Consumer giants feel pinch as budget cuts take hold
Published 29/07/2010 | 05:00
Europe's biggest consumer companies are starting to feel the pinch of budget-cutting. Electrolux, Imperial Tobacco Group and Pernod Ricard said last week demand slackened as shoppers cut back on appliances, cigarettes and liquor.
Groupe Danone yesterday reported weaker sales growth and further evidence of a European consumer slowdown may be provided by LVMH Moet Hennessy Louis Vuitton and British American Tobacco in the coming days.
"Reality will continue to hit the consumer, especially in southern Europe, as disposable income suffers through higher taxes and pay cuts," said Jane Coffey, who helps manage about $50bn (€38.5bn) at Royal London Asset Management.
"In lots of sectors, capacity has not yet been cut in response to lower demand and we would expect further pricing weakness."
Governments in Greece, Spain, Italy and Britain have pledged spending cuts to prevent a continent-wide debt shock.
Electrolux, the world's second-biggest appliance maker, said southern European demand "weakened considerably" toward the end of the second quarter, while Imperial Tobacco's volume decline worsened and Pernod said revenue missed estimates.
The extent of the slump was unexpected. Electrolux stock dropped 7.8pc on July 19 and Imperial Tobacco fell 2.9pc on July 22. Pernod declined 2.3pc the following day.
"The effect will probably be felt stronger this quarter as spending cuts start to impact on real spending," said Mark Bon, who helps oversee $750m at Canada Life in London.
Industries from telecommunications to construction are also coming under pressure from government cutbacks.
Vodafone Group, the world's largest mobile operator, said last week its Spanish service revenue dropped 6.2pc in the fiscal first quarter, while Italian revenue fell 2.5pc.
Telefonica of Spain is "heading for a profit warning this year", Sanford Bernstein analysts wrote on July 21.
The telecoms company will report earnings today.
Italcementi, Italy's biggest cement maker, will get no earnings contribution from its home market in the first half, Exane BNP Paribas analysts estimate.
While the European economy is forecast to return to growth, the Greek economy is set to shrink 4pc this year, twice the rate of 2009, according to estimates compiled by Bloomberg.
The Spanish economy may contract 0.5pc.
"Within Europe, there's a lot of volatility among different markets," Electrolux chief executive Hans Straberg said on July 19.
Demand has reversed from the beginning of the year, when consumers in southern Europe were still buying stoves and vacuum cleaners while northern and eastern European demand was weak, Mr Straberg said.
Pernod's western European sales in the three months ended June 30 were hurt by the UK, Spain and Greece, the Paris-based distiller said, as declining consumer confidence deterred shoppers from buying premium brands.
Danone's sales growth in Europe slowed to 1.4pc in the second quarter from 2.1pc in the first three months of the year as the Spanish markets for water and dairy were "challenging".
On Tuesday, Reckitt Benckiser said the European market was expanding less than 1pc by volume, slower than the growth of up to 4pc the company had anticipated.
Reckitt manufactures a range of household and medicinal products including Nurofen painkillers.
"Europe remains troubling," Credit Suisse analyst Anthony Bucalo wrote in a note on Pernod.
Greece, Spain and Britain have "clearly become more challenging as economic weakness and austerity programmes take hold".
The British government has pledged to reduce the budget deficit to safeguard the nation's top credit rating.
British Chancellor of the Exchequer George Osborne announced an initial £6bn (€7.2bn) of cost cuts on May 24.
Cable & Wireless Worldwide shares slumped 20pc on July 20 after the telecoms company said discretionary government spending had "slowed very significantly".
Some industries are still being boosted by growth-spurring measures introduced during the recession.
Volkswagen and Renault have benefited from a surge in demand because of government incentives for new car sales in Spain, Portugal and Ireland. That may change as governments cut back.
While Greek tax increases may have hit beer sales in that country, a warm summer and a Spanish victory in the World Cup may have helped offset declining consumer confidence in other places, according to Alex Oldroyd, a London-based analyst at Barclays Capital.
"Beer is not as bad as spirits," she said.
Spain "was the winner of the World Cup in beer terms and the weather was pretty good in Europe. Weather is more important than the economy for beer". (Bloomberg)