Department store bankruptcies are only the tip of the iceberg

Food retailers will experience their best year since 2001, with annual turnover up 7%. The shift from restaurants, cafeterias, canteens, etc. to grocery and superstore aisles has provided a considerable boost to food sales under lockdown, but additional health and safety measures have a material impact on profit margins. The capacity of incumbent food retailers to capture a sizeable share of the booming online food and beverage market is good news for their top line, but detrimental to their profitability. Accounting for less than 3% of total food and beverage sales, online penetration will continue to accelerate after the crisis and become the new battleground for food retailers for good.

E-commerce growth will accelerate to 17%. The segment has benefited from a near-monopoly on non-essential goods under lockdown and is seeing an acceleration in online grocery sales. We believe the crisis will durably transform shopping habits and further accelerate the penetration of e-commerce across segments. Despite accelerating growth, the challenge for a majority of online pure-players remains largely unchanged: will turnover growth ever turn into profits?

If past years have been a so-called “retail apocalypse” for discretionary retailers, then 2020 will be hell, with aggregate turnover down -22% and no single sub-segment in green territory. Mandatory store closures have smashed store sales and we anticipate only a slow recovery in demand throughout the year amid high unemployment and depressed consumer confidence. The exit from lockdown will coincide with fierce price competition, with retailers rushing to clear their inventories, and the same additional costs food retailers had to bear to prevent a second wave of contamination.

Strategies to reduce the cash burn (fire sales, freeze in rent payments, cuts in jobs – 1.7m or 29% of discretionary retail jobs have already been cut) will not be enough for many household names that were already struggling before the crisis – bankruptcies have only just begun. Announced policy measures (bridge loans, tax breaks, checks to Americans…) will provide relief in the short term, but only businesses that were sound and viable will be capable of recovering durably. We believe that 30,000 to 50,000 stores could disappear by the end of 2021, the equivalent of 6-10% of the U.S. discretionary retail footprint.


Aurelien Duthoit
Euler Hermes