The Euro Crisis and its Impact on Home Care

If anything is certain about the financial crisis hanging over Western Europe, it is that nothing is certain. As the EuroZone debt crisis continues, with to date no solution, the potential outcomes of this economic instability are numerous.

At the more optimistic end of the spectrum, there is still some hope that EuroZone governments may be able to work together and resolve the situation by agreeing and sticking to strict new borrowing rules, with Italy and Spain getting bail-outs from the European Central Bank as part of the deal. At the opposite end of the vast number of possibilities is the worst-case scenario – a total collapse of the EuroZone and the euro as its problems prove insurmountable.

Troubled countries may go it alone

Lying somewhere between these two potential outcomes is the possibility that the five main troubled economies in the region – Portugal, Italy, Ireland, Greece and Spain – may one by one be forced to exit the union and reinstate their own currencies, which would be extremely depreciated in value, with speculation that currencies would be devalued by as much as 50%.  In November 2011, German Chancellor Angela Merkel mentioned the possibility of Greece’s exit from the EuroZone, the first acknowledgment of a possible break-up from any of the main figureheads involved in the discussions.

Should these five economies end up going it alone, the development would mean huge implications for home care manufacturers operating in Western Europe. Euromonitor International looks at which might be affected and how.

Major multinationals account for most of the market

Ireland, Greece, Spain, Portugal and Italy account for 31% of total Western European home care sales. As would be expected, the world’s largest home care manufacturer Procter & Gamble is the dominant force, accounting for 18% of sales in the five countries combined. In second place is Reckitt Benckiser with a 15% share, followed by Henkel with 13%. Unilever and SC Johnson account for shares of 8% and 6%, respectively.

It would be safe to assume that these major multinationals with European exposure have at least considered their contingency plans with regard to the potential outcomes of the current crisis. However, given that there is no precedent for what could happen and multinational manufacturers know no more than anyone else which outcome is the most likely, forward planning is difficult to say the least. Contingency plans at best will be based largely on ifs, buts and maybes.

Break-offs impact the bottom line

Perhaps the only thing that is certain is that the exit of those five countries from the single currency would not be good news for any home care manufacturers with a significant presence there.

A country exiting the single currency would certainly result in devaluation of the reinstated sovereign currency, which would have consequences for major multinationals importing international brands. Overnight, imported brands would become very expensive, and given that austerity measures will have to continue regardless of a country scrapping the euro, this will be at a time when consumers will have less money to spend than ever. As a result, volume and value sales are likely to take a dive, and to make matters worse any profits that were derived in those countries would also dwindle when converted to sterling or dollars.

Aside from the impact of currency devaluations, the complexity of any break-up would hinder businesses in that it would increase bureaucracy and no doubt ramp up legal costs as the manufacturers involved work out how best to deal with the ramifications of a currency switch, for example, negotiating how to honour contracts based on payments in euros. Furthermore, there would be the risk of asset write-downs for companies with operations in countries that had left the single currency.

Global presence will provide stability

Of the five major players in the affected countries some are perhaps better placed to weather the possible storm than others. As a rule, those that have least reliance on the markets of Western Europe and a stronger emerging market presence will be best positioned to absorb the problems that may arise from countries breaking free from the EuroZone.

Of the five biggest players mentioned above, Unilever has by far the strongest presence in emerging markets and the least reliance on the troubled markets of the West and is, therefore, best placed to come through the events relatively unscathed. Asia Pacific and Latin America account for more than 50% of Unilever’s home care sales, Western Europe just 30%. Procter & Gamble, Reckitt Benckiser and SC Johnson all have wide global exposure and have all made headway in emerging markets. However, they all also still rely heavily on developed markets, with most of their home care sales coming from the West. Of the five, Henkel has the weakest presence in emerging markets and is the most heavily reliant on Western Europe – 50% of its home care sales derive from the region – and as such is likely to feel the impact of any countries leaving the EuroZone most acutely. For all of these major players, with perhaps the exception of Unilever, the potential for problems of course runs much deeper should the worst-case scenario come true and the European economic alliance falls apart altogether.

Local players face turbulent times

While the major players in home care for the most part have enough global coverage to emerge unscathed from whatever fate should befall the euro over the long term, the fate of smaller, local players is much more difficult to predict. While it is expected that larger corporations will have some sort of contingency plans in place, the same is perhaps not true of the smaller players in home care. Although dominated by multinational manufacturers, Italy, Portugal and Spain, in particular, all have many smaller home-grown home care manufacturers that each commands a fraction of the market.

Leaving the euro and the subsequent currency devaluation that would follow could have a detrimental effect on the finances of these small and medium-sized manufacturers, particularly if they have to seek legal and commercial advice on the dissolution of existing trading and loan agreements.

In addition, these small firms could also be disproportionately hit if they depend on importing items from outside their home countries’ borders for use in the manufacturing process. On top of all this, if these countries are to do away with the euro, their existing debt is not going to disappear, meaning further austerity measures will still have to be implemented, which is likely to negatively impact business environments. While again impossible to accurately predict, it seems inevitable that some of these smaller players will go to the wall and opportunities for buy-outs will arise.

Time to watch and wait

Without any certainty over the fate of the euro and the economies currently facing the most difficulties, there is little home care manufacturers, both local and multinational, can do but watch and wait and hope that the fall-out from these unprecedented events can be cleaned up as quickly as possible.