The European packaged-food industry faces a pivotal H2 with accelerating inflation and potentially new normal consumer behaviour. Bloomberg Intelligence has released its Europe Packaged Food 2021 Outlook, which states that if inflation turns out to be transitory, the inability to boost volume and pricing simultaneously since 2015 remains in place, unless companies such as Nestlé and Danone can convince consumers to start eating away from home again where margins are higher.
The emergence also helps Direct-to-Consumer and e-commerce platforms which now account for more than 10% of revenue and now need continued investment.
Duncan Fox, Senior Industry Analyst, Consumer Products, at Bloomberg Intelligence, said: “The narrowly focused MSCI European food index has underperformed the Stoxx 600 by 5% since the start of 2020, after being at a 22% premium at the peak of the pandemic. The sector slipped as normal economic activity returned.
“The broad Stoxx consumer staples index trades at a 50% premium to the Stoxx 600, so companies must deliver on both volume and pricing, tough given higher input prices will have to be passed on this year. This explains why analysts are forecasting growth in 2022, rather than 2021. Dividends are key to sustaining valuations.”
Volume and pricing growth remained mutually exclusive for EU packaged-food companies during 2020, largely due to the demise of food-service custom, yet the sector’s safe-haven status helped it to outperform, according to BI.
However, this sales dynamic must change in 2021 as economies recover from lockdowns, though significantly higher input costs may challenge managements’ pricing skills. Yet the prospect of a wider vaccine rollout by 3Q21 has aided the broader industry Stoxx 600 to marginally outperform the Stoxx consumer index by 1% through June 23.
The more narrowly focused MSCI European food index and broader BI packaged–foods index have trailed the Stoxx 600 by 4%, or performed in-line through June 23, respectively. Appetites endure, but a recovery for high-margin food service sales will take time, concludes BI’s report.
Fox at Bloomberg Intelligence added: “European packaged-food companies need to use their robust cash flows to boost organic growth as Covid-19’s impact wanes. Eating habits are changing, with more emphasis on healthier, local food where competition is already intense, which makes having access to the right raw materials essential to controlling pricing.
“Product initiatives will have to be targeted both to meet local needs and at the right price point, or achieving organic-sales and margin growth could be an elusive pursuit, especially as input costs have risen rapidly in 2021.”
Acquisitions and share buybacks will likely be how the European packaged-food companies invest their excess cash over the next few years, though dividend payments will remain a core part of shareholder returns. These payment should continue to expand in-line with earnings, and generally consume around half the cash generated by the companies.
Share buybacks have been limited to Nestle and Novozymes, though Danone has just announced a large distribution after completing the sale of its China Mengniu Dairy stake for 1.6 billion euros.
Fox at Bloomberg Intelligence added: “Nestlé will continue with its 20 billion franc buy-back through 2022 while also looking at M&A, as it has with the recent $5.75 billion Bountiful deal. Though it looks like Chr. Hansen has cut its dividend, it was just deferred as it awaits proceeds of an asset sale.”
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