Product and market diversity aiding drink maker resilience

By Neil Merrett

- Last updated on GMT

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The European beverage industry will find strength in variety in its attempts to offset the impacts of the current economic downturn, according to a new report.

Beverage manufacturers in the bloc are coming under increasing financial pressure as surging input costs for materials and ingredients are exacerbated by declining consumer spending. However, in its latest research, analyst Moody's Investors Service says there is hope ahead for the industry.

Despite softening economic conditions in both the US and European financial markets, a number of leading beverage companies have moved to boost sales and cut costs their costs by maintaining larger brand portfolios as well as enacting some strategic price cuts, according to the report.

Profit push

Yasmina Serghini, an analyst for Moody’s and author of the new report, said that as a result of these strategies, the entire beverage industry across Europe was proving itself to be resilient to the difficult economic landscape.

“[We expect] that European beverage companies will remain profitable and retain good cash flow generation despite rising pressures on margins as a result of slower economies, still-high commodity prices and changing consumer tastes,"​ she stated. "So far, cost reductions, and positive price and mix effects have helped protect top line growth, particularly for companies engaged in premiumisation strategies."

Expansion impacts

A key feature of these developments has been the growing activity in mergers & acquisitions and joint venture formations over the past twelve months, which the report claims will help drive more cost and distribution efficiencies in the future.

Particularly for larger companies, the report claims that geographical diversity in both the alcohol and soft drink segments has been equally as important as brand volume when it comes to offsetting declining sales figures.

“Moody's also believes that emerging markets will continue to increase their contribution to volume and revenue growth for the European beverage industry,” ​the analyst stated.

“Further acquisition activity is expected to continue for rated companies, albeit at a more moderate pace and scale, as many will be integrating purchased assets and rebuilding their financial profile in the coming months.”

According to the author, its latest European Beverage Industry report rated nine companies primarily based in Western Europe throughout the brewing, soft drink and wine and spirits industries.

Wider economic fears

Despite Moody’s general optimism over resilience in the European beverage industry, the report highlights a number of concerns regarding the bloc’s overall economic health that could still impinge on sector growth.

“In the Eurozone, high energy and food prices are weighing on the ability of both companies and consumers to spend and the strength of the euro over the past year has crimped export growth,”​ the report stated. “While consumer price inflation started to ease in late summer and the euro started to depreciate, those two factors will still dent overall​ gross domestic product (GDP) growth figures for 2008.”

Interest rate interest

Increases in interest rates are also making investment difficult for European enterprises, though the analyst said that the perception of soft drinks and alcohol products as ‘affordable consumables’ meant they were less likely to be hit by wider falls in spending.

Moody’s claimed that there was nonetheless a danger to industry profit margins should consumer visits to bars and pubs fall.

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