Industry Top Trends 2021 December 10, 2020

S&P Global Ratings 1

Industry Top Trends 2021 Consumer Products A Long Road Back For Discretionaries And A Modest Positive For Staples

What’s changed? Ratings outlook. Rating trends are more negative in discretionary subsectors. Most rating activity was at the low-end of the speculative-grade categories.

Consumers and retailers favored established brands. Branded staple companies gained market share. Retailers have favored companies with large, agile distribution systems. Innovation and marketing should enable issuers to retain some of the share gains.

Channel shift. The pandemic will lead to an enduring change in shopping habits. For consumer goods companies, the ability to facilitate e-commerce will become a more critical element of their competitive advantage.

What are the key assumptions for 2021? Effective vaccine and fiscal stimulus. Wide dissemination of an effective vaccine in the second half of next year will spur demand for on-premise consumption.

Sales performance shifts. Consumer staples will have negative organic sales in 2021. Discretionary subsectors benefit from pent-up demand and economic growth.

Financial policy shifts to shareholders. Consumer staple issuers will resume pre-COVID financial policies with regard to shareholder returns.

What are the key risks around the baseline? Macro. Recovery in discretionary sectors could be prolonged if government mandates or fiscal stimulus measures taper off. Margins could come under pressure if consumers trade down.

Delays in the vaccine availability. Travel and out-of-home work and leisure activity will remain weak, impacting sectors like food service and beverages. Travel retail items such as luxury goods and premium alcoholic beverages will continue to see weak demand.

Shift in wallet. Unemployment remaining high will cause a greater portion of the consumer wallet to go toward essentials and less to discretionary items.

December 10, 2020

Authors Diane Shand New York +1 212 438 7860 [email protected] Raam Ratnam, CFA, CPA London +44 20 7176 7462 [email protected] Barbara Castellano Milan +39 02 72111 253 barbara.castellano @spglobal.com Bea Y Chiem San Francisco (1) 415-371-5070 [email protected] Chris Johnson, CFA New York +1 212 438 1433 [email protected] Gerald T Phelan, CFA Chicago +1 312 233 7031 [email protected] Flavia Bedran Sao Paulo +55 11 3039 9758 [email protected] Flora Chang Hong Kong + 852 2533 3545 [email protected] Aniki Saha-Yannopoulos, CFA, PhD Toronto +1 416 507 2579 aniki.saha-yannopoulos @spglobal.com Maxime Puget Paris + 33 140752577 [email protected] Rocco A Semerano London + 44 20 7176 3650 [email protected]

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Industry Top Trends 2021: Consumer Products

S&P Global Ratings December 10, 2020 2

Ratings trends and outlook Global Consumer Products Chart 1 Chart 2

Ratings distribution by region Ratings distribution by subsector

Chart 3 Chart 4

Ratings outlooks by region Ratings outlooks by subsector

Chart 5 Chart 6

Ratings outlooks net bias by region Ratings net outlook bias by subsector

Chart 7 Chart 8

Ratings outlooks Ratings net outlook bias

Source: S&P Global Ratings. Ratings data measured at quarter end. Data for Q4 2020 is end October, 2020.

010203040506070

AA

AA

A+ AA

AA

-A

+ A A-

BB

B+

BB

BB

BB

-B

B+

BB

BB

-B

+ B B-

CC

C+

CC

CC

CC

-C

C CS

D D

North America Europe Asia-Pacific Latin America

0102030405060

AA

AA

A+ AA

AA

-A

+ A A-

BB

B+

BB

BB

BB

-B

B+

BB

BB

-B

+ B B-

CC

C+

CC

CC

CC

-C

C CS

D D

Agribusiness & Commodity FoodsBranded NondurablesConsumer Durables

0%

20%

40%

60%

80%

100%

APAC LatAm N.America Europe

Negative WatchNeg Stable WatchPos Positive

0%

20%

40%

60%

80%

100%

Negative WatchNeg Stable WatchPos Positive

-60-50-40-30-20-10

01020

13 14 15 16 17 18 19 20

N.America Europe

Asia-Pacific Latin America

Net Outlook Bias (%)

-80

-60

-40

-20

0

20

13 14 15 16 17 18 19 20

Agri & Commodity FoodsBranded NondurablesConsumer Durables

Net Outlook Bias (%)

Negative36%

Stable61%

Positive2%

-50

-40

-30

-20

-10

0

13 14 15 16 17 18 19 20

Consumer ProductsNet Outlook Bias (%)



Shape of recovery Table 1

Sector Outlook Heatmap

Sensitivities and Structural

Factors Shape Of Recovery

COVID-19 Sensitivity

Impact If No

Vaccine in 2021

Long-Term Impact On

Business Risk Profile

Revenue Decline –

2021 vs 2019

EBITDA Decline –

2021 vs 2019

Revenue Recovery

To 2019 Levels

Credit Metric

Recovery To 2019

Levels

Consumer Products

Packaged food Low Positive Neutral >=2019 >=2019 Already No

impact

Household products Low Positive Neutral >=2019 >=2019 Already No

impact

Personal care Low Positive Neutral >=2019 >=2019 Already No

impact

Agribusiness Low None Neutral >=2019 >=2019 Already 2021

Beverages - nonalcoholic Low None Neutral 0% to 5% 0% to 10%

2021 No impact

Tobacco Low None Neutral >=2019 >=2019 Already No

impact

Consumer Services Low None Neutral 0% to 5% 5% to 10%

Already 2021

Beverages - alcoholic Moderate Moderate Neutral >=2019 0% to 10%%

2021 2022

Beauty High Moderate Moderate 5% to 10%

10% to 15%

2022 2022

Durables High Moderate Neutral 10% to

15% 15% to

25% 2022 2022

Personal luxury High High Moderate 10% to

20% 10% to

20% 2022 2023

Apparel High Moderate Moderate 10% to

20% 10% to

20% 2022 2022

Food services High High Moderate 10% to

20% 20% to

30% 2023 2022

Source: S&P Global Ratings. For further detail on impact see table 2.

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly. This report does not constitute a ratings action.



Consumer Products Ratings trends and outlook Staples. The pandemic has been a modest credit positive for consumer staples, as consumers turned to brands that were familiar and trusted. Post pandemic, staples could retain part of their share gains with product innovation and effective marketing. The sector remains highly competitive and vulnerable to shifts in consumers’ tastes and preferences, and we don’t believe the pandemic has changed that in any long-term way.

Discretionary. Social distancing mandates and the economic fallout of the pandemic have done significant damage to the consumer discretionary subsectors, especially personal luxury, cosmetics, food service, apparel, and durables. We believe most discretionary subsectors can regain a meaningful portion of their previous business, absent prolonged economic weakness, given pent-up demand and an increase in social activity. Indeed, China’s September and October monthly retail data showed as much as 10% growth from pre-crisis levels, even for subsectors hardest hit. This, in our view, reflects a restoration of consumer confidence after lockdown restrictions were lifted in the second quarter.

The potential for longer-term structural changes in the food service and luxury goods sectors remains. Food service could be held down by a large number of independent and small chain restaurants closing and new entrants emerging while luxury goods is highly dependent on a meaningful return to tourism spending for some selected markets. The apparel and cosmetic sector could be weakened by consumers’ adoption of a more casual lifestyle given the shift to working at home. For some discretionary subsectors, it could take up to three years for credit metrics to return to 2019 levels.

Consumer Products Path Back To Normalcy Luxury. Personal luxury has been severely hit by COVID-19, losing about 15%-25% in global industry value for 2020 and, by our estimation, staying 10%-20% below 2019 levels in 2021. As consumers become more mobile and global travel spending returns, luxury spending should return, although we expect the recovery to be slower than most other consumer discretionary segments, and especially slow surrounding international travel (a key driver of luxury spending in Europe). We expect soft luxury (bags, clothing) to recover more quickly than hard luxury (in particular watches), and note that China is already showing signs of rebound, which is significant as Chinese customers represent about 40% of luxury buyers. COVID-19 sparked a boost in digital sales that were relatively low in luxury. Online sales of the industry are increasing quickly from a limited share of about 10% in 2019.

Food service. We expect sales to partly recover in 2021 (though still 10%-20% below 2019), assuming a vaccine or effective treatment for COVID-19 will be available. The sector has demonstrated some recovery in the second half of 2020, as we saw more consumer activity and better traffic at quick-service restaurants (QSRs). Our base-case forecast assumes monthly sales for the food service sector approach pre-coronavirus levels as we exit 2021. However, industry fundamentals could remain depressed for a longer period as customers—especially those who are older or have a comorbidity—might be hesitant to visit food-away-from-home venues. Moreover, economic factors may depress demand if a large amount of job losses becomes permanent, or if stimulus—especially unemployment benefits—wanes. A permanent increase in the number of people working from home would also likely hurt foodservice demand. Distributors over-indexed to quick-service/drive thru and takeout/delivery restaurants will outperform the industry; those over-indexed to independents, bars, casual/fine dining, and taverns will underperform. Many independent restaurant operators will likely permanently close.



That will hurt industry profits since these customers tend to be more profitable to distributors. Cost-structure flexibility is key if the industry remains depressed. We expect the subsector to maintain a prudent financial policy and focus on maintaining strong liquidity to manage through the change in demand.

Table 2

Apparel manufacturers. The industry has performed better than our August forecast as it has benefitted from the acceleration of the digital channel, government fiscal stimulus to the consumer, and consumers spending on things as opposed to experiences. Many



brands have developed sound e-commerce platforms and, in some cases, have focused on their own direct-to-consumer offerings, which has given them more full-price sales and direct access to customers. Companies have also done a good job with managing their costs structures and inventory, resulting in better-than-expected cash flow generation. Recovery will vary by category and weak traffic in the department store and travel retail channels will likely persist for at least the next two years. Most companies won’t return to pre-COVID-19 credit metrics until 2022 or 2023. We have revised our profit forecast for the sector’s EBITDA in 2021 as companies reduced costs faster than expected. We believe companies that have large direct-to-consumer platforms, a good presence in mass retailers and/or with products focused on children’s, basic, replenishment, or athletic apparel will recover faster than companies that carry seasonal inventory or whose inventory carries a lot of fashion risk. We forecast that on average, the sector’s sales will decline 15%-25% in 2020 and remain 10%-20% below 2019 levels in 2021.

Beauty. Recovery will likely be slow and uneven. We forecast companies with product portfolios skewed toward color cosmetics will rebound slower as work-from-home trends and lower participation in social events reduce the need for these products. Meanwhile, categories such as self-care (i.e., skin care) should perform well. Skincare products—which account for about 40% of beauty market sales—are particularly resilient. The fragrance category is also showing signs of improvement. We attribute this to consumers’ willingness to spend on mood-boosting products. Companies with a strong presence in skincare such as L’Oreal and Estee Lauder should recover faster given the products’ replenishment nature and the recent consumer trend toward health and wellness. Companies that have large businesses in Asia should also perform better than those that are skewed towards developed markets. Credit metrics for these companies will likely remain below 2019 levels until late 2022 and in some cases early 2023.

Durables. Recovery has been modestly better than our Aug. 2020 forecast. Consumers have shifted their away-from-home spending to spending on mattresses, home décor, and appliances, among other household goods. These categories have been recovering in the second half of 2020 as the industry catches up with pent-up demand and benefits from a booming housing market, especially in less-populated areas. For mattress companies, we expect the shift to online to continue and lower-priced mattress sales will outpace higher-priced sales, driving down average selling prices for some time, especially if the U.S. goes into another recession. Among office and office-related companies such as Steelcase Inc. and ACCO Brands Corp., we don’t expect recovery until the back half of 2021 and into 2022 as many white-collar workers continue to work from home. If this trend continues long-term, they will have to modify their channel mix and products.

Beverages-alcoholic. The sector has generated sequential improvement since April- June 2020, when the on-premise channel throughout Western Europe and the U.S. was largely closed. The sector has offset about half the loss in on-premise sales with increased demand at retail and through the online channel. Still, profits have been hurt by negative mix shift. Recovery will be uneven given the rise in COVID-19 cases, and we do not expect consumption at bars and restaurants to return to pre-COVID levels until well into 2021, possibly longer in geographies that have imposed stricter lockdowns. We expect total sales declines in 2020 for the sector to range from 5%-10% and to be flat-to-up on average in 2021 compared with 2019 levels. Sales trends will depend on the companies’ exposures to the on-premise channel, which varies by geography. Companies with more U.S. exposure, where on-premise sales are closer to 20% of industrywide sales, are better positioned. On-premise sales in geographies such as Western Europe, South America, and Asia can range anywhere from 30% to over 50%.

Premium sales, which benefitted from spirits companies’ top lines for several years running with strong growth in bourbon, tequila, and gin, so far have held up better than expected (especially in the U.S., where retail sales remain robust). But if unemployment

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remains high or government stimulus in hard-hit economies falls off abruptly, premium sales may lose share to more value-based offerings—which is similar to what occurred in the 2009 recession. To preserve credit metrics, issuers are cutting costs, paying more attention to working capital, and pulling back on shareholder returns. Indeed, Anheuser-Busch InBev S.A./N.V. and Molson Coors have suspended their dividends.

Beverages-nonalcoholic. We expect only modestly negative sales (on average less than 5%) and EBITDA (less than 10%) in 2020 and 2021 compared with 2019 across the industry, with the vast majority of deterioration affecting issuers with sizable on-premise and single-serve customer footprints. Coca-Cola Co. generates close to 50% of sales from on-premise sales (syrups sold direct to away-from-home establishments) and will see at least temporary credit ratio deterioration over the next 12-24 months. Growth in its off-premise business is expected to only partly offset the on-premise deterioration. Industry peers, such as PepsiCo Inc. and Keurig Dr Pepper Inc. (KDP), will perform much better due to more off-premise business and greater product diversity (PepsiCo has a large snacks portfolio and KDP has single-serve coffee). The sector is also reducing costs by cutting back on advertising, eliminating most travel and other discretionary expenses, and in the case of Coca-Cola, pruning its portfolio of small brands with weak growth prospects. Financial policy for this sector has generally been quite aggressive. Consequently, there is little room at current ratings for material shareholder enhancing transactions.

Tobacco. We expect relatively stable performance over the next two years. The sector has demonstrated resiliency thus far. Moreover, people have had more opportunities to consume tobacco while they are away from formal work environments and venues where smoking is restricted. We do not expect significant EBITDA decline in 2020. Indeed, price realization has been strong this year and volume deterioration has been less than what we were seeing before the pandemic. However, there may be some pressure in 2021 if consumers trade down to less expensive options, possibly because employment is not rebounding or unemployment benefits are being reduced, or excise taxes are being increased. We expect a more challenging performance in emerging markets, due to issues such as affordability, the role of illicit trade, and more-restrictive lockdowns in some regions. Thus far we have seen no evidence that volume declines will accelerate significantly above pre-coronavirus levels because of smokers’ health concerns. Furthermore, tobacco companies are putting more emphasis on strengthening balance sheets and deleveraging. We believe growth in next-generation products into new geographies may be hindered over the near term since the adoption of some products such as heat-not-burn (HNB) benefit from face-to-face demonstrations, which is tougher to accomplish in the pandemic. Nevertheless, the U.S. Food and Drug Administration recently authorized the marketing of Philip Morris International Inc.’s IQOS tobacco heating system in the U.S. as a modified-risk tobacco product with a reduced exposure claim. This could bode well for sales of IQOS and other HNB products, albeit at the expense of combustible cigarettes.

Agribusiness. Our outlook for next year is modestly positive as export demand remains healthy and industrial demand from global food manufacturers should remain robust as the pandemic persists. The rebound in protein processor sales (particularly in Latin America) should continue into 2021. The world is still rebuilding livestock supplies in the wake of the 2018 African Swine Fever epidemic that depleted much of China’s pork supply. Margins should also improve year over year for many companies as higher production costs during the pandemic are likely to trend down while pricing should improve for certain commodities like sugar, biofuels, and poultry. Still, certain segments remain exposed to under-pressure foodservice demand and are likely to face a slower rebound. This includes ingredient providers in areas like sweeteners, cooking oil, and savory ingredients. In addition, several companies that divested underperforming assets and portfolios are now better positioned for growth, and M&A may pick up as a result. This could pressure leverage.







Packaged foods. The sector has benefitted from the pandemic with increased at-home food consumption and consumers turning to brands that are familiar and trusted. We estimate sector revenues, on average, will increase in the mid- to high-single–digit percentages in 2020 and EBITDA margin will expand as increases in volumes and cost containment strategies offset higher operating costs related to COVID-19 and swings within channels. In 2021, we believe organic sales will be negative but remain above 2019 levels because the sector will be lapping strong comparisons in the second half of the calendar year. In addition, we believe companies will reinvest in their businesses to grow the top line over the long-term. Organic sales could remain positive over the next 3-6 months if the virus impacts remain or the rate of vaccination is much slower than anticipated. However, we believe the sector growth rate will be above pre-COVID levels over the next few years because of elevated levels of working at home and a slow return to travel and large events. The sector should also benefit from the return of impulse buying of higher-margin small packages at convenience stores and in categories such as confectionaries.

Household products personal. The sector has been one of the best performing in 2020, as many consumers have increased their hygiene standards in the face of the pandemic. We expect these new habits in health, hygiene, and home will stick well after the pandemic is contained. In addition, increased working from home trends support growth as dishes, surfaces, and toilets will need to be cleaned more frequently. Branded players have picked up market share during the pandemic as customers have preferred familiar and trusted brands, and branded companies have also been fast in adapting SKUs and product formats to retailers’ and consumers’ needs. Indeed, Procter & Gamble recently raised its sales growth guidance from 2%-4% to 4%-5%. Companies such as Procter & Gamble, Nestle, and Unilever to name a few should be able to retain share as they have a history of innovation and effective marketing.

Key risks and opportunities

1. Acceleration of e-commerce channel

E-commerce has accelerated growth and should continue to be the fastest growing channel. New users have entered the channel and it has increased penetration with existing users because consumers like the convenience and safety of the channel. Branded goods companies are driving growth by personalizing marketing, increasing direct-to-consumer offerings, and reformulating products and/or changing packaging to reduce the cost of delivery.

2. At-home consumption will remain elevated

During the pandemic there a been a structural shift to at-home consumption because of social distancing mandates. For at least the next few years, employers and employees will likely strike a balance between working in the office and at home and consumers have demonstrated an interest in at-home cooking. Consumer staples will use innovation, marketing, and value propositions to retain some of the share it gained during the pandemic.

3. Credit quality will remain weak in the ‘B’ category

The sector has had many downgrades this year, concentrated among issuers in the foodservice, cosmetics, apparel, and durable subsectors; all were in the speculative grade category except two. There are signs that credit deterioration has peaked and while we do not see a significant maturity wall or systemic refinancing risk over the next 12 months, companies in the ‘B’ rating category or lower are more likely to experience operational volatility due to unfavorable business conditions.



We believe all sectors will benefit from the acceleration in e-commerce, albeit the growth rates will slow from current robust levels. Consumer products companies had generally invested in logistics to meet the demand for this channel ahead of the pandemic, and demonstrated during the crisis they can shift their distribution and packaging sizes to meet changes in channel demand. Indeed, Nike recovered sales quickly because of the digital channel. To grow and maintain share, companies will continue to increase investments in supply chains to become more agile.

The industry will also adapt to other changes in consumer behavior that are likely here to stay. There has been a structural shift to in-home consumption. Although we expect the on-premise channel to regain share, it will likely take several years for it to get back to pre-crisis levels. This should support growth for consumer staples over the near term. Companies that compete in the health and wellness sectors should also see elevated demand compared to 2019 levels. Consumers retained increased focus on their health coming out of the 2008 recession and we believe the even greater focus that arose this year will last once the pandemic has been contained. This should bode well for companies such as Clorox, Church & Dwight, and Natures Bounty.

We see relatively stable outlook for investment-grade companies in the industry given their strong positions within the categories they compete, product diversification, good cash flow characteristics, and willingness to cut back on shareholder returns in times of stress. Still, we continue to have a negative bias on the sector because of the large number of issuers on the low-end of the rating spectrum. Many of them entered this difficult environment with high leverage, narrow product lines, and weak operating performance increasing the likelihood for lower ratings. Currently we have negative outlooks on 39% of the issuers we rate compared to 24% a year ago. This largely reflects the shocks of this year. The larger number of negative outlooks in North America reflects the greater proportion of discretionary product manufacturers in the region rather than greater pressure in the region. Rating actions going forward will depend on macro conditions, the ability to shift channel and product mix, as well as aligning their cost structures to the new normal.

Related Research – How M&A In The Specialty Food And Ingredients Space Affects The Credit Quality And

Competitive Landscape Of An Evolving Food And Personal Care Supply Chain, Oct. 26, 2020

– COVID-19 Is A Wake-Up Call For The Food Processing Industry, Oct. 20, 2020 – Sector Roundup Asia-Pacific: Net Negative Bias Hits One-In-Five, Oct. 6, 2020 – Asia-Pacific's Recovery: The Hard Work Begins, Sept. 24, 2020 – Credit FAQ: Implications Of Brazilian Meat Processors' Juicy Second-Quarter Results,

Aug. 20, 2020 – COVID-19 Battered Global Consumer Discretionary Sectors But Lifted Staples;

Recovery Varies By Subsector, Aug. 4, 2020 – COVID-19 Will Shape The Future Of Consumer Goods, July 1, 2020 – Efficiency Is The Main Driver Of Credit Quality Among Brazilian Sugarcane Processors,

June 29, 2020 – Brazilian Companies Are Struggling Under The Burden Of COVID-19, June 9, 2020

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Industry forecasts Global Consumer Products Chart 9 Chart 10

Revenue growth (local currency) EBITDA margin (adjusted)

Chart 11 Chart 12

Debt / EBITDA (median, adjusted) FFO / Debt (median, adjusted)

Source: S&P Global Ratings. Revenue growth shows local currency growth weighted by prior-year common-currency revenue-share. All other figures are converted into U.S. Dollars using historic exchange rates. Forecasts are converted at the last financial year-end spot rate. FFO—Funds from operations.

-8%-6%-4%-2%0%2%4%6%8%

10%12%14%

2017 2018 2019 2020 2021 2022

N.America W.EuropeAsia-Pacific Latin AmericaGlobal Forecast

0%

5%

10%

15%

20%

25%

2017 2018 2019 2020 2021 2022


0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

2017 2018 2019 2020 2021 2022


0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2017 2018 2019 2020 2021 2022

N.America W.Europe

Asia-Pacific Latin America

Global Forecast



Cash, debt, and returns Global Consumer Products Chart 13 Chart 14

Cash flow and primary uses Return on capital employed

Chart 15 Chart 16

Fixed versus variable rate exposure Long term debt term structure

Chart 17 Chart 18

Cash and equivalents / Total assets Total debt / Total assets

Source: S&P Global Market Intelligence, S&P Global Ratings calculations. Most recent (2020) figures are using last twelve months (LTM) data.

-50

0

50

100

150

200

250

300

350

400

2007 2009 2011 2013 2015 2017 2019

$ Bn

Capex DividendsNet Acquisitions Share BuybacksOperating CF

8

0

2

4

6

8

10

12

2007 2009 2011 2013 2015 2017 2019

Global Consumer Products - Return On Capital (%)

0%10%20%30%40%50%60%70%80%90%

100%

2007 2009 2011 2013 2015 2017 2019

Variable Rate Debt (% of Identifiable Total)

Fixed Rate Debt (% of Identifiable Total)

0

20

40

60

80

100

120

0

200

400

600

800

1,000

1,200

2007 2009 2011 2013 2015 2017 2019

LT Debt Due 1 Yr LT Debt Due 2 YrLT Debt Due 3 Yr LT Debt Due 4 YrLT Debt Due 5 Yr LT Debt Due 5+ YrVal. Due In 1 Yr [RHS]$ Bn

11

0

2

4

6

8

10

12

2007 2009 2011 2013 2015 2017 2019

Global Consumer Products - Cash &Equivalents/Total Assets (%)

38

0

5

10

15

20

25

30

35

40

45

2007 2009 2011 2013 2015 2017 2019

Global Consumer Products - Total Debt / Total Assets(%)

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Industry Top Trends 2021 December 10, 2020