- 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 is suffering as a result of the global economic slowdown in 2020 caused by the health crisis. Household consumption has plunged in most economies, both emerging and advanced. Mandatory health measures in most regions have affected physical outlets, and retail sales have plummeted. Several reasons account for the decline, including the economic crisis, fear of the virus and health measures that have forced businesses to reorganise and, in some cases, close. This sector, which was already weakened in 2019, may struggle to recover, particularly brick-and-mortar shops.
However, the pandemic has further accelerated the growth of e-commerce, which has been booming in recent years, and should enable a quick rebound for a portion of the sector. This has increased the pressure on traditional players in the sector, who are finding it hard to adapt to this new mode of consumption. To face these challenges and the health crisis, they are having to rethink their strategies, notably by stepping up the use of new digital tools and by using more efficient logistics.
Sector Economic Insights
COVID-19 has exacerbated the sector’s difficulties
Growth is expected to pick up in 2021 after an unprecedented recession in 2020. According to Coface, global GDP contracted by 4.8% in 2020 and is expected to rebound by 4.4% in 2021. The pandemic’s effects impacted individual consumption and, in turn, the retail sector in most emerging and advanced economies. Globally, the retail sector has been hurt by the health crisis, with retail sales dropping by an estimated 6% approximately in 2020 according to Emarketer. This decline was mainly 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.
In China, where the pandemic originated, retail sales dropped sharply. After an 11.4% decline in retail sales in the January-June 2020 period compared with the same period in 2019, the sector gradually recovered and actually recorded positive growth in September 2020 (+3.3% YoY). Coface forecasts that China’s economy will expand by 7% in 2021, after significantly slowing to 1% in 2020, suggesting a recovery for the retail sector in 2021. However, the trade war and heightened tensions with the United States (U.S.), which dented Chinese consumer confidence last year, are a risk for the sector. China's debt, which reached around 60% of GDP in end-2019, is also a concern.
In Latin America, the picture is mixed. In Brazil, the unemployment rate continues to climb, and the contraction of economic growth caused by COVID-19 is limiting growth in retail sales. Argentina’s economic situation continues to worsen, which is negatively impacting the retail sector. After a 12.8% contraction in 2020, Coface forecasts 3.5% growth in 2021. Inflation is decreasing but remains very high, reaching around 37% in September 2020, which is not good for household consumption.
The U.S. outlook is similarly mixed. While the unemployment rate jumped after the outbreak of the health crisis, reaching 14.7% in April 2020, it fell back to 7.9% in September 2020. The growth rate, meanwhile, collapsed, dropping to -4.8% in 2020 according to Coface, after +2.4% in 2019; it is expected to rise to 2.9% in 2021. Following a sharp decline in retail sales in April owing to the health crisis, the retail sector saw an 18.2% YoY increase in sales in May 2020, mainly driven by brisk online sales, which surged by 49% YoY in April 2020. Households have little room for manoeuvre due to their persistently high debt level, which stood at over 80% of GDP in 2020, the highest level since the Second World War.
Eurozone growth contracted by 8.6% in 2020, which was not good for household consumption. Growth could rebound by 5.6% in 2021 according to Coface estimates, potentially lifting a 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. For instance, in France, retail sales fell by 24% in March 2020 compared with February 2020. A global recovery in retail sales was perceptible after social distancing measures were eased and the economy picked up slightly. However, a resurgence of the epidemic in Q4 and the measures taken to counter it once again put a damper on retail sales and could affect the scale of the recovery in 2021.
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 their home country. Overall, situations differ considerably across countries in the sector.
The acceleration of e-commerce due to the health crisis continues to revolutionize the sector
The retail sector is currently undergoing a major structural transformation, mainly thanks to the rise of online sales, which has accelerated sharply because of the health crisis. COVID-19 has led to major structural changes for the retail sector. 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. The acceleration of e-commerce is illustrated by the 74% surge in global online order volumes in March 2020 compared with March 2019.
E-commerce leader Amazon saw its sales increase at a steady pace in the first half of 2020, with a 34% expansion compared to the same period in the previous year. This is severely weakening physical sales outlets, which are struggling to adapt to the new consumption patterns. This weakness was illustrated by the bankruptcy in October 2018 of the U.S. group Sears, which was unable to adapt to competition from online shopping. Conversely, Walmart 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 with an 11.5% YoY increase in online sales in May 2020. 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 1.1 billion users. E-commerce also increased by 18% in the United States in the first quarter of 2020, partly because of the pandemic.
The health crisis has accelerated the transition towards e-commerce, which continues to transform the retail landscape. That said, other trends are also at work. First, the use of analytical tools related to data collection is likely to increase within stores, helping them to manage inventories more efficiently, for instance. Second, companies are making major changes to their offerings in advanced economies to respond to changing consumer preferences. One approach is the development of concept stores, where online retailers partner with traditional stores to create theme-based retail outlets that seek to improve the consumer's shopping experience. The desire among consumers to buy more personalised products could also change retailers’ strategies, as firms harness increased data availability on consumer profiles and purchasing habits to offer products that are more in synch with different shopper categories and buying regions.
E-commerce, which has been impacted by the global recession and the drop in consumption, is doing relatively well and looks set to recover quite easily, as it is suited to health measures, since sales are at distance. Conversely, brick-and-mortar shops should take longer to recover. With the virus continuing to spread and social distancing measures limiting physical sales, retailers are unlikely to be able to get back to an economically stable situation in the coming months.
Last update : February 2021