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      European retail: defaults still on rise after jump in 2023; discretionary-goods suppliers at risk
      TUESDAY, 09/07/2024 - Scope Ratings GmbH
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      European retail: defaults still on rise after jump in 2023; discretionary-goods suppliers at risk

      Credit risk remains high in Europe’s retailing sector this year, particularly in the discretionary goods segment, with no sign that the rising trend of business failures from last year will reverse in 2024 after defaults rose in the first quarter.

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      Scope Ratings says the prospect of more business failures in the sector continues to partly reflect the impact of direct and indirect government support, now largely withdrawn, for companies during the pandemic and last year’s energy crisis which, as in other sectors, propped up many enterprises that might otherwise have failed.

      “The impact is visible in the sharp decline in bankruptcies in the sector in 2021 compared with the previous year and then the subsequent increase, notably last year, in a trend that extended into the first quarter,” says Claudia Aquino, corporate ratings analyst at Scope.
      “We expect defaults to continue rise in the second half,” says Aquino.

      “E-commerce’s lingering disruption of traditional retailing and the rising cost-of-living, with inflation only slowly retreating from last year’s highs, is straining many retailers’ financial performance in the context diminished state support – hence the enduring adverse conditions which weighed down on the sector in 2023,” Aquino says.

      Scope’s retail vulnerability barometer tracks retailing default prospects in Europe

      The risks facing retailers today are spread unevenly across Europe, a phenomenon captured by our analysis of bankruptcy rates over the past six years and Scope’s retail vulnerability barometer (RVB). Fragmented markets, such as France and Portugal, and ultra-competitive ones, such as the UK, are where vulnerability to default in the retail sector remains particularly high.

      Credit risks vary across industry’s different subsectors

      The fashion segment represents 57% of the total bankruptcies in our dataset, reflecting in part sector-specific risk. Stores tend to be on or close to high streets, in close competition for visibility and footfall, and often require integrated or nearby warehouses to ensure continuous supply of goods.

      “Real estate leasing costs are therefore relatively onerous compared with other retail subsectors,” says Aquino.

      Other discretionary retailers – DIY stores and home appliance vendors -- are facing similar if less severe risks and exhibit slightly lower bankruptcies numbers than their fashion counterparts (13% of total). Firms in the category often have seasonal sales – think of gardening centres and DIY specialists reliant on summer trade – making for lumpy cashflow. They are also vulnerable to competition from multiproduct online retailers for which seasonality is not a problem such as, Amazon.com, Germany’s Otto GmbH and France’s Cdiscount SA.

      Food retailers remain high on the list of vulnerable firms

      “Food retailing ranks relatively high on our list of bankruptcies. Some companies in our sample were long-term established businesses like Iceland, the UK frozen-product retailer which filed for bankruptcy in several European countries in 2023, and Pepco, which filed for bankruptcy in Austria in February 2024,” says Aquino.

      Other troubled companies, like Flink which filed for bankruptcy and exited Austria, were relatively new to the market. They were mostly home delivery and online grocery services which boomed during the pandemic, but lost their appeal afterwards, and have struggled to cope with high operating and delivery costs.

      Moreover, scaling up these new food retailing businesses is proving difficult as inflation has gathered pace, borrowing costs have risen, while larger incumbents have fought back with competitive product offerings of their own. There is also the continuing competition from hard-discount chains. Lidl and Aldi gained significant market share in UK and have gained in popularity in the US following the increase in food prices.

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