The retail trade disrupté : pressure and potential in the digital era

The failures of major companies in the sector, an increase of +66% in 2016, on a global scale

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· Price wars fierce have financially drained the traditional players in the retail trade ; the redesign of an economic model exceeded is urgent
· Online sales are expected to represent 15% of all purchases by 2020
· The sales channel, the cost of the online presence and mobility are the key challenges for the retail trade
· It is in the United States, the United Kingdom, and Germany-retail trade undergoes the pressure of the finger as the most intense

PARIS – JUNE 7, 2017 – Euler Hermes publishes its first study on the digitization of retail. The world leader of insurance credit analysis the impact of digitization and changes in consumer demand on the companies of the sector.

This survey assesses the risks, challenges and opportunities related to the digitalization rapid of the retail sector. It is based on the analysis of 1,500 risk experts who work for Euler Hermes in the whole world, and focuses on 12 countries : Germany, Brazil, China, South Korea, Spain, Usa, France, India, Italy, Japan, the United Kingdom and Russia.

Retail Commerce : 3 challenges to get the head out of the water

Globally, retail sales grew by +4.8% per year on average over the last ten years. While the on-line activity accounted for only 9% of sales in 2016, it is expected to increase significantly to 15% by 2020. Driven as much by supply as by demand, this acceleration is supported by the actions of the digital natives and the trading platforms, that are shaking and reshaping the industry.

The price wars fierce have drained the financial resources of many traditional players in the market. Several retailers yet well-established have not managed to adapt to the digitalization of the supply chain, or to respond to the ever-increasing challenge of ” consumer experience “. As a result, the profitability (EBIT) increased from 8% in 2011 to 5.7% in 2016. Major retailers[1] have paid a heavy price : the failures of large companies in the sector have increased by +66% in the global plan. To prevent the financial difficulties, many companies have gone on the offensive. In 2016, the retailers have spent 2 000 Bn USD for acquiring technology enterprises. A amount amazing : for comparison, this sum amounted to 148 in Bn USD in 2014.

“The retail trade comes at a pivotal moment,” says Maxime Lemerle, Head of sector studies and failures at Euler Hermes. “Many traditional retailers have to rethink completely and more quickly as their business model. The challenge is to find the right balance between the digital and the physical, to respond to changes in demand. We have thus identified three main challenges to be faced in the next 5 years :
– Sell multi-channel : deliver to the consumer a shopping experience that homogeneous either online, by phone or in store.
– The cost of the online presence : a major investment and perilous for retailers, which, in an environment of price war, do not have the levers of growth to offset such a cost.
– Mobility : the development of a customer journey mobile by digitizing the offer and the use of the Internet of things.
Finally, the choice of retailers is not so tough : they must adapt, or risk extinction. ”

By measuring the pressure of the finger that weighs on retailers in the world, and on the other hand, their capacity to transform in this way, 4 groups of countries can be distinguished.

1. The finger pressure is intensifying in the United States, the United Kingdom, and Germany

The United States, the United Kingdom, and Germany have the most to gain (or lose) from the digitizing. While in these 3 countries, the majority of retailers seem to be well positioned to adapt to the evolution of the demand, the pressure of change is particularly intense. Their economic model must be transformed urgently, in line with the new expectations of consumers.

United states : in order To thrive, it must first survive

In the United States, retail sales rebounded to +3% y/y in value by the end of 2016. They are expected to accelerate in 2017 and 2018, thanks to the growth of the household consumption and the recovery of pricing power of retailers. However, an increase in the cost of imports could be a heavy one to carry for the companies in the sector. Differentiation strategies are needed to increase the margins and survive in an uncertain environment, where the shops close at a frantic pace. The segment of the food has so far been spared, unlike the ready-to-wear and electronics, the two main victims of the restructuring and failures. American retailers should focus on quality and innovation in the consumer experience, and evolve their modes of delivery, in a market where 70% of consumers buy online.

United Kingdom : The threat of Brexit

With the Brexit, the economic outlook for 2017 and 2018 are uncertain. The expense of the british consumer is expected to slow, weighing on retail sales. Retail sales picked up since the end of 2016 (+3% y/y in value terms), after having stagnated at around +1% in Q3 2015. But the severe pressure on prices and weak inflation (+0.7% in 2016) all contributed to the price war. The competition of online activities puts the retail trade under pressure ; to meet the challenge of the integration of the digital and the physical, it will be necessary to build on the technological development and on new means of payment. This would limit the negative impacts of Brexit for the retail trade.

Germany : It goes to the discounters and the one-liners

From 2017, the return of inflation and the slowdown in real consumption reporting a lower growth in nominal retail sales in Germany. Retailers have suffered from the dramatic decline in profitability of 7% in 2011 to 2.9% in 2016. The discounteurs and specialists in the sale online are well-placed to maintain the momentum of their growth, so that the segments of the fashion and electronics are under pressure.

2. In France, Japan, and Italy, the pressure of the finger is strong, but the potential for transformation is limited

In the retail trade, France, Japan, and to a lesser extent Italy, are undergoing a strong pressure of the finger, but have a potential for processing digital limited. These markets are facing a potential restructuring, which might prove to be confusing and expensive, while the profitability of retailers is not the best.

France : in search of innovation lost

Even if the hard-discount is less present in France (10% market share), Germany (40%), the price war intensified in the country since 4 years. Over this period, retail sales growth has never exceeded +1.5 percent y/y in value. The acceleration of private consumption in 2016 (+1.8% in real terms) was offset by the stagnation of prices, with inflation close to 0%. The major retailers have been particularly affected by this situation : 7 have gone bankrupt in 2015 and 1 in 2016.

“French consumers, of which 64% are buying online, are willing to consume differently. But despite some examples of success, although French retailers have not been able to meet these expectations. Results in a pronounced deterioration of their financial statements. In the retail trade in French, the result of operations decreased to 3.7% in 2015 and 2.6% in 2016, while the debt was increased up to 95% “, develops Maxime Lemerle. After a long time of considered e-commerce as a channel in parallel, the retailers in French are only just beginning to invest to catch up in the race to digital.

The slight upturn in inflation (+1.1 per cent expected in 2017) and consumption (+2%) might represent to the retailers in French a major opportunity to boost their pricing power, eroded by years of price war intense. The food, the specialists of the online sales segments and organic and organic should be able to pull their pin of the game. On the other hand, the ready-to-wear and electronics are likely to suffer.

Japan : The inverted pyramid

Although still in the red, japanese retail sales are following an upward trend since October of 2016. However, the inverted population pyramid and the rapid ageing of the population does not augur well for the growth of consumption. Profits in the retail sector in Japan rose from 6% in 2013 to 5% in 2016, while the net debt ratio has increased by 10 percentage points to 75% during the same period. Local businesses and specialists in the online sale are the segments that are less sensitive. Retail trade-general and the sector of the equipment of the house and the office are suffering from a positioning unattractive.

Italy : the Attraction and repulsion

In Italy, the retail trade was back in the red in early 2017, due to a decline in consumer confidence and the slowdown in private spending. The financial situation of retailers Italian has deteriorated sharply : the ratio of net debt has climbed from 36% to 250% between 2011 and 2016. Retailers of luxury goods and niche focusing on the products ‘sustainable development’ have beautiful outlook. On the other hand, the segments of products, equipment, home and office, and electronics have had to resort to the strategies of low prices that threaten their profitability.

3. China and India are well protected from external pressures by their barriers to entry

Retailers chinese and indians already have an awareness of the potential of the digitalization. The barriers to entry protecting these markets are strong and major retailers to ensure their maintenance, but the stakeholders advised have the potential to win significant market shares.

China : The call of the air Online-to-Offline

From 2017, the retail sales growth in the chinese market is expected to stabilize at around +9% in volume, which is slightly below the long-term average, greater than 10%. Retailers are counting on a strategy Online-to-Offline (attracting the potential customers of the online sales channels to physical stores), so as to exploit the possibilities offered by the emergence of a new middle class. Retailers chinese exchange-traded have experienced a significant decrease in their debts. Net debt fell to 42% in 2015-2016, compared to 51% in 2014. The profitability remains high, at 10.5%. Retailers in electronic and online should keep up their momentum, while the luxury segment should expect a restructuring due to the impact of the policy anti-ostentatious of the country.

India : The bets are open

The growth rate of retail sales in India is expected to stabilize at around +3% to +4% in 2017 and beyond, driven by strong demand growth and governmental policies accommodative. The debt ratio is reduced, to 86% in 2013 to 70% in 2016. At the same time, margins have rebounded to 4% in 2013 to 7% in 2016. The good student will be the segment of the diet, which will benefit from a volume effect with the increase of consumer spending.

4. Brazil and Russia are overwhelmed in the race to digital

In Brazil and in Russia, the retail trade does not undergo a pressure change limited on the part of consumers and new entrants, who are few in number. This is a blessing in disguise : the main actors of the sector, continue to face structural challenges and financial, do not have the skills required to embark in a transformation plan,

Russia : A gap between capabilities and expectations

After a fall of 4.5% in 2016, the economic recovery and the slowdown in inflation will support the gradual recovery of retail sales in Russia in 2017-2018. A return to the positive is possible. 2016 has been a witness to the persistent problems of retailers Russian : the debt levels have been significantly reduced, but they remain high (to 130% in 2016) and the operating profit fell to 3% from 6.1% two years ago. The food distributors and retailers of hard-discount stores take advantage of the indispensable nature of their products, while retailers in the electronics and food retailers independent have been the first victims of the recession in the years 2015-2016.

Brazil : The beginner’s luck is gone

While Brazil is emerging with difficulty from a deep recession, retail sales have sunk in the red following the explosion of the unemployment rate. Given the outlook for consumption is unappealing, the situation is not expected to improve in 2017. The financial capacity of retailers brazilian has deteriorated significantly over the past two years. The net debt to equity ratio has climbed to 110% by 2016, compared to only +70% in 2014. The segments of the ready-to-wear, food and everyday consumer products have held up well. Electronics is the segment most exposed to the risks in the beginning of 2017, with a debt of a staggering 300% and profits are low at only 2.9%.

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