Retail

Navigating digital disruptions and consumer volatility

Sector
value

USD8000bn

M

MEDIUM RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Mid- and long-term expectations in demand from the emerging markets (growing middle-class)
  • Global E-commerce potential since less than half of the world is connected
  • Growth opportunities provided by new consumer habits
  • Expertise of established players on supply-chain issues
  • Vulnerability of consumer confidence and sales to the volatile geopolitical environment and to the changes in purchasing power
  • Intensity of price competition due to consumers’ sensitiviy to prices and best offers/bargains
  • Low margins
  • Costs related to the refreshing of the outdated format of stores to offer better consumer experience and in-store services
  • Investment in AI, AR and other new technologies

What to Watch?

  • Global penetration of E-commerce and M-commerce luring consumers away from physical stores
  • Shifting in consumers’ shopping preferences (the rise of sustainability, recycling and store proximity)
  • The perpetual evolution in store concepts and the rise of marketplaces
  • Growing investment in customer datasets, artificial intelligence (AI) and machine learning to drive customer experience and increase revenue
  • The agility of new entrants and the increasing pressure from pure online retailers
  • Trade conflict, since trade barriers/tariffs can disrupt supply chains, increase costs and pressure margins
  • Major insolvencies in mature markets (US and Europe)

In 2019, despite the softening of global economic growth, we expect global retail to keep on growing, thanks to the resilience of private consumption in most of the top markets. De facto, private consumption momentum is expected on the upside in the US (from +2.6% in 2018 in volume terms to +2.7% in 2019) and Japan (+0.4% and +0.9% respectively), and stable in China (+5% growth) as well as in the Eurozone (+1.3%), despite some weakening in Italy (from +1.5% to +0.9%) and Spain (+2.4% and +1.9% respectively).

In this context, aggregate retail revenue is forecasted to keep on increasing in 2019. Our Global Top 35 companies – which compiles the financials of major players from the US, China, Japan and Europe - would see another +8% increase after two steady consecutive years at +9%. At the same time, aggregate profitability, at EBITDA and net revenue levels, would still register a double-digit growth (+12%) and capex would increase by +7%.

Yet, the outlook is less favorable for 2020, in particular in the US, and this aggregate view masks uneven performances by companies due to intense competition, notably in mature western markets. The growing market share of e-commerce (currently at 10% in the US or USD525bn) is a key driver of transformation, but not the only one. Changes in consumer preferences and nimble new entrants are leading to new store formats, multiple omni-channel propositions, changes in the product and pricing mix and the emergence of smaller niche brands.

In this context, all retailers are being forced to adapt, notably by significant investment in e-commerce and new technologies, lowering operating expenses, saving costs in the supply chain and testing transformations: Some brick-and-mortar companies are selling on third party-websites, some one-line retailers are opening urban stores.  Yet, all companies do not have the capacity to adapt: The sector will continue to register store closures and bankruptcies amongst old fashioned SMEs but also major companies. In 2018, the retail sector posted 51 major bankruptcies (companies with a turnover exceeding EUR50mn), including 24 cases in Western Europe and 15 in the US, despite the already impressive list of 34 cases over 2015-2017.

  • Fast-moving consumer goods: Sector with the highest number of (major) companies and accounting for almost two-thirds of global retail revenue, but with lower margins compared to other retailers. The top players are mainly US and single-country operators, while European retailers have a larger international presence.
  • Hardlines and leisure goods: Sector with the strongest growth in revenue over the last five years and above average margin within the retailer sectors.
  • Apparel and accessories: Retailers with the strongest international presence, but most often relatively small in size compared to other retailers.
  • Diversified: Sector with the lower number of major companies and low margins.

Key players

Country Role Sector risk
United States

#1 producer

#1 investor

C

Sensitive risk

China

#1 producer

#1 investor

A

Low risk

Japan

#1 producer

#1 investor

B

Medium risk

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Sector Risk Analyst

Maxime Lemerle

Maxime.Lemerle@eulerhermes.com

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