European Capex Likely to be Limited Until Costs Reduced

Global consumer product and food companies are likely to focus the bulk of their capital expenditure (capex) in emerging markets while they try to reduce costs and increase margins in western Europe, according to Fitch Ratings.

On 28 November, Unilever’s UK staff voted for industrial action over plans to reduce pension benefits is a predictable result of the company’s attempt to cut costs in the UK. The strike is unlikely to affect the credit profile of the group given that less than 5% of its total workforce is in the UK.

Other large consumer products companies, including Nestle, Danone and Kraft, are pursing similar two-pronged strategies of increasing investments in emerging markets, while reducing costs in western Europe, and generally in the mature markets. In Fitch’s view, the latter move will continue to adopt the form of restructuring capex and one-off expenses in order to consolidate manufacturing capacities, increase efficiency and underpin long-term profitability in the region.

Nestle aims to generate 45% of its gross sales from emerging markets by 2020, from 36% as of 2010. This will come from a combination of further investments, including merger and acquisition (M&A), and emerging market population and disposable income growth. At the same time the company is producing significant cost savings. In its 2010 annual accounts, Nestle announced a 20 basis point (bps) increase in its earnings before interest and taxes (EBIT) margins for Europe, which it attributed to efficiency gains and growth, more than compensating for the investment needed to drive the increases in market share.

Fitch notes that western Europe has become increasingly less important for many of these companies. For example, Europe accounted for only 27% of Unilever’s 2010 global sales from 41% in 2004. Likewise, this region represented 20% of Nestle’s global sales in 2010 from 31% in 2004. Most of this change has been driven by high organic growth and increased investment focus in the emerging markets.


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