The PIGS Markets - Part III: Greece
In the final part of this month's management briefing, Richard Woodard rounds off his tour of the PIGS markets in Greece.
If Greece claims to be the cradle of democracy, it also has the rather more dubious honour of being the birthplace of the eurozone economic crisis. Once it was clear in spring 2010 that the country would struggle to pay its debts, some form of bail-out – in the form of rescue loans from the EU and the IMF – became inevitable.
Nearly a year on, the Greek economy is still sputtering like a badly maintained old car and economists continue to voice scepticism about its immediate prospects. A BBC World Service survey published in late March found two-thirds of leading European economists believe the country will default on its sovereign debt – a finding immediately disputed by Greek finance minister George Papaconstantinou (but then what else could he say?).
One consequence of Greece’s continuing economic fragility has been yet another downgrade by ratings agency Standard & Poor’s, which now ranks Greece’s creditworthiness at BB-, below that of Egypt. S&P’s fear is that a new EU debt resuce system for the eurozone would penalise commercial investors.
As Greece struggles to meet the targets set under its EUR110bn EU-IMF bail-out, the return rate for investors in Greek benchmark 10-year bonds has risen to 12.568%, well above the 7% ceiling considered sustainable in the longer term. That, in turn, will make it hard for Greece to raise money from a very cautious lending community.
The drinks market
The Greek economy is relatively small compared to the rest of western Europe, but its traditionally strong on-trade sector has given it a disproportionate significance for some drinks companies in particular.
For Diageo, Greece is a strong market for Johnnie Walker and José Cuervo, leaving the company more vulnerable than some of its rivals to the downturn, with Greece accounting for about 6% of its annual net sales in Europe as a whole. So, in the six months to the end of December, Diageo’s European EBIT was down 9%, while Pernod Ricard’s was up 4% – largely because of the Greek factor.
The country’s economic woes clearly have a direct and highly negative impact on consumer confidence, leaving people with less disposable income and – perhaps even more important – making them less secure and confident in spending what money they do have.
But the effects go further, as a Diageo spokesperson notes: “The financial crisis has led to a further decline in consumer confidence and reduced the availability of working capital for local businesses, which led to trade destocking.”
Austerity measures have also played their part. Excise duty on Scotch whisky was increased three times in 2010, points out the Scotch Whisky Association, contributing to a 26% decline in sales to GBP97m in 2010.
According to Diageo, that amounted to an 87% increase in excise duty over a 12-month period, ushering in sales declines of 35% by volume and 38% by value for the company. “Negative price/mix was a result of the higher-margin on-trade declining at a faster rate than the off-trade, and prices of some brands being reduced to maintain affordability,” says the Diageo spokesperson.
Johnnie Walker was heavily impacted, as was Dimple, which experienced a sharp sales decline thanks to the slump in deluxe Scotch. However, Haig’s more competitive price positioning helped it to increase market share, despite a volume decline.
Diageo’s response to this haemorrhaging of revenues was mathematically logical, if nothing else: marketing spend was maintained as a percentage of net sales – so, in other words, it was cut by 38%.
Pernod Ricard’s problems in Greece were less severe, simply because the company’s brands are less exposed to the market, but even so Robin Johnston, Chivas Brothers’ regional director, Africa & Europe, notes that trade in Greece has suffered a “disproportionate” impact thanks to the predominance of the on-trade. Meanwhile, Chivas Regal endured a “substantial fall” in sales for the six months to the end of December 2010.
Arguably the brand that has suffered most at the hands of the Greek economic tragedy is, unsurprisingly, one of the country’s most famous drinks: Metaxa. The blend of brandy and wine, owned by Rémy Cointreau, had to take an eye-watering impairment charge of EUR45m on its intangible assets in the six months to the end of September 2010 – on top of the anticipated slump in sales.
But others have been less damaged. Gruppo Campari, for instance, calculates that Greece accounts for less than 1% of its sales and, while noting a decrease in annual sales, claims to have expanded its share of the market. “We foresee 2011 market conditions in line with 2010,” says Alex Balestra, the company’s investor relations senior analyst.
In the final analysis, Greece is hardly the most significant drinks market in the world, even if that significance is exaggerated somewhat by its historically vibrant on-trade sector.
But the fears of the industry revolve around the broader macroeconomic issues, and the fear that Greek history may repeat itself elsewhere in western Europe – in the other PIGS markets and beyond to Italy and even the UK.
As Diageo’s European president Andrew Morgan said in June 2010: “We could be looking at category sales down well into the mid-teen percentages [in Greece] for the next year.
“In itself, that would not have a huge impact on our total performance, but if that starts to spread to Spain, Italy and Portugal then we’re in a different position altogether.”
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