Operating conditions in the French grocery market are likely to become 'increasingly difficult' in the coming years, due to increased structural challenges, a new report by Moody's has found.
The report, Mounting Structural Challenges Will Constrain French Grocers' Credit Quality, reported that sales of fast-moving consumer goods in France rose by 1.5% last year, below the rate of inflation (1.8%).
'Despite French GDP growth of 1%-2% since 2016, the fast-moving consumer goods market, which includes packaged food and cleaning and hygiene products sold in supermarkets, has barely grown in line with inflation, pointing to stagnating industry sales in real terms,' Moody's wrote in the report.
Long-Term Challenges
It noted that French retail faces a number of 'long-term challenges', with sales at hypermarkets likely to continue to fall, reducing grocers' profitability, since many of the costs associated with hypermarkets, such as rents and wages, are fixed.
While major retailers such as Carrefour and Casino are reducing their exposure to the hypermarket decline, they are doing so 'only slowly', Moody's noted, with Carrefour cutting the sales area of its hypermarkets by around 1% last year and Casino recently announcing the sale of six of its Géant hypermarkets, out of a portfolio of 122.
Hypermarkets still accounted for 52% and 25% of Carrefour’s and Casino’s revenues, respectively, in 2018, Moody's noted.
In addition, online sales, while on the rise, remain credit negative for grocers at the moment, Moody's noted, 'because we believe they are less profitable than in-store sales, owing to high delivery and logistic costs, although retailers do not disclose this information.'
Another challenge facing French grocers is that competition from alternative retailers is on the increase, compelling the former to keep restructuring their operations, Moody's noted.
Positive Steps
On the positive side, however, recent moves by the French government (which capped promotions) has eased the price war among grocers, creating a more level playing field between mainstream retailers and the discounters.
However, Moody's anticipates that positive effects on retailer earnings should be limited as a result of these measures, as competition is likely to remain 'fierce' among the major players.
'The increase in minimum wage is another supportive factor,' Moody's added. 'It should increase by €100 net of taxes in 2019, a rise of about 8% from 2018 ,which will somewhat strengthen consumer spending.'
Looking ahead, Moody's maintains a 'stable outlook' on Carrefour, assuming that its Carrefour 2022 transformation plan, announced a year ago, continues to 'improve its underlying profitability, and that restructuring charges will decline sharply in 2019.'
It holds a negative outlook on Casino, due to the high indebtedness of parent Rallye, however, it noted that 'its current Ba1 rating factors, in our view, that its earnings in France will continue to improve, thanks to cost savings.'
© 2019 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine.
