The credit quality of the world's leading consumer goods firms is likely to be eroded this year due to the continued effects of the coronavirus pandemic, however recovery is likely next year, according to Moody's.
In a new report, Credit quality to deteriorate marginally in 2020, with recovery in 2021, Moody's said that major firms that are exposed to 'non-essential' product categories such as beauty and cosmetics, as well as out-of-home consumption and travel retail, are likely to see the biggest erosion of demand and profits this year.
This includes firms like LVMH Moet Hennessy Louis Vuitton, L'Oréal, Kerry Group, and Froneri International Limited, it said.
Speed Of Recovery
At the same time, European consumer goods firms' recovery will depend on how quickly consumer demand and spending picks up agin, with most firms likely to find it difficult to pass higher costs on to price-conscious customers.
The implementation of cost-cutting measures will only partially offset revenue declines and lower efficiencies, Moody's argues.
"While our outlook on the global packaged goods sector remains stable, the increased odds of higher costs and lower production efficiencies have lowered the expectations of any profit growth," commented Paolo Leschiutta, senior vice president at Moody's Investors Service.
"Companies cost cutting measures will only partially limit the effect, but that said, lower commodity costs could help support some companies' margins."
Managing The Portfolio
Consumer goods firms are likely to remain focused on strengthening their balance sheets for the moment, according to Moody's, but may consider moving towards mergers and acquisitions in the future to offset lower organic growth.
'Some large companies will continue to prune their product portfolio by disposing of noncore assets,' Moody's said.
'For example, Nestlé has recently announced the acquisition of the allergy treatment maker Aimmune for $2.6 billion and is considering strategic options for part of its water business in North America, while Unilever is doing the same for its tea business. Companies could reinvest proceeds from these potential disposals into acquisitions, or make larger shareholder distributions, both of which would limit credit quality improvement.'
Moody's noted that the credit quality of firms such as Nestlé, Danone and Unilever is likely to be less affected due to their 'greater diversification, stronger liquidity and business profiles'.
At the same time, consumer confidence is likely to remain low, with the extent of consumption recovery in the next few months said to be 'unclear'. There is also a risk that a second wave of the virus will result in an even deeper recession, according to Moody's.
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.