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Canned goods and shotguns are usually a safe bet in times of extreme economic distress. But how should investors approach yoghurt and bottled water?
Like several food and drink manufacturers, French group Danone has embraced the fad for healthier lifestyles. Its dairy business has grown steadily during the past decade, powered by Actimel and Activia, blockbuster yoghurts that make health claims. Since 1999, these two brands have produced 2.6 billion euro of the division's 2.8 billion euro sales growth, Collins Stewart calculates.
It is hard to believe shoppers will keep buying expensive little bottles of branded "drinking yoghurt" as consumer confidence wanes. As more food and drink manufacturers jump on to the bandwagon and claim health benefits for their products, cynicism seems likely to rise.
First-half results from Danone did prompt an 8 per cent pop in the share price on Friday. But this was thanks largely to low expectations, an unsustainably low tax rate, and continued strong baby food growth. In France - still Danone's largest market - dairy volumes were down about 15 per cent in the second quarter year on year. Growth slowed in the US and Germany. Overall market data suggest that European private label brands are taking yoghurt market share.
Bottled water sales are also suffering. Danone's other big division reported a second quarter sales drop thanks to the drag from western Europe. Trading down is quite a threat when the alternative is practically free and literally on tap.
Meanwhile, there is a fundamental change in attitudes under way. Environmental concerns reward switching - to order tap water in a restaurant is no longer miserly, it is good for the planet. Healthy products have boosted food manufacturers' profits in the good times. But investors would these days be unwise to put too much faith in yoghurt's restorative powers.
Samsung Electronics
When the chips are down, even the mighty take a battering. Samsung Electronics, Asia's biggest technology group, on Friday unveiled an 18 per cent year-on-year slump in operating profits at its semiconductor division. In the same second quarter Taiwan's two biggest DRAM chip makers, Powerchip and Nanya Technology, plunged into the red.
Samsung's more diversified business model meant it pulled off a still-respectable - if below market expectations - doubling of group operating profit to $1.9 billion in the second quarter.
There were even a few pleasant surprises. Shrugging off falling panel prices, the LCD division achieved operating margins of 21 per cent, more than double those of the same quarter last year.
Mobile phone handsets sales dipped slightly on a quarter-on-quarter basis but more snazzy phones helped lift the average selling price. But the weakness in semiconductors, responsible for one quarter of the group's total sales, underlines the pain in the sector.
Memory chip makers lost an aggregate $2.5 billion or so in the first quarter, according to iSuppli Corporation; only three players managed to turn a profit.
Last year, when a glut pushed prices down 70-80 per cent, makers of dynamic random access memory chips' aggregate operating margin was negative to the tune of almost 10 per cent. That has since deteriorated.
Dynamics are against the industry as fixed costs rise and economic slowdown dents demand for PCs, mobile phones and other goods that use memory chips.
Besides, notwithstanding the sector's inherent cyclical nature, manufacturers persist in ploughing in more money. Samsung, which has the firepower to outspend its peers, has earmarked capital expenditure of 7,000 billion won ($7 billion) this year, or almost 40 per cent of sales based on the halfway stage.
The optimistic reading is that smaller players will be crowded out, leaving Samsung to grab market share. Alas, history suggests chipmakers are more resilient than US consumers.
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