Retail Sales Grow Despite Recession but Profits Take a Hit

Despite one of the sharpest economic contractions in decades, the world’s
largest retailers were able to increase sales by 5.5% in fiscal year 2008
(encompasses fiscal years ended through June 2009), with total retail sales
equaling around $3.8 trillion. However, a new report, 2010 Global Powers of
Retailing, from Deloitte Touche Tohmatsu, in conjunction with STORES Media,
shows that the global recession affected retailers’ bottom line. Profitability
at the largest 250 retailers in the world fell from 3.7 percent in fiscal 2007
to 2.4 percent in 2008.

Two-thirds of the 184 retailers that disclosed their bottom-line results saw
their net profit margin decline in 2008, with 30 retailers operating at a loss.
This trend affected almost every geography and category. Retailers in Europe saw
their profitability fall from 4.1 percent in 2007 to 2.7 percent in 2008, while
those in North America fell from 3.6 percent to 2.4 percent. Only those in
Africa and the Middle East saw increased profitability.

Hardlines and leisure goods retailers saw their profit margin fall by more
than half to 3.1 percent from 6.8 percent. Sales growth for fashion retailers
fell into negative territory and profits were cut in half to 4.1 percent. Even
the fast-moving consumer goods (FMCG) sector, which includes supermarkets and
other food retailers, saw profits fall from 3 percent to 2.2 percent, despite
seeing higher sales growth than the other groups at 8.6 percent.

Dr. Ira Kalish, Director of Consumer Business for Deloitte Research in the
United States said: "2008 has been a tumultuous year for the global retail
industry. Sales growth slowed and profitability fell, sharply for some. Many
retailers ‘bought’ sales with heavy promotions which hit the bottom line hard.
However, we are already seeing evidence that as economic recovery takes hold
around the world retailers should be able to return to a path of improving
profitability."

The composition of the Top 10 retailers in the world remained the same this
year. This group now accounts for over 30 percent of the total retail sales of
the Top 250 retailers. Wal-Mart Stores, Inc. (Wal-Mart), remained the world’s
largest retailer, ahead of Carrefour Group (Carrefour). Despite Tesco plc’s
(Tesco) better sales growth rate, relative currency strength against the US
dollar enabled Metro AG (Metro) to climb above Tesco, back into third place.
(Please see table of Top 10).

Some key findings from this report include:

Most retailers have yet to make online push as social networking sites
start to make an impact

Multichannel retailing continues to grow as more companies develop an
e-commerce capability. However, online still accounts for a small percentage of
sales. On average, online sales account for 6.6 percent of total sales for the
top 100 retailers in the world. FMCG retailers seem yet to have embraced
e-commerce with online sales accounting for only 0.9 percent.

"The internet is going to pose an ever-greater challenge and opportunity for
retail in the next decade," said Kalish. "Retailers need to ensure their
multichannel strategy is in place to capitalize on web-savvy shoppers migrating
to the net. Secondly, we are starting to see retailers launch targeted marketing
campaigns online by offering special deals or discounts through their website or
social networking sites.

"Social networking will increase transparency in the retail industry, giving
consumers greater access to information about retailers, their products and
pricing. This has the potential to undermine margins by lowering prices to the
level of the most desperate seller. There are great opportunities too, as new
touch points open up for retailers to communicate with their customers."

Emerging market retailers set to take on established players

"Many emerging market retailers are rapidly becoming world-class players in
their own right," said Kalish. "Not only are they well-equipped to compete with
the global giants in their home markets, some are becoming competitive in other
markets too. The next step will be investments into developed markets and some
of this is starting to take place. These are typically specialty players rather
than food or mass merchandise retailers. The global playing field of retailing
is becoming more level."

Global growth bounces back but economic rebalancing is taking
place

"Countries that borrowed heavily to finance excessive consumer spending may
experience slower consumer spending growth as households struggle to
de-leverage, repair tattered balance sheets and accumulate wealth," said Kalish.
"More of the economic growth of these countries will be driven by exports,
business investment and government spending.

"Conversely, those countries whose growth was fueled by exporting to
borrowing countries will no longer be able to depend on such markets and will
likely shift away from export-oriented growth toward growth driven by consumer
spending. Retail spending growth in markets such as the US and UK is likely to
be slower over the next decade, while a larger share of the growth will take
place in countries with large surpluses, especially the big emerging
markets."

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