April 30 (Reuters) - (The following statement was released by the rating agency)
European spirits manufacturers will probably maintain their high levels of trade investment in China despite a slowdown in sales growth that will take time to recover, Fitch Ratings says.
While this investment will hit profit growth from operations in the Asia-Pacific region, we believe it will be affordable thanks to continued strength of the much bigger US market, where spirits are boosting market share at the expense of beer.
Diageo, Pernod and Remy Cointreau all reported sharply lower growth rates in Asia Pacific between April 2012 and end-March 2013, although all remained comfortably in positive territory. We believe this was in part because of the political changeover in China, which has included a crackdown on gift-taking and personal spending by civil servants.
We expect sales growth for high-end spirits to improve in 2013-2014 following the completion of the changeover and some resumption of gift-giving, but a full recovery to the pace of 2011 is unlikely. Private consumption will support growth, especially among drinks that are already well established in the market, such as cognac.
The eventual impact of the slowdown on consolidated earnings is unclear and will depend on how companies adjust their spending. Spirits manufacturers can cut advertising and promotional spending quickly when necessary. However, in China they may decide against this as the country remains a key growth market in the long term - companies may be willing to keep paying to ensure their products remain on shelves in bars and restaurants.
Among the major European spirits companies, Diageo has the biggest relative exposure to the strengthening US market, which will help compensate for a slowing Chinese market and continued weakness in western Europe. Diageo reported sales growth in Asia-Pacific slowed to 4% in the first nine months of its fiscal year (9M13) from 10% a year earlier, while North American growth edged up to 6% from 5%.
The popularity of cognac compared to scotch whisky should help limit the impact on Remy Cointreau, for which organic sales growth in Asia Pacific slowed to a still-strong 20% in the first half of FY13 from 34% a year earlier in Asia. Pernod’s consolidated sales growth of 4% in 9M13, only marginally lower than Diageo’s 5%, also enjoyed a degree of resilience thanks to its cognac portfolio and despite a lower exposure to the US than Diageo (approximately half of Diageo’s 33% of sales) and a larger one to western Europe.