Companies operating in the European retail sector will need to use technology to develop distinct competitive advantages in the long term, if they want to improve their credit quality, a new report by Moody's has found.
However, initial investment in innovation is likely to depress free cash flow, which is already low in the retail sector, the ratings agency said.
"Innovation will be key to reversing declining market share among European retailers in a deteriorating economic environment. European sales of rated and unrated retailers should grow by about 3% a year in 2018-2020 to about €3,300 billion, but traditional companies will continue to lose ground," said Moody's Senior Analyst Vincent Gusdorf.
"Growing competition from discounters, technology firms and private firms means the European retail sector will struggle to grow earnings over the next 12-18 months."
AI Adoption
The rise of e-commerce, online advertising and social media have turned retailers into technology companies, which is likely to be strengthened by the adoption of AI, Moody's said.
'To adapt their business models, companies must identify the right innovations from a wide range of opportunities with uncertain returns on investment,' it noted. 'However, investing in innovation will depress free cash flow, which is already low in the retail sector. Retailers also need to change their corporate culture and close their technological gap without becoming too dependent on tech firms.'
In the future, retailers will use technology to improve their product and strengthen their brand, however the growth of online does not mean that traditional bricks and mortar stores will be shelved.
'Although retailers will not feel the full effects of AI-powered technologies for several years they are still coping with the consequences of the rise of e-commerce,' Moody's said.
'Large store portfolios hamper incumbents’ technological transformation because sales growth in one channel can be at the expense of falling sales in another. However online sales will continue to grow much faster than the rest of the industry as delivery technologies improve.
'While we do not believe that ecommerce will replace stores, retailers will not only have to restructure their portfolios, but also use technology to improve the in-store experience.'
© 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.
