This golden quarter will be crucial for European retailers' prospects for 2025. Retailers' hits and misses this festive trading season will not only determine their financial performance for the 2024 fiscal year, but will also shape their strategies, operating plans, and investment budgets for next year.
The fourth quarter of the year--which encompasses Black Friday and the Christmas sales--is also known as the golden quarter because it can account for as much as one-third of sales and up to half of the annual profits of retailers of discretionary products, including electronics, apparel, jewelry, toys, and gifts. According to the British Retail Consortium, one-third of consumers plan to take advantage of offers on Black Friday and Cyber Monday this year.
What's Happening
European retailers are pinning their hopes on strong sales this festive season. S&P Global Ratings expects rated retailers in Europe to increase their year-on-year fourth-quarter sales by up to 2%-3% on average compared to the same period last year, supported by a robust labor market and higher household disposable incomes.
However, we expect sales growth to vary considerably between individual players, given the wide range of business models and market positions among rated retailers in Europe. This season, we expect that retailers will substantially increase promotions to boost volumes as unit prices remain elevated.
Why It Matters
One-quarter of rated European retailers have either weak or vulnerable business risk profiles and over one-third have highly leveraged financial risk profiles. These retailers' ability to protect their earnings and free cash generation will be tested as competitive trends continue to intensify due to the proliferation of e-commerce-based marketplace offerings while consumers remain highly price-sensitive.
Moreover, many European retailers face higher capital expenditure requirements to upgrade their stores and omnichannel offerings, having moderated their spending over the past three years to preserve cash, while the cost of renovations has increased substantially. While e-commerce and mobile commerce will remain the main engines of growth, we anticipate that bricks and mortar stores will see a resurgence in footfall this festive season as consumers seek a more immersive in-store experience.
What Comes Next
In our view, the following retailers will significantly outperform their smaller competitors this fourth quarter. They benefit from greater scale and bargaining power with suppliers, more efficient supply chains, or leadership positions in niche categories.
- Next PLC and Marks & Spencer PLC: Leading omnichannel presence in the U.K. with a robust marketplace offering.
- Pandora A/S and Goldstory SAS: Brand leadership in the niche jewelry segments, backed by a well-situated store network.
- El Corte Ingles S.A. and Tendam Brands S.A.U.: Strong economic growth in Spain and sound operational execution.
- FNAC Darty SA and Ceconomy AG: Stronger demand for electronics during the Black Friday and Christmas periods.
- Action Holding BV, B&M European Value Retail S.A., and Pepco Group N.V.: Value retailers with a wide product assortment, Christmas merchandise, and large store footprint.
- Tesco PLC, Carrefour S.A., REWE Group, and Ahold Delhaize N.V.: Healthy sales growth on the back of strong private-label offerings. Grocers and supermarkets are less exposed to sales volatility during the Christmas period, but will prioritize their price competitiveness in relation to the discounters.
In our view, all retailers and their suppliers will need to carefully coordinate and calibrate their stock levels and the timing of their promotions. We will closely monitor full-price sales volumes, as early discounting will hit profitability. If pre-Christmas sales volumes fall short of expectations, there will be an unwelcome build-up of inventory that may force significant post-Christmas and New Year promotions.
Although inflation has moderated, higher wages will continue to constrain the recovery in many retailers' profit margins. Food service companies, restaurants, and pubs will need to actively manage their fixed cost bases to preserve margins.
Related Research
- Consumer Product Companies: The Road To Volume Growth Remains Elusive, Oct. 15, 2024
- Economic Outlook Eurozone Q4 2024: Consumer Spending To The Rescue, Sept. 24, 2024
- Top European Food Retailers' Business Strength Benefits From Operating Resilience, Aug. 19, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Raam Ratnam, CFA, CPA, London + 44 20 7176 7462; raam.ratnam@spglobal.com |
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