In the Spotlight - Drinks Firms Dive for East Exit
Drinks firms spreading their weight
PepsiCo's CFO issued a frank but ultimately fair warning this week about the increasingly dire state of economies across the developed world. As drinks firms of all colours increase their efforts to step back from the West, just-drinks looks at the issue in more detail.
What have we learnt from the recent results season? Well, I could prattle on about the fragility of beer, the ongong woe in wine, the seemingly unending appeal of Coke or the relative health of expensive spirits. Yet, on a much bigger level, what has really struck me is the number of companies that are shouting much louder about rolling their wagons out of Europe and North America.
The push for emerging markets is nothing new, of course, but I feel that we are building towards a screeching crescendo. In 2011, the drive east and south has taken on much greater significance in company results statements amid, it seems, the realisation that western economies are much worse-off than we imagined.
PepsiCo's CFO, Hugh Johnston, this week publicy warned of stagflation in the US and other developed nations. "The outlook has been degrading over the last six months and it's now clear the developed markets have little growth," he said at the Barclays 'Back to School' Conference.
A cocktail of hazards is hitting drinks companies in developed markets. Consumer spending is weak - in the US it is still below pre-recession levels - in countries where consumption of some products is saturated. In addition, commodity cost increases are driving up inflation and pressuring profits. As Johnston himself said, many drinks companies are increasingly reliant on price increases to maintain net sales growth in developed countries, but pricing power is being squeezed from all angles.
Johnston's opinion on developed economies is broadly shared by the Organisation for Economic Co-operation and Development (OECD). Yesterday (8 September), the OECD said that economic recovery has "come close to a halt in the major industrialised economies".
As the G7 nations' finance ministers prepared to meet in France, OECD Chief Economist Pier Carlo Padoan said: “Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up.”
The OECD highlighted a number of problems. "The debate over fiscal policy in the United States, the sovereign debt crisis in some countries of the euro area and the fact that governments have fewer options to boost growth are driving both business and consumer confidence downward," it said.
The BBC's economics editor, Stephanie Flanders, produced an insightful piece this week on whether the US economy is "going the way of Japan". Essentially, the fear is that the US is facing long-term stagnation and is hamstrung by debt. Europe, meanwhile, might be even worse off, by virtue of its ageing population.
Where do drinks companies fit into this macroeconomic navel-gazing? Well, it's hard not to come to the conclusion that, if conditions continue, more radical cost cutting must be on the horizon for several companies. Slow economic growth in mature markets and the rising pressure for investment in new markets have caught firms in a pincer movement.
It is, of course, more politically-amenable to restructure gradually, piece by piece. We have seen some of this already: a brewery shut here, a bottling plant shut there, back-office functions stripped back. However, I wonder if pressure will make firms go further? Investors and markets like clarity, and this is the advantage of a headline restructuring plan - even if savings are achieved over several years. If western markets continue to struggle, more companies may come under pressure to provide this kind of clarity to maintain investors' confidence in their business plans.
As an alternative, or in markets where costs have been cut, firms may have to find new ways of working in order to create value. Consolidation, tie-ups and cross-industry partnerships could become more common: witness PepsiCo and Coca-Cola Co's decision to bring their North American bottling arms in-house.
Naturally, this is all speculative. At the same time, no one is suggesting that the West is finished. Spirits companies, for example, are currently having a decent time of it in the US. "The US demographics remain attractive," Diageo's CEO, Paul Walsh, told me in an interview last month. "There are 1m more legal purchasing age adults coming into the market every year."
While this may be true, both Diageo and Pernod Ricard have said this year that they are putting more resources into emerging markets, at the expense of resources in mature markets. Heineken is pumping millions of euros into Africa at the same time as working through a three-year cost savings programme. The Coca-Cola Co, meanwhile, has recently unveiled a US$4bn investment plan in China.
It's a trend that has grown-up over the last decade. But, with the current economic malaise, the highway out of the West suddenly looks a lot more congested.
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