European Retailers’ Margins Are Unlikely To Regain Their Pre-Pandemic Strength
European retailers’ margins should improve moderately in 2024 and 2025, thanks to the deceleration of inflation on goods, input, and energy costs, offset by high labor costs.
With inflation set to continue moderating and wage growth still accelerating, real disposable income will pick up, gradually easing income constraints for households and supporting
The path to margin recovery since the COVID-19 pandemic has been uneven, and over half of rated European retailers will be unable to restore their pre-pandemic margins even by 2025.
While rated European retail and restaurant companies’ strong pricing and operating resilience have led to many positive rating actions this year, they have limited headroom in their credit metrics.
Our stress tests show that a 100 basis-point haircut to our 2024 base-case EBITDA margins could affect the issuer credit ratings or outlooks on around 14 of the 50 retailers in our sample, without any offsetting operational or financial policy measures.
Households across Europe are battling a sharp rise in the cost of living due to higher prices of goods, services, food, and energy. Higher interest rates and the knock-on effect on mortgages and rents, especially in the U.K., have exacerbated the pressure on household budgets.
Consumer spending has seen broad support in value terms from strong wage growth and the remnants of excess savings in certain demographics. Retailers’ sales have held up, and even increased in nominal value terms, mainly thanks to strong price pass-through. However, the underlying sales volumes are anemic or declining. This puts significant pressure on European retailers, which have faced a series of challenges in the past few years, including the COVID-19 pandemic, supply chain disruptions, high inflation, rising interest rates, and weak economic growth.
While S&P Global Ratings sees inflation rates moderating, slow economic growth, coupled with a tight labor market and higher interest rates, will prevent a meaningful improvement in European retailers’ margins and cash flows over 2024 and 2025, curtailing their rating headroom.
In this article, we focus on 50 rated retailers operating in the food, home, electrical, DIY, and apparel subsectors. Our stress tests on these retailers show that additional pressure on their EBITDA margins could erode their credit quality significantly over 2024 and 2025. A 100
basis-point haircut to our 2024 base-case EBITDA margins could affect the issuer credit ratings or outlooks on around 14 of the 50 companies in our sample, in the absence of offsetting operational or financial policy measures. However, they show greater resilience in 2025, as our forecasts show a stronger improvement in profitability that year.
Household Budgets Are Stretched, But Higher Wages Offer Some Respite
The eurozone economy has barely expanded over the past few quarters. In the third quarter of 2023, seasonally adjusted GDP decreased by 0.1% in the euro area, after an increase of 0.2% in the second quarter, according to Eurostat.
The consumer price index in the U.K. rose by 6.7% in the 12 months to September 2023, the same rate as in August as per the Office for National Statistics (ONS). Annual inflation in the euro area is expected to be 2.9% in October 2023, down from 4.3% in September, according to a flash estimate from Eurostat. While inflation has receded from the high levels we saw a few months ago, a clear and consistent downward trend on core inflation is not yet visible. We forecast slow disinflation, implying that low economic growth and high interest rates will persist for some time. We are also wary of energy price shocks and volatility as a result of geopolitical conflicts.
Consumers are weary of steeper prices, and, with higher mortgage payments and rents now eating into their disposable income, they are balancing their spending across essentials, discretionary goods, and experiences. In some countries, like Germany, rapidly rising interest rates also translate into a growing preference for saving rather than spending (see chart 1). Consumer spending has been lukewarm across all retail categories as a result.
S&P Global Ratings is the world’s leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide. S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence.
