Standard & Poor's report, The Top-10 Trends Shaping The European Consumer Goods Sector In 2007, said that on balance, the sector's profitability was likely to hold in 2007 despite volatile costs and pricing pressures.
What's more, the firm believes that the high level of M&A within the food industry is likely to continue.
"In 2006, European M&A volumes reached a record level ($1.36 trillion), 33 per cent higher than the previous year," said the report.
"Most sizable transactions were triggered by the disposal of large divisions as a result of portfolio restructuring and/or refocusing of the strategies of the main players such as the disposals of the frozen food activities of Unilever PLC
(A+/Stable/A-1), the Dunkin brands by Pernod Ricard S.A. (BB+/Stable/B), and the European beverages business of Cadbury Schweppes PLC (BBB/Stable/A-2)."
Standard & Poor's said that it expects to see an increase in the strategic importance and size of the deals coming through in 2007.
"We believe this will be prompted by new entrants such as Kraft Foods Inc. (A-
/Watch Pos/A-2), following its spin-off from current 89 per cent owner Altria Group Inc. (BBB+/Positive/A-2); concerns that favourable liquidity conditions, necessary to finance large deals, might recede; and peer pressure."
The ratings agency also believes that, given the persistence of raw material cost increases, premium strategies will continue to prevail. In 2006, many operators, including food companies such as Nestlé and Danone (Groupe) (A+/Stable/A-1), reported a renewed ability to increase prices, thereby enabling them to recoup the burdensome cost of inflation.
"Consumer goods companies are placing increasing emphasis on the 'premiumisation' of their product offering, which provides differentiation, meets customer demands for quality, allows sales increases and boosts operating margins," said Standard & Poor's.
"This strategy necessitates relevant product innovation, which may be based on superior marketing campaigns, or on hefty R&D efforts, to gain a competitive edge."
The firm said for example that Danone is climbing the premium curve with a product range increasingly focused on health, with a strong emphasis on low-fat and long-lasting energy products. Western European sales grew by 5.1 per cent for Danone in 2006, a sharp increase on previous years, when demand was weak and focused on value products.
Overall, the report paints a positive picture of the European market - the economic situation has improved and continues to gain momentum, and should be sustained in 2007. Although no final data is available for the fourth quarter of 2006 as yet, estimates suggest that the Eurozone economy finished the year on a high, with GDP approaching 3 per cent in real terms (3.4 per cent in the UK).
Still, growth rates in Western Europe continue to be much weaker than in Asia, which enjoys double-digit rates.
