In general, S&P Global Ratings believes lower volumes, combined with higher costs, will compress margins for the sector over the next few quarters, despite significant efforts by companies to secure operating efficiencies. If consumers cut spending in the face of rising prices for energy, fuel, and food staples, and tap their savings for travel and leisure activities, the financial performance of some consumer goods companies could suffer. So far, consumer product companies and retailers have been successfully able to pass on increases in input prices and operating costs as price hikes to consumers. The bulk of these rating actions are on companies in the 'BB' or 'B' rating categories and in the subsectors most exposed to high raw material prices, such as packaged foods and personal hygiene products. We have taken negative rating actions on approximately 10% of rated companies in the EMEA consumer goods sector in the recent months, due to high costs and supply chain disruptions, which have weakened profitability.Home consumption will still hold up, even in a recessionary environment, as consumers look to moderate their spending on eating out. As a result, sales volumes for consumer goods are set to decline over the next few quarters as consumers-particularly lower- and middle-income households-gradually cut back on discretionary spending, trade down, and become more price conscious to deal with falling real incomes.However, consumer confidence and spending has started to weaken due to slower economic growth, greater geopolitical uncertainty, persistent inflation including for essentials such as fuel, energy, and food.Despite passing on higher prices to retailers and end-consumers, the latest financial reports from rated European consumer goods companies show that so far they have successfully defended their market positions. They are trying to secure supplies and cut costs, but supply chain issues continue to impede measures to secure operational efficiencies. Consumer goods companies around the globe are facing relentless increases in input and operating costs that they are passing on to consumers.
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