WWD.com/business-news/forecasts-analysis/european-retailers-brace-for-tough-holiday-season-5353406/
government-trade
government-trade

European Retailers Brace for Tough Holiday Season

Fears about potential European debt defaults are translating into a very real dearth of shoppers browsing the aisles of the region’s stores this fall.

View Slideshow

PARIS — Fears about potential European debt defaults are translating into a very real dearth of shoppers browsing the aisles of the region’s stores this fall.

This story first appeared in the November 7, 2011 issue of WWD.  Subscribe Today.

Ever since the specter of another major financial crisis reared its head over the summer, households have curbed their spending in preparation for a potential recession, leading retailers to fear the year-end holiday season will be lackluster.

“Management will be preparing the market for a fairly difficult Christmas and 2012,” said James Monro, equity research analyst at S&P Capital IQ in London. “We’re going to see at best flat volumes year-on-year, and I think we’re going to see negative like-for-like growth within that.”

Christmas sales in Europe are expected to rise 1.4 percent to 319.1 billion euros, or $438.96 billion, from 314.8 billion euros, or $417.95 billion, in 2010, the same level of growth as the previous year, according to a study conducted by the U.K.-based Center for Retail Research for online shopping comparison Web site Kelkoo.

All dollar rates are calculated at average exchange rates for the period in question.

Kelkoo chief executive officer Richard Stables pointed out that online sales were behind the progression.

High-street stores are expected to see sales drop for the third year running, with a forecast 0.5 percent decrease versus 2010, while online revenues are set to rise 17.3 percent in 2011. Their total value remains modest, at a forecast 12.4 percent of total European Christmas sales, but it is steadily increasing.

“A climate of government cuts and economic uncertainty is likely to undermine consumer spending, meaning consumers are likely to remain as determined as ever to make sure they are getting the best prices, which could explain why we expect to see many of them head online for their Christmas shopping,” Stables said.

The debt crisis appeared to have been averted by a deal struck in Brussels late last month between the 17 nations that use the euro currency, but it quickly reared its head again. The situation in Greece and its repercussions for other Southern European nations like Italy were the main topics of discussion at the G20 summit held in Cannes, France, last week.

Faced with a daily diet of gloomy headlines, European households are feeling increasingly bleak about their prospects. An index of consumer confidence in the Eurozone fell to minus 19.9 in October, its lowest level since August 2009, European Commission data showed.

Those findings were echoed by the GfK Consumer Climate Europe survey for the third quarter, which polled consumers in 12 countries, accounting for 80 percent of the European Union population.

“In the second quarter it appeared that the recession had bottomed out in Europe, as the economies of most European countries started to recover from the deepest recession since the Second World War and economic results in many countries returned to a slight upward trend for the first time. However, debates on further aid and loan guarantees for Greece severely unsettled European consumers once again this summer,” it found.

The European Central Bank struck preemptively last week by lowering interest rates for the first time in two years. “What we are observing now is slow growth heading towards a mild recession by yearend,” said newly appointed ECB president Mario Draghi.

The Eurozone’s private sector economy contracted in October at its fastest rate since July 2009, with the preliminary composite Purchasing Managers’ Index published by financial information services company Markit falling to 47.2 from 49.1 in September.

“The PMI signals a heightened risk of the Eurozone sliding back into recession,” said Chris Williamson, Markit’s chief economist. “Furthermore, it is not only the periphery that is contracting. France saw a fall in private-sector output for the first time in over two years, led by a steep deterioration in the services sector. Meanwhile, German manufacturing — the spearhead of the region’s recovery — is now also in decline,” he added.

The International Monetary Fund predicted in September that annualized growth in the Eurozone would slow to 0.25 percent in the second half of 2011 from around 2 percent in the first six months of the year, before rising to slightly above 1 percent in 2012.

In its half-yearly World Economic Outlook, the IMF also cut its 2012 growth forecast for the U.K. to 1.6 percent from 2.3 percent previously, and warned that the British government might have to put off some of its planned austerity measures if the economy continued to perform below expectations.

Compounding the morose economic outlook, unseasonably warm weather in September dampened demand for autumn-winter ready-to-wear collections, leaving retailers with excess stock heading into the holidays.

Many have already launched midseason promotions, and some markets could see an earlier start than usual to the winter sales, said Monro at S&P Capital IQ. He pointed out that in 2010, British retailers moved forward the sales by three weeks from their traditional Boxing Day start in order to capture Christmas shoppers.

“Over the Christmas trading period, I think the big thing is going to be how early the retailers start their sales period,” said Monro. “It’s the players that can get their sale offering to the consumer earlier that are going to benefit.”

Here is an overview of retail prospects in Europe’s leading markets:

GERMANY

While euro jitters are clouding retail prospects in most of Europe, the consumer climate in its largest market, Germany, remains fairly upbeat. Conventionally big savers and prone to seal their wallets at the first sign of uncertainty, Germans have changed their ways.

Indeed, according to the most recent GfK Consumer Climate Europe survey, Germans are far and away the most willing to buy. The market research institute’s Consumer Climate report for Germany also showed increases in both willingness to buy and income expectations, fueled by an improved labor market, rising salaries — and the debt crisis.

“Discussions on the stability of the single currency and banks have shaken consumers’ trust in the financial markets. Consequently, they are currently less inclined to save money for a rainy day,” GfK said.

Nonetheless, the poll found economic expectations were steadily dwindling, after Germany cut its 2012 growth forecast to 1 percent from 1.8 percent previously.

The retail sector had a good first half, with apparel sales up 3.7 percent, shoes up 3.4 percent and jewelry and watches gaining 5 percent, according to the German Retail Federation. However, a rainy July and August followed by warm fall weather has eaten into those gains.

“A golden autumn is beautiful, but not so good for business. Especially those who buy according to need require a certain push from the weather,” commented Jürgen Dax, director of the German Association of Apparel Retailers.

“Turnover is actually not so bad, just a bit weaker than last year. But we need a turnaround, and hope the Christmas season will be a good one. The conditions are favorable,” he added, pointing out that domestic unemployment was at its lowest level in years.

Christophe Schliemkamp, analyst at Bankhaus Lampe in Düsseldorf, said he was optimistic about the Christmas season.

“September sales weren’t too brisk, it was too warm and October has been so-so. But the recession isn’t being felt in consumers’ wallets. Retailers have done their homework and worked on their assortments. Now it’s important to get consumers to points of sale,” he remarked.

UNITED KINGDOM

Prime Minister David Cameron underlined Britons’ new attitude to spending in his keynote speech last month at his Conservative Party’s autumn conference. “The only way out of a debt crisis is to deal with your debts. That’s why households are paying down the credit card and store card bills,” he said.

The British Retail Consortium backed up his words. “According to our research, consumers who have spare cash are paying off their debts and putting their money into savings,” said Sarah Cordey, a spokeswoman for the trade association.

Textile, clothing and footwear sales fell 2.1 percent in volume terms in September compared with the previous year, according to the Office of National Statistics. It was the largest drop since April 2008. Retailers are not pinning their hopes on the run-up to Christmas.

“High-street sales remain difficult, but the decline has stabilized, and retailers expect there to be some very modest growth next month in the buildup to Christmas,” said Ian McCafferty, chief economic adviser at the Confederation of British Industry, the country’s largest business lobbying organization.

“Family budgets continue to be stretched because of a combination of high inflation, low wage growth and soaring unemployment, so consumer confidence is severely dented,” he added.

The retail slowdown is obvious in central London, where shops have been festooned with signs for midseason sales since October. Banana Republic on Regent Street was recently offering 25 percent off its fall collection, while brands including Furla, Cos, Uniqlo, Gap, Jaeger and Whistles have been running promotions.

“Despite the common refrain that women always need clothes, U.K. shoppers will be buying fewer of them this Christmas and at bargain prices whenever possible, with clear implications for the profit margins of all but the most exclusive brands and outlets,” said Nick Hood, business-rescue expert at Companies Watch, the London-based firm that monitors corporate health.

“As always, in times of financial gloom, the middle market will be most heavily squeezed and there will be a number of high-profile retail casualties by the time the post-Christmas sales are over,” he predicted.

FRANCE

France heads into a presidential election in 2012 under the shadow of fresh austerity measures and fears that it may lose its prized “AAA” sovereign debt rating.

In the wake of the Brussels summit where EU leaders hammered out an agreement to stem the region’s debt crisis, French President Nicolas Sarkozy appeared on national television to announce the government had lowered its growth forecast for 2012 to 1 percent from 1.75 percent previously. This will force it to introduce new austerity measures worth between 6 billion euros and 8 billion euros, or $8.2 billion to $11 billion, he added.

The news comes amid a renewed decline in French clothing sales since July, when unemployment countrywide hit an 11-year high. Total clothing revenues fell 7.5 percent in September and were down 2.4 percent in the first nine months of 2011, compared with the same period a year ago, according to the latest statistics published by the French Institute of Fashion, or IFM.

“Consumer spending has visibly stalled as households likely anticipate the austerity measures required by the banking crisis,” said IFM economist Franck Delpal. “Due to the very mild weather, ready-to-wear and soft accessories, both women’s and men’s, have seen the sharpest drops.”

The decline has affected all channels, excluding department stores, which saw sales increase 3.8 percent between January and September.

In its September bulletin, the Federation for Urbanism and Specialized Commercial Development, or PROCOS, said several mid- and low-priced clothing retailers registered drops of between 20 percent and 30 percent in the month. PROCOS groups 240 brands, of which some 40 percent are apparel retailers.

Jean-Marc Genis, executive president of the French Federation of Clothing Retailers, is hoping for a cold snap. He declined to make a precise forecast, but said Christmas sales could be disappointing unless the weather spurs sales.

“I don’t think we’re looking at a catastrophic outlook for the moment. There is a moderate decrease. People are not in the festive spirit, that’s for sure,” he said. “When they hear talk of unemployment, of the risk of losing their savings, it does not really encourage them to buy more clothes when their closets are already bursting.”

ITALY

Italian Prime Minister Silvio Berlusconi is under increasing pressure to implement urgent reforms as renewed market turmoil heightens the debt crisis in the Eurozone’s third-largest economy.

Berlusconi has already pushed through two rounds of deficit cuts since July worth close to 100 billion euros, or $132.5 billion, but faces growing calls to step down immediately to stem the crisis. Tod’s SpA chairman and chief executive Diego Della Valle last month took out full-page ads to denounce the status quo in a country weighed down by debt, political unrest and scandals, unemployment and reduced consumer spending, under the heading: “Politicians, enough already.”

Consumers have not been immune to the feverish political and economic atmosphere. The consumer confidence index fell in October to 92.9, its lowest level since July 2008, from a revised 94.2 percent in September, according to the most recent data provided by national statistics office Istat.

Antonello Oliva, director of the research bureau at retail and tourism trade organization Confesercenti, said Italian households have changed spending habits as a result of the crisis.

“For several years, Italian families spent about 7 percent of their budgets on clothing and shoes. Now we are registering a drop as they prefer to wait for sales,” she said. “Over the last two or three years, consumer spending didn’t drop because families drew heavily on savings, but now they are dwindling.”

Confesercenti predicts that Italian consumer spending will drop 0.7 percent in 2012. Italian retail sales were flat in August, with nonfood purchases slipping 0.1 percent, according to Istat figures.

Eva Quiroga, equity analyst at UBS, said banks were likely to tighten credit conditions, which would impact sales, particularly of big-ticket items.

“Peak trading looks set to be subdued, but given an easy weather comparison from last year it should see a similar sales level, although there is potential for increased promotions or weather variations,” she said.

View Slideshow