What did we learn about retail last week?

Arhi Kivilahti, Ada Insights' retail analyst, is writing for Inderes about the Nordic Retail Industry. His views do not represent the view of Inderes, and should not be interpreted as an investment recommendation.

We have seen many retail companies report their earnings. Companies from Amazon to Unilever and Tractor Supply to Kesko have given light on how the industry is performing amid these challenging times. Here are three takeaways.

Grocers struggling with inflation

Grocery retailer has been where customers seem to have focused much of their spending. That doesn’t mean that the market has been easy-going and profitable for most companies. Quite oppositely to the pandemic, the big traditional groceries have struggled mainly during these inflationary times. This has been seen in the UK with Sainsbury’s and Tesco struggling with Aldi and Lidl, and in France, the discounters have been driving growth.

Probably most strikingly, the difference is seen in Sweden, where Willy’s has outgrown ICA. The explosive growth of Willy’s with three 20+% growth quarters is a staggering performance for any retailer. At the same time, the clear market leader ICA struggled to match the market growth and let alone inflation growth.

ICA is losing to Axfood also online. ICA has traditionally been the retailer to lead the online grocery market. Over the last year, the company has been losing revenue dramatically in its online channel despite opening state of the art warehouse (built by Ocado) for the online business. The warehouse must be struggling mightily with low volumes.

According to ICA CEO Nina Jönsson ICA’s profitability has dropped to its lowest levels since the financial crisis. ICA’s operating margin was 2,7% in Q1/2023.

Like ICA/Willy’s, Kesko is dramatically losing to S-Group in Finland. Where S-Group grew by 8,9%, Kesko grocery stores grew by 2,1%. The overall grocery market grew by 7,2%. Kesko is trailing the market quite heavily.

Of the banners within S-Group, Prisma has been the channel where S-Group has focused much of its pricing power to compete against Lidl. Thus, Prisma is probably growing even faster than S-Group in general. The hypermarket segment is also the fastest growing part of the market, with 9,4% growth in Q1/2023.

Regarding the online channel, Kesko saw revenues decline by 10,4%, standing at 3,4% of the overall revenues. This means that the traditional K-Citymarket online revenues have been falling much more than 10% as the new fast delivery service with Wolt is gaining momentum.

Contrary to ICA, Kesko has been able to sustain its profitability. Profits have also been hit, but they are still at a high level of 5,6%. This is probably helped a lot by the wholesale operation of Kespro, which is growing rapidly and, in all likelihood, more profitably.

In the UK, both Tesco and Sainsbury’s have seen profits and volumes decline as the German discounters keep growing. In April, Aldi breached the 10% market share barrier for the first time.

One can summarise that rampant inflation benefits companies with limited assortments (Aldi, Lidl, Willy’s).

FMCG not struggling as much with inflation

As the big grocers are losing volumes and seeing profits decline, some (especially in Sweden) have argued that the big FMCG brands have been reaping the rewards from this situation. Big global FMCG brands did report their earnings last week. The image is slightly different to the grocery players.

To summarise the results:

• Pepsi volumes are up 1% (Europe down significantly)

• Coca-Cola volumes are up 3% (Europe volumes down)

• Hershey volumes up 3,3%, operating margin up to 27,8% from 26,6%

• Mondelez 3,2%, even Europe growing, operating margin to 16,4%, up by 230 basis points

• Nestle’s organic growth of 9,8 %, but Real internal growth of -0,5%, PetCare and Confectionary driving sales

• Unilever is slightly declining, Europe -3%, Personal Care and Home Care grew by 2,6% & 3%

• P&G Beauty and Health Care saw slight volume increases, others declined slightly. Operating margin increased by 40 basis points. Europe was responsible for volume declines.
  
  

For the big FMCG companies, the image in Europe does look somewhat similar to the big grocery retailers. The market is complex, with volumes declining. However, one segment is flourishing in the problematic market: sweets, snacks, and PetCare.

When comparing the profitability of FMCG companies to retailers, one should refrain from too direct comparisons, as the others (FMCG) operate in multiple markets with very differing economic situations. In contrast, the grocers (except Aldi and Lidl) operate in one continent (often in one market).

The fact that the FMCG companies have been able to internationalise their brands to multiple markets gives them a lot of stability in economic performance.

There are specific segments where customers don’t seem to be willing to save, even in difficult economic times.

Non-food retailing in more significant problems

Some non-food retailers reported their earnings this week alongside grocery and FMCG players. The image strengthens the view from last year: non-discretionary spending is declining, and thus many non-foods struggle to find growth.

Last week Verkkokauppa.com, BHG, Byggmax and K-Rauta reported declining sales figures and low (or negative) profitability as consumer sentiment has declined rapidly.

Even the retail giant Amazon reported negative product sales for the first quarter. This is not necessarily indicative of poor performance from Amazon, as the service sales grew by a healthy 17%. The results indicate Amazon’s desire to more or less get rid of the first-party retail business and double down on the lucrative marketplace business with all the associated services.

The department store chain Stockmann was somewhat of an outlier in last week’s reporting with a robust growth of 15,8%. However, one should remember that Stockmann’s growth over the previous 1,5 years has come from a very low basis. Compared to pre-pandemic Q1/2020, Stockmann is 5,8% above that sales level and significantly below Q1/2019.

But all in all, the last eight consecutive quarters of growth represent a solid basis for a turnaround for Stockmann.

As the traditional non-food retailers seem to be struggling, the discount segment reported encouraging growth figures. Tokmanni reported a robust 4,7% growth, which is a turn for the better after several slow growth quarters.

In the US, Tractor Supply reported a somewhat more robust growth of 9,1%. Both saw revenue growth driven by declining profit margins. The discount fashion chain Primark reported the strongest growth in the discount segment with +19%. However, even Primark saw margins decline.

The non-food retailers are finding growth challenging to gain, and those that have grown have seen profits decline.

Arhi Kivilahti is Ada Insights’ retail analyst. He has studied the industry from many perspectives starting as a researcher in Aalto University and spent a year as a visiting researcher in Saïd Business School in the University of Oxford. After academia Kivilahti has worked for example in Kesko corporation where he was responsible for building the ecommerce website and fulfilment operations. More insights about the retail industry at https://www.adainsights.fi/.