Can Black Friday alone relieve ailing retail sector?

 

 

Retailers in many of the world’s biggest markets are pinning their hopes on holiday season sales, kicking off with Black Friday on 24 November. After three years of serious disruption, the sector is looking to the final weeks of 2023 to provide some much needed respite. 

Covid lockdowns, soaring inflation and interest rate hikes have rocked consumer confidence and reduced spending power, with high property, food and fuel costs forcing many consumers to put non-essential purchases on hold. In the US and major European markets, retail spending grew slowly in 2022. In many of them, it is likely to contract in 2023.

In France, retail sales are forecast to fall 2.6% in 2023. The figures for Italy (-2.3%), the Netherlands (-2.3%), Germany (-2.8%) and the UK (-2.1%) paint a similarly gloomy picture. The US outlook is brighter, but even here sales during the holiday period are expected to grow at a much slower rate than in previous years.

Against this background, a good Black Friday can be critical as many retailers enter their most important period of the year. Here, Atradius underwriters from seven key markets give their opinion on what retailers can expect from Black Friday and beyond.

France - heavy discounts expected

French retailers are expecting a lively Black Friday as consumers spend serious money for the first time in months. “Consumers wait for promotions and, given high inventories, retailers plan to offer heavy discounts this year,” says Axelle Martin, manager of Risk Services for Atradius in France. “The sector expects a rather dynamic Black Friday.”

But that comes on the back of a difficult time. Sales in September were disappointing, leading some retailers to revise forecasts for 2023 as a whole downwards.

Consumer electronics has been hit hardest in 2023, with an expected fall in sales of around 5% compared to 2022. Domestic appliances fared better, and clothing sales have largely been stable, though much stock has been sold at discounted rates. E-commerce fell off in 2023 after Covid peaks, but digital sales remain higher than in pre-pandemic 2019.  

On the supply side, high post-Covid inventories have weighed on operating costs and driven up working capital requirements (WCR) across the sector. Major discounts may be offered to clear stock, reducing margins and hitting profits.

“For these reasons, we expect an increase in defaults and insolvencies in the first half of 2024,” says Axelle. “In 2024 we can assume insolvencies in the retail sector will follow the wider trend in French insolvencies, as they did in 2022. For suppliers, that represents a significant credit risk.”

Retailers can help themselves by focusing on developing innovative loyalty programmes and omnichannel strategies and by prioritising digital transformation more widely. “A close monitoring of inventories, WCR and cost structure will be essential,” says Axelle.

Germany - a worsening outlook

Germany’s wider economic outlook has deteriorated further in recent months, and expectations for Black Friday and the Christmas shopping period as a whole are low. 

Oxford Economics forecasts a 1.6% year-on-year contraction in Germany’s retail and wholesale sector in the fourth quarter of 2023, with consumer electronics (-2% year-on-year sales), domestic appliances (-5%) and textiles (-5%) heavily impacted by the downturn.

High inventory is still an issue after the Covid pandemic and last year’s supply chain challenges. With weakening consumer demand as well, discounting has been a feature of the year. Consumers are reluctant to spend on anything but necessities, and have less money to do so. At the same time, retail costs are rising as energy prices remain high and credit is expensive. The credit risk of retailers can only increase as a result.

“Retail is facing major challenges in the second half of 2023 and 2024,” says Nicole Bludau, manager of Risk Services at Atradius Germany. “This will also lead to more insolvencies in 2024. Stringent cost management and a special focus on liquidity and optimal supply-chain management will be crucial.”

Italy - smaller retailers becoming vulnerable

Italian retailers are not expecting a memorable Black Friday. “According to Boston Consulting, in 2022 the average spend of a single consumer in Italy during the Black Friday period was 255 Euros,” says Nicoletta Toldo, manager of Risk Services at Atradius Italy. “For 2023 Black Friday, we estimate this average spending to decrease.”

Inflation and interest rate hikes mean Italian consumers have less money to spend on unnecessary purchases. Year-on-year sales of consumer electronics, cosmetics and textiles are all forecast to fall in the fourth quarter of 2023, which includes Black Friday and the Christmas shopping season. However, eco-friendly and “second hand” (recycled and refurbished) goods may buck the gloomy trend.

There will be aggressive discounting in some sectors, which will put pressure on profits. The credit risk of retailers is likely to deteriorate, with smaller players becoming especially vulnerable to defaults and insolvency. Forecasts suggest a 7% fall in the number of retail stores in 2023 compared to the pre-pandemic total.

E-commerce will continue to grow as a share of retail sales, but Italy is a relatively small e-commerce market compared to the rest of Europe, and bricks and mortar stores still dominate the sector.

How should retailers approach the holiday season? “The right balance between sales and margins should be the focus,” says Nicoletta. “Due to lower spending capacity, consumers will pay attention to the price but also to the quality of the service offered and of the products themselves. Traditional stores should try to offer an e-commerce alternative too, with a presence on social media.”

The Netherlands - revenues should hold up

In the Netherlands Black Friday and holiday season sales revenue should hold up, and may even increase slightly compared to 2022, though this is likely to be down to higher prices rather than increased purchasing.

Domestic appliance sales are likely to do relatively well in the period, while consumer electronics sales will be stagnant at best. High inventory could lead to discounting wars between retailers, hitting margins. Many retailers can’t afford to have a weak year-end and will be desperate to attract consumers, but they have to find the right balance between sales and profits.

“I do not expect a strong deterioration of profit margins in comparison with last year and I do not expect an overall deterioration in the market, but the credit risk of retailers with a weak year-end is likely to worsen,” says Resul Ozdemiroglu, Risk Services underwriter at Atradius Netherlands.

“A large majority of retailers make their profits in the last quarter, and the ones with a weak year-end and a high stock position financed via banks are likely to get into trouble. This is where the greatest risk of insolvencies lies.”

The continuing rise of e-commerce could make the credit risk position of bricks and mortar retailers even worse. Traditional retailers should consider e-commerce channels and keep a keen focus on cash flow and costs. 

Spain - margins likely to be squeezed

In Spain, as elsewhere, rising interest rates, falling consumer confidence and sticky core inflation have eroded consumers' disposable income and borrowing power. This is expected to be reflected in Black Friday and Christmas shopping, with a moderate decline in sales in all sectors compared to 2022.

“All forecasts point to a drop in household consumption in the fourth quarter of 2023, which will result in lower retail sales,” says the Large Buyer Unit at Atradius Spain. “We expect a deterioration of margins, especially in smaller companies, in a context of falling demand, increased competition on the supply side and rising financing and overhead costs that cannot be passed on in higher prices.”

High inventory remains an issue, and Black Friday will be used to clear stock, though aggressive discounting may undermine profitability.

All of these factors, taken together, will lead to growing credit risk in the retail sector, and especially in smaller bricks and mortar stores. “Official data for the end of the first half of the year indicates that business insolvency debtors are growing at 18% in Spain in 2023,” says the Large Buyer Unit. “The main activity of over a quarter of these insolvent companies is commerce, well ahead of construction or manufacturing. We do not expect this trend to change in the second half of the year.”

United Kingdom - big ticket items will suffer

Black Friday is now well established in the UK and has become a month-long promotion for many retailers. Stores prepare for it well in advance, but getting the balance between stock levels, discount rates and sales will be tricky this year. UK consumers are worried about the cost of living and spending intentions across all retail categories are down on 2022 levels.

“Categories we are most concerned about are electronics and home goods - namely big ticket items,” says Ruby Hartery, senior underwriter for Retail at Atradius UK. “These will naturally suffer when consumers have less to spend, but these are also areas where we saw significant demand during the pandemic; so many consumers have already invested heavily in these areas.”

On the upside, the supply chain issues that forced retailers to retain high inventory levels during and after the pandemic have largely been solved, and most retailers are operating with normal peak season stock levels. “Nevertheless, we are still expecting to see a prolonged discounting period around Black Friday and in the lead up to Christmas, as retailers try to encourage consumers to spread their spending”, says Ruby.

Inflationary cost pressures have been the major driver behind insolvencies and defaults this year, and this should continue into 2024, as retailers struggle with subdued demand and higher costs. There have been contractions in some areas, including home and furniture. Smaller players will suffer most in a shrinking market, as they are unable to access more favourable pricing and payment terms.

To survive, strong working capital management will be key, and chasing unprofitable sales in the Black Friday and Christmas shopping periods could be risky.

“Since the pandemic, consumers are much more savvy in the way they shop - they are prioritising price and convenience over loyalty,” says Ruby. “The businesses that are thriving are largely discount retailers, and retailers with a strong omnichannel offering that allows consumers to transition seamlessly between shopping in store and online.”

United States - e-commerce outpacing bricks and mortar

Discounting is a month-long November tradition in the US, with many bricks and mortar stores starting promotions on Thanksgiving Eve, and online retailers revealing major price drops on the Monday before Black Friday. This intense activity is the trigger for a long holiday season discounting spree.

As retail’s most important selling period begins, US retailers are generally in a better position than European counterparts. Sales are forecast to rise between 3%-4% during November and December this year. But even though growth is expected, it is on a declining curve. Sales rose by 5.4% in 2022 and 12.7% in 2021.

Predictably, the main culprits in this slowdown are inflation and interest rates. Nevertheless, US consumers are still in the market for a bargain, and personal tech items, including laptops, smartphones and cameras, will be the bread and butter of Black Friday 2023.

Supply chain and inventory challenges are reduced from last year, but retailers are facing a range of macroeconomic headwinds. “There are more distressed debt exchanges from retailers recently, and high interest rates are another challenge for companies loaded down with debt,” says Marjorie Weinberg, senior underwriter Risk Services at Atradius US. “If the inventories are not properly managed, profit margins will be down, leading to higher credit risk.”

Of the 3%-4% expected sales growth, the majority is likely to be generated online. “Each year, holiday shopping is more and more an online event, and that shift will continue in 2023,” says Marjorie. “More than 60% of the retail sales growth this holiday season will occur online, putting sales growth in bricks-and-mortar stores at under 2%.”

All of which makes bricks and mortar operators especially vulnerable. So far in 2023, over 400 corporations have gone under in the US, and corporate bankruptcies are running higher than in either 2022 or 2021.

“A lot of retail is consumer discretionary, so these businesses are vulnerable to bankruptcies due to supply chain and inventory challenges, as well as inflation and other macroeconomic concerns,” says Marjorie.

A combination of forward thinking and advanced technology will be key to retail success this holiday season. “Retailers are continuing to bring products in earlier during their peak shipping season to ensure they are ready in-store and online for the holiday shopping season,” says Marjorie. “They have invested in enhanced technology that allows customers to see what products are currently in stock, if items are available at alternate locations, and how long items are expected to take for delivery.”