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The story of own-label giant McBride reads like the Cinderella marketing tale of the decade. While the ugly sisters – Lever Brothers and Procter & Gamble – arrogantly bickered between themselves, the lowly McBride quietly built its private-label empire.

The company was set up in its present form in 1993 after a 275m management buy-in from BP Nutrition. It has developed a virtual monopoly in supplying supermarkets with own-label household goods, ranging from detergents, through to shampoos and toothpaste.

Buoyed by the fact that P&G and Lever have stubbornly refused to follow Heinz and use excess capacity to supply own-label, it has enjoyed considerable success. It is now Europe’s largest manufacturer of own-label products with a turnover in 1994 of 409m.

When it came to the stock market last July it was the darling of the City. It had wooed investors with the promise that the future was bleach bright for private label. This year, however, the fairy tale ended.

McBride told Marketing Week it was unable to comment on any issues in the run-up to publication of its results this month.

Only six months after flotation the company issued a profit warning. Analysts downgraded profit estimates by 30 per cent, pushing shares down by 20 per cent. After the company floated in July, its shares reached a high of 215p in September; the price was languishing at 131p last week.

McBride claimed its problems were partly due to the summer heat causing concentrated washing powders for Novon and Cyclon at the Barrow factory to cake because of humidity. It had to buy in product to keep the customers supplied. It also blamed the lack of an “expected slowdown in raw material price increases”.

But the malaise appears much deeper than a technical hiccup, or problems with raw material costs. It is now apparent that last July’s flotation prospectus contained inadequate health warnings.

It is clear from documents surrounding the management buy-in at McBride that it expected brand manufacturers to continue with their premium pricing strategy.

McBride was not prepared for the price-cutting war unleashed by P&G and Lever last month which is likely to continue into laundry detergents (MW last week).

The flotation document says: “The directors believe that, while manufacturers of weaker brands may compete in the private-label market, manufacturers of leading brands will be unwilling to sustain significant pricing competition with private label in order to reduce private-label market share, since this would undermine the pricing structure of their branded products.”

However, it should have been clear as far back as 1991 when P&G’s chief executive Ed Artz declared his intention to embrace everyday low pricing, that the major brand advertisers would not sit back and watch their market share be eroded.

But the biggest problem lies in McBride’s “fill any box for anybody” philosophy of pushing for volume growth. McBride massively increased its volume of products in the five years prior to the buy-in, almost doubling costs in the process, according to a leaked management consultancy report which Cameron Consultants prepared for the buy-in.

The laundry detergents markets indicates it still holds this philosophy: it has sought to replicate the success of Sainsbury’s Novon, its first big own-label textile wash brand which has about 30 per cent of the market in Sainsbury’s stores. At the same time, its product was filling Safeway’s Cyclon, Tesco’s Advance and Asda’s Integra.

The leaked 1993 document predicted that the push for more product lines would make the company highly vulnerable. The management consultancy did a cost evaluation study of each of the lines and found the company was making too many unprofitable new products.

It studied six sites in Hull, Bradford, Middleton, Bolton, Barrow and Burnley and found that of the 932 products made, 29 per cent were unprofitable.

At some plants, such as the one in Bolton, 46 per cent of the products were deemed unprofitable. At the Bradford, Hull and Barrow sites, 30 per cent or more of the products were unprofitable.

The report suggested that rather than closing factories and squeezing costs, the company should cut back its product lines. It calculated that if it removed the unprofitable 29 per cent of products it could improve trading profit by 26 per cent. But rather than cut back on volume, the company has unsuccessfully tried to force increased prices on supermarkets to improve its margins.

However, its fundamental policy makes it more vulnerable to low-cost competitors, producing a small range of products at much cheaper per unit cost.

One analyst comments: “McBride is vulnerable to own-label competitors in its core market where they are able to absorb price cuts more easily because they have fewer loss-making products to subsidise. The company is doing too much. It is building an unwieldy cost structure, that makes it vulnerable.”

This is what happened in the bread sector where own-label giant British Bakeries was only able to offer a loaf at 55p. “In came Starbake with a much smaller range of products and offered the supermarkets the same loaf at 29p,” says the analyst.

The own-label competitors have already started to challenge McBride’s hegemony. It has lost contracts to rivals, while more competitors and new rivals are on the way. Last November, a Northern Irish chemicals company, SB Chemicals, won a patents battle with Albright & Wilson to produce rival liquid detergents.

McBride is also pursuing an acquisition strategy to build market share (MW last week). In April 1995 it acquired the private label textile washing powder business of Albright & Wilson in the UK and Spain. The company is also understood to be considering following soft drink supplier Cott’s move into the mainstream branded goods market.

McBride did seek to cut costs. In 1994 it centralised its purchasing department, sold its Bolton factory in December 1994 and cut its salesforce between 1992 and 1994 by 40 per cent.

But McBride’s tactics will not protect the company from the competitive threats in its core business. Adding new products will continue as long as supermarkets demand them. According to industry sources, McBride cannot – or will not – tell the supermarkets that it is not prepared to supply all of the products they demand, especially those supermarkets which sell them on at cheaper prices.

However, the rug may be pulled from under it. Key supermarket chains, such as Sainsbury’s, have already indicated that they have reached an optimum level of own-label penetration (MW May 19 1995). The private-label market leader has retreated from its own-label promotion strategy by switching back to promoting branded goods, such as Coca-Cola (MW March 1).

If McBride does not restructure, it may be faced with the same problem as its ugly sisters; cutting costs not to maximise profit, but to reduce over-capacity in response to declining market share.