described as unique since local milk and foreign UHT milk were two different products fighting for the same market. Both parties advertised heavily since there was a lot at stake. Following the mentioned out of stock situation importers imported excess stocks, but the local milk started coming back. This was probably due to the consumer euphoria fading out gradually. At this stage importers faced expiry date problems due to a slowdown in sales and at this point a blood bath took place between importers desperately trying to get rid of stocks. At the beginning of 2005 the market stabilized again.