Moody’s forecasts static credit quality for European retail

Growth of traditional retailers’ digital platforms unlikely to compensate for ongoing fall of bricks-and-mortar sales, says rating agency

A predicted 12% growth in online sales for European retailers in the second half of this year – and into 2018 – is unlikely to prevent the sector’s credit quality from flatlining, according to Moody’s.

Despite the strong forecast for retailers’ online operations, the rating agency says that overall growth in the sector will be in the low single digits.

That minimal growth will fall in line with GDP, while retail brands’ margins will remain broadly stable.

“In the next five years,” says Moody’s, “online sales will account for approaching 20% of total retail sales in the UK and 15% in Germany and France.”

Click and collect, it points out, will remain an “important and growing part” of the online offerings of large, apparel-focused retailers.

Brands the rating agency cites as click-and-collect beneficiaries in the coming year include NEXT Plc, New Look Retail Group Limited, Marks & Spencer Plc and department stores such as Debenhams Plc and House of Fraser Ltd.

“Despite the ongoing shift online,” it says, “Moody’s anticipates that large retailers such as NEXT and New Look will continue to selectively add new space.

“However, store closures will become more common as retailers look to offload unsustainable locations to protect overall profitability and credit quality.”

With that in mind, Moody’s notes, e-commerce heavyweights such as Amazon “are particularly well placed to benefit from economies of scale and, consequently, an improvement in credit quality”.

Retailers’ digital fortunes, it adds, will vary from segment to segment: “Across Europe, the proportion of grocery shopping conducted online is lower than the overall average. In contrast, segments such as clothing and consumer electronics already have much higher online penetration.

“Retail segments will reach online maturity at different levels, but the existing penetration gaps will ultimately narrow. Moody’s expects strong growth in home improvement, where online penetration is currently relatively low.”

Moody’s vice president and senior credit officer, David Beadle, said: “Overall credit quality in Europe's retail segment will remain largely unchanged in 2017 to 2018.

“But individual retailers face pressure to adapt their business models as consumers move online in larger numbers, at the expense of falling overall sales in bricks-and-mortar retail.”

He added: “Profitability will decline for companies that fail to adapt and credit quality will deteriorate as a result.”

Moody's subscribers can access a full report on its retail forecasts here.

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