How I learned to stop worrying and love the eurozone crisis

The ongoing financial downturn is harming individuals and businesses across the globe… but there are some for whom the recession has prompted a steady period of growth

 
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With talk that the economies of many European Union member states can expect to grow more slowly than even the most pessimistic forecasts next year – or stagnate or recede altogether in some cases – there seems little to be cheerful about as 2012 goes on. Yet as we move into the fifth year of the recession, there are still many businesses from diverse industry sectors that are bucking the trend and making substantial profits, and that are set to grow even more.

Supermarket sweep
Despite hard times, everybody still needs to eat, and Europe’s biggest supermarkets have used their enviable credit-worthiness (as retailers are paid immediately for goods on receipt, they are able to use their cash-flows to bargain for products) to drive down prices from their suppliers to get more people into the stores. And the strategy is working well. In October, Germany reported the highest retail sales figures for nearly three years. On the month, turnover increased by 0.7 percent (beating all forecasts), and sales rose at the fastest rate since April.

In the UK, while the retail sector may be struggling generally, supermarkets seem to be bucking the trend. In April 2011 Tesco, the UK’s biggest retailer, reported record profits of £3.8bn – more than £10m a day – but admitted that it needs to do better in its core UK operations. Results for the year-to-end February showed that the bulk of Tesco’s 12.3 percent profit increase came from its growing Asian operations. Total group sales were £68bn and in the UK sales grew 5.5 percent to £45bn, with trading profits ahead by 3.8 percent to £2.5bn. Tesco’s strongest growth came in Asia, where profits grew by 30 percent to £570m.

In November Sainsbury’s, the UK’s third-largest supermarket chain, said first-half profit rose 6.6 percent as it won customers with promotions offering money off fuel prices and made savings on transportation and energy. Pre-tax profit before one-time items climbed to £354m in the six months ending October 1 – up from £332m a year earlier. The company is hopeful that it will hit its target of £702m in pre-tax profits for the full financial year.

Sainsbury’s believes that consumers are reducing their spending on weekly grocery shopping as the cost of filling their car with fuel takes a larger slice of their income. In July the supermarket offered a discount of ten pence a litre when shoppers spent £60 in store as it battled for customers with larger rivals Tesco and Wal-Mart’s Asda. In October, it introduced a price-matching promotion in response to Tesco’s ‘Big Price Drop’ campaign on 3,000 items.

Value retail
Such growth is not restricted to the UK’s higher-end food stores. Iceland and Farm Foods, which generally specialise in low-price frozen foods, also saw sales grow significantly year-on-year, increasing till rolls by 4.2 percent and 11.7 percent respectively.

Value retailers such as Aldi and Lidl have also benefitted from the downturn as shoppers look for bargains and low-price products. These stores have helped drive sluggish grocery market growth as the industry’s overall till roll increased just 2.4 percent year-on-year, according to data released by Kantar Worldpanel, a market research firm. Aldi expanded its share of the market from 2.8 percent to 3.1 percent over the course of the year from March 2010 to March 2011, while Lidl increased its piece of the grocery pie from 2.3 percent to 2.5 percent during the same period – the largest percentage of grocery sales it has ever held.

The story is similar elsewhere in Europe. Spanish retailer DIA, the world’s third-largest discount grocer, proved resilient in crisis-hit Spain and Portugal and produced strong sales at its stores in emerging markets. Spain, where one in five workers are unemployed and DIA makes 42.3 percent of its sales, stayed flat, while Portugal fell 2.3 percent. The Spanish brand, which trails German hard discounters Aldi and Lidl by annual sales, said overall nine-month net sales rose 1.8 percent to €7.2bn. With 6,609 stores at the end of September, DIA said it aimed to close the year with about 6,800 stores and with EBITDA at above €540m.

Meanwhile, French retailer Les Centres E. Leclerc – a co-operative association of retailers operating 672 stores, including 555 in France – expects its low-prices and growing internet presence to help boost sales and domestic market share next year even though the outlook is grim for consumer spending.

Privately owned Leclerc, which claims it has lured 590,000 more customers to its stores this year – many of them from listed rival Carrefour – vowed to keep prices low in 2012 despite inflation and looming tough negotiations with suppliers. Leclerc predicts 2012 sales growth of four to five percent and a 0.4 percentage-point market-share gain in France. This would compare with a market share of 17.5 percent and sales growth of five percent this year to €28bn. The retailer has vowed to dethrone Carrefour as France’s number one mass-market retailer by 2015.

To achieve that goal, the retailer will boost internet sales and diversify its hypermarkets to offer automobile services, beauty shops, DIY, jewellery, over the counter drugs and travel. Leclerc is also boosting its Drive service, allowing shoppers to order online and then collect their purchases at distribution points. It has 100 such locations, a number it aims to boost to 400 by 2015. By then, Leclerc will have doubled the contribution of the Drive service to its global revenue by 10 percent.

“At Leclerc, we are not seeing a slowdown because of our focus on prices. When Leclerc is doing well, it’s an indication that consumption is weakening. When consumers are worried, they turn to the cheapest retailers,” chief executive Michel-Edouard Leclerc said.

Cloud cover
Consumer spending may still be well below its peak in the bumper years before the recession, but the market for low-value items is largely ripe – and online sellers are enjoying the spoils, particularly for sales of online music.

For example, internet giant Google is entering the online music market with a new service that will let users store songs online and listen to tracks on multiple devices. The company is also seeking rights for its Google+ social network users to share music with each other. Not to be outdone, Apple has rolled out a new iTunes Match service. For $24.99, iTunes account holders can store their entire iTunes library, plus songs from their CDs, in the cloud. The library contents are then available to listen to on computers and iOS devices, including iPhones.

Europe’s online music services are also eyeing up opportunities. In November 2011, online digital music service provider Spotify announced that it had added about half a million new subscribers within two months of plugging into Facebook’s new entertainment platform, taking its total up to 2.5 million paying subscribers. Analysts say that Spotify’s future success is dependent on getting a larger portion of its non-paying users – who hear and see advertisements interspersed with their music – to subscribe.

The Anglo-Swedish start-up was one of Facebook’s key launch partners for its “open graph” in September. The link enables a real-time feed of users’ Spotify listening to be shared with their Facebook friends, allowing it and other media services to tap the strong viral effects of the social network’s 800 million members. Subscribers pay £9.99 a month for unlimited access to a library of 15 million tracks that can be streamed over the internet for instant listening or downloaded to a portable device such as an iPhone or BlackBerry.

The service debuted in the US in July and since September Spotify has launched in Denmark, Belgium, Switzerland and Austria and is now available in 12 countries. The expansion has helped to nearly treble the number of subscribers within a year. Analysts believe that the conversion rate is likely to gather more momentum following strategic partnerships with telecoms operators including Virgin Media, Telia and KPN, which are offering extended trials or discounted subscriptions to their customers as part of an overall broadband package.

Pay-TV
The recession has forced many people to stay at home as belts are tightened – but this does not necessarily mean that wallets remain padlocked. Savvy home entertainment businesses have realised that people may begin to buy more of their products if they can have more choice about how they can use them, and the price they pay for them.

Eastern European pay-TV revenues will increase from $7.5bn in 2010 to $9.8bn in 2016, according to new research from Informa Telecoms & Media. The number of digital TV homes in the region will double in the same five year period, taking the total to 148 million by 2016. However, while there will be a greater number of pay-TV subscribers, average revenues per user (ARPU) – a key metric to understand the strength of the sector – will likely remain flat between now and 2016.

Russia and Poland are Eastern Europe’s revenue powerhouses, together accounting for 41 percent of the region’s $7.5bn pay-TV revenues in 2010, according to Informa’s research. Their position is set to become stronger during the forecast period – and will account for a combined 44 percent of the US$9.8bn pay-TV revenues forecast for 2016. And demand for set-top boxes is continuing to grow, with local firms cashing in on the new wave of customers. For example, Polish operator Cyfrowy Polsat has manufactured its three-millionth set-top box via its technology arm. The company reached the milestone as it began producing its latest receiver, the Mini HD 200, which is the sixth DTH model it has developed.

The UK is also experiencing larger volumes of people considering signing up to pay-TV. With one-in-six people in the UK subscribing to its channels, BSkyB is the country’s largest pay-TV broadcaster (Virgin has 3.76 million customers and BT Vision has 638,000 customers – both minnows in comparison). And its success continues to grow. In October, the company reported strong growth in its first quarter profits. Revenue was up nine percent to £1.66bn while adjusted operating profit was ahead of forecasts, up 16 percent to £295m.

BSkyB says that there are several reasons why the company has performed so well. Firstly, a 12-month price freeze and investment in US shows and original British comedy and drama helped to retain customers and keep the company’s ‘churn’ rate – meaning the percentage of customers who left BskyB – relatively flat at 11.1 percent.

But perhaps the big pay-off was the company’s recent decision in 2010 to unbundle its traditional package of telephony, broadband and pay-TV services and sell them separately as entirely standalone products. In the three-months to September 30th, the company added 77,000 new households to take its total customer tally up to 10.4 million. It also signed up around 26,000 new pay-TV customers during the same period, though this was down sharply from the 96,000 in the first quarter of 2010.

The company also managed to increase its ARPU by £25 to £535 a year as it sold 150,000 broadband and 147,000 telephony contracts during the period, so that 28 percent of its customer base now takes all three products. Given that three-quarters of its customers do not sign up for all three products, the company believes – as do analysts – that there is still plenty of headroom to expand on further cross-selling opportunities.

Brewing up a storm
Beer sales have bounced up and down since the start of the recession, helped and hampered by good and bad weather, lacklustre European performances in world sporting events, and the general lack of consumer confidence as the recession plods on with little sign of dissipating.

The mood has begun to impact brewers. Danish brewing giant Carlsberg has announced plans to cut up to 150 jobs in Europe in reaction to the region’s weak economic outlook and sluggish demand for beer. Molson Coors, which produces Carling and Worthington’s, has announced it will be increasing its wholesale prices from the start of 2012 due to a sharp increase in energy, raw materials and distribution costs.

But not all industry players appear to be in the same boat. At the end of November Heineken, the world’s third-largest brewer, bought 918 tenanted British pubs from the Royal Bank of Scotland for £422m as the bank took another step in its exit from non-core businesses following the UK government’s £45.5bn bailout – the costliest bailout of any bank worldwide.

Heineken will become one of Britain’s leading operators of tenanted pubs, with 1,380 premises, giving it a wider channel to sell lagers such as Fosters and Heineken itself, Europe’s top-selling beer. Tenanted pubs – run by lessees who pay rent and are ‘tied’ to their landlord when buying beer – have fared less well during the downturn than outlets managed on behalf of pub companies, which have greater freedom on pricing. The two biggest tenanted pub companies – Enterprise Inns and Punch Taverns – have seen profits decimated and have been forced to sell underperforming pubs.

Heineken, which is looking forward to the forthcoming James Bond movie to further augment its markets globally – as the brand has been tagged as James Bond’s preferred beer through his movie sequels – said the sites it was buying were of high quality and had outperformed the market, adding the deal should add to earnings immediately.

Yet not everyone is convinced that buying the pubs makes commercial sense. Citigroup said while the price Heineken was paying appeared “respectable”, it queried the strategy behind the deal. “It is committing capital to what we believe is probably the most rapidly declining part of the UK beer industry,” it said. “At best, the deal can be seen as a way to acquire UK pub assets cheaply from a keen seller.” KBC Securities analyst Wim Hoste said: “I would have preferred if they had made acquisitions of breweries in emerging markets rather than strengthen their network of pubs in a country such as the UK.”