The ongoing concentration process in the domestic market will increasingly put small retailers with a poor capacity to generate cash flow under pressure.
- Limited impact of US tariffs for the time being
- A modest increase in payment delays expected
- High number of fraud cases in 2019
![Overview of Italian food sector](https://group.atradius.com/image/overview-of-italian-food-sector---atradius-market-monitor.png)
![Italian food sector expected growth in the coming years](https://group.atradius.com/image/italian-food-sector-expected-growth-in-the-coming-years---atradius-market-monitor_1.png)
The food sector is one of the most important Italian industries, generating total turnover of more than EUR 140 billion in 2018 and accounting for 8% of Italy´s GDP. Italian food and beverage sector value added is expected to increase 3.0% in 2019 and 1.4% in 2020.
Export of agrifood products increased 1.2% in 2018, to EUR 41.8 billion, and grew 5.5% in H1 of 2019, with the EU remaining the main end-market. However, domestic consumption was less dynamic with a modest 0.8% increase in Q3 of 2019. Italian food production, processing and retail remain heavily fragmented, with a very competitive business environment.
Impact of US retaliatory tariffs on individual segments
Turnover in the meat segment has stabilised in 2018 and 2019 after several years of declining sales triggered by changed consumption habits. Value added is expected to increase 0.9% in 2019 and 0.2% in 2020. Beef processors have benefited from a slight increase in sales prices and consumption. However, the pork processing industry suffers from increased slaughter cattle prices, triggered by the African swine fever epidemic and increased Chinese demand.
Impact of US retaliatory tariffs on individual segments
Value added in the dairy segment is expected to increase 2.5% in 2019 and 1.5% in 2020. While adverse weather conditions have resulted in dairy businesses having to pay more for milk in 2019, sales prices for their dairy products (e.g. cheese) have also increased. The recent introduction of US import tariffs on certain Italian cheeses (e.g. Parmigiano and Grana Padano) could affect the positive export trend seen so far. US import tariffs could also have an impact on the liquors segment in the beverages subsector, while the wine segment is not affected and is still performing well domestically and abroad.
Currently it is difficult to quantify the potential economic damage of US import tariffs to Italian food businesses. While the US account for 10% of total food exports, the EU remains by far the main market with a two-third share, and few products have been targeted by the US tariffs so far. Therefore, the impact on the credit risk of certain segments seems to be rather limited for the time being.
Food producers and processors are often highly geared in order to maintain working capital requirements. Due to its anticyclical business performance, lending to the food industry remains appealing to banks and other financial institutions, enabling them to diversify asset investments.
Ongoing consolidation puts smaller food retailers under pressure
In general, the domestic food retail segment is rather resilient with a positive credit cycle, which mitigates risks of liquidity distress. However, the market is also characterized by intense competition, too many players and a low average size of Italian food retailers compared to other major international businesses. In 2019 a consolidation process has started. We expect it to continue in 2020, with a small number of larger retailers using their strong liquidity to pursue further investments and acquisitions in order to gain market share. This process will increasingly put small retailers with a poor capacity to generate cash flow under pressure.
While the profitability of Italian food businesses is generally low, profit margins are expected to remain stable in 2020, also taking into account the current level of food raw material prices. The ‘Article 62’ law decree from 2012 lays down a maximum payment term in the food sector of 30 days for perishable goods and 60 days for non-perishable goods. While most businesses are abiding by those terms, some weaker players still protract payments in order to manage their liquidity in case of financial distress. Due to this and the sluggish performance of the Italian economy we expect a modest increase in payment delays in 2020, and a levelling off of insolvencies.
Our underwriting stance for Italian food businesses remains generally open to neutral. However, we are pursuing a more cautious approach towards highly leveraged companies (due to possible difficulties in refinancing) and small- and medium-sized retailers with a poor market position, impacted by the increasing competitive pressure from larger retailers. We are also monitoring the impact of the ongoing EU-US trade dispute (e.g. a further escalation).
In the first months of 2019, we have observed a high degree of suspected frauds in the food sector, mainly in the general wholesale of foods, meat, and fish segments. Therefore, we take a closer look at the frequency of credit limit applications and the reliability of businesses’ management. Financial figures of individual businesses not aligned to average sector/subsector levels serve as a warning sign.
![Performance forecast along Italian food subsectors](https://group.atradius.com/image/performance-forecast-along-italian-food-subsectors---atradius-market-monitor_1.png)
Related Documents
![Download](/cs/dist/assets/img/basic_sheet.png)
1.19MB PDF