A Mixed Fate for the Consumer Sector

From this demand-side perspective, the discretionary segments will unsurprisingly take the biggest hit.

However, it is crucial to also look at the supply side of the equation. A differentiated approach from IHS Global Insight's World Industry Service (WIS) can give us interesting insights on how exactly each consumer segment will be affected and will rebound depending on its strengths and weaknesses.

The "World Industry Barometers" study focuses on various industry fundamentals, such as financial leverage and efficiency, industry structure, or investments, to compile three barometers critical to foresee the dynamics ahead: the "Credit Crunch" barometer, the "Severe U.S. recession" barometer, and the "Recovery" barometer.

The results for consumer-related sectors show that staples (food products and beverages especially) should be relatively more resilient to a severe U.S. recession scenario than the average in both the United States and Europe. That said, they are not always in the most favorable position in a credit crunch environment.

In particular, beverage manufacturers in the European Monetary Union could have relatively more difficulties than their U.S. peers in getting further funding from banks. As an export-intensive industry, they are handicapped by a high currency risk that has been exacerbated by a strong euro in recent years. They have also accumulated a lot of debt, which could repel lenders.

By contrast, producers of discretionary goods are traditionally more sensitive to macroeconomic conditions, with consumers cutting back on big-ticket items in times of uncertainty. Nevertheless, some segments could make the best of a bad situation, as they are relatively well-equipped to weather the lending squeeze. In the United States, this is the case for leisure, media, and entertainment, which has seen good growth in free cash flows over the last two years and substantial progression of pricing strength, which should encourage further credit from banks.

This industry is also expected to be well-positioned for a cyclical recovery when macroeconomic conditions bounce back, with then-positive prospects for sales and profits. Resilient and efficient fixed investments during the storm will not only prevent players from jeopardizing future sales, but should also help them benefit the most from the upturn.

Hence, no clear pattern is emerging, and the coming year should see a heterogeneous consumer sector, with discretionary segments relatively more exposed to the recession than staples. The latter are traditionally slower-growing segments and the former also have an opportunity to be well positioned to come out of the crisis provided they play their cards well.

by Lucas Casalino