Market Monitor - Focus on the food industry - Italy

• A modest rebound in 2015
• Meat sector faces more troubles
• Higher insolvency risk for smaller food retailers

The food sector is one of the most important industries in Italy, which employs around 385,000 people and generated a total turnover of more than EUR 132 billion in 2014. After several years of suffering from the domestic economic downturn, the Italian food sector´s performance was stable in 2014, benefiting from lower raw materials and energy prices. In 2015 a modest production increase of 1.1% and turnover growth of 0.3% is expected, mainly driven by higher exports (up 6%). The sector was able to compensate for losses caused by the Russian import ban with higher exports to the US and the EU.

Profit margins have decreased in 2015, but are expected to remain stable in 2016. Payment delays and insolvencies are also expected to remain stable next year.

So far in 2015 dairy production has grown in absolute value, but not enough to compensate for the general decrease in milk prices, putting pressure on businesses´ margins. Lower demand from China and the Russian import ban have added to that pressure. At least Italian dairy recorded higher export growth to the US, Japan, the UAE or South Korea. However, the outlook for 2016 remains subdued, unless milk prices increase again. The butter and powdered milk segments remain the best performers in this segment.

In the cereals sector prices for raw materials have been generally low, except for wheat prices, which remained volatile after a peak at the end of 2014 and beginning of 2015. In general, higher wheat prices have put pressure on margins in the mill segment. The pasta and bakery segments have benefited from the strong reputation of the “Made in Italy” trademark abroad with increasing exports, while the domestic performance remained flat. The outlook remains positive, with further growth of demand expected in the EU, the US and new market opportunities in Asia.

In Italy, domestic meat consumption has remained below EU average. The beef sector is affected by a change in food habits towards increased white meat consumption. Except for the beef segment, the sector has taken advantage of lower animal feed prices, which led to a small recovery of margins. While it is too early to assess the effects of recent WHO warnings about the negative consequences of processed meat consumption on health, Italian consumers´ first reaction has already been a reduction in meat consumption. We monitor this subsector more closely than others due to its problems, and our underwriting stance is more restrictive.

After decreasing sales in 2014, food retail turnover has increased again in 2015. However, this growth was mainly generated by large scale retailers, while smaller retailers are still recording decreasing sales. Large scale retailers show better capitalisation, stronger market power, a reasonable level of liquidity and access to the bank system, while small- and medium-sized retailers face a higher insolvency risk.

The Italian retail sector remains strongly fragmented, with increasing competition, higher gearing and pressure on margins. Even the biggest Italian businesses are small compared to other international major retail players. It is expected that the concentration process in the Italian retail segment will accelerate further in 2016.

Since October 2012 a new law (‘Article 62’) lays down a maximum payment term in the food sector of 30 days for perishable goods and 60 days for non-perishable goods. This law was also meant to release further liquidity in the Italian food value chain and help to improve international competitiveness. However, the effects of the law have been limited so far. In many cases additional liquidity has been used to reduce short-term bank facilities, not being substituted with new investments. Additionally, there is still a lack of external monitoring of compliance: many small players are still not complying with Article 62, leading to longer payment terms.