Oct 3 - Fitch Ratings says that European food retailers' business models
will be tested as the consumer environment remains lacklustre, mainly in
developed markets. In addition, lower organic revenue growth and increased cost
inflation in developing markets might put additional pressure on retailers'
trading performance and credit metrics. Fitch expects most retailers to divest
assets or non-core activities in order to restore some financial flexibility at
their current ratings level.
A series of recent investor meetings with Fitch's EMEA Food Retail team in
London, Frankfurt, and Paris underlined that investors are concerned to what
extent ratings are at risk due to increased business and credit risks for
European food retail companies. This is emphasised in Fitch's "European Food
Retail Sector and Companies Overview" report published on 03 October 2012 at
These issues are emphasized as a result of continuing weak demand and intense
price competition in developed markets. In addition, investors also remain
concerned over retail companies with large stores format, such as hypermarkets.
Those issues are raised notably regarding large European food retail groups such
as Tesco Plc ('A-'/Negative), Carrefour SA ('BBB'/Stable) and Metro AG
Fitch believes that the hypermarket format is still sustainable. This is because
a few large operators are still performing well in Europe such as Leclerc and
Auchan. However, Fitch expects that an adjustment needs to be made in this
format, notably for the biggest stores (reducing size, changing the non-food
proposition and food product ranges, adapting their private label, branded
products and developing services).
In addition, Fitch expects the weak consumer environment along with structural
changes such as an ageing population, changes in consumer behaviour (less loyal
to one retail brand, savvier, demanding multi-channel availability) to be the
main challenges facing the industry. Consumers are requesting more value
products (price and quality at a certain pricing point) and services (clearer
in-store information, deliveries at home, click-and collect in store) and favour
convenience in their shopping habits.
Most of Fitch's rated companies have started to address these issues. Top
management have been changed (Metro, Carrefour, Tesco). Companies have revisited
the pace of the roll-out of large stores (Carrefour, Tesco) and are expanding
their convenience stores (Casino Guichard-Perrachon SA). In addition, most
companies have started to accelerate the roll-out of their internet proposition
via partnerships (Carrefour and Dixons Retail plc ('B'/Stable) or by
acquisitions (Metro AG buying Redcoon, Royal Ahold N.V. acquiring bol.com, Tesco
buying Mobcast and Sainsbury acquiring a majority in Anobii).
Fitch expects revenue growth to remain slightly positive in the sector in 2012,
driven mainly by the groups' exposure to emerging economies despite recent
evidence of a slowdown in consumption in some markets. However the groups'
profitability will be under pressure as competition remains fierce among retail
operators and like-for-like sales growth might not compensate for the groups'
cost inflation. Fitch also notes that some emerging markets (China, Brazil) are
experiencing slowing growth. In China, high wage costs inflation and GDP growth
deceleration are putting pressure on retailers exposed to that market (Tesco,
Fitch does not expect large M&A or liquidity risk to be a major factor in the
sector. The only exception on the M&A front remains Royal Ahold N.V. due to its
strong balance sheet at the moment. Fitch expects most retailers to continue to
implement cash preservation measures (better allocation of capex, exiting
non-profitable businesses or countries where they cannot reach market leadership
in the medium term). Fitch expects those measures to stabilise companies' credit
metrics in 2012 and 2013. Failure to improve their business risk and reduce
leverage could potentially put some ratings and Outlooks at risks.Additional information is available at www.fitchratings.com.