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Spanish Consumer Goods Companies See Tougher Times Ahead

Highlights

- Spanish consumer goods companies are entering into a phase of slower economic activity that will weigh on revenue growth in 2019 and 2020.

- The purchasing power of households will rise more slowly due to more sluggish job creation, which, combined with an already low savings rate, will translate into weaker growth in consumption and thus decreasing demand for consumer goods.

- We expect export-oriented, geographically diversified Spanish consumer goods companies to better cope with these domestic trends, but at the same time remain exposed to international trade tensions.

- Due to their exposure to economic cycles, Spanish companies in the consumer goods sector in our view will have to build sufficient buffers to maintain or improve their current creditworthiness in 2019 and 2020 as the economy slows.

Jan. 21 2019 — Increased costs, intense competition, and several strategical missteps. That was the year 2018 for two big Spanish consumer companies that S&P Global Ratings covers, DIA (CCC+/Negative/--) and Deoleo S.A. (CCC+/Stable/--), which triggered falling credit metrics and then negative ratings actions.

On Oct. 15, DIA announced a profit warning after suffering margin erosion due to stiff price competition in the Spanish market, especially from the No. 1 retailer Mercadona. What's more, strategic slip-ups, high restructuring costs, and financial missteps resulted in weak top-line performance and dented overall creditworthiness. Meanwhile, Spanish olive oil bottler Deoleo faced tough competition in the U.S. where its premiumization strategy is facing hurdles because of the company's inability to lure customers. Furthermore, Deoleo's margins have been narrowing in response to new highs for volatile olive oil prices since 2017.

Although some of these challenges are unique to DIA and Deoleo, especially the strategic missteps, we believe the Spanish consumer goods sector overall will face more difficult operating conditions in 2019 and 2020, namely, weaker economic growth and rapidly changing consumer preferences. We expect Spanish consumer confidence will decline in coming years and push manufacturers to focus much more closely on price cliffs while rapidly changing consumer tastes in the country--toward convenience, experiences, and healthier options--will likely test logistics, and pricing and product differentiation. Due to their exposure to economic cycles, Spanish companies in the consumer goods sector in our view will have to build sufficient buffers to maintain or improve their current creditworthiness in 2019 and 2020 as the economy slows. Yet, some opportunities are likely to surface for Spanish consumer goods companies that can offer a broader range of price points for their products and with geographically diversified operations.

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