GREECE: Concern for drinks firms as Greece economy worsens
Diageo, Heineken et al to face more problems in Greece
Concern is growing that Greece could default on its debt, potentially worsening a national economy that is already in a dire state. Yesterday (13 June), Standard & Poor's downgraded Greece to a 'CCC' rating, making it among the worst-rated economies in the world.
Multinational drinks companies have already suffered in Greece and the country's downgrade will prompt fears that more bad news is to follow. Greece contributes to around 6% of Diageo's annual net sales. Meanwhile, Rémy Cointreau said last week that full-year net profits growth was wiped out by a EUR45m impairment charge on its Metaxa brand in Greece.
Heineken is the biggest brewer in Greece, accounting for seven out of every ten beers sold, although the country only accounts for around 7% of volumes in the brewer's Central & Eastern Europe division. Carlsberg is the second largest brewer.
"Greece has not bottomed," Sanford Bernstein analyst Trevor Stirling told just-drinks today. "If one looks at Ireland, it looks like it's bottomed out, but in Greece the worst is yet to come."
While decline in drinks consumption may slow as companies cycle heavy destocking and an effective 87% rise in excise duty in 2010, the situation continues to look tough. "Greece will continue to be in substantial decline for the next year or so," said Stirling.
Within this climate, it is thought almost certain that drinks companies will seek to take more costs out of their businesses. Earlier this month, Diageo announced that it has begun a review of its global operations, with a view to cutting costs in hard-hit European markets.
Diageo declined to comment today on further cost cutting measures that may be required in Greece. Heineken said that "to a large extent, beer has proven to be recession resistant (but not recession immune)". The group said that it is launching three "innovations" in the country this year. However, it added that it has "extensive efficiency plans in place".
Beyond Greece, there is growing concern about the economy in Spain, which observers believe will face higher borrowing costs as a result of Greece's downgrade.
The triumvirate of Spain, Greece and Ireland is the main reason for Diageo's current travails in Europe. For the first nine months of the Smirnoff distiller's fiscal year, to the end of March, its net sales fell by 3% in Europe. Rival Pernod Ricard has also been affected, particularly given Spain's prominence as a Scotch whisky market, but is less exposed to the worst-hit markets.
Commenting on projections for a double-digit sales in decline in Greece, Diageo's Europe president, Andrew Morgan, said in June 2010: "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."
Morningstar analysts Phil Gorham said earlier this month that drinks volumes "may not rebound to prerecession levels for many years to come in some Western European markets".
[Updated at 15:45 UK time on 14 June 2011 to include comments from Heineken.]
For the more on the situation in Greece, click here.
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