Retail Outlook 2017: Swiss Retail Sector in Upheaval

Credit Suisse, in partnership with consulting firm Fuhrer & Hotz, today published the latest issue of the annual 'Retail Outlook' study. Retail sales fell again for the second year after the abandonment of the EUR/CHF exchange-rate floor - and indeed by 1.0%. For 2017 the Credit Suisse economists expect stagnating sales, which amounts to a stabilization after the negative trend of the past couple of years. The sector representatives surveyed by Fuhrer & Hotz also viewed the situation as more optimistic than in the previous year, with around 60% expecting sales to increase. Having flatlined at a high level in 2016 thanks to a relatively stable EUR/CHF exchange rate, shopping tourism is likely to remain fairly constant in 2017 too. In addition, the Credit Suisse economists use a supply/demand model to assess the regional supply density in bricks-and-mortar retailing and show that this already declined between 2011 and 2013, in the wake of the previous jump in the Swiss franc's value The decline was at its most acute in the Basel region, where retailers are more heavily exposed to shopping tourism.

2016 was another challenging year for the Swiss retail industry. Real demand fell, according to the Credit Suisse economists; coupled with slightly lower prices, this again led to a decline in nominal sector sales (1.0% vs. 2015) for the second year after the abandonment of the EUR/CHF exchange-rate floor. The downward momentum has nevertheless slowed markedly in some segments, according to the economists. Even so, the situation in 2016 varied sharply from sector to sector: whereas food retailers managed to post another slight rise in nominal sales (+0.2% year-on-year), their counterparts in the non-food segment continued to suffer from a significant fall in sales in some areas - a rate of decline that was only slightly weaker than that seen in 2015. Within non-food retailing, the situation became increasingly difficult for clothing and footwear retailers. Their sales decreased once again, at an even faster rate than in 2015 (2016: -7.8% year-on-year, 2015: -4.1%).

Shopping Tourism on a Par with 2015 Level

Shopping tourism stabilized at a very high level in 2016, judging by VAT receipts at Swiss border posts. Although cross-border shopping on location is likely to have fallen slightly in 2016 (-6.2% vs. 2015), Credit Suisse economists assume cross-border e-commerce continued to enjoy strong growth momentum. All in all, one in every ten Swiss francs in the retail sector is likely to have been spent abroad in 2016.

2017: Impetus Too Weak for Significant Sales Growth

The Credit Suisse economists expect nominal sales for the retail sector as a whole to flatline in 2017, which amounts to a stabilization after the weakness of the last few years. The absence of a significant growth impetus from the economy as a whole precludes a more dynamic recovery, in the economists' assessment. Given a stagnating unemployment rate, they believe consumer sentiment will at best stage a hesitant recovery in 2017. Since inflation is likely to make a comeback in Switzerland in 2017, consumer spending power is unlikely to increase much despite a slight uptick in nominal salaries. Provided the Swiss franc does not experience another significant bout of appreciation against the euro, bricks-and-mortar shopping abroad by Swiss residents is also unlikely to increase further in 2017 but will at most fall only slightly. Real demand will therefore increase slightly in 2017, primarily thanks to population growth. Retail prices are nevertheless likely to fall again in 2017, as in previous years. In light of the subdued sector outlook, the retail space expansion plans of Fuhrer & Hotz survey participants in 2017 are the most defensive they have been since 2009. Here the plans of food retailers are more aggressive than those of non-food retailers. The retailers and manufacturers surveyed by Fuhrer & Hotz nevertheless start 2017 on a hopeful note, with around 60% expecting sales to increase.

Food/Near-Food Segment to Outperform Non-Food in 2017

The mild demand growth in real terms will primarily benefit retailers in the food/near-food segment. In addition, they should be more or less able to maintain prices in 2017 compared with the previous year. Prices in the non-food segment, on the other hand, are likely to go on falling in 2017, too. Nominal sales in food retailing are likely to grow slightly, whereas the non-food segment will continue to face declining sales - if at a slower rate than in 2016.

Growth in E-Commerce Continues Unabated

Burgeoning e-commerce is a key factor behind the current, challenging situation facing many bricks-and-mortar non-food retailers. Swiss consumers made online purchases worth an estimated CHF 7.5 billion in 2015, i.e. around 5% of total retail sales. In the last seven years e-commerce has seen impressive annual growth of 6.4%, and this growth is likely to continue at a dynamic rate in future. In their updated online trading scenario, the Credit Suisse economists anticipate that e-commerce will increase to more than 10% of retail sales over the next five years. By 2022, E-commerce is likely to account for a considerable share of total sales in the clothing and home electronics segments in particular at 27% and 38% respectively.

Cities Show the Highest Supply Density

In this year's special topic, the Credit Suisse economists assess the regional supply density in bricks-and-mortar retailing using a supply/demand model. This shows that supply density is above-average in Switzerland's main cities and urban areas. By contrast, rural areas other than the tourist municipalities have a below-average supply density. The relationship between supply (measured in full-time equivalents) and demand in bricks-and-mortar retailing declined in a large number of regions between 2011 and 2013. The Credit Suisse economists also show that retail employment declined in most major inner cities, with a few exceptions such as Lucerne; this compares with an expansion of jobs in the outer districts. The development of rents for retail property at prime locations was one of the main factors behind the decline in employment in the city centers, according to the Credit Suisse economists.

Significant Fall in Employment at Retailers in Basel

A regional analysis of the development of supply density also shows the impact of the sharp rise in shopping tourism back in 2011. Retailers in municipalities bordering Germany and France saw a 5.4% and 3.4% reduction in full-time equivalents respectively in 2013 compared with 2011 - and the city of Basel as much as 6.6%. Across Switzerland as a whole there was a fall of 2.1%. The rise in shopping tourism following the Swiss franc's rise in value in 2010/2011 accordingly had a disproportionately heavy impact on retailers in the Basel region in particular.

The publication '2017 Retail Outlook - Swiss Retail Sector in Transition' is available online in German, French and Italian at:
www.credit-suisse.com/publications (Markets and Trends/Swiss Economy)