Covid-19 separates e-commerce leaders from rest, says Scope Ratings

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Europe’s retailing sector is reeling from the shock of lockdowns across the region to limit the spread of the Covid-19 pandemic, but the impact on the sector’s credit outlook will be uneven, says Scope Ratings.

Scope’s outlook for the sector was negative for 2020 even before the coronavirus outbreak spread from China to Europe, so the confinement of a large share of Europe’s population to their homes and the forced closure of non-essential commerce comes at a difficult time for many companies.

“Robust online distribution capacity is proving crucial in determining which retailers can adapt to the accelerated shift to online shopping brought about by the public health crisis,” says Adrien Guérin, analyst at Scope.

“The credit outlook for more vulnerable companies – bricks-and-mortar retailers in the non-food segment – will critically depend on the degree of support from governments, commercial property owners and banks,” he says. 

Bricks-and-mortar retailers face substantial fixed costs, such as leases, with little or no revenue to cover them. Several EU governments have promised to pay a significant proportion of wages for staff no longer able to work. Commercial gestures from real estate owners, as German retailers’ association Handelsverband Deutschland has called for, may be necessary to stave off covenant breaches and defaults, says Guérin.

For now, the non-food sector is among the parts of the economy worst hit by the health crisis. The European sector’s daily revenue has fallen by half and retailers in Germany, Europe’s biggest economy, are losing EUR 1bn a day, according to industry association EuroCommerce.

“The impact on this segment is particularly severe: the long-running shift towards online shopping and slowing growth in Europe had already created intense financial pressure, notably in the UK, but also in other parts of western Europe,” says Guérin. The risk of firms going out of business is real, he adds. UK clothing and home-furnishing supplier Laura Ashley and German mail order fashion store SØR are among the first commercial victims of the pandemic.

Shopping centre operators – previously confident in offsetting declining footfall with revenues from other services, including cinemas, cafés, and pop-up stores – face a longer-term threat to their business strategy if “social distancing” becomes the norm until the pandemic is brought under control. 

“Covid-19 nullifies returns from the capital expenditure on so-called ‘retailtainment’ that shopping-mall operators have undertaken in recent years,” says Guérin.

The situation is different for those non-food retailers with established online activities – so-called omnichannel retailers – as the pandemic has forcibly shifted huge volumes of shopping to the internet. For example, FNAC Darty SA (BBB-/Stable), a French consumer-goods retailer, is assuring customers that its online store, delivery service and call centres are operating mostly as normal while its shops are closed. E-commerce will compensate these firms for a possibly significant proportion of lost revenue from their physical stores.

Food supermarket operators find themselves in a more nuanced position. Governments are determined to ensure that their quarantined populations can shop for food and other provisions as usual.“Two questions arise,” says Guérin. “Will the pandemic lead to longer-term changes in shopping habits beyond the initial stocking-up – and sometime panic buying – as lockdowns prevail? And will supply chains hold up?”

“The pandemic is pushing more grocery shopping toward the click-and-collect format” says Guérin. 

“The majority of food retailers typically generate their revenues by encouraging buying of complementary or non-essential products, but now shoppers may focus exclusively on essential goods,” says Guérin.

Retail-sector supply chains face the strain of a possibly longer-term trend to bulk buying as the pandemic takes its toll on those working through the crisis in warehouses, transport companies, and supermarkets, he says.

The pandemic is likely to entrench the dominance of leading online operators, notably Amazon.com, which said on 16 March it would hire 100,000 new staff and increase hourly wages for warehouse and delivery-service staff in North America, the UK and the EU. Walmart Inc., the world’s largest brick-and-mortar retailer, announced it would hire 150,000 temporary workers as competition heats up in the online-delivery segment.