DJ Discount Retailers Pounce on Austerity
Jun 22, 2012 (Dow Jones Commodities News Select via Comtex) --
By Michael Wright
LONDON--Europe's budget retailers are defying the bleak conditions of southern Europe and pressing ahead with expansion plans, even as pressure in the continent's most troubled economies has caused mid-market retailers to pull out.
Swedish fashion giant Hennes & Mauritz AB (HM-B.SK), fresh from posting 23% quarterly profit growth, Thursday announced plans to open its 24th store in Greece, citing growth potential in the debt-ravaged country. This follows Associated British Foods PLC's (ABF.LN) decision in April to open four more Spanish stores under its discount Primark banner in the second half of the year, having opened three in the first.
The success of the low-cost business model is in sharp relief with many middle-market retailers, highlighting the sharp diversity of fortunes as Europe's long financial crisis plays out.
A grim combination of high unemployment and government austerity measures has hit consumer spending and eaten into profits of many of the region's best-known brands. Overall retail sales in the 17-nation euro zone dropped 2.5% in April compared with a year earlier, while those in Spain were down 9.8%. In Greece for March - the most recent data available - showed a 14% drop.
French supermarket operator Carrefour SA (CA.FR), the world's No. 2 retailer by sales, last week said it would sell its large supermarket business in Greece to its local partner and exit the country after posting losses there. The retailer has issued several profit warnings as it struggles with the challenges in core markets like Spain.
U.K.-based Dixons Retail PLC (DXNS.LN), a former high-street stalwart, Thursday said it will keep trading in Greece despite taking a big hit on its operations there. This followed a GBP309 million write-down on the parts of its business exposed to Greece and Spain. Last year it closed its loss-making Spanish operations.
In contrast, the business models of low-end retailers like H&M and Primark are tailored to profit most from economic weakness, as pinched shoppers turn to cheaper products in times of hardship, while cutting out many non-essential items.
"H&M and Primark have a value appeal that suits increasing austerity among consumers," said Jon Copestake, chief retail analyst at the Economist Intelligence Unit.
He added that the running costs of a large hypermarket chain are far greater than for smaller clothing outlets, so operators like Carrefour have greater exposure in weak markets.
H&M and Primark also have other trumps in their hand.
Both are expanding from low bases in southern Europe, said HSBC analyst Paul Rossington.
H&M operates in 49 markets, with shares of less than 1% in the vast majority, meaning that expansion in a troubled economy is likely to carry less risk than it would for a retailer exposed to few markets, he added.
Hard-pressed mid-market retailers are increasingly searching outside Europe for their sales growth.
Just days before withdrawing from Greece, Carrefour announced plans to buy 129 stores in supermarket chain Eki in Argentina, a country where business is brisk. Meanwhile, the world's No. 1 fashion retailer by sales, Spain's Inditex SA (ITX.MC), is expanding in China at breakneck speed, with plans to have 425 stores there by the end of the year, 150 more than in January.
Besides Carrefour, the other major international retailer with significant operations in Greece is Belgium's Delhaize Group (DEG), which relies on the country for some 7.5% of its total sales. Exiting the crisis-hit country, however, may not come as easy for Delhaize.
"Carrefour's Greek exit was managed because it was a joint venture with a local partner willing to buy out the operation for a nominal sum," said Mr. Copestake. "For other retailers to extricate themselves may be more problematic and difficult."
Write to Michael Wright at firstname.lastname@example.org
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