Economic studies
Retail

Retail

Retail
Asia-Pacific
Central & Eastern Europe
Latin America
Mid-East & Turkey
Northern America
Western Europe
Change sector

Strengths

  • Growth of the Chinese middle class
  • Rapid urbanisation in Asia and Africa is driving the sector

Weaknesses

  • Fierce competition in the sector
  • Global economic slowdown
  • Physical points of sale struggling to respond to the growth of online commerce

Risk assessment

Risk Assessment

Household consumption, one of the retail sector’s main drivers, is suffering from the global economic slowdown, which is expected to continue in 2020. Nevertheless, the sector remains relatively resilient overall in this unfavourable economic setting, although situations vary in different parts of the world. China and India continue to drive the sector’s momentum. Global retail sales growth, including online sales, was about 4.5% in 2019, which is stable compared with 2018 but lower than in previous years. Growth is being fuelled by continued strong momentum in online sales, whose share in total global retail sales is steadily increasing, particularly in China, the world leader in e-commerce (see chart).

 

This growing competition is putting pressure on traditional players in the sector. To meet these challenges, they are being forced to rethink their strategies, notably by stepping up use of new digital tools. In many cases, online sales players are teaming up with traditional groups, which are seeking to diversify distribution channels and further segment their offer.

 

Sector Economic Insights
Retail sector will be impacted by economic slowdown

Global economic growth will slow in 2020, with Coface forecasting 2.4% in 2020, after 2.5% in 2019 and 3.2% in 2018. As a result, growth in consumer spending is also expected to soften. This decline in demand is expected to affect most major economies, both advanced and emerging, but to varying degrees.

In China, retail sales growth cooled from about 9% in 2017 to 2% in 2018 (at constant prices, as are all regional retail sales growth rates in this note). However, the sector proved quite resilient in 2019, despite the economic deceleration. Coface expects Chinese growth to reach 5.8% in 2020 compared with 6.1% in 2019 and 6.6% in 2018. Demand in the sector should stay strong, fuelled by a rapidly growing urban middle class. However, trade tensions with the United States, which dented consumer confidence last year, pose a risk to the sector. In addition, an eye needs to be kept on household debt, which stood at 52.6% of GDP in January 2019, up from less than 20% a decade ago. Corporate debt, estimated at 155% of GDP at the beginning of 2018, is also a cause for concern.

In Latin America, the outlook for the sector in Brazil is mixed. On the one hand, inflation and low interest rates are contributing to a recovery in consumer spending, after two years of recession in 2015 and 2016. However, on the other hand, Brazilian GDP growth remains low (0.9% according to Coface in 2019, after 1.1% in 2018) and the unemployment rate is struggling to go down. As a result, retail sales growth in 2019 was limited (+1.3% YoY over the 9 first months of the year). However, Coface expects activity to rebound slightly to a 1.5% expansion in 2020, which should provide better support for consumption and therefore retail. In Argentina, the economic situation is still very poor after the 2018 currency crisis and this continues to have a negative impact on the retail sector. Coface forecasts activity to contract by 2% in 2020, after shrinking by 2.5% in 2018 and by 3% in 2019, in a context of high inflation (3.5% year-on-year in October 2019) and elevated interest rates (around 68% in October 2019), which is making it harder for households and companies to access credit.

In the United States, despite high consumer confidence, disposable income and a historically low unemployment rate (3.5% in September 2019), retail sales have slowed, increasing by 1.6% in the 3rd quarter (Q3) 2019 year-on-year, compared with 5.1% in Q3 2018. Growth is being mainly driven by strong online sales, which were up 13.3% year-on-year in the first quarter of 2019. Households have little room for manoeuvre due to their persistently high debt levels (76.3% of GDP in the first quarter of 2019). However, the US central bank’s decision to lower its key interest rates several times in the second half of 2019 should help to support the sector’s activity.

Eurozone conditions are unfavourable to household consumption. Growth in 2020 is expected to be 1.1% after 1.2% in 2019, according to Coface, down from 1.9% in 2018. Meanwhile, the household confidence index has been deteriorating since the beginning of 2018. As a result, retail sales growth remained weak in 2019, at around 2%. In the United Kingdom, they have stayed strong thanks to the sub-4% unemployment rate, brisk wage growth and a persistently low savings rate. Nevertheless, the slowdown in growth, due in particular to Brexit-related uncertainties and low household confidence, will continue to pose a risk to the sector in the coming months.

The sector remains dominated by US global leaders: according to the 2019 Deloitte Global Powers of Retailing ranking (based on 2017 revenues), Walmart, Costco Wholesale, Kroger and Amazon were the top four with revenues of approximately USD 500 billion, USD 129 billion, USD 119 billion and USD 119 billion respectively. In Europe, Germany’s Schwartz Group and Aldi as well as France’s Carrefour generated the most income. However, despite the size of these retail giants, the market remains highly fragmented. The 250 largest companies in the sector accounted for just 20% of global retail sales in 2017. Fragmentation is mainly geographical in nature: the 250 companies mentioned above operate in only nine countries on average and make less than a quarter of their sales outside their country of origin. In general, situations differ considerably across countries in the sector. In India, for example, about 90% of the market is still dominated by small businesses.

 

The retail sector is undergoing a major structural transformation, mainly due to the rise in online sales 

E-commerce is expected to continue to grow at a sustained rate of 19% in 2020 and account for 16.1% of global retail sales in 2020, according to information provider eMarketer. This shift has paved the way for the emergence of new players, such as Amazon, the world leader in e-commerce, whose sales increased by 31% between 2017 and 2018. It has also weakened some long-standing companies in the sector, particularly in advanced economies, as illustrated by the fate of American group Sears, which went bust in October 2018 because it was unable to adapt to competition from online shopping. Conversely, Walmart’s strong financial health is partly due to the group’s ability to take advantage of market developments and diversify distribution channels. In June 2019, Walmart introduced a new unlimited home delivery service for grocery products, matching what Amazon already offers. Thus, while e-commerce still represents less than 10% of Walmart’s sales, this segment of activity is expanding rapidly (+40% in 2018).

China remains by far the leading e-commerce market with 54.7% of global sales in 2019, over three times more than the United States, representing nearly USD 2 trillion, up 27.3% from 2018. eMarketer is forecasting 24.3% growth in 2020. This dominance is partly explained by the number of online shoppers in the country: nearly 700 million people say they make at least one online purchase per year, compared with 200 million in the United States. Moreover, Chinese e-commerce is unique in terms of its domestic share, since it now accounts for more than a third of retail sales nationally and could surpass physical sales as early as 2021. This growth is being driven by several factors, such as the increase in average salaries, widespread smartphone use, urbanisation and the expansion of applications such as WeChat, which, in addition to being a social network, can be used to make many types of online purchases. WeChat now has 600 million regular users. Chinese online sales are dominated by the Alibaba group, which derives most of its revenue from this market, although it is trying to expand internationally.

Additional trends are at work and could transform the retail landscape in the coming years. First, the use of analytical tools related to data collection is likely to be stepped up within stores, for example to manage inventory more effectively. Second, companies are making major changes to their offerings in advanced economies to respond to changing consumer preferences. One approach is the development of concept stores where online retailers partner traditional stores to create theme-based retail outlets that seek to improve the consumer’s shopping experience, which is now necessary given the growth of online commerce. Concept stores feature creative and playful spaces, sometimes with food options. The desire among consumers to buy more personalised products could also change retailers’ strategies, as firms harness increased availability of data on consumer profiles and purchasing habits to offer products that are more in synch with different shopper categories and buying regions.

 

Last update : February 2020

Uz augšu
  • Lithuanian
  • English