Electrolux, Pernod, Imperial Feel Bite of European Budget Cuts
Bottles of Evian water, produced by Groupe Danone SA. Photographer: Fabrice Dimier/Bloomberg
Europe’s biggest consumer companies are starting to feel the pinch of budget-cutting.
Electrolux AB, Imperial Tobacco Group Plc and Pernod Ricard SA said last week demand slackened as shoppers cut back on appliances, cigarettes and liquor. Groupe Danone SA today reported weaker sales growth and further evidence of a European consumer slowdown may be provided by LVMH Moet Hennessy Louis Vuitton SA and British American Tobacco Plc in coming days.
“Reality will continue to hit the consumer, especially in southern Europe, as disposable income suffers through higher taxes and pay cuts,” said Jane Coffey, who helps manage about $50 billion at Royal London Asset Management Ltd. “In lots of sectors, capacity has not yet been cut in response to lower demand and we would expect further pricing weakness.”
Governments in Greece, Spain, Italy and the U.K. have pledged spending cuts to prevent a continent-wide debt shock. Electrolux, the world’s second-biggest appliance maker, said southern European demand “weakened considerably” toward the end of the second quarter, while Imperial Tobacco’s volume decline worsened and Pernod said revenue missed estimates.
The extent of the slump was unexpected. Electrolux stock dropped 7.8 percent on July 19 and Imperial Tobacco fell 2.9 percent on July 22. Pernod declined 2.3 percent the next day.
Telecoms, Cement
“The effect will probably be felt stronger this quarter as spending cuts start to impact on real spending,” said Mark Bon, who helps oversee $750 million at Canada Life Ltd. in London.
Industries from telecommunications to construction are also coming under pressure from government cutbacks.
Vodafone Group Plc, the world’s largest mobile operator, said July 23 its Spanish service revenue dropped 6.2 percent in the fiscal first quarter, while Italian revenue fell 2.5 percent. Telefonica SA of Spain is “heading for a profit warning this year,” Sanford Bernstein analysts wrote July 21. The telecoms company will report earnings on Thursday.
Italcementi SpA, Italy’s biggest cement maker, will get no earnings contribution from its home market in the first half, Exane BNP Paribas analysts estimate.
While the European economy is forecast to return to growth, the Greek economy is set to shrink 4 percent this year, twice the rate of 2009, according to estimates compiled by Bloomberg. The Spanish economy may contract 0.5 percent.
Demand Reversal
“Within Europe, there’s a lot of volatility among different markets,” Electrolux Chief Executive Officer Hans Straberg said July 19. Demand has reversed from the beginning of the year, when consumers in southern Europe were still buying stoves and vacuum cleaners while northern and eastern European demand was weak, the CEO said.
Pernod’s western European sales in the three months ended June 30 were hurt by the U.K., Spain and Greece, the Paris-based distiller said July 22, as declining consumer confidence deterred shoppers from buying premium brands. Danone’s sales growth in Europe slowed to 1.4 percent in the second quarter from 2.1 percent in the first three months of the year as the Spanish markets for water and dairy were “challenging.”
Reckitt Benckiser Plc yesterday said the European market was expanding less than 1 percent by volume, slower than the growth of up to 4 percent the company had anticipated. Reckitt manufactures a range of household and medicinal products including Nurofen painkillers.
‘Remains Troubling’
“Europe remains troubling,” Credit Suisse analyst Anthony Bucalo wrote in a note on Pernod. Greece, Spain and the U.K. have “clearly become more challenging as economic weakness and austerity programs take hold.”
The U.K. coalition government has pledged to reduce the budget deficit to safeguard the nation’s top credit rating. Chancellor of the Exchequer George Osborne announced an initial 6 billion pounds ($9.2 billion) of cost cuts on May 24.
Cable & Wireless Worldwide Plc shares slumped 20 percent on July 20 after the telecoms company said discretionary government spending has “slowed very significantly.”
Some industries are still being boosted by growth-spurring measures introduced during the recession. Volkswagen AG and Renault SA have benefited from a surge in demand because of government incentives for new car sales in Spain, Portugal and Ireland. That may change as governments cut back.
While Greek tax increases may have hit beer sales in that country, a warm summer and a Spanish victory in the World Cup may have helped offset declining consumer confidence in other places, according to Alex Oldroyd, a London-based analyst at Barclays Capital.
“Beer is not as bad as spirits,” she said. Spain “was the winner of the World Cup in beer terms and the weather was pretty good in Europe. Weather is more important than the economy for beer.”
To contact the reporter on this story: Paul Jarvis at pjarvis@bloomberg.net.
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