The landscape for consumer products will continue to pose a challenge for retailers moving into 2007, according to a recent report from Standard & Poor’s Ratings Service. And the biggest pressure seems to fall on the apparel and cosmetic sectors.
“The demanding retail environment has led to more promotional activity and contributed to slowing sales growth at some of the major textile and apparel companies,” said the report, titled “U.S. Consumer Products Sector Continues to Face Challenges.”
Domestic manufacturers continue to be hurt by pricing pressures arising from higher raw material costs, the influx of low-cost foreign imports and a more demanding, value conscious consumer, according to the report.
In 2006, S&P’s downgrades in the consumer products sector outnumbered upgrades 3 to 1, compared with 5 to 1 in the year prior.
“Close to 76 percent of the downgrade rating change activity occurred in the much more volatile speculative-grade rating categories in 2006, compared with about 81 percent in 2005,” according to the report.
S&P said rating and outlook changes for these companies generally were prompted by mergers and acquisitions or a dramatic change in financial risk profile, while speculative-grade credits were much more susceptible to macroeconomic conditions and changes in fiscal policies that increase financial risk.
Soaring energy prices are hurting consumer product companies by fueling higher operating costs throughout the manufacturing supply chain and putting pressure on the sector’s profit margins.
Summer’s soaring prices at the pump also altered consumers’ spending habits, making shoppers think twice before purchasing nonessential items.
“While U.S. consumer confidence remains strong overall and energy prices have dropped somewhat since their summer highs, a slowing housing market, in addition to record high debt burdens and a lack of savings, will still dampen some consumers’ spending patterns,” the report said.
Last year the apparel sector was marked with the high-profile mergers of Adidas and Reebok, Warnaco’s acquisition of Calvin Klein’s Asian and European businesses, and Apax Partners’ $1.6 billion acquisition of Tommy Hilfiger USA.
“With retail consolidation, in particular the merger of Federated Department Stores with May Department Stores, retailers have gained more bargaining power, while apparel makers have suffered sales contractions,” said the report.
And S&P predicts this consolidation race will continue to create steep competition in the sector.