Retail

Coping with inflation and Covid-19 again in 2022

Last update – December 2021

Sector rating

MEDIUM RISK FOR ENTERPRISES

Fragmentation

Internationalization

Capital Intensity

Profitability

Strengths & weaknesses

Resilience of household consumption for food and staples through the cycle
Boost to food and staples sales through the sanitary crisis
“Modern retail” still has a lot of room for expansion in Emerging Markets
E-commerce can be a growth catalyzer in Emerging Markets
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
In the face of growing e-commerce penetration, adaptation to new business models proves very challenging for incumbent retailers

Sector overview

What to watch ?

Normalization of retail sales in mature economies as the pandemic eases
Trends in consumer confidence and unemployment as support measures for consumers and businesses are phased out
Pandemic legacy on physical retail surface and penetration of e-commerce across product markets
Shifts in business models among e-commerce specialists (marketplace, direct-to-consumer, super-apps etc.)

Retail activity has begun to normalize in mature economies where sales peaked in Q2 2021 before slowly receding as the reopening of the economy translated into a shift of spending from goods to services. Food retail sales (40-50% of retail turnover) in particular have receded as consumers have been taking more meals away from home. Conversely, discretionary retail sales, including e-commerce (50-60% of retail turnover), have generally been more resilient and remained above their past levels.

Assuming the pandemic is kept in check in 2022, retailers will focus on addressing the structural challenges that were only made more acute by the past few months, such as the growing penetration of e-commerce and the excess of retail space. They will also have to cope with growing procurement costs related a general increase in commodity prices and tensions on manufacturing and transport activities. The extent to which consumer confidence will remain strong once support measures to businesses and consumers are phased out remains a major question mark.

The situation has been far more challenging in a majority of emerging economies where economic policies have been far less supportive to consumers and businesses. Their generally softer economic recoveries together with restrictions on mobility have considerably weighed on retail activity, while profit margins suffered from rising procurement and operating costs (agricultural commodity and energy prices, in particular). Despite their favorable long-term fundamentals, emerging markets will continue to remain far more at risk for the foreseeable future.

Subsectors

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.
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