- Recovering prices should lead to better pricing power for retailers
- Data management and user experience (UX) become increasingly important parts of the business model
- M&A activity was estimated to be up +11% in 2016. Often it is directed at acquiring new technological capabilities. Restructuring should continue across the board in 2017
- Growing global, thinking local: the dominant theme propelling future growth
Growing pains: How to expand without worsening already-high indebtedness
Despite a +2% increase in volume, nominal sales steadied against a backdrop of low commodity and consumer prices in 2016. This has a negative impact on retailers’ pricing power.
As a result, the sector’s profitability - as reflected by Earning Before Interests and Taxes (EBIT) - have reached the lowest level in six years at 6.6% (down -1.5pp over this period). In addition, indebtedness skyrocketed: the net gearing ratio now surpasses 200%. This deterioration is remarkable for Electronic retail where net debt exceeds equity by a factor of four.
The combination of weakening profits and rising debts will be a key concern as interest rates have already been raised in December 2016 in the US and as more Fed hikes are expected in 2017-18.
Yet, we forecast a contained reflation in 2017 with +2.2% in the US and +1.3% in Eurozone compared to +1.3% and 0.2% in 2016 respectively. Combined to recovering consumer spending, Retailers’ margins should rise by +1.5% on average in 2017.
Yet, the ability to grow the business and profitability will much depend on the chosen distribution format. The rise of e-commerce is crucial: by 2020 it could represent 15% of worldwide retail sales.
retail-global-sector-report-feb17.pdf