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Companies plan for two-speed Europe

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Analysis: Companies are planning for a two speed Europe, devising strategies to take advantage of growth in the northern part of the continent while plotting more corporate austerity for the moribund south.

Dismal overall European sales were a recurring theme among big U.S. and European companies reporting first quarter results in the past fortnight.

But beneath the headline numbers was a clear trend of a bifurcated economy - recovery in Germany and the Nordic countries combined with further sales drops in Italy, Spain, Greece and Portugal.

"Germany, the Netherlands, the UK, and the Nordic had pretty good orders performance and Southern Europe is in a lot tougher shape. So there's a real split going on there in terms of the economic activity," Keith Sherin, General Electric Co. (GE-N) Vice Chairman and Chief Financial Officer told analysts last week.

Swiss engineering group ABB said its orders in the first quarter were up in Germany by 14 percent, in Britain by 12 percent and in Sweden by 21 percent compared to the same period last year. Italy was down by 26 percent.

Food group Danone said it saw the negative first quarter trend in southern Europe continuing into the second quarter.

French industrial group Schneider said it did not see recovery before the fourth quarter, partly because government austerity measures - which are set to continue - were eating into demand.

The weak outlook echoes economists' forecasts which predict that economies in Spain, Greece and Portugal would contract this year and next and that Italy would see falling growth this year and stagnation in 2013.

CORPORATE AUSTERITY


The weak outlook for southern Europe has prompted many companies to look at cutting costs and scaling back operations.

Italian carmaker Fiat SpA, which is highly reliant on its home market for European sales and manufacturing, said weak demand prompted it to put a hold on investments.

"We need to be careful in maintaining our resources and safeguarding the organization until we get better clarity on the development of the market," Chief Executive Sergio Marchionne said.

Finnish elevator maker Kone was among other companies which said they had implemented restructuring measures to tackle the sluggishness in southern Europe.

Some companies are trying innovative measures to allow them maintain their footprint in Southern Europe, so they can capitalize on any recovery which may materialize, but not rack up huge losses at the same time.

French Carrefour, Europe's biggest retailer, said it was pushing a "southern Europe-wide plan" that involved cutting costs and increasing its push of cheaper Carrefour-branded goods.

That's bad news for sellers of branded goods like Paris-based Danone, which said it was seeing "significant down-trading in the market to private label" goods.

Some analysts have suggested the downturn in markets like Portugal and Spain represented an opportunity for international groups to make cheap acquisitions that could, when southern Europe recovers, pay dividends.

The problem, executives say, is that one has to believe in that recovery.

"We're starting to see prices come down in Europe for some of the properties but again, you have to make some assumptions about when you're going to see an upturn," said Chuck Bunch, CEO of U.S.-based chemical maker PPG Industries.

TRADING OPPORTUNITY

Even if firms struggle to profit from the split in Europe's economic prospects, analysts say that investors might still manage to do so.

On the basis of this bifurcation, Deutsche Bank is advising clients to favor Dutch staffing group Randstad, over its Swiss-based rival Adecco.

Since the two companies are focused on European employment market, the two usually trade in tandem. However, the investment bank reckons that Adecco's relatively high exposure to southern European markets may weigh on its shares.

That said, Deutsche notes that if things get so bad in southern Europe that countries there are forced to enact measures to liberalize their labor markets, while northern Europe's relative comfort prevents fundamental reform there, this could see Adecco outperform.

"If there is significant Southern European labor market reform then Adecco will likely be a relative winner," the bank said in a research note.
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