Slow Growth Prompts Innovation and Earnings Focus for Consumer Products Industry

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Higher food inflation pass through from weaker currencies and tightening monetary policy in emerging markets have increased the cost of living resulting in slowing consumer demand for the U.S. consumer products industry according to Fitch Ratings.

Furthermore, in emerging markets, softer expansion of consumer credit will weigh on consumption through 2014. With both lower consumption and price competition in developed markets, Fitch anticipates organic growth of 3% in 2014 versus 4% in 2013.

Fitch also notes the issuers can no longer depend on pricing to boost organic growth, with Fitch anticipating that pricing will contribute less than 1% to turnover in 2014.

Despite underlying macroeconomic pressures, Fitch's credit and sector outlooks for both the U.S. and EMEA consumer products sector is stable. Fitch believes that the industry's solid FCF and margins will provide flexibility for issuers to manage capital structures and credit metrics appropriate for current ratings.

Consumer products companies have long had cost and efficiency programs both to grow EPS in a slow growth rate environment as well as to provide a cushion for volatile currency movements and commodity costs. Further, issuers have been pruning their portfolio of marginal or unprofitable businesses and/or increasing investment in faster growing regions or margin-accretive categories. Both actions support stable or improving margins. Fitch also expects limited M&A activity, with most issuers having a stated desire for bolt-ons only.

Leverage is expected to decline in 2014 and most rated entities have ample headroom within current rating categories.

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Tags: USA 

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