The ripples are spreading. Spanish consumers are buying cheaper yogurt, Europeans are buying fewer Volvos and Asians are consuming fewer chicken nuggets.
What it all adds up to is a steady drip-drip-drip of earnings preannouncements and warnings from the multinational giants who once bet that having their tentacles in every corner of the globe would help them ride out recessions and other setbacks. This time things may be different, however.
Take FedEx (FDX). Shipments fell 5 percent during its fiscal fourth quarter, which ended May 31, the company recently announced. It isn’t just about an economic cycle, either; this time, FedEx CEO Fred Smith told analysts, increasingly cash-strapped and price-conscious investors are turning to other kinds of delivery services that may not get the goods from point A to point B in 24 hours, but that get them there reliably, and at a lower price point. Reading between the lines, it seems as if Smith doesn’t expect that behavior pattern to change any time soon, even if the global economy does show fresh signs of strength.
For its part, French food products company Danone – the biggest manufacturer of yogurt in the world – is finding that Spanish yogurt eaters are opting for cheaper brands. About a quarter of the adult population in Spain is unemployed, and half of those between 18 and 25 are jobless, so cutting food bills to the bone is part of a Spanish family’s survival strategy. That will pare several percentage points from its sales growth and eat into operating profits, CFO Pierre-André Terisse cautioned investors. Danone plans to cut its own prices to avoid losing those customers altogether – but that move won’t help its profit margins, either.
Even McDonald’s (MCD) – a stalwart market performer that often does relatively well even in tough economic times, simply because it’s relatively cheap to “dine” out at its stores – isn’t commanding the respect it used to. Competition is growing – Burger King (BKC) is expected to challenge its rival more aggressively now that it is once again a publicly traded company, as of yesterday. And Goldman Sachs (GS) just cut its rating on Golden Arches stock to a “neutral” from “buy,” at the same time as it reduced its price target (from $100 to $92) and earnings forecast (now $5.55, down from $5.61). The reasons for the move, the analysts said, included the company’s reliance on Europe (which accounts for as much as 40 percent of profits) and a slump in same-store sales in Asia.
Indeed, exposure to Europe is becoming a red flag for many investors. Some analysts came close to questioning the sanity of the management and board of Walgreen Co. (WAG) after the drugstore chain announced today that it’s buying half of Alliance Boots GmbH, the holding company that in turn owns the iconic British-based Boots pharmacy chain. Revenues and profits have been growing at a double-digit clip at Boots for the last few years, a strong contrast to Walgreens; the latter is likely to struggle still more given its ongoing contract dispute with Express Scripts (ESRX) that has forced many of its longtime pharmacy customers to fill their prescriptions elsewhere.
What’s not to like about the deal? Boots has a great brand, has been successful at marketing its own beauty and health-care products as upmarket options and has a global footprint. (Want sunscreen at a Thai beach resort? Just ask your tuk-tuk driver to take you to Boots.) Still, one analyst referred to the transaction as a “drastic” shift in strategy and many of those who reacted to yesterday’s announcement raised their eyebrows at the spectacle of Walgreen paying a premium price to buy a Europe-based company at this particular moment in time.
Time will tell whether this was an incredibly prescient move or one that was made at the wrong moment and for all the wrong reasons, but what is most telling is the extent to which companies are reporting that the impact of European events or the impact of the Eurozone crisis on the global economy are taking a toll on their bottom lines. FedEx plans to cut costs; Proctor & Gamble (PG) blamed itself for not acting sooner to do the same. Instead, the consumer products giant has had to cut its growth forecasts twice in only two months. Moreover, investors also are becoming unwilling to give these businesses the benefit of the doubt.
The trick is to find a way to distinguish between changes in demand that appear to be cyclical and those that are more secular in nature. If FedEx’s Smith is right, his company may be dealing with a structural change that, while sparked by an economic slump, may not reverse course when the economy revives. In contrast, to the extent that Danone does make a premium yogurt that consumers prefer to eat – and to the extent it can maintain that quality even if the yogurt is sold at a discount – brand loyalty may still triumph in the long haul. And it’s hard to imagine how a brand as strong as Boots can be displaced, unless we end up inhabiting a world in which consumers can no longer afford to spend on toothpaste and soap.
That would be an even more unnerving forecast than any of those being offered by sheepish CEOs confessing that their second-quarter results aren’t going to be quite what they had hoped, and an omen of a far more dismal world ahead. But even with all the sturm und drang surrounding the global economy, it’s still hard to be quite that bearish.