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 www.fitchratings.com. 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 ('BBB'/Stable). 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, Carrefour, Metro). 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.