BBC Monday, 30 July, 2001, 05:56 GMT 06:56 UK No recession for champagne and chocolate

By BBC News Online's Orla Ryan

Is there ever a time when people don't want champagne or chocolate?

With the UK economy settling in for a long, slow summer, several thousand jobs have already been lost in telecoms, technology and the media.

But even as workers fear layoffs, there are some sectors that will escape the worst of any economic downturn.

These sectors, such as luxury goods, pharmaceuticals and utilities, may not only provide slightly more job security but are also likely to attract more investors.

Chocolates all round

Some would say that British sweets and soft drinks maker Cadbury Schweppes deserves to treat itself to a box of its own chocolates, washed down with a fizzy drink.

It saw its underlying pre-tax profit rose 14% to $351m in the 24 weeks to 17 June.

"This is a rock solid, very good set of figures and about as good as you could ask for given market conditions," David Lang, analyst at Investec Henderson Crosthwaite, said.

The world's second-biggest drugmaker, Glaxo SmithKline also unveiled healthy profits - the first of the major drugmakers to report its results in what is thought to have been a healthy quarter.

Even troubled retailer Sainsbury's delivered news of a strong rise in second quarter sales on Wednesday.

On the defensive

All these companies can be seen as good examples of defensive stocks.

They sell goods that people will want or need to buy no matter what happens.

"Fortunately, people still have the good grace to get ill, even during a recession. Some might say even more so," Barclays investment manager Henk Potts said of Glaxo SmithKline's strong results.

Food manufacturers, retailers and utilities will also be cushioned from the worst effects of any recession.

"No matter what happens, people need their services," Martin Evans, head of European research at Credit Lyonnais said.

Investors - scarred by the dot.com fall out - now want to put their money in companies with visible earnings streams.

"What the market is looking for is clear, visible earnings stream. We have gone through this whole business of promising earnings...what we want is companies that make money," Barclay's Henk Potts said.

But the changing nature of the food retail business could however mean that this sector - already hit by intense competition on price - could be more vulnerable.

Increasingly, the big retailers - such as Tesco, Sainsbury's and Asda - rely on non-food sales to boost their profits. "This means elements of the sales revenue of food retailers that is more sensitive to changes in economic cycle," Verdict's Richard Hyman said.

If a recession really takes hold, then "it is going to filter through at some stage to service sector," Henk Potts said. "There is no real safe place in the UK anymore."

Life of luxury

Ironically, it is luxury retailers that have least to fear from recession.

"The rich tend to be damaged less in a recession than the poor," Verdict Research's Richard Hyman said.

"At face value, you would imagine that it is the luxury end that might get hit the most, people might want to do without that £1,000 suit, the reality is that most people that can afford to buy a £1000 suit can still afford it during the recession."

Similarly, champagne companies are unlikely to see sales fall.

"Generally the people who are drinking high volumes of champagne aren't ones who are going to be particularly badly hit by recession," Datamonitor's drinks analyst Neil Broom said.

In fact, drinks companies generally will find that they sell the same volume of booze, but most of it will be shifted in off licences [liquor stores] and supermarkets than in pubs, clubs and restaurants.

Testing times

But crucially, how a company handles life in a recession is as much as a symptom of how healthy a company it is as the strength of the sector it operates in.

"Some companies will clearly see a downturn as an opportunity to win market share and business from weaker and smaller companies but that would be across a range of industries," Credit Lyonnais's Martin Evans said.

Verdict Research's Richard Hyman added that the "retailers are able to deal with zero inflation are the same ones that are going to come through the downturn."

-- Anonymous, July 30, 2001