By Tom Bergin
LONDON, April 27 (Reuters) – Companies are planning for a
two speed Europe, devising strategies to take advantage of
growth in the northern part of the continent while plotting more
corporate austerity for the moribund south.
Dismal overall European sales were a recurring theme among
big U.S. and European companies reporting first quarter results
in the past fortnight.
But beneath the headline numbers was a clear trend of a
bifurcated economy – recovery in Germany and the Nordic
countries combined with further sales drops in Italy, Spain,
Greece and Portugal.
“Germany, the Netherlands, the UK, and the Nordic had pretty
good orders performance and Southern Europe is in a lot tougher
shape. So there’s a real split going on there in terms of the
economic activity,” Keith Sherin, General Electric Co.
Vice Chairman and Chief Financial Officer told analysts last
week.
Swiss engineering group ABB said its orders in the
first quarter were up in Germany by 14 percent, in Britain by 12
percent and in Sweden by 21 percent compared to the same period
last year. Italy was down by 26 percent.
Food group Danone said it saw the negative first
quarter trend in southern Europe continuing into the second
quarter.
French industrial group Schneider said it did not
see recovery before the fourth quarter, partly because
government austerity measures – which are set to continue – were
eating into demand.
The weak outlook echoes economists’ forecasts which predict
that economies in Spain, Greece and Portugal would contract this
year and next and that Italy would see falling growth this year
and stagnation in 2013.
CORPORATE AUSTERITY
The weak outlook for southern Europe has prompted many
companies to look at cutting costs and scaling back operations.
Italian carmaker Fiat SpA, which is highly reliant
on its home market for European sales and manufacturing, said
weak demand prompted it to put a hold on investments.
“We need to be careful in maintaining our resources and
safeguarding the organisation until we get better clarity on the
development of the market,” Chief Executive Sergio Marchionne
said.
Finnish elevator maker Kone was among other companies which
said they had implemented restructuring measures to tackle the
sluggishness in southern Europe.
Some companies are trying innovative measures to allow them
maintain their footprint in Southern Europe, so they can
capitalise on any recovery which may materialise, but not rack
up huge losses at the same time.
French Carrefour, Europe’s biggest retailer, said it was
pushing a “southern Europe-wide plan” that involved cutting
costs and increasing its push of cheaper Carrefour-branded
goods.
That’s bad news for sellers of branded goods like
Paris-based Danone, which said it was seeing “significant
down-trading in the market to private label” goods.
Some analysts have suggested the downturn in markets like
Portugal and Spain represented an opportunity for international
groups to make cheap acquisitions that could, when southern
Europe recovers, pay dividends.
The problem, executives say, is that one has to believe in
that recovery.
“We’re starting to see prices come down in Europe for some
of the properties but again, you have to make some assumptions
about when you’re going to see an upturn,” said Chuck Bunch, CEO
of U.S.-based chemical maker PPG Industries.
TRADING OPPORTUNITY
Even if firms struggle to profit from the split in Europe’s
economic prospects, analysts say that investors might still
manage to do so.
On the basis of this bifurcation, Deutsche Bank is advising
clients to favour Dutch staffing group Randstad, over its
Swiss-based rival Adecco.
Since the two companies are focussed on European employment
market, the two usually trade in tandem. However, the investment
bank reckons that Adecco’s relatively high exposure to southern
European markets may weigh on its shares.
That said, Deutsche notes that if things get so bad in
southern Europe that countries there are forced to enact
measures to liberalise their labour markets, while northern
Europe’s relative comfort prevents fundamental reform there,
this could see Adecco outperform.
“If there is significant Southern European labour market
reform then Adecco will likely be a relative winner,” the bank
said in a research note.
(Additional reporting by Niklas Pollard in Stockholm; Editing
by Peter Graff)
