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Prolonged store closures and economic recession to hit discretionary retail hard

S

SENSITIVE RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Resilience of household consumption for food and staples
  • “Modern retail” still has a lot of room for expansion in emerging markets
  • Expertise of established players on supply-chain issues
  • Changing consumer habits are an opportunity
  • Expertise of established players on supply-chain issues
  • Strong price competition and overall limited room for differentiation for food retailers
  • Cut-throat competition between online and incumbent discretionary retailers
  • Household consumption for non-food items is far more volatile and sensitive to economic downturns
  • In the face of growing e-commerce penetration, adaptation to new business models proves very challenging for incumbent retailers

What to watch ? 

  • The return to normal after the Covid-19 outbreak in key regions (Asia Pacific, Europe, North America)
  • The capacity of incumbent retailers to maintain the relevance of store concepts in the face of growing competition from e-commerce. In the US and Europe, large retail insolvencies are standing at unusually high levels
  • Penetration of e-commerce across countries and segments, and more importantly, whether incumbent retailers can secure profitable growth online
  • Penetration of e-commerce in the still untapped food segment, in particular. The race between food retailers and e-commerce specialists has only just begun
  • Shifts in consumers’ shopping behaviors and preferences. Sustainability, in particular, is having a still modest but growing impact on the industry (demand for shorter supply chains, less plastic packaging, more durable goods, etc.
  • Shifts in business models among e-commerce specialists. Marketplaces, direct-to-consumer websites and so-called “super apps” are gaining traction.
  • Trade tensions as additional trade barriers and tariffs can disrupt supply chains and pressure retail margins
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Distributors generated a global turnover of about USD16,700bn in 2019, up 1.5% from 2018. Lower consumer spending across key regions sent growth well below its ten-year average (3%). In light of the global pandemic sending the global economy into negative territory, we believe industry turnover could decline by as much as 5%, with a clear divide between food retail, for which consumer spending is resilient, and discretionary retail, which generally suffers from reduced spending in times of downturns.

The pandemic comes at a bad time in mature economies (62% of global turnover) where discretionary retailers have been struggling to preserve their profitability in the face of intensifying competition for online sales and declining store footfall. The mandatory prolonged closure of discretionary stores could send annual sales down by 10/15%, while annual sales of food and fast-moving consumer goods should remain broadly flat. This drop in revenue could delay efforts by companies to profitably grow their e-commerce businesses and rejuvenate their store concepts, at the risk of further losing market shares to the dominant e-commerce giants.

Emerging economies (38% of global turnover) are expected to prove more resilient because the share of food in total consumer spending is higher, and because food purchases are often subsidized.

In light of this gloomy picture, we anticipate another year of record large retail insolvencies - more than 50 companies with a turnover superior to EUR50m have gone bankrupt every year since 2017.

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Fast-moving consumer goods (food, personal care, house care, etc.): Traditionally the most resilient segment of the industry with little volatility in consumer spending and high industry concentration. The main challenge for retailers is to adapt their store mix to address changing consumer preferences.
Furniture, electronics, appliances, hobby and leisure: Segments with generally higher profit margins but greater volatility as they sell discretionary consumer goods. Fierce competition from e-commerce specialists. Uncertain transition froma  brick-and-mortar to click-and-mortar business model.
Apparel and accessories: Much like other discretionary spending, apparel and accessories see reduced consumer spending when the economy decelerates. In mature economies, per capita spending on apparel is slowly declining, suggesting structural changes at play.
Beauty and cosmetics: Very dynamic sales globally pushed by the retail expansion of luxury companies.
Department stores: Department stores face very strong competition from online stores. The segment is cutting capacities in North America and is starting to adapt in Europe, but still growing in other regions of the world.
E-commerce specialists: Buoyant top line growth but still elusive profitability for the vast majority of players

Key players

Country Role Sector risk
United States

#1 retail market
C

Sensitive risk

China

#1 retail market
C

Sensitive risk
Japan

#3 retail market
C

Sensitive risk

Contact

Contact Euler Hermes

Economic Research Team

research@allianz-trade.com

Sector Risk Analyst

Aurélien Duthoit

aurelien.duthoit@allianz-trade.com

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