For Germany, a Cup of Plenty?

The World Cup is big business for the host country, and this year Germany has the honors. Here's S&P's look at the likely impact

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Less than three months before the soccer World Cup kicks off in Germany on June 9, the nation's football fans are biting their nails over the recent poor performance of their team. But whatever the home team's fortunes, the German consumer goods, retail, and tourism sectors are likely to score big from Germany hosting the tournament. Sales will be accelerated by the spending sprees of the 3.5 million football fans expected to flock to matches, including about 1 million visitors from abroad, as well as by related spending by people watching at home.

Experience shows sporting mega-events such as the World Cup can actually have a measurable effect on gross domestic product (GDP) growth for the host nation. Standard & Poor's Ratings Services expects that, although companies' gains will be generally too small to affect overall credit ratings, the event will make a positive impression on the 2006 profits of the German outfits whose debt it rates, particularly for manufacturers and retailers of flat-screen televisions and the hotel and lodgings industry. It might also bring longer-term benefits by lifting German consumer sentiment.

The "feel-good" factor from hosting the World Cup could be just the extra boost needed for the fragile consumer recovery that has started to appear after years of stagnation. S&P forecasts German GDP growth of 1.6% in 2006, after a 0.9% increase in 2005. Business confidence signals are promising, rising to the highest level in more than 14 years, according to the latest reading for the Ifo Business Climate Index, based on a survey of 7,000 companies. This has been aided by the high approval ratings of the new coalition government under Chancellor Angela Merkel.

FRENCH HISTORY. Yet it remains to be seen whether the current recovery, which is at present highly dependent on healthier levels of consumer spending, is sustainable or only temporary. The consumer sector could be dealt a setback by an anticipated rise in the country's value-added tax (VAT) to 19% scheduled for January, 2007, from the current 16%.

Consumer-spending statistics for the second quarter of this year could already signal whether the World Cup might provide the much-hoped stimulus. When France hosted the World Cup in 1998, French private consumption grew by a strong 1.5% in the quarter ahead of the tournament, driven in part by a surge in consumer-goods purchases, such as televisions.

We consider economists' current predictions that the World Cup will add about €5 billion to GDP in 2006, equivalent to a 0.25% increase in the rate of growth, to be realistic. This is based on industry estimates that the 64 matches will attract about 1 million fans from abroad and 2.5 million from within Germany, that overnight stays in hotels and guesthouses will increase by about 5 million in 2006 on the previous year, and that fans will spend an average of about €150 to €200 per day.

SECTOR RUNDOWN. Although the benefits will be greatest in the 12 cities in which the World Cup matches are to be held, gains are likely to be made throughout the country by tournament-related spending of those watching at home.

Many German corporate sectors will be affected by a soccer-crazed summer, including airlines, advertising, media, communications, security services, and sports manufacturers. The most immediate effects however, are likely to be seen in retailing, consumer goods, and tourism.

Consumer Goods/Retail
This sector will be an obvious World Cup winner. Retail stands to benefit from the spending not only of the 1 million expected overseas visitors traveling to Germany to see the football games, but also from the effects of some fans extending their stay in the country beyond the championships. A survey by Germany's retailing association HDE found that 40% of its registered member companies expect the event to at least result in an improved mood for consumption, and about 17% believe that actual sales will be higher due to the championship.

This very careful assessment might be due to the big €370 billion size of the retail sector in Germany in total, and the likely perception that a 30-day sporting event might not be felt significantly in a company's total annual sales. However, S&P believes that, while the World Cup alone will not be able to kick-start German consumption in 2006, it might well contribute to some positive overall growth in combination with other factors affecting the economy.

Although HDE expects aggregate additional retail spending of €2.2 billion from the event, which is equivalent to 0.6% incremental growth for the sector, we consider that sales growth could be significantly stronger in selected niches of the retailing market. Consumer-electronics retailing, in particular, is likely to benefit greatly from the expected accelerating effect on sales of new-generation TV screens. This industry is currently in transition from old-generation "big box" cathode-ray sets to modern flat-screen plasma or liquid-crystal technology. The football championships are therefore likely to propel the adoption of this new technology.

CHEMICAL HIGH. Moreover, the pending VAT increase in 2007 could significantly strengthen this trend, as VAT on big-ticket electronics has more weight than on food items. On the downside, much of this sales growth would be merely brought forward from 2007, and could result in lower sales next year. However, the consumer-electronics effect doesn't only pertain to domestic sales in Germany, as billions of people worldwide are expected to watch the championships on television. Thus, the global effect for consumer electronics retailing could well be much stronger.

German companies likely to benefit most from the World Cup effect include chemicals and pharmaceuticals company Merck (S&P Credit rating, BBB+). It's the leading manufacturer of liquid crystals used in flat-screen television production, holding an impressive two-thirds of the global market share. A further winner will be Germany's biggest retailer Metro (BBB), with group sales of €59 billion in 2005. Metro also owns Media Markt/Saturn, Europe's consumer-electronics market leader, with 503 locations in 11 countries.

Tourism/Hotel & Lodging
The German tourism industry has mixed feelings about the forthcoming World Cup championship. Expectations of rising demand for accommodation during the event are offset by concerns that many Germans might abandon their holiday plans in order to support the home team.

The statistics give cause for optimism, though. According to the World Tourism Organization, Germany has grown to become the fifth most popular tourist destination, measured by revenue, behind the U.S., Spain, France, and Italy.

In terms of business travel, Germany tops the European league. The World Cup is expected to enhance this trend. Accordingly, the hotel and catering industry expects additional earnings of about €500 million from the World Cup alone -- not including ancillary business opportunities generated through city travel and short-term trips. Only time will tell, however, if this upward trend can be transformed into sustainable growth for the fragmented German hotel and catering sector.

TRAVEL PLANS. While onshore earnings in the tourism sector are expected to rise by about 5% to 7% in 2006, to €24 billion to €25 billion, growth from travel abroad is expected to rise by only 2% to 4%, to €58 billion to €59 billion.

Yet the times when World Cup summers heralded a decline in travel activity may be over. With consumer behavior in the tourism sector undergoing a profound change, customers aren't willing to renounce their holidays for football. Vacations might just be shorter and decided at short notice. TUI (BB+), the Germany-based largest European tour operator, maintains its forecast of 4% growth for the German tourism industry in 2006 and the following years, and reports its currently strongest booking figures throughout the year for the World Cup month of June, 2006.

Overall, tourism growth has become more resistant to external shocks such as avian-flu fears or terrorism. However, growth has also become harder to predict in recent years due to emerging trends away from early bookings toward last-minute, low-cost offers, short city breaks, and trips to events. Flexibility in pricing and logistics will be key success factors for tour operators on the winning side this World Cup summer.

MOOD SWINGS. Hosting the World Cup will undoubtedly benefit the German consumer sectors in 2006, yet a good performance by the home team, or even a win, could reap greater harvests by further lifting consumer sentiment. When France won the tournament it hosted in 1998, indexes showed a leap in consumer spending in the months before the event and in consumer confidence afterwards. It's reasonable to expect, therefore, that a rally by the German side could bolster recovering German business confidence and have longer-lasting effects on consumer sentiment.

By the same token, however, an unexpectedly poor performance by Germany could dampen this impulse. Uncertain outcomes, which are the essential appeal of sport, are the bane of business. At any rate, Germans will be reaching for their match tickets -- or TV remote controls -- on June 9 to cheer on Die deutsche Nationalmannschaft.

Frankfurt-based Brookman is an editor for Standard & Poor's Securities Data

All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report.
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