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Retail Outlook 2014: Solid Sales Growth in 2014

Credit Suisse Study on the Outlook for the Swiss Retail Sector

Credit Suisse has today published the annual study "Retail Outlook" in collaboration with the consultancy firm Fuhrer & Hotz. Credit Suisse economists are anticipating an improvement in consumer sentiment in Switzerland in 2014, and are forecasting retail sales growth of 1.5% in nominal terms. According to a survey of industry representatives, the retail trade is heading into 2014 with great confidence, with three out of four companies budgeting for a year-on-year increase in sales. In terms of prices, Swiss retailers have grown more competitive compared to neighboring countries. Over the last two years, the difference between food prices in Switzerland and those of neighboring countries has narrowed from 46% to 37%. Liberalized store opening hours are benefiting not only consumers, but in particular shopping centers on urban peripheries and easily-accessible local stores. This is illustrated in the study with the assistance of a model.

After a relatively weak 2013, the basic economic parameters are looking favorable for Swiss retailers in 2014. Net migration in 2013 amounted to 80,000 people, and 2014 is likely to record a similar figure, which will bring retailers tens of thousands of new consumers. The improvement in economic growth abroad and persistently robust economic growth in Switzerland suggest that consumer sentiment is likely to improve further, albeit with the occasional setback. The factors that have proved a drag on growth in previous years will no longer weigh on the sector: prices are likely to fall only slightly overall and "shopping tourism" should stagnate at a very high level.

Industry Representatives Head into 2014 with Confidence
The 218 decision-makers in the retail sector and its supplier industry surveyed by consultancy firm Fuhrer & Hotz are heading into 2014 with plenty of confidence. No less than 74% are planning for higher sales, while 55% expect to generate higher earnings. The more circumspect stance with respect to earnings as compared to sales indicates that the pressure on margins is likely to remain high. The fact that a clear majority of companies achieved or exceeded their budget targets in what was a very challenging year in 2013 suggests that industry representatives have adjusted to the "new reality" in retailing. The signals are contradictory where retail space planning is concerned: The proportion of retailers anticipating an expansion of retail space in 2014 has risen, but so too has the proportion of retailers planning to downsize. No company is planning an expansion of more than 10%, however. The general focus among retailers is first and foremost on the optimization of existing space. Very few providers are pursuing an aggressive expansion strategy involving new locations.

Swiss Retailing Becomes Increasingly Competitive Internationally
The 2013 business year accentuated the division in retail sub-sectors between "winners" and "losers." Food sales increased by 2%, not least due to higher prices. Clothing and shoe retailers recorded a decline in sales of more than 3%, making it the third annual decline in a row. In particular, the second-largest retail sub-sector was confronted by a pronounced problem of price erosion last year. Overall, the Swiss retail sector has gained considerable ground in terms of its price competitiveness vis-à-vis neighboring countries since the introduction of the EUR/CHF exchange-rate floor. Unlike in Switzerland, the price of food has risen sharply in neighboring countries, while the Swiss franc has depreciated slightly. The average price differential in food has therefore fallen by nine percentage points since 2011, and amounted to an estimated 37% in 2013. In the non-food area, Swiss retailers have become more competitive. Indeed, in the areas of consumer electronics and home furnishings (furniture, textiles, etc.), Swiss retailers are already at a comparable price level with neighboring countries.

Shopping Tourism Peaks
The phenomenon of shopping tourism increased very slightly in 2013 from a very high level, as is implied by the growth of 2.5% in German export certificates in the first nine months of the year. The volume of cross-border shopping in areas close to Switzerland's borders is therefore likely to have amounted to more than CHF 4.5 billion, a figure that excludes online purchases and shopping during vacations and business trips. There has clearly been a structural increase in shopping tourism, and despite a slight weakening, it is unlikely in the medium term that this phenomenon will revert back to the level it was at prior to the appreciation of the franc. However, Swiss retailers are themselves benefiting from shopping tourism too: The economists of Credit Suisse estimate that foreign tourists spent over CHF 1 billion on watches alone in 2012.

Liberal Opening Hours Benefit Consumers Most of All
The economic consequences of a liberalization of store opening hours are analyzed in the study with the assistance of a simulation model. As expected, the results show that customers are the greatest beneficiaries of longer store opening hours. Consumers spend more time shopping when stores open for longer, although this effect declines with each additional liberalization step. Purchases are spread more evenly across the day, with frequency "spikes" in the late afternoon in particular being smoothed out. The model shows that a number of a large shopping centers on the edges of towns and cities – as well as readily accessible stores in residential districts – benefit most from longer store opening hours. In city centers, however, longer opening hours have hardly any effect in terms of increased shopping frequency. Whether or not the retail sector benefits overall from longer opening hours is very questionable given the rise in operating costs that these entail. Nonetheless, most retailers in restrictive cantons are very much in favor of liberalization, as they hope to increase the amount of business they do with customers who currently spend money in more liberal cantons or abroad instead.

Greater Qualification Requirements for Employees
The qualification requirements for employees in retailing have risen continuously, not least due to the increasing sophistication of consumers. One in every two consumers nowadays undertakes internet research prior to visiting a store. According to the survey respondents, the qualifications of applicants have not kept pace with increasing requirements. In particular, the industry is struggling to recruit specialist personnel with professional training. According to the surveyed industry representatives, the promotion of on-the-job training and the dual education system are key priorities as companies seek to meet rising qualification requirements.

Combating Wage Disadvantages with Productivity Advances
The reasons cited by industry representatives for the retail sector's difficulty in finding specialist personnel include the low level of wages, unappealing hours outside the standard working day, and a relatively poor image. The median salary in retailing is CHF 4,600 per month, putting it in second-last position in an industry comparison (ahead of the hotel and catering industry). However, retailers cannot simply increase wages given the cost pressures and the foreign competition they face. In the long term, increased productivity is the only sustainable way of increasing wage levels. In the past, Swiss retailers passed on the majority of productivity advances to staff in the form of wage increases. As a result of technological progress (e.g. self-scanning, RFID technology, e-commerce) it is likely that there will be further productivity gains and wage increases, but this will come at the cost of staff numbers.