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Retail Outlook 2012: Uncertainty and Cross-border Shopping Slow Down Retail Trade

Credit Suisse Study on the Outlook for Swiss Retailing

Credit Suisse today published the annual study "Retail Outlook 2012" together with the consultancy firm Fuhrer & Hotz. Swiss retailing will continue to be hit by the adverse effects of the strength of the Swiss franc and price erosion in 2012 though to a lesser extent than in 2011. Credit Suisse economists forecast a slight decline in nominal retail sales for 2012. The study estimates that between 4 and 5 billion Swiss francs in purchasing power flowed abroad in 2011 as a result of cross-border shopping. Through the key topic of city centers, the study also reveals that the city centers of Zurich, Geneva and Berne are particularly attractive from a consumer perspective. The share of chain stores in the Swiss city centers is constantly increasing but Credit Suisse experts have nevertheless found no evidence of a general deterioration in the sector mix.

In terms of the general economic climate, the outlook for retail in 2012 is mixed: As long as uncertainty about the outcome of the euro crisis persists and unemployment climbs, retail sales performance will be held back by poor consumer sentiment. However, immigration, which should drop slightly but still remain at a high level in 2012, will continue to have a positive impact. Falling retail prices will also counteract a loss of purchasing power. Credit Suisse economists therefore anticipate moderate growth in real retail sales in 2012. As in 2011, the forecast nominal decline in sales will primarily be due to falling prices.

Fundamental Outlook in the Sector Less Optimistic for 2012
The survey conducted by the consultancy firm Fuhrer & Hotz among 200 decision-makers in Swiss retailing and their supply partners reveals a less optimistic fundamental outlook in the sector than a year ago. 38% of those surveyed are expecting sales to stagnate or decline in 2012 versus the previous year, while as many as 51% of respondents anticipate stagnating or declining profits. Despite the gloomy economic prospects, 55% of retailers plan to increase their sales area by over 5% on average in 2012. Productivity per area unit will consequently remain under pressure. In 2012, the retail trade will mainly focus on leveraging labor productivity and cutting jobs in net terms, as in 2011. The strength of the Swiss franc caught retailing and supply partners by surprise in 2011. Those surveyed budgeted for an average euro-Swiss franc exchange rate of 1.34 in the 2011 financial year. The franc's strength was one of the reasons why 58% missed their sales targets and 43% their profit targets. Only 11% of those surveyed reported that the strength of the Swiss franc had had predominantly positive effects. It therefore comes as no surprise that half of the companies consider the Swiss National Bank's current exchange rate lower limit of CHF 1.20 to be too low.

Greatest Fall in Prices Since 1969 – Soaring Rise in Cross-border Shopping
Retail trade prices dropped by over 2% in 2011 – the greatest fall since records began in 1969. Price erosion added to the decline in nominal retail sales. The key clothing retailing segment made the most significant contribution to the slowdown in the sector's economic activity in 2011 with a 3% decline in sales. However, various retail trade segments, such as food retailing and electronic goods, sold more goods than in the previous year in real terms. Despite the stabilization of the exchange rate situation, Credit Suisse economists anticipate a continued fall in retailing prices in 2012 albeit to a lesser extent than in 2011. Cross-border shopping soared in 2011 by an estimated 20% to 30%, having an adverse impact on Swiss retail trade in border areas in particular. Credit Suisse economists estimate the total outflow of purchasing power in 2011 at 4 to 5 billion Swiss francs. Cross-border shopping should continue to affect Swiss retailers in 2012 but is not expected to increase further after massive rises in 2010 and 2011.

Above-Average Presence of Chain Stores in the City Centers
The main topic addressed by the latest study is retail trade in the city center with one in seven retail trade employees working in one of the city centers of the ten largest Swiss cities. Despite the great attractiveness of city center locations, they are also being hit by store closures. One in nine city center stores closed between 1998 and 2008 in net terms, while employment fell by 3.3% overall during this period. These figures reflect the trend towards larger stores and the increase in labor productivity in retailing. 69% of those employed in city center retailing work in chain stores, far exceeding the Swiss average of 55%. Chain stores have significantly gained in importance in almost all city centers in recent years. Credit Suisse experts found no evidence from a Switzerland-wide perspective to bear out the frequently expressed premise that the sector mix in city centers is becoming increasingly one-sided owing to the expansion of clothing and watch stores. Employment in the clothing segment and department stores, both significantly overrepresented in the city centers, declined overall by 9% and 8% respectively between 1998 and 2008. Contrastingly, less well represented segments, such as sport and electronic goods, gained in importance in the city centers. The deterioration of the sector mix generally concerns individual main shopping streets but in many cases not the city center as a whole.

Zurich, Geneva and Berne with Extremely Attractive City Centers
The study systematically assessed the strengths and weaknesses of the city centers of the ten largest Swiss cities to evaluate their attractiveness from a consumer perspective. The following main indicators were included in the city comparison: range of offerings, sector mix, extent of chain store presence and employment concentration, pedestrian friendliness, reachability by public and private transport, and store opening times. The city centers of Zurich, Geneva and Berne performed best in the comparison. Their strong ratings were based not just on their extensive range of offerings but also on solid performance in terms of the other indicators. Zurich, in particular, offers the longest opening times of all the cities and has a relatively low employment concentration. Geneva has a comparatively high proportion of stores that are not part of a chain, and Berne performed exceptionally well with its balanced sector mix and the compactness of its city center which is attractive to pedestrians. In Berne, it is possible to reach a further 110 stores from an average store within a walking radius of 200 meters. But smaller city centers also scored well. Winterthur has a relatively limited offering but excelled thanks to its pedestrian friendliness and good sector mix. Lausanne is the most easily reachable city center. It is relatively well served by public transport and has the largest number of parking spaces in relation to the retail trade offering of all city centers by some margin. Basel city center is relatively pedestrian-friendly but did not perform particularly well or poorly in any of the indicators. The smaller cities generally compensate for their more limited offering compared to the other city centers with good reachability by transport and an often well balanced sector mix.