The recent profit margin increase is expected to bottom out in the coming months due to a slowdown in inflation and increasing competition in food retail.
- The Portuguese food and beverages sector value added growth is expected to increase 2.5% in 2017 and 1.4% in 2018. Producer price deflation in 2014 and 2015 had a negative impact on business margins, and profitability of food businesses declined due to strong competition and price wars in the food retail segment. However, both consumer and producer food prices increased again in 2016 and H1 of 2017, which had a positive effect on profit margins.
- We expect that the profit margin increase will bottom out in the coming months due to a slowdown in inflation and increasing competition, especially in the food retail segment. At the same time local food businesses face strong competition from international food producers in the Portuguese market.
- The average payment duration in the Portuguese food industry is 60 days. Non-payment notifications and the number of food business insolvencies remained low in 2017, and we expect no increase in 2018 due to the increased resilience of the Portuguese economy. Since 2016 access to bank credit has improved for food businesses, in line with the economic rebound.
- Our underwriting stance for the food sector remains mainly open. However, we are more cautious when underwriting the dairy segment, as businesses in this subsector face more difficulties due to the end of the EU milk quota and lower prices. Additionally, special attention is given to highly geared companies, assessing the evolution of their debt burden and the final use of any significant debt increase. We also pay special attention to the existence of unused commited credit lines and the maturity profile of long-term debt.
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Market Monitor Food December 2017
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