Moody’s research on energy costs as the key factor for European food retailers

Rising energy costs will hit frozen food specialists hardest
Newly released Moody’s research on how European food retailers and Chemicals companies are to weather the rising energy prices disruptions:

Retail:

• Frozen food ones – UK’s Iceland (B3 negative) and French Picard Bondco SA (B3 stable) are the most exposed (they spent around 1.5% of their total revenue on energy costs in 2021 – before the 2022 energy price spike. We recently downgraded Iceland to B3 negative from B2 stable because we think its credit ratios will materially weaken, in part exactly because of these rising input and energy costs)
• We expect fresh food prices to rise further this winter because the cost of heating energy-intensive greenhouses will continue to increase
• Exposure also depends on retailers’ ability to absorb the cost. Everything else being equal, companies with narrower EBITDA margins like UK grocers Morrisons (B1 stable) and Asda (B1 stable) will find this more difficult
• It is not the same for European countries. For example, UK food retailers face higher energy tariffs than those in France
• Companies that have hedged their energy costs will feel price increases too, although with a lag

Chemicals:

• There’s quite a difference for the companies relying on gas to produce electricity and steam (as part of the manufacturing process) vs for those who use gas as a critical raw material
• We expect the combination of dwindling natural gas imports from Russia, reduced end-market demand and elevated energy and production costs will dampen earnings in the second half of 2022 and into 2023
• Those with lower gas intensity and energy dependence and a regionally diversified manufacturing footprint are in a better position
• We think companies with societally important products (eg related to pharmaceuticals or water treatment) would be prioritized if gas is rationed
• While many producers would generate lower EBITDA and experience higher leverage, we expect companies to reduce inventory levels and cut or delay capital spending

Rising energy costs are particularly challenging for European food retailers because they have much higher energy needs and generally have lower EBITDA margins than nonfood retailers. The price of some fresh foods is also closely linked to energy prices. We estimate that fuel costs linked to logistics and transport make up about 30% of food
retailers’ energy cost on average and utility bills the other 70%. Refrigeration is by far the biggest component of food retailers’ utility bills .
Exhibit 1
Refrigeration is by far the largest portion of grocery retailers’ electricity consumption % energy consumption by end use
Refrigeration 73%
Cooking 5%
Lighting 7%
Ventilation 6%
Miscellaneous 9%
Store heating and cooling (included in miscellaneous) can vary significantly based on the climate where the store is located. Source: E Source

Food retailers’ exposure to refrigeration costs differ depending on what proportion of their products are fresh or frozen. Frozen food specialists Picard Bondco SA (B3 stable) in France and the UK’s Iceland VLNCo Limited (B3 negative) are the most exposed to rising energy prices. These companies spent around 1.5% of their total revenue on energy costs in 2021, which was before the energy price spike this year. We recently downgraded Iceland VLNCo to B3 negative from B2 stable because we think its credit ratios will materially weaken, in part because of these rising input and energy costs. By contrast, general merchandise retailers and retailers that specialize in unrefrigerated,
or ambient food, like France’s Euro Ethnic Foods Bidco S.A.S. (B2 stable) have the lowest

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