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Retail outlook 2019: Swiss retail trade facing tougher competition from international online retailers
Credit Suisse publishes today its annual "Retail outlook" study in collaboration with consultancy firm Fuhrer & Hotz. Despite a buoyant economy, the Swiss retail trade saw only a slight increase in sales in 2018. As for 2019, Credit Suisse economists expect growth in the retail sector to be just as sluggish as last year. Robust labor market conditions and an expected increase in purchasing power are likely to provide a positive impetus. On the flipside, competitive pressure due to the growth in cross-border online trade should continue to increase. This will squeeze prices and lead to a loss of market share.
Sales in the Swiss retail sector increased by an estimated 0.4% in 2018 thanks to above-average growth in the country's economy, according to economists at Credit Suisse. Last year saw the economy enjoy a temporary growth surge on the back of an acceleration in economic activity abroad. This benefited the labor market, which in turn supported consumer sentiment; however, it was not enough to send shoppers on a spending spree. Consumer spending was dampened by the fact that inflation rose faster than wages, resulting in a slight loss of purchasing power. On a positive note, the population grew at roughly the same rate as in the previous year thanks to immigration; in addition, exchange rate developments between the euro and the Swiss franc, as well as minimal price increases on the part of Swiss retailers, meant that shopping abroad became slightly less attractive to Swiss consumers than in previous years.
The weather has a close bearing on purchasing behavior
Last year was characterized by extraordinary weather conditions that benefited sales in some segments but had a highly adverse impact on others. Those negatively affected included clothing, according to economists at Credit Suisse, which suffered a substantial drop in sales of around 9% due to the weather and other one-off factors. Meanwhile, the leisure and DIY segments benefited from the warm spring and hot summer. Because of the fall in sales in the clothing segment, sales in the non-food segment continued to be down on the previous year (–0.8% vs. 2017). Sales in the food sector were slightly more dynamic at +1.5%, meaning food retailing has continued to outpace non-food since 2017.
Amazon faces tough challenge in Switzerland
Amazon's partial entry into the market last year is likely to accelerate the move away from brick-and-mortar to online trading in the non-food segment. However, Credit Suisse economists see various reasons as to why Amazon will struggle to achieve the same dominance in Switzerland that it has in other countries. First, Swiss consumers have been shopping at Amazon for some time – only the process is now becoming slightly easier. Second, Switzerland is no longer virgin territory for online retailers in the way that other countries were when Amazon entered those markets; Switzerland now has now some strong, established online providers. Third, in countries such as Germany, Amazon is now seeing its fastest growth through cooperation agreements with third-party retailers. Very few of these retailers currently deliver to Switzerland or enjoy automatic customs clearance by Swiss Post.
Online retailing is an increasing source of international competition
The Amazon example nevertheless demonstrates that the competition facing Swiss retailers is increasingly international in nature. There are essentially three types of foreign competition, according to Credit Suisse economists. First, foreign players that have opened branches in Switzerland. This trend was particularly pronounced prior to 2010 and was mainly due to food discounters Aldi and Lidl entering the market. It sparked significant structural change in the food retailing sector, and continues to do so. Second, competition in the retail sector became more international due to the repeated rise in the value of the Swiss franc. Currency appreciation made shopping trips just across the border considerably more attractive in price terms and therefore increasingly popular. The trend began between 2010 and 2011, and grew again in 2015, before stabilizing at a high level over the last two years. Third, competition is intensifying primarily due to foreign online retailers rather than physical market entry by foreign competitors or Swiss shopping tourists. Fact is, the advent of e-commerce has blurred national borders and enabled players to increase their reach.
Swiss retail trade lags behind international counterparts
Increasing foreign competition is putting the heat on retailers, according to the Credit Suisse economists: Ten years ago, only one in three had major competitors from abroad – now it is one in every two. This development has consequences: In practically no other western European country were retail sales – after stripping out overall inflation and economic performance – as weak as they were in Switzerland between 2005 and 2017. While the number of retail employees rose in most west European countries, the figure for Switzerland fell by 3%. However, the fall in employment was more severe the greater the proximity to a foreign supermarket – a direct consequence of brick-and-mortar shopping tourism. Even so, in the opinion of the economists at Credit Suisse, challenging times also bring opportunities – as is almost always the case. Retailers affected by the more intense competition are putting more effort into developing their companies than those that have not (yet) felt the effects of international competitive pressures. This, the Credit Suisse economists hope, will ultimately make the industry more resilient in the long term.
2019: Stagnation in non-food, greater momentum in food retailing
According to the economists' forecasts, the economy will give the retail trade as much of a boost in 2019 as it did last year. Although economic growth is likely to cool slightly in overall terms, this will probably be due to lower foreign trade activity and to a lesser extent to domestic demand. The economists expect purchasing power to increase again slightly thanks to more rapid wage growth as well as slightly lower inflation. The positive economic picture is marred by the negative effects of structural change, which are likely to dominate the non-food segment in 2019 as well. Here the Credit Suisse economists therefore anticipate a minimal nominal decline in sales (–0.3% vs. 2018) and stagnating prices (+0.1%). This assessment is broadly in line with the views of the companies surveyed by Fuhrer & Hotz: Barely half of the representatives of the non-food segment expect sales to increase. At the same time, the Credit Suisse economists predict that nominal sales in food retailing will grow slightly more rapidly than the population (+1.3%) but that prices will rise only marginally (+0.5%). For the Swiss retail sector as a whole, sales and price growth (+0.4% and +0.3%) are therefore likely to be minimal in 2019, as in the previous year.
The publication "Retail outlook 2019 – Swiss retailing in a competitive world" is available online in German and French at: credit-suisse.com/en/retailoutlook