Horse Meat Scandal To Hit Small Food Producers, Manufacturers - Fitch

02/22/2013| 09:27am US/Eastern

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By Michael Haddon

Europe's horse meat scandal will likely result in higher costs for the continent's smaller food producers and manufacturers, Fitch Ratings said Friday, adding to pressure on the sector's margins and profits.

Fitch said the discovery of horse meat in a variety of beef products will probably lead to tighter health and safety standards and new requirements for labeling and tracing ingredients across the value chain, which will push up costs.

The rating company added that product recalls and lost sales will also hurt the industry's revenue in the near-term, though the long-term impact on sales is less clear.

"There is a problem of reputation and trust in certain meat product categories and a few brands associated with this scandal which can take some time to rebuild," Fitch said.

Some manufacturing companies may be already operating on relatively slim margins, Fitch said, partly due to pressure from major retailers to keep prices down.

These manufacturers then put pressure on their suppliers, which helped create the complex supply chains and lack of traceability which is at the heart of the current scandal, it added.

Smaller, less-diversified manufacturers or single-brand manufacturers of frozen food and ready-meals--such as Findus--may be harder hit than larger multiple-brand manufacturers, it said.

The impact on bigger manufacturers such as Nestle SA (NESN.VX) will be much less because meat-products make up only a fraction of their brands, Fitch said.

The Swiss food giant said Tuesday it was withdrawing its beef pasta meals from sale in Italy, Spain and France after finding traces of horse DNA in them.

Meanwhile, major retailers like Tesco PLC (>> Tesco PLC) are unlikely to feel any significant impact, it added, although the crisis is likely to be long-running, given the complexity of the supply chain.

Wm. Morrison Supermarkets PLC (>> Wm. Morrison Supermarkets plc) has been left unscathed by the horse meat scandal, Fitch said, as the U.K. supermarket is vertically integrated, owning its factories and manufacturing facilities.

Therefore, the strength of the country's major retailers' market share may be tested, it added.

Consumer research and media reports indicate that sales of some frozen meat products have dropped and that consumers say they are less likely to buy these products in the future, Fitch said.

However, the ratings firm said its unclear how long this might last, especially as the scandal revolves around the misrepresentation of horse meat, rather than a major health scare such as bovine spongiform encephalopathy, or "mad cow disease."

Write to Michael Haddon at michael.haddon@dowjones.com or on Twitter @MichaelHaddonDJ

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