Investors Spurn European Retailers Ahead of Christmas

The Christmas shopping period is unlikely to bring relief to European retailers selling everything from running shoes to handbags as the cost-of-living crisis puts pressure on consumers and squeezes disposable income.

The Christmas season is traditionally a high point for the retail sector, but even Europe’s big names are warning of tough months ahead this year, and investors have punished them accordingly.

German sportswear company Adidas has cut its forecast for the full year, while the world’s No. 2 fashion retailer H&M has launched a 2 billion Swedish kronor ($177 million) cost-savings campaign.

British online fashion retailer Asos’ full-year profits plunged 90 percent from pandemic highs and its shares are the second worst performers of the top 350 UK-listed companies this year, wiping out two-thirds of its market capitalization.

Even companies like Reckitt Benckiser, which makes more mundane consumer staples like Dettol cleaning products and Durex condoms, and giant Unilever have warned of pressure on consumers.

In equity markets, the European retail sector has lost 40 percent of its value so far this year, more than double the impact on the broader regional stock index. However, JPMorgan and other strategists say the worst is yet to come for consumers and retailers alike.

“Consumers are under a lot of pressure and they are going to cut back on some discretionary spending, while costs for retailers are going up,” said Ciaran Callaghan, head of European equity research at Amundi, Europe’s largest asset manager.

Callaghan pointed to rising mortgage and other bills that are putting pressure on consumers, while higher prices for commodities such as cotton are driving up costs for retailers.

Investors and strategists expect retail margins to shrink well into next year as cost pressures are further exacerbated by weakening currencies and collapsing consumer demand.

rising costs

Higher energy bills and wages and soaring freight and fabric prices have pushed up costs for euro zone businesses by more than 40 percent this year, according to Eurostat data.

Weaker currencies — the euro and pound are down 12 percent and 14 percent against the US dollar this year — have also made goods more expensive for the big-import retail sector.

Ahead of the Christmas season, a host of companies have announced they plan to hire seasonal Christmas staff with UK retailers Boots and John Lewis, each of which said it would hire 10,000 people. But wages are also rising in tight labor markets where competition for staff is strong.

Some companies have been able to partially pass on higher costs to customers, even when demand falls.

IKEA, the world’s largest home furnishings brand, is one. It reported record annual sales as price increases and easing effects of the pandemic offset supply shortages, weakening consumer confidence and their exit from Russia.

But other companies are struggling with high levels of unsold products that they may have to change cheaply.

“Many of these retailers are running high inventory levels, to clarify that I would expect a lot more promotions and discounts. That’s not going to be good for gross margins,” Amundi’s Callaghan said.

Stephane Ekolo, a strategist at Tradition in London, said the trend of high inventories is likely to continue next year.

“We are going to see increasingly clear signs of demand erosion,” he said.

christmas shopping

Half of Britons plan to spend less at Christmas this year, according to market researcher Kantar, which already monitored spending last month with confidence near a record low amid 10 percent inflation and a chaotic political backdrop.

In the euro zone, where inflation is at a similar level, non-food retail trade fell 3% year-on-year in August, according to Eurostat.

“It’s hard to be positive on retail spending as consumer confidence continues to fall to record lows and the cost of living crisis hits hard for everyone,” said Trevor Green, head of UK equities at Aviva Investors.

“Our exposure to retailers has remained highly selective throughout the year,” he said, adding that he prefers discount retailers, which could benefit from consumers cutting back.

By Joice Alves; Editors: Amanda Cooper and Kirsten Donovan

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