Consumer Products Outlook 2021 - Scope Ratings
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Consumer Products Outlook 2021 The credit outlook for European consumer products sector is stable. The Covid-19 pandemic is disrupting demand, but Scope expects there will be limited impact on credit quality for investment-grade companies. Consumer Products, Scope Ratings GmbH, 14 January 2021 info@scoperatings.com │ www.scoperatings.com │ Bloomberg: RESP SCOP
Consumer Products Outlook 2021
Executive summary
The coronavirus pandemic has disrupted demand for consumer goods but suppliers have
proved resilient. Consumer goods companies are helped by the spread of e-commerce as
Covid-19 restrictions have forced people to spend more time at home. We see a recovery in
demand in 2021 amid possible further changes in the structure of distribution channels. The
credit outlook for the European consumer goods sector in 2021 is stable.
The main trends for the year ahead are:
• Sustained changes in shopping habits triggered by the pandemic will enhance the potential growth for
consumer-product companies with direct e-commerce channels.
• The adverse effects of the pandemic on the broad economy and employment have resulted in weaker
demand for less-essential products. Demand for non-discretionary consumer goods remains resilient.
• Demand for travel items will remain relatively weak before widespread vaccination against Covid-19
allows a ‘return to normal’ which would lead to improved consumer sentiment – reversing the recent trend
favouring savings over consumption – and the lifting of restrictions on travel.
• Lockdowns and other physical distancing protocols have led to more eating and drinking at home rather
than at cafés, bars and restaurants, so food and beverage manufacturers can expect continued weak out-
of-home sales until Covid-19 restrictions are eased.
• Investment grade consumer goods companies, characterised by diversified product line-ups and strong
cash flow, have generally taken prompt action to reduce costs and cash outlays (such as dividends), to
protect themselves from the worst economic and financial consequences of the pandemic. We expect to
see limited rating impact on investment grade consumer products companies in our coverage.
2Consumer Products Outlook 2021
Contents
Executive summary .............................................................................................................................................. 2
Key trends for 2021 ............................................................................................................................................... 4
Changing habits................................................................................................................................................... 4
Travel goods in a squeeze .................................................................................................................................. 4
Branding to increase in importance ..................................................................................................................... 5
Non-discretionary items in demand ..................................................................................................................... 5
Rating impacts ..................................................................................................................................................... 5
Annex II: Related research ................................................................................................................................... 6
Scope Corporate Ratings
Henrik Blymke John F. Opie Per Haakestad
Managing Director, Corporates Associate Director, Corporates Intern, Corporates
h.blymke@scoperatings.com jf.opie@scoperatings.com p.haakesad@scoperatings.com
3Consumer Products Outlook 2021
come through the pandemic with relatively few major
Key trends for 2021 upsets and bruises. Many companies reacted robustly
to shifts in demand and government actions to counter-
Changing habits act the pandemic and have been proactive in adjusting
to shifts in sales channels.
The Covid-19 pandemic has disrupted demand for
European consumer goods companies, from the heavy Consumer goods companies have always faced the
hit the region’s economies have taken to the altered challenge of staying ahead of disruptive forces. The
patterns in consumer behaviour (Figure 1). Broadly pandemic intensified this challenge. While many
speaking, changes in demand stemmed from two consumer behaviour shifts are almost certain to be
groups of people: those adversely affected by the temporary, there are strong indicators that there will be
pandemic financially and those whose habits changed some permanent changes to consumer behaviour.
due to physical distancing and other pandemic control Possible changes might include a shift to brand value
measures. away from private-label, budget and generic products,
and a general tendency to consume more at home.
These changes in consumer behaviour have an impact
on the consumer goods industry in three ways: they The accelerating shift to e-commerce is clear and has
have encouraged greater savings in the wake of grown dramatically in 2020 (Figure 2). In Europe, the
negative consumer sentiment, increased consumption UK clearly leads the way in online shopping, while a
at home, and lowered spending on non-discretionary proportionately larger shift took place in Spain last year.
goods. These changes will manifest in shifts in The expected drop in e-commerce shares of retail trade
distribution channels and in the mix of consumer goods in 2021 reflects recoveries in more traditional channels
bought and consumed. as the pandemic ends.
We believe that both consumer groups affected by the Figure 2. E-commerce share of retail trade
pandemic will shop less at physical stores, even after 201 4 201 5 201 6** 201 7 201 8 201 9 202 0F 202 1F
these re-open, as any ‘return to normal’ will take time to 30
change pandemic-related behaviour, even after 25
vaccines are administered and herd immunity takes
20
effect.
15
More innovative companies that are more attuned to 10
understand consumer preferences are also more likely 5
to take advantage of multi-distribution channels to 0
connect with their customers in 2021.
The negative direct effects on the industry in the EU
(Figure 1) mirrors the drop in consumer demand.
Source: retailresearch.org
Production of durable goods in the EU declined by 27%
peak-to-trough, with non-durables declining by 14% We expect that much of the shift in distribution channels
and overall consumption spending down by 16%. will last into 2021 and beyond, away from low-margin,
high-volume bricks-and-mortar retailers to e-commerce
Figure 1. Consumer spending, consumer goods and brand-value channels.
manufacturing take big hit from Covid-19 crisis
One of the side-effects of the pandemic has been
EU 27 (excl.UK), Pri vate Fi nal Co nsu mp tion Expen diture, Index 2015=100
EU 27 (excl. UK) - Non-Durabl e Consumer Goo ds, 2015=100 ide x
significant increases in savings (Figure 3) as
EU 27 (excl.UK) - Durab le Con sumer Go ods, 2015 =100 in dex consumers, facing the negative effects of the pandemic,
115
saved personal disposable income rather than
110
spending it.
105
100 Travel goods in a squeeze
95
We expect this big shift from consumption to savings to
90
prove temporary, but, in the meantime, one sector is
85
80
especially vulnerable: travel goods (not including travel
services). Overall demand will return once the
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pandemic is more under control with many people
vaccinated, but any recovery in passenger traffic looks
as if it will be slower and more protracted than first
Source: OECD, EuroStat
anticipated in the early phases of the pandemic. Some
Hence both durable and non-durable consumer goods indications today suggest that air travel volumes will not
show both a strong negative impact and strong return to 2019 levels before 2025. As a result, travel
recoveries through the end of 2020, with durable goods goods remain particularly vulnerable to pandemic-
now above pre-pandemic levels. While production was related lockdowns and travel restrictions, as well as
reduced significantly, consumer goods companies have decreased spending for non-essentials.
4Consumer Products Outlook 2021
Figure 3. Euro area YoY % increase in private companies enjoy more purchasing power with key
household savings suppliers, which also makes it easier to be a price-setter
12
among competitors.
10
8 Consumer durable production has already exceeded
6
pre-pandemic levels (Figure 1), with strong recovery
4
2 (+39% trough-to-peak, vs. 13% for both personal
0 consumption and consumer non-durables). This
-2
-4 reflects strong pent-up demand that should provide
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solid impetus for further growth in 2021, provided that
pandemic side-effects (i.e. higher unemployment) do
not continue strongly into 2021.
Source: ECB
Rating impacts
We believe that some companies will need to rethink
some of their business models in order to get demand We rate numerous consumer goods companies ranging
back quicker in 2021. Although some recovery is from investment grade to speculative grade. Of these
expected in passenger air traffic in 2021 (and other form companies, a couple of entities have seen their rating
of international travel), it is definitely not high enough to outlook turn to Negative from Stable. Both companies
restore confidence. In our current view, the first year of were rated below investment grade.
significant demand rebound is 2022, based on the
expectation of global vaccinations and lifting of We expect investment grade companies to continue to
government travel restrictions. show strong resilience and remain healthy, with
relatively low free operating cash-flow volatility.
Branding to increase in importance Companies here have reduced uncertainty of recovery
from the pandemic, as they generally tend to be makers
We expect brands to become even more important in of non-durable goods and have strong brand presence.
the consumer goods sector than they have been in the
past as companies differentiate themselves in a market For the non-investment grade companies, we expect
increasingly reliant on online sales and marketing and free operating cash flow generation to remain volatile,
distribution direct to consumers. Companies with reflecting not only the smaller sizes of these companies
already established brands with loyal followings are at and their dependence on more limited distribution
an advantage. chains and products, but also weaker brands and thus
the uncertainty of demand recovery from the pandemic.
As an example of this trend, French luxury
conglomerate LVHM – with its stable of strong brands Figure 4. Consumer goods credit metrics
such as Moët, Vuitton, Dior – succeeded in accelerating (average)
its direct online sales last year when sales from retail EBITDA in tere st cover SaD/EBITDA
stores declined. This is not necessarily been the case FFO /Sa D (rhs) FOCF/SaD (rhs)
for smaller rivals with less strong finances and less well- 30.0x 0.5x
known brands. 25.0x 0.4x
20.0x 0.3x
In the food & beverage sector, companies with strong
15.0x 0.2x
global branding were able to offset declines in the sales
10.0x 0.1x
from significant lower out-of-home volumes - as the
5.0x 0.0x
pandemic forced the partial or complete closure of bars, 0.0x -0.1x
sporting events and restaurants - to some degree by 201 7 201 8 201 9 202 0 202 1
exploiting other sales channels. However, we still saw Source: Scope Ratings GmbH
that beer giants like Heineken NV or AB InBev were
adversely affected by the crisis and have started to re- When assessing the impact of the Covid-19 pandemic
think responses to the impact of government lockdowns on Scope credit metrics, we have looked at analyst
and restrictions on social gatherings. forecast expectations of our rated consumer product
universe (Figure 4). Currently, Scope expects FY2020
Non-discretionary items in demand cash flow metrics1 such as FFO/SaD and FOCF/SaD
multiples to be clearly weaker than 2019. Still, looking
Consumer product companies with strong market at the overall average forecasts for SaD/EBITDA at
positions are more resilient during economic YE2020, the average expectations are for increases, if
downturns. Such companies are not only large with high not severe ones. Going into 2021, the average analyst
market shares but are also favourably positioned in consensus is for leverage to decline again, but not all
supply and distribution chains, with low dependence on the way back to the level at end-2019.
any specific distribution channel or customer. These
1
Funds from operations/Scope-adjusted debt; free operating
cash flow/Scope-adjusted debt; Scope-adjusted debt/earnings
before interest taxes depreciation and amortisation
5Consumer Products Outlook 2021
Annex II: Related research
European corporates: creditors, taxpayers bear Covid-19 financial burden; will shareholders in 2021?,
published Dec 2020, available here
Rating Methodology: Consumer Products, published Sep 2020, available here
Commercial real estate in Europe: retailing-exposed segment faces tough months ahead; UK in focus,
published Sep 2020, available here
European retailing: Covid-19 separates e-commerce leaders from rest; credit outlook still negative,
published Mar 2020, available here
6Consumer Products Outlook 2021
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