Cost-cutting initiatives will ‘continue to be the primary driver of profit growth in the consumer packaged goods sector’, according to a new outlook report from Moody’s Investors Service.
The report, Outlook Remains Positive As Cost-Cutting Initiatives Continue Driving Strong Profit, says that despite weakening consumer spending, operating profit will rise between 4.5% and 5% in the consumer packaged goods industry over the next 12 to 18 months, as companies continue to roll out cost-cutting initiatives in their businesses.
‘Consumer confidence remains relatively strong, although consumers remain relatively cautious in their purchase making decisions,’ Moody’s said in its report. ‘Slowly declining retail store traffic will also hurt the sector as consumers increasingly buy products online.’
Consumer spending is likely to remain stable during 2018, however a lessening of disposable income is likely to affect CPG firms that sell discretionary products such as fragrances and grooming essentials, such as Coty Inc and Revlon, Moody’s reported.
Emerging markets are also likely to provide a boost to several firms, with G-20 emerging market economies to see GDP growth of about 5% through 2018, Moody’s noted. Russia’s emergence from recession is likely to boost the performance at Henkel, it said, wit round 7% of the company’s revenue generated from that market.
Elsewhere, a strong US dollar will weigh on US-based companies that generate much of their revenue overseas.
‘Although the US dollar has fallen from its recent highs, foreign-currency translation will continue to hurt earnings at P&G, Kimberly-Clark Corp and Colgate-Palmolive Co, which all generate about 60% of their revenue outside of the US,’ Moody’s noted. ‘Some companies will try to increase prices to offset foreign-currency losses, but aggressive promotions will limit their ability to do so in advanced markets.’