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.