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Retail Outlook: One Year After the Sharp Rise in the Swiss Franc

Credit Suisse, together with consulting firm Fuhrer & Hotz, published today the latest issue of the annual "Retail Outlook" study. After an exceptionally difficult year for the retail sector in 2015, Credit Suisse's economists expect a slight easing in 2016 with marginal growth of 0.3% in nominal retail sales. According to the survey of sector representatives by Fuhrer & Hotz, retailers are cautiously optimistic about prospects for 2016 with companies in the food sector slightly more optimistic than their colleagues in the near and non-food sector. On an EUR/CHF exchange rate in the region of 1.10, shopping tourism is likely to stabilize in 2016 at the high level seen in 2015. According to the economists, foreign consumer prices in 2014 were 30% lower compared with Swiss prices in the case of food, while furniture prices were 26% lower and clothing 38% lower. These price differentials are largely down to higher provision costs in Switzerland. In a scenario, the Credit Suisse economists calculate the impact of a 15% rise in the EUR/CHF exchange rate on consumer spending. The outcome of this is that Swiss household spending on food, clothing and furniture falls by a total of CHF 1.3 billion.

2015 was an extraordinarily difficult year for the Swiss retail sector. With the EUR/CHF exchange rate floor abandoned, Swiss shopping tourism abroad again increased by an estimated 8% compared with 2014 to nearly CHF 11 billion. Added to that, consumer sentiment in Switzerland deteriorated noticeably as the year progressed. Real retail sales as well as prices and nominal sales in 2015 were significantly lower than in 2014. However, the decline in the food and near-food sector was less pronounced than in the non-food sector. According to the survey of sector representatives by Fuhrer & Hotz, just one third of the retailers and manufacturers questioned managed to achieve their sales targets. One in every five companies fell significantly short of its 2015 sales target.

Economists Expect Slight Easing for Retail Sector in 2016
Credit Suisse's economists expect a slight easing for the retail sector in 2016 in overall terms. The EUR/CHF exchange rate is likely to settle at around 1.10 thanks to negative interest rates and sporadic foreign currency purchases by the Swiss National Bank. According to the economists, shopping tourism is therefore likely to stabilize at the high level of 2015. Consumer sentiment is unlikely to undergo a marked improvement; however, thanks to slightly higher disposable income and only a minor slowdown in net immigration, Credit Suisse's economists expect retail sales in 2016 to be significantly more positive in real terms compared with 2015. The fall in retail prices is likely to diminish in 2016 and nominal sales to stabilize.

Majority of Retailers Expect Higher Sales in 2016
The expected slight easing is also evident in the survey by consulting firm Fuhrer & Hotz, with 53% of the more than 200 retailers and manufacturers questioned budgeting for an increase in sales in 2016 compared with the previous year. Companies in the food sector are slightly more optimistic than their colleagues in the near and non-food sector. The retailers and manufacturers are implementing appropriate marketing measures in order to achieve their targets. Thus 35% of the companies are topping up their sales promotion budget in 2016, in most cases at the expense of their advertising budget. Whereas a majority of food retailers intend to increase their floor space in 2016, most near and non-food retailers are planning either no change or a reduction. The expansion of retail floor space is therefore likely to continue leveling out in 2016.

Share of Swiss Value Added in Retailing Still High Despite Shopping Tourism
With the strong growth in shopping tourism and e-commerce, the Swiss retail sector has increasingly faced competitive pressures from foreign players and therefore international price comparisons in recent years. Nevertheless, in the three sectors analyzed in the "Retail Outlook" – food, textiles and clothing and furniture – the major part of Swiss household spending continues to flow to Swiss retailers, wholesalers and producers (79%, 57% and 78% respectively). According to Credit Suisse's economists, much of the value added in the food, clothing and furniture sectors therefore is created in Switzerland. Whereas wholesale and retail services – in other words, the sale of products – are almost exclusively provided by Swiss players, the products themselves are significantly more international: 21% of the foods consumed in Switzerland are imports. In the case of furniture, on the other hand, 53% of the products consumed in Switzerland are imported while in clothing and textiles the share of imports is as high as 77%. If one takes account of the share of upstream services obtained from providers abroad besides product imports, a total of 21% of the household spending on food flows to foreign retailers, producers and suppliers. In furniture and clothing/textiles this share is 22% and 43% respectively.

International Price Differentials Largely Due to Provision Costs
Consumer prices for food, furniture and clothing are relatively high in Switzerland compared with other countries. Food prices in the key countries of origin for corresponding Swiss imports are on average 30% lower than in Switzerland; for furniture the figure is 26% and for clothing it is 38%. These price differentials are largely down to disparities in the cost of provision. The cost of labor plays a crucial role in this respect because it is a major cost component in the production of food, textiles/clothing and furniture. Labor costs in Swiss industry are significantly higher than in the key countries of origin for these imports. In addition, input goods for production are significantly more expensive in Switzerland than in other countries. Labor costs in the Swiss wholesale and retail sectors are also significantly higher than in the key import countries. In wholesaling and retailing, however, transport and logistic costs as well as the cost of renting warehouse and retail space play a more important role than labor costs. Switzerland is a relatively expensive location on that front too. Only the cost of capital and value added taxes (VAT) are lower in Switzerland than in the key countries of origin for Swiss food, furniture, textile and clothing imports. Since the cost of capital as a share of output is nevertheless relatively low in the EU countries for the three industries examined as well as the wholesale and retail sectors, Switzerland's advantage on this score makes barely a difference. If Swiss VAT rates were higher, the difference between Swiss and foreign consumer prices would be even more accentuated.

15% Rise in Swiss Franc Causes Swiss Household Spending to Fall by More Than a Billion
The Swiss retail sector's international ties mean that exchange-rate fluctuations have a direct effect on the consumer spending of Swiss households. Credit Suisse's economists calculate the extent of this impact in a scenario in which the Swiss franc rises by 15% against the euro and the currency advantages are passed on at all levels of the value chain. In the case of unchanged behavior on the supply as well as the demand side (i.e. no change in product range or consumer shopping behavior), household spending on food falls by 2.2% under this scenario, on furniture by 1.9% and on clothing by 3.3%. Taking household spending in 2011 as the basis for the calculation, this equates to a total sum of around CHF 1.3 billion. This sum of money can be spent on additional or more expensive products, leisure activities, vacations, investments or in other areas, from which a whole series of sectors would potentially benefit.

The publication "2016 Retail Outlook – How Swiss is the Swiss Retail Sector?" is available online in German, French and Italian at: www.credit-suisse.com/research