Food retailers had to navigate challenging times during the Covid-19 pandemic, with supply-chain disruptions, labor shortages, changes in customer needs and behaviors and costly safety protocols to ensure the health and safety of employees and customers. With people spending more time at home and restrictions on eating-out opportunities, food retail sales surged in 2020 and well into 2021, before progressively returning to pre-pandemic levels in early 2022.
Russia’s invasion of Ukraine considerably changed the retail trading environment not just in Europe through lower consumer confidence but also in other international markets through record high food inflation and product shortages. While international agricultural benchmark prices have fallen well below their 2022 highs, food producer prices have only begun to decelerate and will remain elevated for the foreseeable future. Pressure will remain strong on retailers to strike the right balance between increasing their prices in turn to preserve their profitability and maintaining their market shares by being as price competitive as their competitors. Notably, food-retail sales in volume terms are decreasing because of high inflation in advanced economies – a phenomenon so far more typical of emerging economies.
Retailers also have to adapt their e-commerce logistics in response to the post-Covid reality, with online sales figures lower than during the pandemic but still exceeding pre-pandemic levels. Rising inflation may discourage consumers from making online purchases due to the additional cost of delivery fees, which could result in lower-than-expected sales for online retailers. As a result, retailers may see a reduction in profitability if their capacity utilization falls below expected levels due to the decreased sales volume.
Adding to this highly challenging environment, the tightening of financing conditions seen across most markets could significantly add to the expenses of retailers that relied on debt for expansion in past years.
At the onset of the Covid-19 pandemic, discretionary retailers experienced significant challenges due to the closure of physical stores and reduced consumer spending amid economic uncertainty. However, following the easing of lockdowns, spending on discretionary items such as consumer electronics, furniture and appliances surged, with households tapping into their accumulated savings from reduced spending on non-essential items and services during the pandemic. In most advanced economies, extra spending from the second half of 2020, 2021 and the first half of 2022 more than offset the initial losses of the first pandemic wave.
Rising inflation began to hurt discretionary retailers in Q3 2022. Because of growing pressure on the purchasing power of households, leading retailers experienced lower sales volumes, even though higher prices helped to maintain satisfactory sales performance for a few months. The situation worsened in the fourth quarter of 2022, with sales volumes falling further and inventories building up, leading retailers to cut prices, hurting profitability.
The outlook for 2023 appears bleak, with depressed real estate markets, unfavorable comparables, persistently high inflation and lower economic growth on the cards. As the economic environment continues to deteriorate, flaws in the business models of companies that were previously masked by the 2021-2022 boom in consumer spending are likely to become more apparent. Discretionary retailers will continue to face fierce competition from e-commerce specialists, and achieving profitable growth in their e-commerce operations will continue to be a significant challenge.