Bricks-and-mortar retailers: Continental European subjects are braced for e-commerce whirlwind. Mass bankruptcies among bricks-and-mortar stores like Toys “R” Us amid relentless growth of the online sector have made for a “retail apocalypse” in the US, with signs of one in the UK. Can the rest of Europe escape? Scope Ratings thinks it might.
The prevalence in Europe’s retail sector of conservatively financed, privately held and family-controlled companies has made for a more robust, if less dynamic, industry than in the US. Out of the 65 biggest retailers in Europe, privately held companies generated 47% of aggregate revenue in the region last year, compared with 12% for the biggest 65 in the US.
Crucially, European retailers, often privately held companies, hold less debt than many of their private-equity controlled US counterparts, so they are less vulnerable to any drop- in sales and decline in interest cover. Scope estimates that the median indebtedness of US retailers is twice that of European peers for the 25 largest public companies in each region, with reported financial net debt at around 1.3 times earnings before interest, taxes, depreciation and amortisation compared with 0.69 times in Europe.
“Traditional retailers in Europe are likely to prove more resilient than many think, despite growing online competition and the need to invest in existing stores, better logistics and new technology,” says Scope analyst Philippe Wass.
Another factor favouring the European retailers’ capacity to resist online competition is their dominance of local markets. In the case of food retailing in France, Germany, the Netherlands and the UK, the top five largest players have close to a 75% share of each market.
Nationally fragmented rules and regulations–among them, geo-blocking, data-protection laws, hygiene and other product requirements—have also protected bricks-and-mortar retailers across Europe from e-commerce rivals. Consumer enthusiasm for online shopping differs within Europe too, from double-digit penetration rates in France, Germany and the UK to much lower acceptance in Italy and Spain.
“Bricks-and-mortar retailers in Europe, with the notable exception of the UK, have the luxury of greater financial flexibility and more time to adapt to shifting consumer habits and competition from home-grown and international e-commerce rivals,” says Scope analyst Adrien Guerin.
Even so, as a forthcoming Scope Ratings e-commerce research paper will show that some retail segments in Europe look more exposed to further digital disruption than others.
About Scope Ratings GmbH
Scope Ratings GmbH is part of the Scope Group with headquarters in Berlin and offices in Frankfurt, London, Madrid, Milan, Oslo and Paris. As the leading European credit rating agency, the company specialises in the analysis and ratings of financial institutions, corporates, structured finance, project finance and public finance.
Scope Ratings offers a credit risk analysis that is opinion-driven, forward-looking and non-mechanistic, an approach which adds to a greater diversity of opinions for institutional investors.
Scope Ratings is a credit rating agency registered in accordance with the EU rating regulation and operating in the European Union with ECAI status.