A Pan-European View of the Consumer Staples Market

The consumer staples market is defensive in nature and has traditionally displayed resilience to the radical upturns and downturns seen in more mobile sectors. However, even this comparatively stable industry has not been left unaffected by Europe’s ongoing economic challenges. The MSCI Europe Consumer Staples Index, which tracks the performance of the broader European consumer goods market, showed a significant decline at the start of 2011, after two years of positive growth.

Figure 1: MSCI Europe Consumer Staples Index (Jan08-Jan11)

Source: S&P

 

Likewise, the ratings agency Standard & Poor’s (S&P) has downgraded two European consumer staples companies in 2011, having maintained all ratings for this sector throughout 2010.

Indeed, with the sovereign debt crisis and concerns about the future of the euro dominating what has been a turbulent first half to 2011, it is not surprising that even relatively inelastic sectors such as consumer staples have been responding negatively to wider economic events.

By reviewing key financial ratios for consumer staples companies operating in six European countries – the UK, France, Greece, Germany, Spain and Italy – over the past three years, we can analyse how the consumer staples sector in these countries are performing relative to each other, assess how they have reacted to the current financial situation and discover which areas of Europe have experienced the best and worst performances.

For this analysis – carried out with information sourced from the Credit Health Panel – we used 11 sub-industries to classify the consumer staples sector (agricultural products, brewers, distillers and vintners, drug retail, food distribution, household products, hypermarkets and supercentres, package foods and meats, personal products, soft drinks and tobacco). We then used the Credit Health Panel to pool these companies by the six countries and analysed their income, operational ratios and liquidity ratios in order to assess their relative performance.

Gross Margins

Figure 2: Gross Margin

Source: S&P

 

The consumer staples sector in Greece has managed to achieve a 24.5% gross margin on average – lower than the group average of 39% for 2010, but not by an alarming margin. Meanwhile, the sectors in Germany and Spain have enjoyed the highest gross margins in the past three years. Interestingly, the gross margin for the UK’s consumer staples sector has increased in each of the last two years but it is still behind all other counties, with the exception of Greece.

The consumer staples sector in Germany, one of the strongest economies in Europe, actually achieved its highest level in 2010 – as did its peers in Spain – with a gross margin of 49.9%.

Return on Capital

However, when we look at return on capital and return on assets, consumer staples companies in Greece fail to keep up with their peers by a more significant margin, being the only country whose return on capital decreased in 2010. Italy, Spain and the UK have consistently improved their returns over the period with the UK figure increasing to 6.2% in 2009 from 3.2% in 2008. In 2010, the return for consumer staples companies in the UK reached the top of the group at 7.2% on average.

Figure 3: Return on Capital (%)

Source: S&P

 

Debt to Assets Ratio

In a comparison of debt to assets ratios, consumer staples companies in Greece have the highest leverage, continuing a three-year upward trend and culminating in a ratio of 56.8% for 2010. Likewise, Italy’s sector has consistently increased its debt-to-assets ratio, crossing the 45% mark in 2010. Meanwhile, the sectors in the UK, France and Spain have all decreased their leverage with the UK’s sector achieving the lowest figure for 2010, at a ratio of 30.5%.

Figure 4: Debt/Assets

Source: S&P

 

Debt to EBITDA Ratio

 

Figure 5: Debt/EBITDA (x)

Source: S&P

Although Greece’s consumer staples industry figure for its debt to EBITDA level has improved, dropping to 6.9 times in 2010, the country has still lagged behind its peers in this respect. On this measure, the northern European sectors systematically outperformed their southern European peers in 2010, with companies in the UK obtaining the lowest ratio of the year at just 2.6 times. On the other hand, Spanish companies have seen a dramatic increase in their ratio, from 2.7 times in 2009 to 5.5 times in 2010.

Quick Ratio

Figure 6: Quick Ratio (%)

Source: S&P

 

A ‘quick ratio’ analysis (also known as an ‘acid-test’) measures a company’s ability to meet its short-term obligations with its most liquid assets, and provides a more conservative view of short-term liquidity. Unlike a ‘current ratio’, it includes inventory in current assets. The UK consumer staples sector has the highest average quick ratio over the past three years but, more surprisingly, companies in Greece have managed to match or even outperform their peers in Europe’s powerhouse, Germany, closing 2010 at 0.9 times. Companies in France and Italy performed in a very similar range to each other (1.08 times to 1.2 times) and Spain’s sector continuously improved its short-term liquidity, starting with a quick ratio in 2008 of 0.7 times and reaching 1.1 times by the end of 2010.

Cash from Operations to Total Liabilities Ratio

Our final piece of analysis measured how much cash from operations is available to cover a company’s short-term obligations. Although the UK consumer staples industry had a lower ratio than that of Greece in 2008, it has experienced a significant improvement over the past three years, from 0.1 times in 2008 to 0.2 times in 2010. Spanish companies have also consistently improved their ratio, reaching their peak in 2010 at 0.6 times, whereas those in Italy had their lowest ratio in 2010, showing a marked drop in performance.

Of the northern European peer groups, France’s consumer staples industry has led the way, with a ratio of 0.3 times for 2010. Greece’s sector displayed an improvement from 2008 to 2009 but failed to sustain it, dropping to 0.1 times in 2010 – the lowest of all countries.

Figure 7: Cash from Operations to Total Liabilities (x)

Source: S&P

 

The Bigger Picture

It is clear to see that there are marked discrepancies between northern and southern European consumer staples sectors. Although gross margin returns for Greece’s consumer staples sector were positive in each of the three years studied, the country’s industry had a negative return on capital in 2010. The high levels of leverage observed in the liquidity spectrum imply that interest payments are exceeding the Greek industry’s capacity of generating revenue.

This is corroborated by the cash from operations to total liabilities ratio, where Greece’s sector has lagged behind all its peers. The consumer staples industry in Germany is on the other end of the spectrum, with the highest gross margin of the group and a return on capital of 5.6% in 2010. The country’s sector has also benefited from more conservative leverage levels, falling behind the UK’s industry only in terms of its debt to EBITDA ratio.

Indeed, companies in the UK have the most conservative leverage in terms of debt to assets and debt to EBITDA ratios and the highest liquidity as seen by their quick ratio. This suggests that the country’s consumer staples sector is best positioned to meet its debt obligations in the short term.

Peer groups in Spain, Italy and France, meanwhile, seem to be performing in line with each other, consistently achieving the top three performances for cash from operations to total liabilities. These three sectors also had similar quick ratios in 2010. Out of the three, the consumer staples industries in Spain and Italy have had the strongest return on capital, producing returns to shareholders and being able to repay their debts.

Spain’s sector in particular has continually lowered its leverage and increased its debt repayment capacity, while producing positive return on capital. Companies in Italy, on the other hand, have continued to increase their leverage, despite having the lowest debt to EBITDA ratio of their southern European peers.

Overall, the consumer staples sectors in Germany and the UK have displayed the strongest performances whereas Greece’s industry has proved to be the sick man of Europe – showing that whilst there are marked differences in performances across the continent, which must be taken into consideration by any counterparties and analysts, the consumer staples industry has behaved in line with other industries.

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