Future deterioration in credit quality is likely to be uneven across the sector because of the range of business models in Europe, analysts said, adding that retailers are likely to be operating in the face of slowing economic growth across the region.
“The year ahead will be one in which we see a continuation of the business trends that have dominated the sector in recent years rather than a turning point,” said Adrien Guerin, an analyst at Scope in a report released on Tuesday.
However, the group said recent improvements in credit quality and previous investment plans have given legacy retailers some financial space to refine their strategies for combating the online threat.
The median net debt to EBITDA multiple among retailers tracked by Scope is at its lowest level in five years, according to data from Bloomberg.
“A Damocles Sword dangles over legacy retailers in UK, Germany and the Nordics in the form of the particularly fierce competition from e-commerce rivals.”
Furthermore, the average maturity of issued debt implies it would have to be rolled over only in 2022.
“The trouble [for European retailers] is that the e-commerce pressure is showing little sign of letting up, forcing retailing CEOs to make difficult choices, such as sacrificing market share to cut costs given the infrastructure investment needed to make a success of online sales,” said Philipp Wass, a director at Scope Ratings.
Maintaining permanently high inventory and high capital expenditure will also weigh on cash flow generation in the sector.
The consumer electronics sub-sector has had success in integrating online and physical sales channels, Scope said.
CEconomy, Dixons Carphone and Fnac Darty are examples of leading European incumbents with bricks-and-mortar origins that have shown some resilience in face of e-tailers such as Amazon.com.
Striking commercial partnerships to bolster gross operating margins has become a way of protecting cash flow, as in the alliance consisting of CEconomy, Fnac Darty and m.video.
Other sectors have room to develop online sales in the short term, especially the food sector. Though one constraint is the high initial investment needed as consumers seem increasingly willing to buy groceries online.
“A Damocles Sword dangles over legacy retailers in UK, Germany and the Nordics in the form of the particularly fierce competition from e-commerce rivals,” said Guerin.
The danger reflects consumers’ strong preference in these countries for doing more shopping online and the existence of high-quality logistics infrastructure, without which such high levels of e-commerce would be impossible.
In southern and eastern Europe, where logistics infrastructure is less developed, the pressure facing bricks-and-mortar retailers is significantly less intense, Guerin added.