Moody's Investors Service has said that European retail sector revenues are likely to remain 'anaemic' over the next 12 to 18 months, driven by a number of mitigating factors.
The negative outlook will largely be driven by the rise of online and discount shopping; consumer demand for convenience and value; and weaker economic growth throughout the region.
In addition, retailer cash flow and profitability is also likely to weaken in the coming year, as traditional retailers adjust store portfolios in an effort to adapt to the impact on demand of ageing populations, high youth poverty and increased urbanisation.
Squeezed Margins
In the report, Shifting demand patterns and slowing economies keep outlook negative, Moody's says that margins are likely to be squeezed among larger retailers, as the rise of the discounters continues.
In addition, softening growth will mean that consumer confidence is likely to remain subdued, in turn curbing demand and compounding negative secular trends.
'While cost saving initiatives and developing new revenue streams can limit the hit for some, they must also contend with lower in-store sales densities and the need to invest in expanding often margin dilutive online operations,' Moody's said.
Another factor likely to impact retail performance is the emergence of sales periods such as Black Friday and Cyber Week, as well as back to school sales, midseason sales and a growing number of promotion-focused events throughout the year.
'Apparel retailers and electronics retailers [...] are most affected by this trend. For instance, Kantar Worldpanel, a consumer panel research company, estimates that 47% of sales are made at a discount in France, compared with 30% ten years ago,' Moody's added.
Changing Marketplace
According to Moody's, the share of online sales, which stands at 10.9% this year, is likely to reach 11.7% in 2020, 12.5% in 2021, 13.3% in 2022 and 14.0% in 2023, which will have an impact on traditional retailer profitability.
Of the retailers it rates, it estimates that Ahold Delhaize, Casino, Esselunga Marks & Spencer, Metro, Ocado and Picard are likely to see their EBITDA levels decline by less than 2% in the period 2018 to 2020.
Among those set to see EBITDA decline by between 2% and 5% are Carrefour, El Corte Inglés, Iceland, Lenta, Tesco and Morrisons; while Action, B&M and DIA could see their EBITDA decline by between 5% and 10%.
The harshest prognosis is afforded to retailers such as X5 Retail Group and New Look, which could see EBITDA decline by more than 10%, according to Moody's estimates.
Further Rationalisation
Further store rationalisation is likely as a result declining profitability, with Moody's pointing to Debenhams and House of Fraser as examples of established businesses that have 'struggled to adapt to evolving shopping habits'. Over time, it added, more examples are likely to emerge across Europe.
Retailers are also likely to explore more partnerships, and/or franchise and wholesale agreements, in order to offset negative market trends, as well as selling products on third-party e-commerce platforms, Moody's said.
'Testing new solutions could generate sales growth with limited investments if successful,' it noted. 'However these additional sales usually generate a lower margin and can divert management's attention from day to day operations. Partnerships with online platforms could also lead to sales cannibalisation for retailers.'
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
