Should Consumer Staples Investors Be Worried About Growth?

Should Consumer Staples Investors Be Worried About Growth?

For many producers of consumer staples, and in fact for many producers of pretty much anything, emerging markets have been the areas sustaining growth. With many established markets highly saturated, growth here has slowed meaningfully which has forced companies to look elsewhere for lucrative markets. However, for beer brewers things seem to be slowing down in many of these core growth markets. Heineken's most recent earnings report raises a number of questions on the sustainability of the industry's growth, and perhaps that of the broader sector, as AB InBev and Unilever seem to be suffering from the same problem.

Heineken miss and profit warning
While group revenue for the third quarter was up slightly, 0.4% on an organic basis, the bottom line took a fairly disastrous tumble. Coming in well below analyst expectations, net income fell a hefty 15% to EUR 483 million, or $664.5 million. Following the report, Heineken stock was down around 4.8% in Amsterdam trading .

Worryingly, the weakness was mainly to be found in Heineken's key growth markets which include Central and Eastern Europe, Mexico and Nigeria. Central and Eastern Europe showed the strongest decline, with organic revenue down 4% and organic volume down 7%. Management cited soft consumer spending in Russia as one of the biggest drags on revenue, although political unrest in the region and poor weather were also contributing factors.

The Africa Middle East region showed a 3% organic decline in volume, with inflationary pressures and high unemployment in Nigeria pressuring sales. Volume was down in Mexico as well, with hurricane weather impacting sales. To make matters worse, the company issued a profit warning for 2013. It now expects a modest drop in earnings compared to an earlier view of growth in line with last year. It now plans to increase its cost-cutting initiatives .

Still, the report wasn't all bad. Group revenue per hectoliter was up 2.7%, while the company's premium segment returned to growth for the quarter. Western European organic volume was up around 2%, while US sales were stable. Growth markets in Asia were a bright spot, with beer volume in the Asia Pacific region growing around 2%.

What's are AB InBev and Unilever doing?
Heineken's report raises the question if this development is company-specific, or representative of a broader trend in the industry. So far, AB InBev investors don't seem too worried. However, some of BUD's growth markets are contracting as well, as becomes clear from the company's Q3 report. While the synergy with Grupo Modelo is still going well in Mexico, volumes in the region were down by 2.3% for the quarter, management citing sluggish economic growth and climate factors. Brazil fared even worse with a 5% decline in volume, again due to a weak macro-economic backdrop. The most severe drop however was in Central and Eastern Europe, where volumes were down a worrying 19% for the third quarter. This figure was apparently in line with a very weak industry performance across the region.

The weakness in emerging markets doesn't seem limited to beer brewers. Unilever, another Dutch consumer staples heavyweight, recently threw off a rare profit warning citing slower-than-expected growth in emerging markets. Emerging market sales growth is now seen in the 3%-3.5% range, previously 5%-6.5 %. Growth was seen slowing in India, Brazil, and Indonesia especially because the free-fall in many emerging currencies has led to higher costs and lower consumer spending . It seems that the broader consumer staples sector may be suffering from a hiccup in emerging markets growth.

The bottom line
Heineken's freshest earnings report was a sound disappointment to investors as net income plunged and missed analyst expectations. Weakness in emerging markets especially weighed on results as the company issued a profit warning for 2013. Competitor AB InBev seems to be suffering from a similar slowdown in growth markets, as well as Unilever. While much of these slowing sales are probably due to currencies weakening, investors would be wise to take heed of this development.

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