linking the retail & wholesale sector with its macro ... · presentation _ eurocommerce_vf.pptx...

Linking the retail & wholesale sector with its macro-economic

Prof. Dr. Bruno ColmantPartner Roland Berger Strategy Consultants

Brussels, April 23 2014

its macro-economic environment

Contents Page

2.

1. Summary of the retail & wholesale sector's macro-economic impact 3

2Presentation _ Eurocommerce_vf.pptx

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not be passed on and/or may not be made available to third parties without prior written consent from Roland Berger Strategy Consultants. RBSC does not assume any responsibility for the completeness

and accuracy of the statements made in this document.

© Roland Berger Strategy Consultants

2. Evolution of the European economic context and impact on the retail & wholesale sector 5

3. Societal contribution of the retail & wholesale sector 13

1.


1.Summary of the retail & wholesale sector's macro-economic impact

The retail & wholesale sector contribution to most important macro-economic indicators is very critical

Macro-economic impact of the sector – overview

> Retailing and wholesaling in the European Union:

– account for 1 in 4 enterprises and 99.9% of

COMMENTS# FIRMS[# firms; 2013]

EMPLOY-

3.7 1.8 25 million

RETAIL WHOLESALE

22%

13%


enterprises and 99.9% of the 5.5 million European retail & wholesale businesses are SME's

– provide 1 in 7 jobs in Europe, which, for example, represents 25 X more than in the chemical industry

– contribute ≈≈≈≈ 10% of Europe's gross value added

– represent more or less 8.5% of European GDP

EMPLOY-MENT[# empl.; 2011]

GVA[EUR tn; 2011]

GDP[EUR tn;2011]

18.6 10.4 223 million

RETAIL WHOLESALE

0.59

0.49 EUR 11.3trillion

1.1EUR 12.6 trillion 1)

RETAIL WHOLESALE

RETAIL + WHOLESALE

13%

9.6%

8.6%

1) Taking the assumption that ∑ GVA ≈ 90% of GDP

Source: Oxford Institute of Retail MGMT, Roland Berger

2.


2.Evolution of the European economic context and impact on the retail & wholesale sector

Many expected trends in the European macro-environment could directly or indirectly impact retailers and wholesalers

Overall model of economic

interactionECB watching Eurozoneinflation report Household debt

Euro area retail sales


Retail sales, confidence and PMI in the retail and households sectors

The Big Mac index

Consumer confidence indicator

Unemployment in the Euro area

Source: Tradingeconomics & Eurostat, Bloomberg, European Commission, ECB, The Economist, Financial Times, Roland Berger

Among them, we selected the most impactful economic variables for the European retailers and wholesalers

MACRO-VARIABLES:SELECTION

MICRO-VARIABLES:INCOME STATEMENT

1. Disposable income

2. Unemployment

UNITS SOLD

AVERAGE PRICE

SALES

COST OF SALES


2. Unemployment

3. Consumer confidence

4. Inflation

5. Interest rates

GROSS PROFIT

SELLING, GENERAL ANDADMINISTRATIVE EXPENSES

(INCLUDING PERSONNEL COST)

EBITDA

DEPRECIATION, AMORTIZATION, PROVISION

INCOME BEFORE TAXES

FIN. INCOME

FIN. EXPENSES

LEGEND:

points at a positive relation; points at a negative relation; points at a balanced relation

E.g. An increase in the disposable income has a positive effect on the retail sales (upward arrow), while an increase in unemployment has a negativeeffect on retail sales (downward arrow).

During the financial crisis, the disposable income remained relatively stable

Balance of primary income per inhabitant after taxation [In current Euro per inhabitant; 2007-2011]

24,000

23,000

1 DISPOSABLE INCOME – BACKUP

> The disposable income was severely impacted in the United Kingdom during the financial crisis (from EUR22,900 per inhabitant to EUR 17,700 per inhabitant). In the biggest

COMMENTS


2007 2008 2009 2010 2011

19,000

21,000

22,000

20,000

18,000

17,000

16,000

15,000

United KingdomGermany ItalyFrance

per inhabitant). In the biggest Eurozone member states, the impact remained limited

> From 2009 onwards, the disposable income has started to increase again in most member states (except for Italy, where it seems to have stabilized around EUR 18,300 per inhabitant)

> Since 2008, Germany has the highest disposable income of our set of big European Union member states

> A further increase in the disposable income would be beneficial for retailers.

Source: Eurostat, RB Analysis

Unemployment rates will go down again, but the heterogeneity amongst member states will remain big

2 UNEMPLOYMENT – BACKUP

Unemployment rate in the European Union and its biggest member states [%; 2010-2020e]

13%

12%

> The unemployment rate has been increasing in the overall European Union for the last 4 years

> As we return to a world where the

COMMENTS


2013201220112010 2018(e)2017(e)2016(e)2015(e)2014(e)

8%

7%

6%

2020(e)2019(e)

12%

11%

10%

9%

United KingdomItalyGermanyFranceEuropean Union

> As we return to a world where the economic growth is positive, the unemployment is expected to go down (from 12.1% in 2012 to 10.4% in 2020 for the overall EU)

> Amongst the four biggest member states, the heterogeneity in unemployment rates has increased since 2010, and it is expected to remain high

Source: Oxford Economics, Office for National Statistics, Bank of England, RB Analysis

The consumer confidence increased a lot over the last year

3 CONSUMER CONFIDENCE – BACKUP

Consumer confidence in the European Union and its biggest member states [index value; 2010-2014]

0

5

10

> The consumer confidence indicator has been low between 2010 and 2013

> Germany was the first member state

COMMENTS


-45

-40

-35

-30

-25

-20

-15

-10

-5

0

2010M01 2011M01 2012M01 2013M01 2014M01

GermanyFranceEuropean Union Italy United Kingdom

> Germany was the first member state where the consumer confidence started rising. Since 2013, the other big member states have been following.

> The upward trend will translate in a higher sales volume, especially for big purchases (which have been delayed for a longer time)

Source: Eurostat, RB Analysis

We have entered a climate of very low inflation, and a sudden increase is not excluded

4 INFLATION/ DEFLATION - BACKUP

Consumer Price evolution in the European Union and its biggest member states [% of annual growth; 2010-2020e]

> The current inflation is far below the 3.1% we had in 2011. The expected inflation for 2014 is 1.1%

> In the short term, the heterogeneity

COMMENTS

5.0%

4.5%


> In the short term, the heterogeneity amongst the biggest Eurozone membersis expected to increase (e.g. for 2016, 2.9% inflation is expected for Germany and only 1.3% for Italy)

> In the longer run, the inflation is expectedto return to the ECB target (below, but close to 2%)

> So, there is still a positive inflation expected for 2014-2020. However, the evolution of consumer prices has to be followed with a lot of attention as deflation could potentially make customers delay their purchases. If this would happen on a large scale, a deflation spiral (cf. Japan) could be the result.

Source: Oxford Economics, RB Analysis

2019(e)2018(e)2017(e)2016(e)2015(e)2014(e)2013201220112010

2.5%

2.0%

0.5%

2020(e)

4.0%

3.5%

3.0%

1.5%

1.0%

United KingdomItalyGermanyFranceEuropean Union

The interest rate is currently historically low, and an immediate increase is not expected

5 INTEREST RATES – BACKUP

European Central Bank (ECB ) Policy Rate: past evolution and predictions [%; 2012-2020e]

> Following the financial and sovereign debt crisis, the policy rate of the ECB (currently 0.25%) has approached the "zero lower bound"

COMMENTS

4,0

3,5%


> As there currently is no risk for inflation, the interest rate is expected to stay at this level

> The low interest rate has a positive effect on the average household budget, as it implies that the share of mortgage payments in the total budget decreases

> For retailers who can use market financing, the low interest rates shape an interesting climate to invest.

2017(e)2016(e)2015(e)2014(e)20132012

3,0%

2,5%

2,0%

1,5%

1,0%

0,5%

0,0%

2020(e)2019(e)2018(e)

ECB Rate [main refinancing rate – short term]

Source: ECB, RB Analysis

3.


3.Societal contribution of the retail & wholesale sector

The retail and wholesale sector plays an important societal role: zoom on employment and tax collection

Societal role of the retail and wholesale sector until now (cf. findings Oxford Institute of Retail management)

1

EMPLOYMENT

> The retail and wholesale sector is far more flexible than most other sectors in terms of employment, offering job opportunities in education, age or gender's categories for which unemployment rates are higher than average:

– education profile: the sector employs people with no qualifications to PhDs

– age: the sector employs from the very young (student jobs) to more mature workers


2

TAX COLLECTION

– age: the sector employs from the very young (student jobs) to more mature workers

- 20% of the 18.7 m 15 to 24 years old employed in the EU economy in 2012 worked for this sector

– gender: the sector employs proportionally more women than European economy average, mainly explained by the flexible employment opportunities offered by the sector (part-time, temporary, permanent, …)

Source: Oxford Institute of Retail MGMT, Roland Berger

> Wholesalers and retailers collect Value-Added Taxes (VAT) on behalf of public authorities:

– Considering an average VAT rate of 15% and total retail sector's sales of EUR 2.6 tn, the total amount collected by wholesale and retail firms reaches EUR 390 bn

In a deflationary context, the sector could also play an important role in the support of internal consumption

Societal role of the retail and wholesale sector in a deflationary context

Deflationary contextStimulating internal

consumption

REQUIRES

ROLE FOR INVESTMENTS BY THE RETAIL AND

WHOLESALE SECTOR


> The sector is investing heavily in more sophisticated communication with customers ("click-and-drive-in supermarkets", new payment solutions,…)

> Investments can lead to a more optimized supply chain, and can increase the productivity in the sector

> As a result of this increased efficiency, the sector can induce and foster internal consumption

Source: Roland Berger

> Investments in retail might also require additional workforce

> On average, the profile of a significant part of the workforce required matches the profile of unemployed people

> Therefore the impact on the employment rateand the impact on internal consumption will be very positive

1 CAPITAL INTENSIVE INVESTMENTS 2 LABOR INTENSIVE INVESTMENTS

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