February 26, 2020 / 1:35 PM / a month ago

Breakingviews - Consumer giants take rosy view of epidemic damage

Smirnoff cans are seen on a conveyor belt at the production line inside the East African Breweries Limited factory in Ruaraka factory in Nairobi, Kenya April 6, 2018.

LONDON (Reuters Breakingviews) - The coronavirus is making 2020 a tough year for consumer goods companies, particularly when Asia is their main engine of growth. Distiller Diageo said the outbreak could cost it as much as 325 million pounds in sales. Yoghurt and baby food maker Danone, meanwhile, reckons the hit could be 100 million euros in the first quarter. Both forecasts, however, look a little rosy.

Estimating the impact of the coronavirus sounds like a fool’s errand. The disease, which has so far affected over 80,000 people, is spreading rapidly across countries, making any kind of forecast likely redundant by the time it is made. Yet chief executives of the likes of Diageo and Danone must at least try.

Diageo Chief Executive Ivan Menezes reckons the virus could hurt sales by between 225 million pounds and 325 million pounds in the year ending June 2020, as people drink less in bars and restaurants, and shun travel. The hit to operating profit would be 200 million pounds at the upper end. Using 2020 consensus figures from Refinitiv, that corresponds to a 5% decline in earnings.

Diageo’s forecasts come with a health warning. They are mostly based on the loss of sales in Asia and assume the crisis eases after June. The Smirnoff maker has so far provided little clue as to how it will fare if the virus spreads or lasts longer.

Danone’s estimate is a little murkier. It is forecasting a 100 million euro hit to sales for the first quarter, or about 1.5% of revenue when annualised. Sure enough, the Activia seller also downgraded its sales guidance for 2020 to 2% from 4% at the bottom end. Yet analysts were already pencilling in a similar decline before the virus spread, suggesting the French group’s own targets may need to be revised down further if the outbreak endures. And, as with Diageo, its estimates are also based on the hope that the virus will mostly affect Asia.

Investors are taking a more bearish view. Diageo’s shares, for example, have fallen over 9% so far this year, wiping around 7 billion pounds off its market value. That suggests they are either counting on a much bigger loss of earnings this year and a slower recovery than a mere 5% short-term hit. Given the potential loss of revenue that could come if the virus keeps spreading, forcing governments everywhere to keep citizens at home, the risk is that even markets are still too optimistic.

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