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Shining amid Europe's Gloom


The bankers wore frock coats when Germany's Buderus had its initial public offering, but it wasn't some marketing gag. That's how people dressed in 1899. By then, Buderus already had been in business 168 years.

So maybe it's a little surprising that some analysts think the former ironworks, which nowadays makes equipment for water-heating systems, is--excuse the pun--hot. The company, based in Wetzlar, about 30 miles north of Frankfurt, embodies many of the qualities that have allowed plenty of European businesses to deliver solid profits even in a terrible economic climate. Buderus is on track to deliver a 9% pretax return on sales for 2002, analysts say, even though the company's second-quarter net slipped slightly, to $23 million on sales of $436 million. That's only down a bit from the boom times, even though its domestic market has shrunk by 10%. "That's very good for a German industrial company," says Susanne Schwartze, an analyst at M.M. Warburg & Co. in Hamburg.

For all the gloom about profits, a surprising number of European companies are coming through the slump just fine, thank you. Some are even thriving. Like Buderus, many may not make sexy products. But they watch costs and stick to their specialties in good times and bad. More important, they continue to innovate and stay a step ahead of their peers even when it's tempting to slash the research-and-development budget. "Companies can do well in a downturn or at least maintain sales if they have the right products," says Andrea Guerra, CEO of Italian appliance maker Merloni Elettrodomestici.

That may seem elementary, but all too few companies are actually able to pull it off. Merloni is one. The $2 billion manufacturer has continued to ratchet up sales, profit, and market share through the downturn by making products that incorporate new technology yet aren't too complicated to use. One example: a washing machine packed with sensors that determine how dirty the laundry is and the most efficient cycle for washing. Another Italian company bucking the negative trend is jeans-wear designer and retailer Diesel, which counts such Hollywood stars as Penelope Cruz and Tom Cruise among its customers. With 180 single-brand stores and 6,000 points of sale in 80 countries, Diesel CEO Renzo Rosso says sales will be up more than 10% this year, topping $622 million, on the heels of a 39% surge in 2001. "I wouldn't be preoccupied with the market being up or down, I would be preoccupied with products being excellent," says Rosso.

Indeed, some of Europe's best performers are in some of the worst industries. Take travel. France's Accor kept profits steady at $210 million in the first half of 2002 by building on its strength in budget hotels. That has allowed the Paris-based company to hang on to at least one corporate client that didn't want to shell out anymore for employees to stay in Accor's four-star Novotel chain. Instead, Accor offered its client a deal on rooms in its budget Ibis chain. Says Mark Abramson, senior managing director with Bear, Stearns & Co. in London: "The [budget] market segment has been developed and dominated by Accor." The French hotelier also runs the Motel 6 and Red Roof Inn chains in the U.S. The lesson: Adjust your offering to your clients' needs.

That's what Werner G. Seifert is doing. The chief of Deutsche B?rse, which operates the Frankfurt Stock Exchange, has kept his company profitable despite a ferocious bear market. True, Seifert's prestige suffered after he was forced to phase out the Neuer Markt, Germany's answer to the NASDAQ. Yet the stubborn Seifert has clung to his vision of a company that would give customers the widest range of services. Thus, in April, Deutsche B?rse bought the 50% in settlement house Clearstream International that it didn't already own. It also has benefited from its dominance of the European derivatives business as customers bought futures and options to offset increased risk. "We are the only provider of the complete securities processing chain in the world," Seifert boasts. Deutsche B?rse managed to boost second-quarter profit 14%, to $58 million, even as Frankfurt's benchmark DAX index tanked.

Tech isn't dead, either. Nokia Corp., long a business-school case study in good management and innovative products, proved it's still the best when, on Oct. 17, it reported that third-quarter income tripled, to $592 million. Meanwhile, French startup Wavecom, which supplies kits for building wireless phones, saw third-quarter profits soar fourfold, to $17 million, on sales up 91%, to $168 million.

Even some dot-coms are showing signs of life. The trick: Find a niche and avoid huge investment. Less than two years after it was launched, France's PriceMinister has hit breakeven and become France's fourth-largest e-commerce site by letting users sell used CDs and books at fixed prices. Customers send items to each other, so PriceMinister has no inventory and no shipping department to worry about. When business booms, "our revenues rise, not our costs," says Olivier Mathiot, marketing vice-president.

A search for Europe's profit stalwarts also turns up a handful of companies that are relentlessly consistent and often very old. Wm Morrison Supermarkets PLC is the fastest-growing publicly listed supermarket chain in Britain, with a sterling track record of 36 straight years of sales and profits growth. The $6.6 billion retailer doubled its market share in the past decade. Analyst Simon Proctor at stockbroker Charles Stanley in London lauds Morrison's conservative bookkeeping and management stability. No kidding. Chairman Sir Kenneth D. Morrison, 71, is the son of the man who founded the company in 1899.

Perhaps it's not fair to include French spirits maker Pernod Ricard in a review of star performers. After all, booze always does well when times are tough. Still, give the company credit for smoothly integrating its acquisition of part of Seagram's liquor business, which added Chivas Regal Scotch and Seagram's Gin to its liquor cabinet. "The Seagram brands brought them into the big league," says Andy Bryce, a consultant for Pernod Ricard at British marketing group Canadean. With the Seagram's purchase earlier this year, Pernod gained more upmarket brands, better exposure in the U.S., and the rank of No. 3 spirits company in the world. The company also has boosted sales of its existing brands.

German carmaker Porsche is also riding out tough times. Rivals admire not only its cars but how Porsche ensures that they are sought-after rarities. The company deliberately holds production below demand, guaranteeing a wait list for its stylish cars. The 911 is driving business now. Fueled by that kind of brand power, Porsche's net profit for the fiscal year ended July 31 soared 71%, to $455 million.

Buderus isn't neglecting its image either. Already known for lean management, the company further cut costs by slashing advertising and negotiating a shorter workweek. But CEO Uwe L?ders isn't scrimping on product development. His European customers are willing to pay more for a unit that saves energy in the long run. So technology leadership is crucial. "Because of our strong brand, we were in a position to raise prices," says L?ders. Now, L?ders and his crew are plotting how they can lead consolidation of the European industry. Don't snicker. No company has more than 5% of the market, meaning mergers and acquisitions are overdue. For Buderus and its ilk, the hot streak continues. By Jack Ewing in Frankfurt, with Gail Edmondson in Rome, Christina W. Passariello in Paris, Kerry Capell in London, and bureau reports


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