Retail: Risk

In 2009, the decline was smaller in household consumption than in the world economy, and much smaller than in investment, inventories, or industrial production. The sector suffered bankruptcies nonetheless, especially in distribution focused mainly on non-food, in the United States, United Kingdom and Germany. And no significant improvement is expected 2010.

The improvement in household confidence recorded late 2009 could prove misleading having developed from a very low level with households moreover still facing the rise of unemployment, stagnating or declining wages, a moderate increase in inflation, and the gradual waning impact of support measures included in stimulus programs. They will thus remain intent on further reducing their debt, which they will achieve at the expense of goods generally purchased on credit like the family car, large furnishings for the home (appliances, furniture, and so on). In this context food has been the big winner.

The major players in the sector have tended to react in lockstep to the crisis in reducing costs, giving priority to neighborhood formats in urban centers, developing their presence abroad in emerging countries where they are able to reach critical size, offering their own brands at attractive prices to counter gains by discounters.

In the United States, retail sales fell sharply in the closing months of 2008 and then tentatively leveled off before ending 2009 with a slight upturn. A very moderate recovery will develop from a low level in 2010. Households have been manifestly cutting back on non-essential buying, focusing on low prices, and making drastic reductions in credit card spending. Supermarkets, neighborhood shops, dollar stores, discounters, chemists, drugstores, sporting goods chains, bookstores and shops specialized in leisure articles will continue to perform well despite unrelenting price competition. Conversely, chains specialized in furniture, home appliances, and home furnishings and do-it-yourself, along with department stores and luxury will continue to suffer even if furniture chains are expected to benefit from a recovery, albeit limited, in construction. Clothing and leisure electronics will remain steady at an intermediate position between the two groups.

In the United Kingdom consumption has in general held up well in the crisis, down only 2% in 2009. Although households are deeply in debt, easing interest rates have lightened their burden somewhat. In 2010, however, household spending could stagnate. VAT will move up again from 15% to 17.5% in January and fiscal conditions will tighten notably with increases in income taxes. While supermarkets will likely achieve more growth, the non-food segment, especially everything related to the home, will continue to struggle. The demise of Woolworths has only marginally eased the level of competition, which remains intense. The weakening of the pound sterling has given rise to mechanical price increases for imported products difficult to pass on to consumers in this context. The American "dollar store" format has been taking hold while German hard discount chains consolidate their positions.

Household consumption in Germany, rather than constituting a drag on the economy in 2009 as it has in the past years, has paradoxically been a relative source of economic support. Like elsewhere, the food market has proven much more resilient than the markets in other sectors, particularly clothing. Department Stores, at least those still surviving, have suffered greatly, as the Arcandor bankruptcy illustrates. Conversely, traditional supermarkets have been holding up well against discounters whose market share has leveled off at 50%. In the absence of a surge in unemployment, consumption could continue to grow slightly in 2010.

In France, consumption has also held up well. Households there have relatively low debt and efforts to check the growth of unemployment have met with some success. In addition to the dichotomy between food and non-food, the relative sluggishness of megastores contrasts with the gains made by neighborhood formats like supermarkets, traditional mini-markets, and hard discount. A similar trend appears likely in 2010.

In Spain, the drop in consumption has weighed heavily on the sector with the price war growing more intense. Actors that relied heavily on debt to develop their business in past years have experienced difficulties.

In Japan, retail sales dwindled over most of 2009, but the context has actually been difficult since 2006, especially for department stores. Supermarkets, however, have been able to put their business on an even keel. Small neighborhood shops continue to outperform meanwhile and constitute a development option for retail groups. Consumption is expected to grow slightly in 2010 with tax breaks compensating for continuing income erosion and the rise of unemployment.

The large emerging markets, like China and Brazil, continue to hold the attention of major global players now familiar with local tastes, supply methods and administrative procedures. After slumping only briefly, the Chinese market has resumed strong growth. Besides the major European and American players, the large Asian retailers also present have also been developing the full range of sales formats. Interest in the Indian market has been comparably strong especially with organized distribution representing only 5% of retail sales. But setting up multi-brand chains is prohibited.

Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.