- Growth of the Chinese middle class
- Rapid urbanisation in Asia and Africa is driving the sector
- Fierce competition in the sector
- Strongly impacted by the COVID-19 crisis
- Physical sales outlets are struggling due to the development of online shopping
Risk Analysis Synthesis
The retail sector is suffering from the decline of global economic growth in 2020 because of the health crisis due to Covid19 outbreak. In most economies, both emerging and advanced, household consumption has considerably dropped. Mandatory health measures in most regions have affected physical outlets and retail sales have plummeted. Several reasons can explain this decline: the economic crisis, fear of the virus and health measures that have prompted businesses to reorganize themselves, and even caused closures in some cases. This sector, already weakened in 2019, may experience a challenging recovery, particularly for brick-and-mortar shops.
However, the pandemic has accelerated the development of e-commerce, which was already booming in recent years in some regions and should enable a quick rebound for a portion of the sector. This has amplified the pressure on traditional players in the sector, who are struggling to adapt to this new mode of consumption. In order to face these challenges and the health crisis, they have to rethink their strategies, notably by stepping up the use of new digital tools and by using more efficient logistics.
*Turnover of Retail sector (billion USD)
Sector Economic Insights
COVID-19 exacerbates the sector’s difficulties
Growth is expected to pick up in 2021, after an unprecedented GDP contraction in 2020. Indeed, according to Coface, global economic GDP should contract by 4.4% in 2020 and rebound by +5.1% in 2021. The pandemic will impact individual consumption and, in turn, the retail sector in most emerging and advanced economies. Globally, the retail sector is suffering from the health crisis, with an expected drop in retail sales of nearly 5.7% in 2020 compared to 2019 according to Emarketer. This decline is mainly due to the economic crisis induced by COVID-19, as well as store closures and physical distancing measures, which limit face-to-face shopping. The outlook for this sector remains uncertain because of the lack of visibility regarding the evolution of the pandemic. In the short-term, a recovery in retail sales is expected thanks to the reopening of stores and the economic recovery. The long-term effects are unclear: since the virus is still present, the occurrence of a second wave materializing because of a renewed intense virus propagation worldwide cannot be ruled out, which would cause the retail sector to relapse.
In China, hotbed of the pandemic, retail sales dropped sharply. After an 11.4% decline in retail sales in the period January-June 2020 compared to the same period in 2019, the sector is gradually recovering (1.8% in June 2020 year-on-year, YoY). Coface forecasts Chinese economic growth to reach 7.5% in 2021, following a significant slowdown to 1% in 2020, suggesting a recovery in the retail sector in 2021. However, trade tensions with the United States (U.S.), which dented consumer confidence last year, is a risk for the sector. Moreover, China's debt is also a cause for concern, as it reached around 60% of GDP in end-2019.
In Latin America, the situation remains difficult. In Brazil, the unemployment rate is continuously rising, and the contraction of economic growth caused by COVID-19 is limiting growth in retail sales. In Argentina, the economic situation is still deteriorating and has a negative impact on the retail sector. After a GDP contraction of 7.5% in 2020, Coface forecasts 3.5% growth in 2021. Inflation is decreasing but remains very high, reaching around 41% in the second quarter of 2020, which does not favour household consumption. In the U.S., the outlook is mixed. While the unemployment rate had considerably increased in the aftermath of the health crisis, reaching 14.7% in April 2020, it is likely fall back to 11.1% in June 2020. Economic activity is expected to considerably deteriorate, with a sizeable GDP contraction, reaching -5.6% in 2020 according to Coface, after +2.4% in 2019. Following a sharp decline in retail sales in April, because of the health crisis, the retail sector saw an 18.2% YoY increase in sales in May 2020. This growth in sales was mainly driven by the dynamism of online sales that surged by 49% YoY in April 2020. Furthermore, households have little room for manoeuvre due to their persistently high debt level, which reached approximately 77% of GDP in the first quarter of 2020 according to Statista.
Eurozone growth is expected to contract by 9.7% in 2020, which is unfavourable for household consumption. A rebound of growth, forecasted at 7.7% in 2021 by Coface, could favour the retail sector, which was weakened by the pandemic. Indeed, we observed a drop in retail sales during the months when most European countries were under lockdown.
For instance, in France, retail sales fell by 24% in March 2020 compared to February 2020. Nevertheless, after the easing of social distancing measures and a slight upturn of the economy, a recovery in retail sales is visible.
The acceleration of e-commerce because of the health crisis continues to revolutionize this sector
The retail sector has been undergoing a major structural transformation that started before the Covid-19 pandemic, mainly due to the rise of online sales, which has accelerated sharply because of the health crisis. Indeed, companies have had to adapt to new health regulations and new consumer habits. On the one hand, lockdown measures in a large number of countries have led consumers to buy online. On the other hand, the fear of the virus has considerably limited the physical movement of individuals, boosting online shopping. The acceleration of e-commerce has been illustrated by a 74% surge in global online order volumes in March 2020, compared to March 2019.
The e-commerce leader, Amazon, saw its sales increase at a steady pace in the first quarter of 2020, with a 26% expansion compared to the same period of the previous year. This is weakening physical sales outlets, as they are struggling to adapt to these new consumption patterns. This fragility was illustrated by the bankruptcy of the U.S. group Sears in October 2018, as it was unable to adapt to competition from online shopping. Conversely, other companies such as Walmart, has recorded an increase in e-commerce, with a 74% growth in online sales in the first quarter of 2020 compared to the first quarter of 2019. After quickly adapting and setting up appropriate services for the health situation, as well as diversifying its distribution channels, the sector leader in the U.S is competing strongly with Amazon. It can already rely on a dense network of sales outlets and a highly developed supply chain, to offer easily in-store delivery or collection of online orders. Overall in the United States, there has been an 18% increase in e-commerce in the first quarter of 2020, partly because of the mobility crisis due to the pandemic.
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 in the country, occupy 83.6% of the 2020 market, compared to 80.3% last year. This growth appears to be due to the adaptation and diversification of their offers and good logistics, which enabled them to cope with and adapt to the pandemic. There are several reasons that explain China’s leadership in terms of e-commerce. First of all, the high population density and nearly 700 million online shoppers. Furthermore, the rise in the average wage, the democratization of smartphones, urbanization, the expansion of the WeChat application - which allows for many types of online purchases and has 1.1 billion users - favor this growth.
The health crisis has accelerated the transition towards e-commerce globally, which is transforming the retail actors’ landscape continuously. That said, other trends are also developing nowadays. First, the use of analytical tools related to data collection is likely to increase within stores, for instance, to manage inventories more efficiently. Second, companies are making major changes in their supply 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, which is now necessary given the growth of e-commerce. Concept stores feature creative and playful spaces, sometimes with food options. The desire among consumers to buy more personalized products could also change retailers’ strategies, as firms harness increased data availability on consumer profiles and purchasing habits to offer products that are more harmonious with different shopper categories and buyer regions.
E-commerce, which has been impacted by the global recession and the drop in consumption, is doing relatively well. It seems that this new consumption mode will recover quite easily, as it is adapted to health measures, since sales are at distance. On the other hand, brick-and-mortar shops should take longer to recover. The virus is still circulating and social distancing measures that limit physical sales should not allow retailers to return to an economically stable situation in the coming months.
Notes for the reader :
Scenarios described in the chart and Coface’s methodology to produce them are available in Coface Barometer June 2020 by Coface Economic Research Department : From a massive shock to a differentiated recovery
Last update : August 2020