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Western European manufacturers hit low ebb

By Anita Awbi , 06-Mar-2006

Fears for Western Europe's food processing industry have been raised following revelations that firms are cutting back on jobs and R&D spending in the face of cheap foreign competitors.

Competition from the less-developed economies of Asia and Eastern Europe is the single biggest threat to UK and Western European manufacturers that are struggling to maintain profit margins as commodity costs rise, claims business analyst firm KPMG.

And the recent wave of job losses and profit warnings from major Western European operators underlines apparent problems in the industry.

Food giant Campbell's last month admitted UK and Western European operations are below par, as have Heinz and Unilever. And British manufacturer Golden Wonder fell into receivership at the start of the year, citing fierce competition and rising costs as major factors.

In the UK, business activity has picked up slightly from last summer but remains historically low, KPMG's pan-European business survey revealed.

Only a quarter of UK firms are spending on research and development - the lowest investment level in Europe.

And French firms seem equally pessimistic.

KPMG's Andrew Smith explained it has not been the best start to the year, as companies were hoping for an increase in export levels and investment to offset the fall in consumer demand.

"Output is not yet rebounding strongly," he added.

Instead, Western European firms are being forced to concentrate on restoring profitability, rather than expanding capacity, while companies operating in regions where input costs are lower are able to sell their products cheaper.

But according to the KPMG study, UK firms seem confident they can pass rising input costs onto consumers.

And although analyst Standard & Poor's expects retailers to accept reasonable price increases on selected brands produced in Western Europe, consumer acceptance and retailer resolve will be important for ailing firms.

Meanwhile the outlook for Germany, the Netherlands and Eastern Europe is much better. All regions look best placed to make gains in the next 12 months, where some modest rises in employment levels are expected.

Smith said: "It's a two-speed Europe. By and large, companies in most of Northern and Central Europe are cost competitive and relatively optimistic. But those in the UK, France and Southern Europe think it will be tougher to grow sales and profits."

High input costs, mainly due to the impact of the increased oil price, have been hurting food companies over the past year. The cost of plastic packaging has soared, as has the price of energy. Coupled with higher wages and land costs, companies in Western Europe are finding their margins squeezed.

And further margin contraction could occur from the sector's limited pricing flexibility - due to the highly competitive operating environment and the increased buying power of a consolidated retail sector.

Other rising costs are also impacting food companies, including compliance and regulatory expenses, and increased obligations from higher debt levels.