Retail sector diversely affected

In the European Union, the impact of Covid-19 on the sales of the retail sector (excl. motor vehicles) began to be felt in March 2020. As illustrated in graph 1, retail sales of the non-food sector in the EU dropped sharply during the first wave of Covid-19 before rebounding above their pre-crisis level as of June until October (latest available data). The performance of the food sector remained good on the entire period as from the beginning of the year and even peaked in March. There are large discrepancies across countries, as illustrated in graph 2 – some countries experienced large drops in both segments while others held up very well in both. Ireland is remarkable in that respect.

Short-term outlook remains very uncertain

The COVID-19 Community Mobility Reports from Google (which measure the numbers of visitors to specific locations or shops and compare it with pre-Covid data) did not bode well for retail sales across the EU in November and also highlighted sharp discrepancies across countries. Indeed, since September, mobility has started to decline again, reflecting the constraints posed by social distancing measures and lockdowns to fight the second wave. However, the drop in mobility is much smaller than during the first wave, and the data suggests that the economic activity could have bottomed out as mobility appears to have passed its inflection point and started up again for most countries (see graph 3). Nonetheless, an extension of the measures or the imposition of new ones could damage the sector further.

A consumer survey made by the European Commission in November 2020 also points to a drop in consumer confidence, which reached the level of the 2012 crisis before showing an improvement in the July-September period (see graph 4), and remains much lower compared to the long-term average of -10.6. Consequently, we can expect that households are going to remain cautious and delay their non-essential purchases. Moreover, lockdown measures introduced across Europe amid the second wave of Covid-19 are likely to dampen retail sales of non-food. Therefore, we expect lower retail sales in the ongoing quarter, even if traditionally the last quarter of the year is supporting sales (thanks to the end-of-year festivities). Moreover, the uncertainty around the pandemic evolution combined with the households’ lower purchasing power could continue to weight on the sector in 2021. Needless to say that the recent experience shows that a third wave would have a negative impact on retail sales. 

On the positive side, the vaccine announced for the beginning of next year should improve the outlook to a certain extent as of mid-2021. However, many consumers have lost their jobs or seen their income decline. Above all, low-income households have been more impacted by lockdown measures (job loss, reduction in working hours, salary cut, etc.) than the rest of the population while they stand for a significant share of the total spending in the retail sector. All this will therefore cap the increase in sales, as long as the level of employment does not return to its pre-crisis level. We are therefore currently facing a situation where consumers want save money. 

Comparative advantage for online retailers

On the supply side, competition between retailers will be fierce, as they will try to make up for lost revenues, all in a more challenging economic climate and change of consumer behaviour. It is a safe bet to say that, in general, brands with an online presence are more likely to get by than the only brick-and-mortar brand stores. Online sales started to be much more used during the first lockdown, hence slowly becoming a habit. Shops with large stocks may become unsustainable while shops with an online presence will enjoy a definite comparative advantage. Companies that have not invested in an online portal yet could be strongly penalised in the short, medium and long term. This should lead to significant investments in the future. Also, health security of customers in stores becomes a strategic issue. We can expect that the only investments in the sector in 2020 and 2021 will be in that field. All those investments will lead to a lower profitability of the points of sale.

Given all the investment needed and the strong competition among brands, combined with the households’ lower purchasing power, only companies with healthy margins will be able to get by. We can expect bankruptcies in the short term as Covid-19 is acting as a catalyst for bringing forward bankruptcies among weak companies and the necessary investments over time. And here again, small local retailers will not be on the same footing as big international retailers.

Analyst: Matthieu Depreter – m.depreter@credendo.com