TEXT-Fitch:Horse meat scandal ups margin strain on smaller food cos

Fri Feb 22, 2013 8:09am EST

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Feb 22 - Europe's horse meat scandal is likely to result in higher costs for the continent's smaller food producers and manufacturers, adding to the pressure on the sector's margins and profits, Fitch Ratings says.

Some of these companies may be already operating on relatively slim margins, partly due to pressure from major retailers to keep prices down. Manufacturers, in turn, put pressure on their suppliers which helped create the complex supply chains and lack of traceability which is at the heart of the current scandal. Ultimately, there is a problem of reputation and trust in certain meat product categories and a few brands associated with this scandal which can take some time to rebuild.

The discovery of horse meat in a variety of beef products will probably lead to tighter health and safety standards and new requirements for labelling and tracing ingredients across the value chain, which will push up costs. Product recalls and lost sales will also hurt revenue in the near-term, though the long-term impact on sales is less clear.

Smaller, less-diversified manufacturers or single-brand manufacturers of frozen food and ready-meals, such as Findus, may be harder hit than larger multiple-brand manufacturers. This could be the case regardless of the small proportion of product lines directly affected due to the reputation damage done by the scandal to individual brands and frozen foods in general.

The impact on bigger manufacturers such as Nestle will be much less because meat-products make up only a fraction of their brands. Similarly, major retailers like Tesco are unlikely to feel any significant impact although the crisis is likely to be long-running, given the complexity of the supply chain. So far, Morrisons has been left unscathed by this scandal, being vertically integrated in the UK where it owns its factories and manufacturing facilities. One thing the scandal may do, therefore, is test the strength of the major UK retailers' market share.

The overall effect on future sales is uncertain. Consumer research and media reports indicate that sales of some frozen meat products have dropped and that consumers say they are less likely to buy these products in the future. But it is unclear how long this might last, especially as the scandal revolves around the misrepresentation of horse meat, rather than a major health scare such as the BSE crisis.

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