- Growth of the Chinese middle class
- Rapid urbanization in Asia and Africa is driving the sector
- Fierce competition in the sector
- Severely impacted by the COVID-19 crisis
- Physical points of sale struggling to respond to the growth of online shopping
Risk Analysis Synthesis
The retail sector, which has been suffering from the global economic recession in 2020, faced several obstacles that hindered its recovery in 2021. The vaccination rollouts that started in early 2021 in advanced economies helped removing mobility restrictions and lockdowns, thus fuelling optimism and return to physical outlets. Household consumption, which had plunged in most economies in 2020 therefore rebounded significantly thanks to vaccination campaigns and accumulated savings through 2020, but did not reach pre-pandemic levels. On the supply side, the retail sector was affected by the disruption of global supply chains, which may further result in inflation and thus impact the retail sector in 2022. Transportation costs, and most importantly, maritime freight rates, increased significantly because of insufficient capacity, thus passing the cost increases on retail prices alongside consequent delivery delays. The Chinese energy crisis could also hurt global supply chains, and in turn, the retail sector.
E-commerce, which has been booming in recent years and enjoying significant success during lockdowns, was not spared by supply chain disruptions. However, as the latter unwind, e-commerce may exert pressure on traditional players in the sector, who are finding it hard to adapt to this new mode of consumption. To face these challenges, they have to rethink their strategies, notably by stepping up the use of new digital tools and by using more efficient logistics.
Despite progress made in terms of vaccination rollouts, the COVID-19 pandemic remains a significant downward risk for the sector’s recovery.
SHARE OF E-COMMERCE IN RETAIL SALES
Sector Economic Insights
The sector’s recovery faces uncertainty due to the pandemic and supply chain disruptions
Coface expects the global growth rate in 2022 to be slightly lower than in 2021, down from 5.6% to 4.4% according to Coface. There was a significant recovery in the sector in 2021, driven by the rebound in household consumption, but the sector’s growth is likely to be hampered by the ongoing supply chain disruptions.
Globally, the retail sector was hurt by the health crisis, with retail sales dropping due to the economic crisis unleashed by COVID-19, as well as to store closures and physical distancing measures, which have limited face-to-face shopping. The outlook for this sector remains uncertain because of the lack of visibility regarding the pandemic’s evolution and the supply chain issues.
In China, where the pandemic originated, retail sales’ growth was slow and decelerating, reaching 4.9% YoY in October 2021. The pace is likely to remain slow, as a zero-tolerance policy to the resurgence of the pandemic and drastic measures could hurt consumption demand. Online sales (about 23.6% of retail sales as of August 2021) were also weak and decelerating, with a 6% YoY growth in August 2021. As China is headed into its winter season, and is facing a power shortage, the government forced factories to cut production, thus exerting additional pressure on global supply chains. Coface forecasts that China’s economy will expand by 6.1% in 2022 after a 7.5% rebound in 2021, and growth could still help the retail sector to expand, although impeded by the abovementioned factors.
The U.S. outlook was positive during 2021: as of October 2021, retail sales were up by 16.3% relative to October 2020. While the unemployment rate jumped after the outbreak of the health crisis, reaching 14.7% in April 2020, it has been steadily decreasing, down to 4.6% in October 2021. The U.S. economy rebounded by 6.0% in 2021 according to Coface, and it is expected to grow by 3.8% in 2022. Consumer spending has been persistently growing, helped by government financial help to households. However, the inability of supply to meet the spike in demand may result in increased prices, and hurt consumer sentiment in 2022, thus decelerating domestic retail growth in the U.S.
Eurozone growth rebounded by 5.4% in 2021, which benefited household consumption, but insufficiently for a complete return to pre-pandemic levels. Growth could rebound by 4.5% in 2022 according to Coface estimates, potentially further lifting the retail sector that was weakened by the pandemic. A drop in retail sales was observed during the months when most European countries were under lockdown. However, a global recovery in retail sales was perceptible after social distancing measures were eased and the economies picked up. As of September 2021, calendar and seasonally adjusted retail trade volumes stood at levels higher relative to pre-pandemic levels. Still, they were losing momentum during the last months of 2021 and the sector may struggle in early 2022 because of the supply chain disruptions and the pandemic.
The sector is dominated by U.S. global leaders: according to the 2020 Deloitte Global Powers of Retailing ranking (based on 2018 revenues), Walmart Inc., Costco Wholesale Corporation and Amazon.com Inc. were the top three and Schwarz Group, the European leader, came in fourth (with revenues of approximately USD 514 billion, USD 141 billion, USD 140 billion and USD 121 billion, respectively). However, despite the size of these retail giants, the market remains highly fragmented. Market fragmentation is mainly geographical in nature: the world’s 250 largest retailers operate in only ten countries on average and generate less than a quarter of their sales outside of their home country. Overall, situations differ considerably across countries in the sector.
The pandemic had a strong but short lived effect on e-commerce
The retail sector is currently undergoing a major structural transformation, with the increase in e-commerce, which peaked sharply during lockdowns. Companies have had to adapt to new health regulations and new consumer habits. Lockdown measures in a large number of countries have led consumers to buy online. Meanwhile, fear of the virus has considerably limited the physical movement of individuals, again boosting online shopping. In EU-27, the share of e-commerce increased by 2.4 percentage points (pp) in 2020 after +0.6 pp in 2019, +4.8 pp after +1.6 pp in China, +2.7 pp after +1.3 pp in the U.S. and +4.1 pp after +2.7 pp in Canada. However, as lockdowns were lifted, the increase in e-commerce was marginally noticeable: in the U.S, the share of online sales stood at 14% in June 2021, barely higher than the 13% average in 2019.
E-commerce leader Amazon saw its operating income increase at a steady pace over the first 9 months of 2020, with a 70% expansion compared to the same period in 2019. However, as economies reopened, the online Amazon sales drastically decelerated.
Walmart, the largest U.S. retailer is very well positioned regarding the increase in e-commerce, recording 97% growth in online sales in the second quarter of 2020 compared to the second quarter of 2019. After quickly adapting and setting up appropriate services to cope with the health situation, while also diversifying its distribution channels, the sector leader is competing strongly with Amazon. It can already rely on a dense network of sales outlets and a highly developed supply chain, making it easy for the group to offer delivery or in-store pick-up of online orders.
China remains by far the largest e-commerce market. Alibaba, JD.com and Pinduoduo, the three e-commerce giants, occupied 83.6% of the 2020 market, compared with 80.3% in 2019. Their growth appears to be due to efforts to adjust and diversify their ranges, coupled with good logistics, which enabled them to cope with and adapt to the pandemic. There are several reasons for China’s leadership in e-commerce, starting with the country’s high population density and nearly 700 million online shoppers. Other factors include the rise in the average wage, widespread use of smartphones, urbanisation, and the expansion of the WeChat application, which supports many types of online purchases and has 1.2 billion users. From January to September 2021, the year-on-year increase in Chinese online retail sales was about 18.5%.
The ongoing pandemic crisis could still favourably affect e-commerce in case lockdowns are re-implemented.
Last update : February 2022