If I own a fish’n’chips shop down at the beach during a very hot summer, I’m going to do very well. I may even have to expand as summer draws to a close and as beach-goers try to take in every last bit of the warm summer sun. The trouble is that as winter sets in, I run into a bit of trouble. Yes, I am bigger than I was at the start of summer, but my costs have gone up and my revenue has gone down.
It’s a silly example but it’s a real problem for British FTSE 100 multi-national companies when various regions that they have expanded into run into trouble. It’s certainly become a problem for both Reckitt Benckiser (LSE: RB) and Standard Chartered (LSE: STAN). Just how concerned should investors be? Read on to find out.
Standard Chartered in Asia
Earlier this year the bank announced that its third-quarter operating profit dropped 16% to USD$1.53 billion. Bad loans soared to $539 million. In many cases it’s been a direct result of the impact that weak commodities markets have had on Standard’s clients as China’s growth has slowed. The bank also announced its second-half operating profit would be lower than last year’s.
South Korea has also been a sore spot for the bank. The CEO, Peter Sands, has responded by shrinking the bank’s unit in the region. Standard Chartered has also sold off underperforming businesses in Hong Kong amid growth concerns there.
The approach from management appears to be: de-scale and speed-up. Over the past 12 months, though, the stock has lost around a third of its value on the FTSE 100, so investors are still eagerly waiting to see when the growth curve is going to turn up again.
Reckitt Benckiser in Europe
You wouldn’t have believed it even six months ago but Germany — yes, Germany — is now fending off threats of deflation. The latest figures show the lowest rise in consumer prices since October 2009, with inflation coming in at just 0.1% in December. The man at the steering wheel of the European Central Bank, Mario Draghi, has now admitted that there’s a risk the ECB may not fulfil its mandate of 2% inflation.
Another one of Reckitt Benckiser’s markets, Russia, is also in economic strife. Russia’s total currency reserves, according to one estimate, have fallen from $511 billion to $388 billion. The Institute for International Finance says the ‘point of no return’ is reserves of just $330 billion. After that you risk a serious flight of capital. Russia is being hammered by Western sanctions, a fall in the oil price and a collapse of the nation’s currency.
In Europe and North America, which together account for 57% of the company’s revenue, Reckitt’s like-for-like sales rose 1%. Did you notice the company combined sales in Europe AND North America in its accounts? That’s like an “organic bolt-on acquisition” — or something?? It doesn’t really make sense to this Fool. Regardless, for that entire block to boast just 1% sales growth is a red flag for me.
Fight or Flight
One analyst described these economic regions to Reuters as “decelerating”. That deceleration has had a direct impact on the earnings of Reckitt Benckiser and Standard Chartered. Both companies are working to produce growth despite this challenge. I don’t like their chances, but I’d love to be proved wrong.