The level of sales in the sector is mainly challenged by inflationary pressures, including high energy prices, the continuation of the "zero-COVID" policy in China, and ongoing disruptions in certain supply chains.
After a rebound in global economic activity in 2021 (+6%), the war in Ukraine and the near halt in trade relations between many countries and Russia will weigh on growth in 2022 and 2023 (+2,8% and +1,9% respectively according to Coface forecasts), especially as inflationary pressures were already at work before Russia's invasion of Ukraine, notably due to the increase in maritime freight rates observed since the end of 2020 (albeit they have fallen sharply in 2022). This inflationary environment, as well as the possibility that some European countries will have to introduce energy rationing for businesses and households following the cessation of Russian gas exports, will weigh on the retail sector via two channels. First, the increase in electricity bills will reduce the disposable income and thus the consumption of certain non-essential goods. Second, as price increases affect all types of goods, household consumption will fall even more in 2023.
In China, after rebounding in 2021, economic growth is expected to remain moderate in 2022 and 2023 (3.2% and 4% respectively after 8.1% in 2021). This slowdown, linked to the "zero-COVID" policy led by the Chinese authorities on the one hand and the global economic slowdown on the other, is weighing on household consumption. Retail sales decreased by 0.5% in value in October 2022 year-on-year, even though inflation was 2.1%. Coface expects this downward trend in retail sales to continue in 2023.
In the U.S., retail sales increased by 9% year-over-year in August 2022. However, this strong increase should be seen in the context of inflation, which was at 8.3% (6.3% excluding energy and food prices). In addition, Coface forecasts a slowdown in real activity growth for 2022 and 2023 (+1.7% and +1% respectively, after +5.7% in 2021), suggesting weak growth in retail sales.
The Eurozone is particularly affected by the war in Ukraine, being heavily dependent on Russian gas imports. Consequently, Coface forecasts growth of 2.8% in 2022 and 0.1% in 2023, after 5.4% in 2021. Consequently, the dynamics of household demand should remain weak in this region.
The global retail sector is dominated by U.S. leaders: according to the 2022 ranking (on 2020 revenues) of the Deloitte "Global Powers of Retailing" report, Walmart Inc., Costco Wholesale Corporation, Amazon.com Inc. are in the top three and European leader Schwarz Group comes in fourth. However, despite the size of these giants, the market remains highly fragmented. The fragmentation of the market is mainly geographical: the 250 largest companies in this sector operate in only 10 countries on average and generate less than a quarter of their sales outside their home country. In general, the sector covers very different realities depending on the country.
E-commerce, spared by COVID-19, will be impacted by the economic slowdown just like the other segments of the sector
The retail sector is currently undergoing a major structural transformation due to the rise of e-commerce, whose share in distribution is continuously increasing. The lockdowns have temporarily been beneficial for e-commerce, but the effect of COVID-19 in the long run seems marginal.
E-commerce is likely to suffer from the economic slowdown and rising energy prices in the same way as retail as a whole, via the mechanisms explained above.
China remains by far the largest e-commerce market. The market share of China's three e-commerce giants (Alibaba, JD.com and Pinduoduo) reached 84% in 2020. Their growth can mainly be attributed to their efforts to adapt and diversify their product lines, coupled with good logistics, which allowed them to cope with the pandemic and adapt to the health situation. There are several reasons behind China’s leadership in the e-commerce sector. First of all, the high population density and nearly 700 million online shoppers. Moreover, the increase of the average salary in recent years, the democratization of smartphones, urbanization, and also the expansion of the WeChat application, which allows to make many types of online purchases and which counts 1.2 billion users, favour this growth.
The persistence of the pandemic in the country could further impact e-commerce, in case of new lockdowns in some regions, as part of the "zero-COVID" policy of the Chinese authorities.
ESG criteria will impact the sector in the long-term
The retail sector will be impacted by ESG (Environmental, Social, Governance) standards. This issue will constrain companies both in terms of regulations (for example, requiring companies to have a certain ESG score) and in terms of the reputational risk that a poor ESG score could bring to the company. Thus, companies could be encouraged to pay attention to the treatment of their employees or the origin of the products they sell. However, there are currently no internationally recognized criteria for the construction of ESG scores.