NEW YORK — For U.S.-based consumer product companies, the business challenges of 2005 will return in 2006, but will be more intense, according to a report last week from Fitch Ratings.
The ratings firm described 2006 as having “limited upside” potential in sales and profit growth. Higher interest rates, rising raw materials costs (due to higher oil prices) and consolidation, which will increase sales concentration levels, is expected to make the next 12 months more challenging than 2005.
However, the ratings firm said it expects the household products and personal care segments to perform better than other segments in the consumer products sector. “These companies have well-supported, strong brands and an ability to produce well-conceived, new products that can command premium pricing in sectors with less cyclicality or narrowing markets,” Fitch said in its report. “The toy sector and those companies exposed to the fortunes of the housing industry are expected to face more difficult conditions.”
Other events in the second half of 2005 that will impact the industry in 2006 include several acquisitions and share buybacks. Fitch also said companies are engaging in restructuring strategies to reduce costs and “to enable companies to defend their market positions.” There have also been a number of executive changes and other “event risks” as companies “face difficult decisions regarding ongoing operations.”
“In general, price increases and productivity improvements have been able to mitigate rising material costs, but not offset them,” the firm said in the report. “Rating activity was moderately negative in 2005, reflecting an inability to meet these rising costs and sustain market positions, acquisitions and a severe decline in financial strength at one company.”
Against this backdrop is softer global growth, “which has slowed from last year’s near-record 4 percent to a more sustainable 3 percent pace during 2005.
“Business spending has wavered after last year’s rapid growth, but consumer spending has, until recently, been sustained by a continuing strong housing market,” Fitch continued. “That is likely to reverse at some stage, easing GDP growth to 3 percent or below next year. Sectors such as appliances and other consumer durables that have some level of dependence on the housing market will be negatively affected by these cyclical forces.”
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Another factor that is expected to limit top- and bottom-line growth in the consumer products sector is pressure on the disposable income of low- and middle-income consumers. The pressure is not only being driven by “sustained high gas and heating oil prices and high consumer debt levels, but also by many large employers downsizing their labor force in restructurings.”
As a result, there may be pricing pressure on certain goods. In turn, gross margin growth will be weaker.
“Intense competition will continue and scale will become more of an issue particularly for those who compete against [Procter & Gamble]. The sheer size of the company, even prior to its merger with Gillette, has prompted several restructuring announcements as companies free up funds for brand support,” the report said.