Ratings agency Moody’s has reported that US retail is likely to outperform that of Europe this year, reporting that the ‘performance gap between the US and European retail markets continues to widen, as differences in execution become increasingly clear.’
According to Moody’s, weaker economic growth in Europe, coupled with a more fragmented market, mean that US retail is likely to have an economic advantage as the year progresses.
E-Commerce Investment
In addition, US retailers increasingly have an e-commerce advantage, Moody’s reported, with large operators such as Walmart and Target having ‘invested heavily in e-commerce capabilities while rationalising square footage to better complement e-commerce sales. This has helped many US retailers counter competition from Amazon and provide consumers with a seamless shopping experience.
‘In contrast, with the exception of [the] UK where online penetration has been strong, most European retailers are still in the earlier stages of adapting to the intense online competition,’ it added.
Outlook Downgrade
In May, Moody’s downgraded its outlook on the European retail industry from ‘stable’ to ‘negative’, reporting that this reflects the broad operating environment in the sector at present.
In an outlook update, Moody’s reported that it expects ‘overall modest retail sales growth and narrowing sector margins due to the continued shift in demand to discounters and online specialists, which operate with lower margins.’
This, in turn, means that the profitability of many traditional retailers is ‘under pressure’, with prices being cut in order to limit sales declines.
Moody’s had held a ‘stable’ rating on the European retail sector since 2013.
Growth Opportunities
Revenue growth for bricks-and-mortar outlets across Europe is likely to be largely driven by new-store openings, the ratings agency reported.
In addition, an ageing population, higher youth poverty and ‘unfavourable demographic developments’ will impact retailers’ revenue and cash generation capabilities.
‘These dynamics are among the drivers of consumers’ constant search for value and convenience,’ Moody’s reported.
‘The trend towards shopping more during sales periods such as around Black Friday and favouring off-price specialists will continue, depressing industry margins. Increasing urbanisation will mean a continued adjustment to store portfolios, weakening free cash flow,’ it added.
It reported that it would consider returning to a ‘stable’ outlook for the European sector if retail sales volumes and values can grow steadily, and if sector margins start to stabilise.
© 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.
