LONDON |
LONDON (Reuters) - Anglo-Dutch group Unilever makes a margin estimated at over 25 percent on the Flora 'pro-activ' spreads and drinks beloved by the wealthy and healthy, while its standard margarines command a margin closer to 15 percent.
And therein lies the problem.
With the euro zone debt crisis threatening to spill over into a recession in Europe, margins at the major food groups are going to get thinner, challenging the received wisdom of recent years that they are insulated by sales in fast-growing emerging markets.
The fact is that the spreads or cooking oils of choice in these markets are more often the lower margin types and not the high end cholesterol-lowering products, also sold under the Flora and Becel brands.
"With the euro zone crisis deepening into a slowdown across Europe, this has to be a worry for these group's high margin food products aimed at Europe's most affluent consumers," said one major investor with shares in Unilever.
The group's margins last year were the highest at 16.1 percent in western Europe, boosted by top brands such as Knorr and Hellmann's, while they were 13.4 percent in emerging markets where it sells products like Rama margarines.
Unilever is not alone. It will create a headache for the likes of Nestle and Danone too.
All three have been adept at driving sales in emerging markets, but now are increasingly concerned about a Europe beset by debt and austerity.
Investors worry that Nestle's Nespresso coffee capsules could suffer in Europe even as its cheaper coffee brands expand elsewhere, and Danone's specialist Milupa babyfoods may struggle while its more basic baby milk formula thrives.
Analysts say we may be seeing a tipping point in the emerging market growth story, and one that could be gathering pace in other industries. Luxury car maker Daimler said in October that the downturn in Europe is now outweighing growth in emerging markets for its bottom line.
Ford has blamed a drop in quarterly profit on Europe, and Volkswagen said the debt crisis will weigh on western Europe, while Dutch brewer Heineken has seen tough trading in Europe offsetting gains in markets like Mexico and Nigeria.
Unilever and Nestle have already cautioned on margins for 2011 blaming tough trading in Europe and saying they will need more spending to keep momentum behind their brands, while the European Commission has warned the euro zone economy grew just 0.2 percent in the third quarter.
The Commission expects the economy of the 17 countries using the euro to shrink 0.1 percent in the last three months of 2011 and stagnate in the first quarter of 2012. Economists say an outright recession is now quite likely.
"This will really test food groups' defensive qualities, as a prolonged slowdown will lead to downtrading to cheaper items and cutting back on luxury ones," said another investor with shares in Unilever.
All three groups are expected to see underlying sales growth of over 6 percent this year driven by emerging markets and price increases, but the pressure on margins will start to show on the bottom line.
Earlier this month, Unilever said tough markets in western Europe were a major reason behind its warning of flat to lower margins for 2011 compared to its medium-term aim for a steady improvement in margins each year.
"The net-net is that Unilever did not deliver, whatever the excuse. It is going to take a little longer to build a reputation for steady, dependable operating performance, including meeting its own targets," said analyst Andrew Wood at Bernstein Research.
Analysts now expect the Anglo-Dutch group's underlying operating margins for 2011 will fall by 0.1 percentage point to 14.9 percent. They had previously had them rising by a similar amount to 15.1 percent, and that decline is worth around 100 million euros in lost profit.
Over at Nestle, the maker of brands such as Maggi, Nido and KitKat, the mood music has also changed on 2011 margins. The group now says it is "striving" to grow margins after previously being "confident" of growth.
Bernstein's Wood suggests Nestle is having to invest heavily to sustain sales growth which means it will just "crawl over the finish line" and see only a slight improvement over 2010's operating margin figure of 14.8 percent.
Paris-based Danone still expects to see 2011 margins rising 0.2 percentage points from 2010's 15.6 percent, but the marketer of Activia yoghurt and Evian water is the most exposed of the three to western Europe with 38 percent of group sales there compared to Unilever with 26 percent and Nestle with 28 percent.
(Reporting by David Jones; Editing by Chris Wickham)
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