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Battling a Bumpy Road: Economic Downturn

American retailers aren't alone in feeling the economic crunch, European retailers also are bracing for a tough ride for the second half of the year.

PARIS — American retailers aren’t alone in feeling the economic crunch.

This story first appeared in the June 13, 2008 issue of WWD.  Subscribe Today.

With inflation soaring, the financial and housing markets stagnating, gas prices biting and general sentiment heading south, European retailers also are bracing for a tough ride as they head into the second half of the year.

“It’s been pretty bad so far in 2008,” said Guy-Noël Chatelin, a partner at OC&C Strategy in Paris. “It can’t get much worse.”

Yet fears are growing that it can, especially after major protests in Spain, France and Portugal this week against spiraling diesel fuel prices. Truck drivers blockaded highways in all three nations, leading to concerns Europe could face a summer of discontent — which might further derail consumer spending.

The story across Europe is hardly homogeneous, though. While Spain and the United Kingdom are suffering from adverse credit and housing markets, and diving consumer sentiment besets France and Italy, Germany and the Nordic countries are faring better.

Christian Burns, retail analyst for Oppenheim Research in Frankfurt, for instance, said he expects 2008 to be a “relatively good year” for German retailers, with growth of about 1 percent.

Still, the indicators are far from clear. Even as its economy grows, the German consumer confidence index fell sharply to 4.9 points earlier this month, fanned by fears of the financial markets crisis, the uncertain U.S. economy and rising fuel costs. Meanwhile, French business sentiment fell in May at its fastest pace since 2001.

Retail across the Continent was generally dismal in April, with almost every country in the European Union logging negative growth — overall retail sales in the EU countries dropped 2.9 percent in April on an annual basis, according to Eurostat.

“When it costs 80 euros [$125] to fill the car [with gas], it’s not anodyne,” said Gilles Goldenberg, partner in charge of consumer business at Deloitte in Paris. “It becomes a matter of pure arithmetic.”

Analysts expect several things to happen as a result of the downturn in business. As in the U.S., markdowns are expected to arrive earlier and be deeper than usual. Big international chains such as Zara and H&M are expected to gain market share to the detriment of smaller regional players; consolidation in the sector may accelerate, and consumer shopping habits are expected to evolve in new directions.

“There will be new arbitrages on spending,” said Goldenberg. “We will see people making new spending decisions. We are already seeing it with inflation. Consumers are worried about having enough money to eat and deciding between which goods to buy in different ways.”

That’s not necessarily good news for apparel retailers. In France, clothing and shoe sales have been on a downward spiral since December. For the first quarter, clothing sales in France fell 2.1 percent, according to Paris’ IFM fashion institute.

Carrefour, the hypermarket operator, which is France’s largest clothing retailer, said when it reported its first-quarter sales that current market conditions “remain challenging and are tougher than we would have anticipated at the end of last year.” Carrefour added that its non-food sales were toughest.

Poor weather across Europe this spring has made matters worse for many players, even in the fast-fashion sector.

Nils Vinge, head of investor relations at Sweden’s Hennes & Mauritz, blamed weather conditions for a “quiet, weak March and April.” H&M’s same-store sales fell 8 and 10 percent for March and April, respectively. “In early May, sales picked up really well,” said Vinge. “Temperatures are very sensitive [when it comes to selling clothes]. This year was extreme. There was snow and hail.”

A spokesman for Inditex Group, the Spanish chain that runs Zara, also indicated weather conditions had affected sales. However, Inditex on Wednesday reported its profits rose 10 percent in the first quarter despite the poor weather and weak economic conditions.

Even if weather played a role in tough clothing sales this spring, analysts wondered whether larger macroeconomic factors played a bigger role.

“The [spring] season was bad,” said Goldenberg. “In clothing, you never know if climatic factors are to blame or if it’s something else. This season I think the sector got hit on both sides.”

In Italy, spending on goods and services fell 1.7 percent in volume in March — the most in three years — while inflation rose to its highest value in more than a decade. The IMF has forecast that Italy’s economy will grow a mere 0.3 percent this year, a fifth of last year’s pace.

Italy’s finance minister, Guilio Tremonti, last month said real economic growth would be “about zero,” which would make Italy the slowest-growing economy in the 15-nation Euro bloc.

Such numbers make retailers nervous. At La Rinascente, managing director Alberto Baldan said he was “not optimistic but quite realistic” for the year. “[The market] is difficult globally,” he said. “It’s not just an Italian situation, even if it is perhaps a bit more accentuated here by comparison to other countries.”

That said, the store has delivered double-digit sales growth in the first four months of the year, helped by its move upscale and a 3 million euro, or $4.6 million, overhaul of its men’s wear floor at the flagship in Piazza Duomo in Milan.

And despite the dismal outlook, there are bright spots. As in the U.S., luxury continues to perform well. Antonia Giacinti, the owner of Antonia in Milan, said sales at her three stores were up 15 percent for the spring season. Andrea Panconesi, who owns Italy’s Luisa store, said she was similarly bullish, expecting sales for the year to grow 50 percent, thanks to a major renovation of the store.

In the U.K., where general retail sales in April fell 1.5 percent and the environment is one of the weakest in recent years, luxury, too, is holding up. Harrods said its luxury positioning has insulated the department store from the effects of a slowing economy.

France’s Printemps said its luxury offer was buttressing it against the tough environment, too. “I’m satisfied in our sales,” said Paolo de Cesare, chairman of Printemps. “Sales continue to grow even if it’s not at the same rate as last year.”

Most people aren’t so sanguine. Krishan Rama, a spokesman for the British Retail Consortium, said U.K. retail sales this year would be the weakest in eight years.

“People’s incomes are being squeezed by rising fuel and council tax prices,” said Rama. “Consumer confidence [in the U.K.] is at a 15-year low and consumers are sticking to essentials. We’re seeing that food sales have held up, but clothing and footwear are both down.”

Germany, Europe’s biggest economy, may outperform much of the Continent, though inflation hangs over its head like a sword of Damocles. “The biggest strain on consumers in Germany right now is high oil costs,” said Christian Burns of Oppenheim Research. “Nonetheless, in developed markets, Germany is one of the strongest, compared to the U.K., Spain and Italy.”

“In men’s, women’s and children’s apparel sales, we’re expecting to see almost a 20 percent decline for next fall-winter,” said Hermann Fuchslocher, director of a management consultant firm in Gelsenkirchen. “Retailers are very skeptical at the moment,” he continued. “Consumer spending is down about 4 to 5 percent compared [for the period] to last year.”

Fuchslocher said luxury is not feeling the same squeeze. “But we’re talking about only 6 to 7 percent of the population. It doesn’t change the bigger picture.”

Despite a strong performance from the German economy in the first quarter, with GDP growing 1.5 percent, the highest level in 12 years, consumers still appear to be cautious about spending.

According to a consumer climate survey published by the Nuremberg market research firm the GfK Group at the end of May, inflation caused by rising gasoline prices and an increase in the cost of food is preventing a bounce-back of consumer spending. Price hikes, and fears of further inflation, have weakened the impact of the improved job market, leading to more pessimism among German consumers.

Researchers believe that positive gains in the German economy have been undermined by the credit crunch in the U.S., as well.

Volker Treier, chief economist at the German Chambers of Industry and Commerce, remains positive, though, saying that although consumer consumption in the first quarter was disappointing, German businesses feel confident about the outlook for the year. “We expect a rise in consumer confidence as a result of falling unemployment,” he said.

Germany remains the world leader in exports, in terms of value, specializing in high-quality industrial machinery needed in the rapidly growing economies of Asia. This has in turn led to more jobs. According to Treier, a subsequent rise in consumer spending is the last piece of the puzzle, which he believes should now come as a result of increased job security.

— With contributions from Nina Jones, London; Andrew Roberts, Milan, and Damien McGuinness, Berlin