Moody's Investors Service has announced it had revised its outlook for the global consumer packaged goods industry to stable from positive, due to mounting profit pressures in the industry.
The firm said that industry operating profit is likely to grow between 3.5% and 4.0% over the next 12 to 18 months, which is short of the ratings agency's previous forecast of 4.5% to 5.5%.
Despite the lower outlook, earnings growth is likely to continue to be supported by 'still-strong consumer confidence, price increases and economic stability', it added.
Modest Increases
“The change in outlook reflects our expectation that profit margins will increase only modestly as commodity and transportation costs remain high,” commented Chedly Louis, a Moody’s VP-senior credit officer.
Profit growth in the sector is likely to 'slightly exceed' revenue growth of about 2% in the next year or so, due to cost-reduction initiatives and productivity improvements.
The prevalence for consumers shopping online is also likely to impact the sector, as it will result in declining retail store traffic.
On the positive side, consumer confidence largely remains strong, which is helping to drive discretionary spending by affluent consumers. However, amongst middle- and lower-income consumers, spending will remain 'soft', Moody's said, with high rents, food and healthcare costs and other necessities will take a larger share of disposable income.
Pricing Strategy
With raw material prices on the increase, not to mention transportation costs, CPG firms have in many cases increased prices, which could lead to one of two paths, Moody's said.
'If the price hikes stick, they will partially offset high input costs and temper declines to profitability and cash flow,' it noted. 'But if higher prices trigger a decline in sales, companies may be prompted to spend more on promotional activity, which could hurt profitability.'
In addition, acquisition spending is likely to increase in the sector, as CPG firms seek to improve margins, expand product portfolios and enhance geographic diversity.
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
