Discover (or rediscover) the best of our research this holiday season: in focus – food retailers & supply disruptions

This year, our economists shared their expertise on everything from supply chain disruptions to SPACs. Stay tuned for our picks to discover (or rediscover!) the best of our research this holiday season, or dive right in here .

European food retailers: The bitter digital aftertaste of the Covid-19 legacy

Covid19 has fast-forwarded Europe's #ecommerce transition, but it comes with a steep cost for food #retailers, threatening up to EUR1.9bn of profits. Get our full analysis Here .

The Covid-19 crisis has fast-forwarded Europe’s e-commerce transition by four to five years, especially in food retail: In the top five markets, e-commerce penetration now ranges from between 3% to 11% of grocery sales. But we estimate that every percentage of grocery sales moving online threatens EUR13.6bn in sales and up to EUR1.9bn in profits (4% of total). More meals eaten at home and the flourishing sales of home and personal care products propelled annual grocery sales growth to +5.3% in 2020, about twice the average growth rates seen in the 2010s. The positive trend carried on in H1 2021, with sales up +2.4% despite a slowdown since March and the progressive reopening of bars and restaurants. In the same period, the use of e-commerce for groceries has skyrocketed and this is expected to continue even as the pandemic is being kept in check on the continent as consumer habits have definitely changed.

The growing penetration of e-commerce for groceries brings about two main challenges for established retail companies. First, it shakes up the competitive game by creating a new opportunity for retailers to place a greater emphasis on convenience and service vs. price competition. Companies slow or reluctant to embrace the digital transition face the risk of losing market shares. Second, it is a major threat to profitability: Online grocery sales are made at a loss irrespective of the delivery mode (click-and-collect or delivery) using the most common order-fulfillment methods.?Grocery e-commerce entails higher costs because part of the service value chain (typically product picking, checkout and delivery) is transferred back from the customer to the retailer while the associated expenses are not fully passed onto service fees. Assuming an average 3.7% EBIT margin for food retailers in Europe (the weighted average of the sector in 2020), we estimate that every percentage of grocery sales moving online is threating a corresponding EUR500m in profits if online grocery margins are at zero, which is optimistic, or EUR1.2bn if they are at -5%. In a more pessimistic scenario, the profit losses could go up to EUR-1.9bn. ?

The big squeeze: Supply disruptions pressure manufacturing margins in the US and Europe

Companies in #Europe and the #US could face a profit squeeze as sustained supply-chain disruptions eat into the #manufacturing recovery. Discover which sectors are most at risk here .

Companies in Europe and the US could face a profit squeeze from Q4 2021 onwards as sustained supply-chain disruptions slow the manufacturing recovery. We find that the automotive, machinery, oil and gas and chemicals sectors are the biggest cause for concern, and Germany in particular is at risk of a shortage-induced industrial recession. In Europe, financials data and estimates from a panel of about 1,100 large corporates suggest that 31% of companies should see their sales recede in the second half of 2021 vs the first half (against 25% of US companies), with a higher proportion among the automotive suppliers, chemicals and metals sectors. Profits expressed as a percentage of turnover will start to suffer in Q4, with more than 50% of sectors in Europe posting a decrease in EBITDA margin of -2.5pp on average versus 70% of sectors in the US (-0.6pp on average). Market expectations confirm that an earnings slowdown is in the making. As of today, market participants are consistently revising down their companies’ earnings estimates, signaling that an earnings slowdown is in the making and that the highly uncertain environment will, most probably, damage the permanent earnings safety net that has been preventing equity markets from consolidating in the upcoming quarters. In this context, we expect earnings aggregates to come in close to flat in Q3, with clear early indications of (i) balance sheet deterioration, be it in terms of sales, earnings and/or margins moving forward, especially from Q4 2021, and (ii) differentiation across sectors, to the detriment of the sectors most affected and vulnerable to the current environment such as consumer discretionary (12.5% of the equity market capitalization in the US and 17.8% in Europe) and industrials (respectively 8.2% and 17.4%) – noticing that the aggregate Eurozone equity market seems to be more vulnerable that the US due to its underlying sector allocation. Three factors could tighten the squeeze in 2022 and unfold in a context where policy support measures (tax deferrals, partial unemployment schemes and direct subsidies) will be entirely phased out in most countries: semiconductor supply, energy prices and tensions in Chinese manufacturing and transport activities. We expect Q2 2022 to be a turning point for supply-chain disruptions.?In this scenario, the catch-up potential in sectors plagued by shortages could be significant, notably for those with higher pricing power. Across sectors, this would translate into a +5-10% increase in turnover and profits over the whole year, reflecting two opposite trends: 1) Sectors which outperformed during the Covid-19 crisis, including metals, pharmaceuticals, electronics and household equipment, will post softer growth after two excellent years. 2) Sectors which underperformed, including the wider automotive sector and transport equipment, will bounce back from their 2020-2021 lows as supply-chain tensions ease and demand for air transport picks up gradually, respectively. In equity markets, the earnings expectations deterioration is also perceived to affect 2022 and part of 2023, though long-term growth expectations (beyond three+ years) seem to be maintaining some resilience.

Happy New Year!