Sectoral Report of Bank Austria Economics Department:
Retail slow to pick up pace
- Retail sales rise nominally by 2.1 percent in 2015 to EUR 59.2 billion
- Food retail grows fastest, recording an increase in sales of 3.5 percent
- Retail activity increases momentum slightly in 2016, but remains below the long-term growth rate of roughly 3 percent in nominal terms
- Revenues in retail post below-average growth compared to production sectors
- Consumer spending relevant for retail loses significance
After three years of weak growth, Austria's retail activity recovered somewhat in 2015. That said, sales revenue growth remained below the long-term growth rate in nominal terms, coming in at 2.1 percent, as revealed in the latest sector report by economists at Bank Austria. All told the industry generated revenue of EUR 59.2 billion. "The lack of stimulus from household incomes was the main reason preventing stronger consumer demand. What is more, pressures rose on the labour market and the consumer mood darkened again in the course of the year", said Bank Austria economist Günter Wolf, analysing the situation.
The food retail trade again made the highest contribution to growth in 2015. Including the specialised food and beverage trade, the sector contributes more than EUR 24 billion or almost 40 percent to retail sales revenue, and has risen by an average of 3.3 percent in nominal terms per year since 2010 – compared to 1.8 percent for retail overall. As shown by the results for the first quarter in 2016, the Austrian food retailers are still benefiting this year from above-average growth in demand. The relatively high demand for food stems principally from the strong population growth.
The general conditions for retailers improved overall during the first half of 2016, primarily because the positive impacts of the low inflation on real incomes were intensified by the tax reform. Retailers themselves have become more optimistic in their economic projections; business confidence in April 2016 was balanced for the first time since spring 2011, and indicated at least a modest acceleration in sales. In this context, Wolf said: "Despite the pleasing economic environment we can rule out faster growth in retail sales revenue in 2016. The retailers will lose the increased spending of private households on cars as well as the expected growth in shopping on international online platforms are passing the retail industry by. Additionally, a portion of disposable incomes is likely being saved." The industry can expect to see sales revenue increase by around 2.5 percent in nominal terms.
Earnings in retail deteriorate
As the product markets have opened, competitive and pricing pressures in retail have risen substantially in the last two decades. What is more, the growing use of electronic markets and the associated price transparency, pricing and margins of retailers are becoming steadily narrower. Consequently, incomes in retail have risen to a below-average extent, particularly in comparison to production sectors. The net operating profit of the sector as an earnings benchmark rose by an average of 2.8 percent p.a. from 1995 to 2014, with industry posting a figure of 3.4 percent over the same period. Following a phase of continuous earnings growth, incomes came under pressure again after 2010 based on weak retail activity.
Looking at individual segments, shoes and leather goods replaced watches and jewellery in 2013/2014 as the strongest earning retail sector. According to an evaluation by the Austrian Institute for SME Research, the retail segment managed to generate a return on sales of 6.4 percent. Similarly high results were recorded by pharmacies and trade in medical products. At the lower end of the profitability ranking we find the food retailers in their now traditional position with an average return on sales of around 2 to 3 percent. In spite of the pleasing development in sales there has been no improvement in profitability, which reflects the high competitive pressure and the tight margins in the retail food sector in Austria.
Consumer spending relevant for retail trade loses significance in long run
The prospects for the retail trade are largely influenced by demographic trends, the development of disposable incomes and the share of incomes that households spend in retail. Consumer spending by Austrians is growing in the long term, but this is happening less and less in favour of goods relevant for the retail trade. "Private consumption in Austria over the last ten years has risen on average by 3.1 percent per year in nominal terms overall, while spending on goods relevant for retail only increased by 2.6 percent. Its share in consumer spending has fallen from just short of 50 percent to 47 percent, and is still dropping", analysed Wolf.
"There is a myriad of reasons why goods relevant for retail are not as significant for consumption. Changes in living and working conditions, such as smaller household sizes and the growing female employment rate, are weakening demand in the long term. Furthermore, market saturation with everyday goods has grown on account of the low population growth and rising prosperity. Economic development will play an important role in the short term, and larger purchases are often postponed in years of economic uncertainty. A contrasting development is emerging at the same time, with restaurant and canteen visits being replaced by higher demand for food. Results of a survey by the German BAT Foundation show that Austrian households with tight budgets primarily save for "going out" and travelling, and only thereafter do they spend smaller amounts on retail.
Enquiries: Bank Austria Economics & Market Analysis Austria
Güner Wolf, Tel.: +43 (0) 5 05 05-41954;