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Group Management Report

 

12 Outlook*

12.1 Overall economic situation: Emerging markets give cause for optimism

After the global economy bottomed out in 2016, the International Monetary Fund (IMF) expects real global GDP to rise year on year by 3.4 percent in 2017. If this were to come about, the global economy would have developed slightly above the long-standing average between the years of 1980 and 2008 – in other words, before the major recession.

Experts from The German Institute for Economic Research (DIW) see potential growth drivers as being a continuation of expansionary monetary policies, salaries rising more quickly and momentum gained from financial policies, as announced in the United States by the new President, Donald Trump. In all likelihood, the Trump administration will be determined to promote increased growth. They are planning to induce a positive “demand shock.” Public expenditure on infrastructure is expected to be significantly increased. At the same time, tax cuts are to be introduced, especially for businesses, while regulatory obstacles are to be removed. This should stimulate dynamic demand at least in the short-term.

According to estimates from the Kiel Institute for the World Economy, economic expansion should increase in emerging markets. The institute explained: “With commodities prices continuing to remain relatively low and many unsolved structural issues, it is unlikely that any great dynamism will develop.” Growth rates in China are above all likely to drop off. Experts are warning that, despite the new strategy based on strong domestic demand, innovations and service instead of exports, heavy industry and debt-financed investment, the current Chinese growth model is unsustainable. The economy is still too dependent on government-driven stimulus programs, a report from the IMF claims. Should lending continue to rise excessively and high debt levels among companies remain unchecked by the government, a “major slowdown” threatens to take hold. After the expiration of expansionary monetary and fiscal policy measures, with which the government supported the economy in 2016, IMF experts anticipate growth rates of just 6.4 percent (2017) and 5.9 percent (2018) for China.

Overall, it is likely that Emerging Markets and Developing Economies (EMDEs) will increasingly become the driving force behind global economic growth. While stagnation with long-term subdued growth rates of just 1.6 percent took hold in established economies, the group of EMDEs has experienced economic normality with average growth rates of 4.9 percent since 2010. For 2017, the World Bank expects the EMDEs to contribute 60 percent of global economic growth – the highest value since 2013. At the same time, the differences between countries which export commodities and those which import them should even out with the expected increases in commodities prices.

“Nevertheless, the long-term outlook for EMDEs is overshadowed by a whole host of other factors,” World Bank analysts are warning. In addition to demographic factors and weak investment levels, the instability regarding the future of global trade and the political situations of mature economies are worthy of mention. This means that all forecasts for 2017 should come with a large question mark.

12.2 Market research industry: All signs point toward growth

Following a year in which the skepticism of many market players was dispelled by an unexpectedly favorable industry economy, experts interviewed by ESOMAR went into the new year with far more optimism. Overall, 68 percent (2015: 58 percent) forecast renewed growth in financial year 2016. Only 12 percent expected sales to decline within our industry, while 20 percent anticipated no tangible change.

In Europe, the majority of market players are preparing for moderate growth as a best-case scenario. In the UK, data analysts and consultancy services were cited as growth drivers. In contrast, a collaborative and flexible approach was offered as a strength of the German market research industry. APAC market players brought up issues such as a lack of well-trained market researchers, dependence on governments and non-market player activities as possible risks for the industry. In Latin America, cost pressure from the customer side (Peru and Brazil) as well as skepticism in terms of data handling (Mexico) were factors which could potentially compromise business. In contrast, new technologies, increasingly extensive global networking and the arrival of online survey tools were cited as elements which could breathe life into the economy.

12.3. Outlook, Order Intake and Investments

GfK expects that 2017 will also present a challenging competitive environment. The risks outlined, above all in relation to the Media Measurement contracts in Brazil and the Kingdom of Saudi Arabia, remain valid for the current financial year as well. Regardless of the progress made in achieving technical performance indicators, contractual negotiations with the three Brazilian television broadcasters are yet to be finalized. This also compromises our ability to gain new clients. In terms of the Consumer Experiences sector, the order intake situation in the second half of 2016 was restrained. Against the background of these challenges in both sectors, it will be difficult for GfK to exceed the margin recorded in the prior year.

Our focus will therefore be unchanged: We shall target measures to strengthen our competitive standing and further develop our organizational structure. This is in line with our “One GfK: One Industry, One Region and One Operation” goal. There will be a focus on the eld of digital innovation and a concentration on Global Service Centers through which new, additional value contributions are to be created. At the same time, the Group structure will be further streamlined, while the product portfolio is to be adapted and realigned with a digital focus.

We currently expect capital expenditure to be up slightly versus the prior year by around €80 million (2016: €71 million). In terms of mergers and acquisitions, investments will be carefully evaluated on a case-by-case basis. GfK is mainly interested in technology-driven and data-centric companies, offering us immediate added value. In the Consumer Experiences sector, our focus will be on optimization and streamlining processes. A challenging market environment will persist with regard to our ad hoc business in 2017. In light of this, sales are expected to decline slightly and we are aiming to record a margin in line with the prior year. 

New growth and margin potential is to be systematically exploited in the Consumer Choices sector. As our main business, POS Measurement will be expanded to include new product categories, industries and services, supplemented by online evaluation options. The Management Board expects that the sector will record moderate growth. The margin should improve moderately versus the prior year in as much as the persistent teething problems in the TV Audience Measurement contracts in Brazil and the Kingdom of Saudi Arabia are set to be overcome. Should these delays persist further, it may lead to a decline in sales and together with impairments, this could also lead to a decline in (adjusted operating) income.

For 2017 the group expects, depending on the mentioned challenges, a sales development slightly above 2016 and an AOI margin (adjusted operating income against sales) in the same range as 2016.

As at the end of January 2017, sales coverage was 43.2 percent (2016: 43.8 percent) of expected annual sales. It is there- fore within the fluctuation range of between 37 percent and 44 percent over the last five years. 

12.3 Outlook, order intake and investments

GfK expects that 2017 will also present a challenging competitive environment. The risks outlined, above all in relation to the Media Measurement contracts in Brazil and the Kingdom of Saudi Arabia, remain valid for the current financial year as well. Regardless of the progress made in achieving technical performance indicators, contractual negotiations with the three Brazilian television broadcasters are yet to be finalized. This also compromises our ability to gain new clients. In terms of the Consumer Experiences sector, the order intake situation in the second half of 2016 was restrained. Against the background of these challenges in both sectors, it will be difficult for GfK to exceed the margin recorded in the prior year.

Our focus will therefore be unchanged: We shall target measures to strengthen our competitive standing and further develop our organizational structure. This is in line with our “One GfK: One Industry, One Region and One Operation” goal. There will be a focus on the field of digital innovation and a concentration on Global Service Centers through which new, additional value contributions are to be created. At the same time, the Group structure will be further streamlined, while the product portfolio is to be adapted and realigned with a digital focus.

We currently expect capital expenditure to be up slightly versus the prior year by around € 80 million (2016: € 71 million). In terms of mergers and acquisitions, investments will be carefully evaluated on a case-by-case basis. GfK is mainly interested in technology-driven and data-centric companies, offering us immediate added value. In the Consumer Experiences sector, our focus will be on optimization and streamlining processes. A challenging market environment will persist with regard to our ad hoc business in 2017. In light of this, sales are expected to decline slightly and we are aiming to record a margin in line with the prior year.

New growth and margin potential is to be systematically exploited in the Consumer Choices sector. As our main business, POS Measurement will be expanded to include new product categories, industries and services, supplemented by online evaluation options. The Management Board expects that the sector will record moderate growth. The margin should improve moderately versus the prior year in as much as the persistent teething problems in the TV Audience Measurement contracts in Brazil and the Kingdom of Saudi Arabia are set to be overcome. Should these delays persist further, it may lead to a decline in sales and together with impairments, this could also lead to a decline in (adjusted operating) income.

For 2017 the group expects, depending on the mentioned challenges, a sales development slightly above 2016 and an AOI margin (adjusted operating income against sales) in the same range as 2016.
As at the end of January 2017, sales coverage was 43.2 percent (2016: 43.8 percent) of expected annual sales. It is therefore within the fluctuation range of between 37 percent and 44 percent over the last five years.

Nuremberg, March 10, 2017

Nürnberg, den 10. März 2017

Dr. Gerhard Hausruckinger
Christian Diedrich
Alessandra Cama
David Krajicek
Matthias Hartmann

* The outlook contains predictive statements on future developments, which are based on current management assessments. Words such as “anticipate”, “assume”, “believe”, “estimate”, “expect”, “intend”, “could / might”, “planned”, “projected”, “should”, “likely” and other such terms are statements of a predictive nature. Such predictive statements contain comments on the anticipated development of sales proceeds and income for 2016. Such statements are subject to risks and uncertainties, for example, economic effects such as exchange rate fluctuations and changes in interest rates. Some uncertainties or other unforeseen factors which might affect ability to achieve targets are described under the ‘Risk position’ in the Group Management Report. If these or other uncertainties and unforeseen factors arise or the assumptions on which the statements are based prove to be incorrect, actual results could materially differ from the results indicated or implied in these statements. We do not guarantee that our predictive statements will prove to be correct and do not accept any liability for these statements. The predictive statements contained herein are based on current Group expectations and are made on the basis of the facts on the day of publication of the present document. We do not intend or accept any obligation to update predictive statements on an ongoing basis.

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