A new report from Moody's has said that leading beverage firms are likely to see a 'significant profit improvement' this year, after 'unprecedented declines' in 2020 due to the coronavirus pandemic.
The report, Return to profit growth in 2021 but credit quality improvement will lag, says that sales volumes are set to recover from a low base this year, while drinks companies will continue to focus on higher margin, premium products.
Efficiency programmes are also likely to reap dividends, Moody's said – for example, Heineken is targeting €2 billion in cost savings by 2023, through cutting its workforce by 10% and implementing a number of efficiency measures.
'However, there are risks to executing this strategy and the investments associated with it will depress cash generation in 2021, with benefits materialising later,' Moody's said.
Operating Costs
Commodity prices are continuing to increase, and while most companies operating in the beverage space hedged their 2021 costs in advance, 'which should protect profitability', according to Moody's.
'However, in 2022, we expect higher commodity prices to increase operating costs,' it added. 'Currency devaluation, particularly in emerging markets, will continue to reduce reported revenue and profit in 2021.'
Foreign exchange movements are also likely to have an impact on some firms; as Moody's noted, Heineken reported a 5.3% negative impact on revenue in 2020, due to its exposure to markets such as Brazil, Mexico and Nigeria. Pernod Ricard, too, is likely to experience a drag from foreign currency movements.
Industry Closures
Another factor to consider is the continued closure of bars and restaurants in many markets, as well as the travel retail channel, which has been hit by the slump in international travel.
'Recovery will depend on how long governments keep restrictions on movement in place and how stringent they are, which will in large part depend on the success of vaccination campaigns,' said Moody's.
'Additional risks include a prolonged economic contraction or a weak recovery resulting in consumers shifting to cheaper products with lower margins.'
Profit Rebound
Of the drinks firms that have provided guidance for the year ahead, all expect some improvement in 2021, Moody's noted, adding that it sees a 'stronger profit rebound for Diageo and Rémy Cointreau in fiscal 2022, largely due to their different year-end date.
'Pernod will improve its credit ratios, but most of this improvement will be beyond the 2021 fiscal year ending June,' it said. 'Compared with soft beverage companies and brewers, demand for spirits continues to suffer from ongoing disruption in the travel retail channel. Despite this, Remy reported a strong rebound in third-quarter revenue thanks to strong consumption in the US and good recovery in China.'
Heineken, meanwhile, which has a higher than average reliance on traditional Western European markets and the on-trade channel, is not likely to see profits improve until the second half of 2021, Moody's noted.
© 2021 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.
