European stores that sell everything from running shoes to handbags are likely to feel the effects of the cost-of-living crisis during the Christmas shopping season. This is because consumers have less money to spend because their living costs are going up.
Usually, the holiday season is a busy time for retailers, but this year, even the biggest names in Europe are warning of tough months ahead, and investors have punished them accordingly.
Adidas (OTC:ADDYY), a German sportswear company, has cut its full-year forecast, and H&M, the No. 2 fashion retailer in the world, has started a $2 billion ($177 million) cost-cutting drive.
The full-year profit of British online fashion retailer ASOS (LON:ASOS) dropped by a huge 90% from its pandemic highs, and its shares were the second worst performers of the top 350 UK-listed companies this year, wiping out two thirds of its market capitalization.
Related: European stocks fall before the ECB’s decision, and Credit Suisse falls on plans to turn things around.
Even companies like Reckitt Benckiser, which makes everyday products like Dettol cleaning products and Durex condoms, and the huge Unilever (NYSE:UL) have said that consumers are under a lot of pressure.
So far this year, the European retail sector has lost 40% of its value on stock markets, which is more than twice as much as the overall regional share index has lost. Still, JPMorgan (NYSE:JPM) and other strategists say that both consumers and retailers haven’t seen the worst yet.
“Consumers are under a lot of pressure and will cut back on some of their 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 said that higher mortgages and other bills are putting pressure on consumers and that higher prices for raw materials like cotton are making retailers’ costs go up. Investors and business strategists think that retailers’ margins will be squeezed well into next year as weakening currencies and a drop in consumer demand add to cost pressures.
European retailers (http://fingfx.thomsonreuters.com/gfx/mkt/movakmwmova/European%20retailers.png)
SURGING COSTS
Costs for companies in the euro zone have gone up by more than 40% this year, according to data from Eurostat. This is due to higher energy bills, wages, freight, and fabric prices.
Weaker currencies have also made goods more expensive for the retail sector, which imports a lot of goods. The euro and the pound are down 12% and 14% against the U.S. dollar this year.
A lot of companies have said they will hire temporary Christmas workers. For example, the British stores Boots and John Lewis have said they will each hire 10,000 people. But wages also go up in tight job markets where there is a lot of competition for workers.
Even though demand has gone down, some companies have been able to pass on some of their higher costs to customers.
IKEA, the biggest brand of furniture for homes in the world, is one. It had record-high annual sales because price increases and the end of the pandemic made up for supply shortages, a drop in consumer confidence, and the fact that it was leaving Russia.
But other businesses are struggling because they have a lot of products that aren’t selling and may have to sell them at a low price.
Many of these stores have a lot of extra stock, so you’d expect them to run a lot more sales and discounts to get rid of it. “That won’t be good for the profit margins,” Amundi’s Callaghan said.
Stephane Ekolo, a strategist at the London-based company Tradition, said that the trend of high inventories was likely to continue into next year.
He said, “We’ll see more and more clear signs of demand falling.”
Shopping for Christmas
Market researcher Kantar says that half of Britons plan to spend less on Christmas this year. They already cut back on spending last month, when confidence was close to a record low because of 10% inflation and political chaos.
In the euro zone, where inflation is about the same, retail sales of non-food items fell by 3% from August 2016 to August 2017.
Trevor Green, Head of UK Equities at Aviva Investors, said, “It’s hard to be optimistic about retail spending when consumer confidence is still at record lows and the cost-of-living crisis is hitting everyone hard.”
Related: Upbeat profits lift European stocks.
“Our exposure to retailers has been very limited all year,” he said, adding that he likes discount stores, which could benefit if people buy fewer items.
Retail sales worldwide https://fingfx.thomsonreuters.com/gfx/mkt/lbvggrjnnvq/Global%20retail%20sales.png
