Stable outlook for European beverage industry

The outlook for the European beverage industry is stable, despite a difficult economic climate, Moody's Investors Service said in a new report. The companies have sparked revenue growth and mitigated costs by retaining a large portfolio of brands at various price points, including premium products. They have also enacted strategic price increases, cut costs and hedged where possible against the rising costs of commodities. Recent mergers, joint ventures and acquisitions have further reshaped the competitive landscape. The report, "European Beverage Industry Outlook", expresses the rating agency's expectations for fundamental credit conditions in the industry for the next 12-18 months.
Moody's notes that input costs, especially the prices of aluminium, sugar and barley, have increased in the past year, continuing to put pressure on margins. Furthermore, softening economic conditions in the US, where many of the rated companies have a substantial presence, as well as in European markets, have reduced consumer spending, holding back volume growth.
"However, the industry has proven that it is somewhat resilient to general consumer downturns, because of the overall low prices and variety of its products," explained Yasmina Serghini, a Moody's analyst and author of the report. "Also, most rated beverage companies enjoy good geographic diversity, which helps offset volume slowdowns in markets where consumer spending is tightening," she said.
"Moody's also expects 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," said Serghini. "So far, cost reductions, and positive price and mix effects have helped protect top line growth, particularly for companies engaged in premiumisation strategies."
Moody's noted that increased M&A and joint venture activity in the sector in the past 12 months, especially amongst brewers, has expanded their scale, geography and portfolio of brands; as a result, Moody's is expecting savings through cost and distribution efficiencies. Moody's also believes that emerging markets will continue to increase their contribution to volume and revenue growth for the European beverage industry. 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.
Moody's currently rates nine European beverage companies, mainly located in Western Europe. The companies operate in the soft drink, brewing, wine and spirits industries.