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Retail Outlook: 2015 Sales at Best Marginally Higher than in 2014

Credit Suisse Study on the Outlook for the Swiss Retail Sector

Credit Suisse, together with consulting firm Fuhrer & Hotz, published today the annual "Retail Outlook" study. Credit Suisse's economists expect to see a subdued development of consumer sentiment and growth of 0.7% in nominal retail sales in 2015. According to the survey of sector representatives by Fuhrer & Hotz, retailers are fundamentally optimistic about the prospects for 2015, but confidence levels have fallen slightly compared with last year. While shopping tourism looks unlikely to see any further growth in 2015, e-commerce will become more important. A forward-looking e-commerce scenario developed by Credit Suisse's economists predicts that the e-commerce share of total retail sales will rise from around 5% today to 11% in 2020. By 2020 the e-commerce share of the home electronics retail market will rise from 26% today to approximately 38%, clothing from approximately 14% to 27%, and groceries from approximately 1.6% to 3.5%. This should lead to further pressure on employment and prices in the sector.

Credit Suisse's economists predict that the development of Swiss retail sales in 2015 will remain subdued. According to the economists, disposable income and consumer spending power are likely to increase slightly compared with the previous year on the back of stable growth in the Swiss economy. The population is also set to grow, albeit at a lower rate than in 2014 due to a slightly lower increase in immigration. However, Credit Suisse's economists are expecting consumer sentiment to be subdued in the coming year. Although sentiment should recover from the setback experienced in the fourth quarter of 2014, there is unlikely to be any significant upturn compared with 2014 because of the dearth of strong growth signals from Switzerland and the European Union.

2015 Outlook by Swiss Retailers More Reserved Than in 2014
Sales and profit planning among the 250 retail decision-makers surveyed by Fuhrer & Hotz is more reserved for 2015 than for 2014. Nevertheless, 73% of sector representatives foresee sales growth and 50% are forecasting a rise in profits, thereby predicting a growth rate of between 0% and 2%. Food retailers are more cautious than their colleagues in the near-food and non-food sectors. 11% of food retailers are predicting a fall in profits, compared to 6% of near-food/non-food retailers. One reason for this could be that 76% of food retailers are planning a – usually expensive – increase in floor space. In contrast, only 47% of near-food/non-food retailers are planning to increase their floor space, with 24% planning a reduction. One key driver in the move to reduce floor space is e-commerce, which is motivating non-food retailers in particular to reorganize and reduce sales space.

Shopping Tourism Likely to Remain Fairly Stable in 2015
Credit Suisse's economists are assuming that stationary shopping tourism remained stable at a high level in 2014. VAT receipts from private travel to Switzerland stagnated for the third year in a row. Important reasons for this stabilization were the exchange rate and price trends. In 2014 the differential between price levels in Switzerland and neighboring countries narrowed once again and the Swiss franc rose only marginally against the euro. In contrast, the number of export certificates presented by Swiss citizens at the German border for the purpose of reclaiming VAT rose significantly compared with the previous year. This is more likely to be due to an increase in the number of those making use of the VAT reclaim facility than to a rise in shopping tourism. Credit Suisse's economists also assume that the still relatively insignificant level of foreign online purchases has risen significantly compared with the previous year for structural reasons. They expect this trend to continue in 2015. Stationary shopping tourism, on the other hand, looks likely to remain stable at a high level in 2015. The economists expect the differential between price levels in Switzerland and its neighboring countries to narrow further in 2015 and for the EUR/CHF exchange rate to remain stable.

Differing Significance of E-Commerce in Individual Segments
In 2013 Swiss retailers generated 4.7% of their sales in the online business-to-consumer segment. The online share of total retail sales in Switzerland is relatively low compared with other countries with similar retail and e-commerce structures (e.g. Norway and the UK). However, the significance of e-commerce varies sharply by segment. In 2013, home electronics was already generating 23% of its sales online, while the clothing segment had an e-commerce share of 12.4%. However, e-commerce was still in its infancy in the food retailing segment with only 1.5% of sales generated via this channel in 2013. For the most part these segment-specific differences can be attributed to the differing nature of the products and markets. It is much easier, for example, to assess the quality of a camera online than the quality of fruits.

E-Commerce Puts Pressure on Employment and Prices
The current “Retail Outlook” study shows that the growing share of e-commerce in retail sales is having a negative impact on employment growth in the sector. Retailers with only an online presence can use software in many areas instead of employees. The growth of the e-commerce share also puts pressure on retail prices. Retailers who only operate online do not have expensive stationary shops and therefore generally have more scope than stationary retailers when it comes to pricing. The growth of the e-commerce share also brings down market entry barriers. This is also the case for foreign retailers who can often offer their products at lower prices. Evidence of lower market entry barriers is provided by the sharper rise in newly founded retailing companies in Switzerland. The growing share of e-commerce in retail sales has also led to growth in IT spending across the sector because running an online shop and managing a complex direct delivery operation requires sophisticated and adaptable IT solutions.

Online Share of Total Retail Sales Is Likely to Reach Approx. 11% by 2020
The forward-looking e-commerce scenario developed by Credit Suisse's economists predicts that the e-commerce share of total retail sales in Switzerland will rise from around 5% today to 11% in 2020. In the food segment this share will rise from approximately 1.6% today to 3.5%, underpinned by trends in employment, demographics and familiarization with e-commerce. Growth of the online share in the home electronics market should lose some of its impetus. Nevertheless, the scenario developed by Credit Suisse's economists indicates that the online share of electronics sales will rise from approximately 26% to 38% by 2020. In the clothing segment the economists have looked at the previous success of online retailers and the corresponding pressure on stationary retailers and concluded that the e-commerce share of this segment will rise to 27% by 2020.