The GfK report confirms suspicions that the Euro crisis is first of all a trust crisis. As mentioned last week, many years of tough restructuring lie ahead of Western European societies, especially in the southern Euro area – despite the current lack of panic headlines which should not be misread as a lack of problems.

I suppose Europe will either crack over all this, or emerge in much stronger shape. This morning, I would bet on the latter – it looks as though most people, even in the southern periphery, know what they’ve got in the European Union despite the sacrifices they are having to make. Global competition is getting tougher, and Europeans will need each other.

Have a good week –

Boris

In more detail, the paper states that the Euro area’s main unresolved problem is “the lack of competitiveness of the southern European countries and France” – the result of years of prices going up faster than productivity before the crisis. For export strength and external debt sustainability to be restored, the paper suggests that price levels need to drop by as much as 30% relative to the Euro area average in Portugal, Greece and Spain, and by 20% in France, while prices in Germany would need to rise by 20% relative to the Euro area average.

Achieving this will a) take a long time and b) imply German inflation rates running far above rates in the southern periphery. We may safely assume that northern European (including German) savers and pensioners won’t be delighted at the thought, and the fact that restoring European competitiveness looks likely to imply another huge round of wealth redistribution will worry retailers as well. The crisis is long from over and, of course, the demographic factor – triggered by ageing societies – will kick in pretty strongly as well, essentially right after the crisis.

And that’s one of the big stories that ensure that emerging markets will continue to remain an attractive option for both grocers and FMCG suppliers. More to follow soon.

What struck us most was the continued high level of fragmentation of the local retail scene – a couple of large modern stores (Biedronka, Polomarket) competing with anything between 15 and 20 tiny mom & pop stores, many of which are associated with buying groups such as Eurocash’s ABC and Zabka. Very few of them were trading from more than 100 square metres.

And with the apparently limited budgets of the local population, the entertainment infrastructure that people living in London, Berlin, New York and of course Warsaw etc are so used to – including restaurants and bars – was virtually non-existent. The same goes for street lights off the main road, which were just bright enough to make sure no-one would bump their heads against the 13^th century church tower.

A picturesque place, all in all, and very provincial. Which is exactly what we had been looking for – kind of showing that while retailing in Central Europe’s large cities may be very modern, there’s clearly a long way to go in terms of market modernisation for the more off-motorway places.

As always, you can click on the pictures to see larger versions. And have a good week.

Boris

Not much going on in central Rzepin due to the almost complete lack of a public entertainment infrastructure

Portuguese-owned discounter Biedronka is the market leader in Poland. Since 2003, it has been generating more than half of its sales through private label.

The independent ABC neighbourhood store network is part of the domestic Eurocash group

The very small fruit and vegetable department at one of the ABC stores

One of several competing Zabka stores

In September, Euro area sales fell by 0.2% in real terms compared with August, according to a first estimate that is likely to be revised in the coming months. In the traditionally better-performing EU-27 area, sales were up 0.1% in the same period.

Looking at the more meaningful year-on-year comparisons, among the EU states for which data are available, retail sales rose in thirteen and fell in seven, and remained stable in Germany. The strongest growth impulses came from the northern countries, including Estonia (+9.9%), Latvia (+7.9%), Sweden (+4.2%), the UK (4.0%) and Norway (+3.2%). And while Ireland has been reporting thinly positive growth rates again since July this year, it is the southern Euro periphery which continues to report the worst data, with Spain down by 12.6% and Portugal shrinking 5.8% in September. Greece reported a 9.1% slide for August – which is the latest data available as the September figure is still classified as ‘confidential’.

Looking at different channels and categories, food once again proved to be a fairly stable segment in the Euro area, while the biggest pressure continues to be on automotive fuels (-4.6% in August), electrical goods and furniture (-2.4%) and textiles, clothing & footwear (-1.5%). Meanwhile, mail order and internet sales are taking off rapidly outside the Euro area, with the category growing by 6.5% across the EU, compared with just 0.7% in the Euro area.

Finally, the chart below shows how EU retail sales have essentially failed to produce any sustainable growth in real terms since around 2009, while in the Euro area markets keep hovering around the 2005 level (as always, you can click on the thumbnail to see a larger version). It looks as though the Euro area will be losing at least a decade of growth as a result of the economic crisis. And when the crisis is over, the demographic factor is likely to kick in powerfully. Lots of challenges there for retailers and suppliers working to achieve growth in a market that has been stagnant for years and that has a largely stagnant long-term outlook as well.

Put in a designer frame to improve the typical Eurostat chart design

Back in a couple of weeks, with some impressions of retailing in the provinces of Poland.

Have a good week,

Boris

These ageing societies will inevitably lead to smaller households and higher levels of income redistribution. The latter will in turn lead to falling average incomes; more people living in smaller flats (with less storage room); lower car ownership rates; and perhaps new cultural priorities in consumption even in price-focused Germany (with decent numbers of people travelling less but eating better to make up for it?). I think we can see it coming, and it already seems all of this is triggering a shift in retail investment away from hypermarkets and towards residential formats.

In more detail, some thoughts on the demographic change as well as potential consequences for retail (plus a number of other big trends that will change European retail), will be presented by my humble coffee-addicted self at the inRetail Congress in Lisbon next week.

Looking forward to everyone saying hello at the venue!

Have a good weekend,

Boris

As the European Stability Mechanism (ESM) has been pushing into global headlines again after yesterday’s conditional go-ahead from Germany’s constitutional court, here are some questions and answers about what will be a key tool for policymakers to keep the Euro  crisis under control – today with a chart and decent contents input from our team member Franziska Schmidt!

What is the ESM?

The European Stability Mechanism is an institution for the containment of financial crises in the Euro area, to be launched shortly by the members of the Euro area. It will be equipped with EUR700 billion (USD880 billion), of which EUR500 billion (USD630 billion) are available for lending. Worth noting three things: A, the term ‘mechanism’ is probably a bit misleading, as the ESM has very few automated processes, contrary to what ‘mechanism’ might suggest to many. B, it is a formal and permanent institution, rather than just an abstract mechanism. And C, the ESM has been designed as an intergovernmental institution outside the formal EU framework, despite being an amendment to the Treaty of Lisbon and despite being accessible to Euro area members only.

What is the ESM there for?

The ESM will be used to support the Euro area as economic problems in the periphery states continue to threaten its stability. Euro area member states with severe economic problems (e.g. with difficulties to attract primary market financing) and unable to help themselves can apply for support. In return, they will have to commit to restructuring and adjustment programmes. The latter can be painful, which is to make sure the ESM is not used as an easy way around unpleasant policy decisions for national governments. From a wider perspective, the ESM should strengthen the monetary union institutionally while helping to restore trust within the financial markets – which governments depend on with their financing needs.

Who is filling the EUR700 billion pot?

The ESM money will be made available through a combination of cash deposits (worth EUR80 billion) and guarantees (worth EUR620 billion) from the 17 Euro area member states.  Member state contributions will be weighted by economic power – for example, Germany as the largest member will account for 27% of the amount (EUR190 billion), with France backing 20.4%, Italy 17.9% and Spain 11.9%. The four countries alone will contribute around 77% of the total – however, should one of the countries need ESM support and become unable to contribute, the burden of the other Euro area members will increase accordingly, as stated by the ESM treaty.

(Please click on the image for a larger version.)

What are the implications of yesterday’s court ruling in Germany?

This last point about liquid Euro area members paying extra contributions to compensate for defaults elsewhere will have to be looked at again, after Germany’s constitutional court yesterday declared that Germany must not exceed its EUR190 billion threshold unless the national parliament gives its explicit go-ahead. The decision essentially means that German parliament must always remain in control of amounts guaranteed by the German taxpayer, rather than agreeing to an uncontrollable automated process. This creates uncertainty, given that a potential need for Spain and Italy to seek financial support could drastically reduce the ESM volumes available if the German parliament refuses to increase contributions – with the potential of triggering a new forceful escalation of the Euro crisis. This in turn means: the financial markets will sleep better for now, but only as long as Spain and Italy are doing fine.

Will the ESM finally end the Euro crisis?

No, the ESM alone definitely won’t. The ESM, as a crisis management institution, is merely a tool that will help to extinguish a fairly limited number of fires, but the underlying structural problems in the periphery economy (budget deficits, lack of competitiveness, unemployment) will still have to be tackled by national governments. This will be painful and the crises in the affected states can be expected to drag on for years. In other words, ESM does not mean ‘there will be no homework’.

What does the ESM mean for retailers?

The mere existence of the ESM, when it comes on-stream as early as next month, will contribute to calming down the financial markets, which in turn should have a positive impact on business and consumer confidence. However, once a country needs to seek shelter under the ESM, restructuring and adjustment policies are very likely to intensify with damaging short and medium-term effects to economic output, the job market and consumer confidence.

Simultaneously, should the ESM burden of contributors (such as Germany) increase as a result of defaults elsewhere in the Euro area (e.g. in Spain), and should the higher guaranteed amounts actually be collected by the ESM, this will negatively impact on government spending and tax burdens in the contributor states. As the ESM helps to limit moments of escalation, it spreads the problems more evenly across member states, with potentially negative effects on retailers across the whole Euro area (albeit to varying degrees).

Today’s example comes from the US where the presidential elections are due in November. Well, to be fair, the US administration has just lowered its GDP growth forecasts for 2012 and 2013 by 0.4 and 0.3 percentage points, respectively. It was difficult to hang on to the higher growth rates after the latest quarterly update.

Still, the official predictions continue to be well above the potentially more independent IMF forecasts, and the IMF itself isn’t exactly famous for anything like manic pessimism.

The chart below comes in two versions: one is trying to be serious, with the y axis starting at zero. The other is a little dramatizing, making the difference between the forecasts look bigger – a little trick sometimes used in the media and always interesting to watch.

(As always, you can click on the thumbnail to see a larger version of the chart.)

And that’s it for today. Have a good week,

Boris

Have a good weekend,

Boris

According to the tables, the most expensive places are Switzerland (with a price level at 162% of the EU average), Norway (151%) and Denmark (142%), while the cheapest countries surveyed are Macedonia (45%), Albania and Bulgaria (51% each).

Rather than dumping huge masses of numbers that get buried under yesterday’s news of another Euro area bailout request, this time from Cyprus, I’d say let’s make a little series of this, beginning with the categories of food & non-alcoholic beverages as well as booze & tobacco.

Bailout candidate from space

The former category includes bread and cereals, meat, fish, milk, cheese, eggs, oils and fats, fruits, vegetables, potatoes, ‘other foods’ (whatever that may refer to) and non-alcoholic drinks. It’s hard to say to what extent processed foods and private label ranges are included in the survey – the list seems fairly biased towards staple foods, which probably makes discount-heavy Germany look more expensive than it actually is.

The second category comprises spirits, wine, beer and tobacco. Very straightforward. And as always, you can click on the thumbnails to see larger versions of the charts.

To be continued with a clothing overview shortly. Have a good week,

Boris

Of course, inflation has been a key reason behind continued weak spending power among consumers, with price increases beating salary hikes in many sectors and places – leading to shrinking real incomes. And while the prices of many key commodities such as oil, wheat, corn and cocoa are now between 10% and 20% lower than a year ago (which is fairly good news for consumers), the  threat of weakening consumer spending power continues to haunt retailers in the shape of continued underlying upward pressure on commodity prices (based on global economic and demographic trends and realities); the long-term effects of ‘quantitative easing’; and the expected reverberations of interest rate hikes that can’t be avoided forever and which will see monthly mortgage payments shoot up at the cost of consumer expenditure in retail.

Across the EU, the highest inflation rates can now be found in Hungary (5.6%), Poland (4.0%), the Czech Republic (4.0%) and the UK (3.5%). In the UK and the Czech Republic, the situation is aggravated by the fact that these countries are now back in recession.

My little desk rescue helicopter

As has been obvious since around 2008/09, straightening out imbalances that built up for years will not be achieved within a short space of time, and with UK consumers still repaying debt and holding out insecurely in a waiting position, it’s hard to see consumer spending in the country return to pre-crisis levels until 2014. As a result of this as well as some structural reasons (related to store rents and the like), the UK retail shakeout must, sadly, be expected to continue.

By the way, the list of European countries now in recession includes (in alphabetic order, and with recession defined as two consecutive quarters of economic output falling in real terms): Cyprus, Czech Republic, Denmark, Greece (my guess when looking at the brutal y-o-y figures, although q-o-q figures aren’t available from Eurostat), Ireland, Italy, Malta, Netherlands, Portugal, Romania, Slovenia, Spain and the UK. That’s 13 countries, and we might have to add Hungary and Sweden to that list soon.

The new general elections in Greece mid-June will tell as a lot about whether or not the situation will worsen in the months ahead. Should Greece be forced to leave the Euro, it will worsen. Should the Euro fall apart, expect an extremely heavy recession – although for now this radical scenario remains unlikely.

Portugal is much more than just a crisis country... Boca do Inferno near Lisbon.

Weekend in Lisbon ahead. Third visit to Portugal this year, but this time it’s mainly for a couple of days relaxing on the beautiful Atlantic coast rather than work. Always worth a trip, highly recommended.

Have a good week,

Boris