A new report* published this week by retail analysts Verdict Research, part of the Datamonitor Group, finds that the phase of Spain being one of the EUís fastest growing retail markets, providing a model for the future development of other economically less mature countries such as the ten new member states has now come to an end. After years of rapid house price inflation Spainís housing market has gone into reverse. This has had a major impact on Spainís macroeconomic climate, since the housing market accounted for 10.0% of GDP and 13.0% of jobs. Unemployment is rising, consumer confidence is falling sharply and borrowing which has fuelled the consumer boom has become much harder to secure in times of the credit crunch. As consumers start struggling to pay off their debts, something has got to give, and as a result retail spending will be squeezed. However, despite all this doom and gloom Verdict Research sees a number of opportunities in Spanish retailing.
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The research finds that the change in fortunes will be less drastic for the grocery and clothing sectors, however retailers in the home related sectors such as furniture, DIY, electricals, and homewares will have to adjust to much tougher conditions going forward.
Spanish grocery retailing is set to be affected by global inflation, and will slow down less than other sectors. Growth rates in grocery (2002-07: 22.3%) have been less explosive than for non food (2002-07: DIY 41.2%, Furniture 27.1%, Electricals: 37.4%) and since food expenditure is less impacted by changes in consumersí disposable incomes it should prove resilient to the downturn. Grocery retailing also benefits from a strong group of indigenous players that includes Mercadona and Eroski. That said, French players such as Carrefour and Auchan have a strong presence in the country and Germanyís hard discounters have made inroads into the market. As price has been the defining feature in recent years, the change for Spanish grocery retailing will be less drastic than say DIY or furniture.
While clothing was the only sector of overall retail to contract in 2007 (2006/07: -2.0%), mainly due to a relentless focus on price and the flight to value, Verdict Research believes that going forward the adjustment process will not be as severe as for other sectors. Certainly the larger players such as Spainís crown jewels, Inditex, Mango and Cortefiel will continue to do well. Indeed these players - well established in Spain - are now going abroad to diversify their exposure risk to various markets. The clothing sector in Spain has also attracted its fair share of foreign players such as Irelandís Dunnes stores, the UKís Primark, Swedenís H&M and Hollandís C&A ñ to name but a few.
The home related sectors look likely to be most affected from the fallout of the housing market crisis: On the back of a slowing housing market Verdict Research predicts rough times ahead for furniture, DIY, electricals, and homewares retailing. Daniel Lucht, Senior Analyst at Verdict Research and author of the report, comments: ìWhile Spain looked like the land of opportunity for years, now trading conditions have become much more challenging for the likes of IKEA, Conforama and Leroy Merlin. That said, the various independents will be hardest hit by toughening conditions.î While electricals has been one of the fastest growing sectors for some years and the easiest to make money in, 2007ís growth rally of almost 10.0% seems to be the last in this magnitude for some time to come.
Despite all this doom and gloom, Verdict Research argues that there are a number of opportunities in Spainís Ä218bn retail market: the liberalization of pharmacies regulations forced by the EU, a still underdeveloped outñofñtown sector, the fledgling multi channel offer and Internet retailing in particular present significant growth avenues. Verdict Research also sees format development and new furniture boulevards, with ING Real Estate planning a massive new development outside of Madrid, as a prime growth opportunity. Daniel Lucht adds: ìWe believe that convergence trends among the EU member states will return once the Spanish housing bubble has corrected itself and that on a per capita basis Spainís consumer expenditure will be driven up to the levels of France, Germany and the UK eventuallyî.
According to Verdict Research, liberalization of pharmacies would present a major boost to Spanish retailing. EU legislation looks set to change the restrictive ownership model, under which every owner had to be a licensed pharmacist. As a result, vertical integration by pharmaceutical wholesalers, which is currently unknown in Spain, could become a business model going forward. As at May 2008 the law prohibits pharmacy chains and mail order pharmacy.
If retailers and private equity players and other non-pharmacists such as pharmaceutical wholesale companies are allowed to own and run pharmacies in future, then Verdict Research believes grocers such as Mercadona and Eroski would be in a prime position to work existing footfall harder and increase their sales. Eroski has a tie in with Dapargel, Spainís number two in the sector, and could use the chain to break into the pharmacy sector and make its credentials and footfall count. Germanyís and the EU market leader in drug store retailing Schlecker with 1,184 outlets in Spain would be another prime candidate for exploiting growth should the sector be liberalised. Spanish players in the Perfumeria-Drogueria Moderna sector could also use this opportunity.
Verdict Research argues that out-of-town (OOT) retailing will develop strongly in Spain going forward. Demand for retail warehouse space is strong, both from domestic and international retailers. Moreover, OOT development could receive a further growth fillip from planning and shopping hours liberalisation, especially at a time when the government is trying to boost consumer expenditure. Current developments in Madrid suggest that more liberalisation could be on the cards.
Format development is a major issue in Spanish grocery retailing. In large measure historically buoyant growth conditions in retailing overall have made the country an ideal testing ground for new formats. Carrefour, which again showed strong growth in Spain last year, trialled the multi-format single brand strategy, which has been exported to its operations in France. Eroski is emulating a similar strategy, after acquiring the Caprabo stores in 2007, the group is renaming 151 stores under the Eroski banner. Last but not least Auchanís efforts at rebranding and relaunching its store portfolio and by so doing the expansion of its discount format Simply Market deserve mention.
El Corte Ingls continues to dominate the Spanish retail scene but sees potential for further expansion in the country with new formats. Bricor is the name of its new DIY fascia, and the department store operator is looking to exploit the homewares opportunity, currently filled by Zara Home. The department store giant already dominates the furniture market through its El Corte Ingls Hogar standalone and shop-in-shop outlets. In addition El Corte Ingles has operated its own food formats such as Hipercor for years. All of these new formats benefit greatly from the brand recognition and status of the department store.
Despite the dark clouds on the horizon, Verdict Research believes that now is the time to grow ñ this applies especially to those retailers with the necessary capital expenditure levels and the financial muscle and El Corte Ingls is in a prime position to exploit this opportunity and increase its market share even further.
Though Spanish retailing faces many short term challenges, Verdict Research highlights several reasons for optimism about its long term prospects. Spain has still much potential to drive up household income and purchasing power to the levels enjoyed by France, Germany, Italy and the UK. Moreover underlying fundamentals and long term trends are favourable. Declining household sizes and more single households will drive expenditure on household related sectors such as DIY and furniture, once the bubble is corrected and the current economic gloom lifts. As young people start to move out from the parental home quicker, Spain is set to emerge from the parochial backwaters of yesteryear as a socially advanced, modern country at the forefront of the EU.
*Retailing in Spain 2008
Spanish retail boom ends as housing market turns negative
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