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Retail Outlook 2013: Massive Price Erosion Coming to an End

Credit Suisse Study on the Outlook for the Swiss Retail Sector

Credit Suisse today published the annual study "Retail Outlook 2013" together with the consulting firm Fuhrer & Hotz. Credit Suisse economists forecast only a slight decline in prices in the retail sector, which, driven by stable real demand, will push nominal revenues upward. At roughly 1.5%, growth in retail revenues is likely to match the average of the previous years. The study estimates that between 5 and 6 billion Swiss francs in purchasing power flowed abroad in 2012 as a result of consumer tourism. Three-quarters of the Swiss population is less than 60 minutes away from a supermarket in another country. However, this year's study, whose focus is on "Shopping and Mobility," shows that despite consumer tourism, local shopping meets a widespread customer need.

After two years of extremes, retail indicators point toward normalization in 2013. The large gap between nominal and real revenues will gradually close as a result of easing price erosion. In 2013, this should play out in stronger growth in nominal retail revenues and in weaker growth in real revenues. Immigration will consolidate at a high level, bringing about stable basic growth in the sector. While consumer sentiment is expected to remain average in view of the uncertainty over global economic trends, this will not slow retail business any more significantly than it did in 2012. Swiss consumers have become acclimated to an atmosphere of crisis and have learned that little of the negative economic news has an impact on their own wallets.

Tenor in the Sector More Optimistic than One Year Ago
The consulting firm Fuhrer & Hotz surveyed 240 decision-makers in Swiss retail businesses and their supply partners, which once again revealed a slightly more optimistic tenor in the sector than one year ago. Of those surveyed, 62% budgeted for higher revenue in 2013 than in the previous year. Just under half of the respondents expect earnings to rise, which indicates that the price cuts of recent years are putting pressure on margins. As in the previous year, a majority of retailers and manufacturers fell short of their revenue targets in 2012. Fewer than 50% of retailers anticipate expanding their sales area in 2013. The euphoria in the market for sales area is waning in the face of the already high retail density. This trend is likely furthered with the increasing shift to online sales. Brick-and-mortar retailers are feeling the pressure to devise suitable strategies for combining on-site business with online channels. However, cross-channel retailing is still in its infancy in Switzerland. English-speaking countries are leaders in this area. Even Switzerland's neighboring countries have advanced further in cross-channel retailing, according to the results of an international study conducted in cooperation with Fuhrer & Hotz. The key findings of the study are presented in "Retail Outlook 2013."

Consumer Tourism: 3/4 of Swiss Population within Catchment Area of Foreign Supermarkets
The 2012 retail year showed excellent results for watch and jewelry sales. Revenues increased by roughly 15%, driven by the boom in free-spending tourists from China and the Gulf states. Business was slow in clothing and shoe sales, where revenues dropped by 3% mainly as a result of prices. Prices in the retail sector overall saw a fresh decline of more than 2% in 2012. However, the trend for the year does suggest that the lowest point has been reached. In spite of the minimum exchange rate limit set for the euro, consumer tourism increased drastically in 2012 by an estimated 25%. Credit Suisse economists assume that the purchasing power outflows of 2012 have reached a new high at approximately CHF 5 to 6 billion. More than half of the purchasing power flowed to Germany. Thanks to rising prices abroad and a stable euro exchange rate, consumer tourism is expected to stabilize on a high level in 2013. Fifty percent of consumer tourists travel more than 30 minutes by car for their purchases abroad, compared to only 18% for purchases in Switzerland. This means that the catchment areas of foreign supermarkets extend deep into Switzerland. Seventy-three percent of the Swiss population can reach a foreign supermarket by car in 60 minutes. This corresponds to potential purchasing power in the retail grocery sector of about CHF 35 billion.

Business Hours: On Weekends, Shopping Abroad Is Clearly More Attractive
Swiss retailers are at a disadvantage compared to over-the-border shopping destinations when it comes to shopping hours. A systematic analysis of shopping hours in bordering regions shows that business-friendly cantons like Zurich can keep pace with neighboring European countries during the week. But on the weekend, all of our neighbors – with the exception of Austria – boast more attractive shopping hours. In more restrictive cantons like Neuchatel, retailers have a distinct disadvantage compared to foreign competitors throughout the week. The survey finds that the Lombardi parliamentary motion, which calls for a partial harmonization of store business hours across Switzerland, enjoys broad support. Other political initiatives to counter consumer tourism, particularly one to lower the CHF 300 duty-free allowance, are drawing considerably less approval. Landscape preservation is also a hotly debated political issue. The retail sector must brace itself for new laws that call for compact building design. Credit Suisse economists used detailed geographical analysis to demonstrate that between 1998 and 2008, retail businesses enjoyed growth primarily in peripheral locations with excellent transportation access, and thus added a piece to the puzzle of Switzerland's persistent decentralization. Such locations saw increased employment totaling 8,400 full-time equivalents.

Local Shopping Meets Customer Needs despite Consumer Tourism
Shopping accounts for 13% of the distance traveled daily by the Swiss population. The debate over consumer tourism diverts attention from the fact that short shopping distances meet a widespread need. The boom of gas station convenience stores and neighborhood shops is evidence of this. Well more than half of consumers do their shopping near where they live. The average shopping trip is about one kilometer long. Even by car, consumers cover a median of just less than 3 kilometers. These distances even decreased slightly between 2005 and 2010. Systematic analysis of mobility patterns shows that roughly one-quarter of purchases are combined with work or school. Proximity to consumers' workplaces is therefore a key success factor for retail businesses. The car continues to be the most important mode of transportation for shopping, holding a share of more than 70% of distances covered. Public transportation increased its share in shopping transportation slightly as a result of the general public transportation boom in recent years. Measures at shopping destinations (after the fact) such as parking fees often only have a minimal impact as a determining factor. The key to increasing the share of public transportation in shopping travel lies in skillful urban planning and consumers' purchasing behavior. The more frequently these purchases are combined with work and school, the higher the share held by public transportation in shopping travel.