One industry, but a divide between food and non-food retail vs. advanced and emerging economies
The structure of the retail industry varies significantly between food and non-food segments and between advanced and emerging economies. In mature markets, non-food retail represents up to 60% of total goods spending, while food accounts for the remaining 40%. In emerging economies, the balance shifts, with food retail dominating at 70-90%, leaving non-food retail at just 10-30%.
Market structure also differs. In advanced economies, large retail chains dominate, particularly in food, where markets are often highly concentrated at the national or regional level. Non-food retail is more fragmented, featuring a mix of major chains and independent players. In emerging economies, the landscape is more hybrid, with independent retailers playing a much larger role at the local level.
Across both categories, food retail is typically more resilient, with lower working capital requirements, but fewer opportunities for differentiation as competition is largely price driven. Non-food retail is more cyclical, requiring higher inventory levels but offering greater differentiation through branding and product offering.
Growth drivers also diverge. In mature economies, consumer spending is shaped by employment trends, wage growth, inflation and confidence levels. In emerging markets, these same factors play a role, but urbanisation and population growth act as additional catalysts for expansion.
The past few years have been exceptional, marked by pandemic-driven swings in demand and an inflationary episode that played out differently across retail segments.
Non-food retail: weak growth, margin pressure, rising debt, and lengthening cash cycles
Non-food retail sales growth has remained sluggish since mid-2022. Initially, inflation propped up sales growth as higher prices offset declining volumes. However, as inflationary pressures eased in 2023, volumes failed to rebound significantly, resulting in a slowdown in overall sales growth. Efforts by retailers to recapture lost sales volumes, combined with an increase in overhead expenses, have led to a general decline in EBITDA margins from their post-pandemic highs to 7-8% of sales in 2024.
The slowdown has affected most segments, albeit for different reasons. Home improvement and home equipment retailers – including those selling construction materials, furniture and domestic appliances – have been hit by a cooling real estate market, which is itself a consequence of a higher interest-rate environment compared with the pre-2022 period. Retailers of discretionary goods such as books and toys have struggled, much like clothing specialists, which are highly sensitive to shifts in consumer sentiment. Department stores, already under structural pressure, continue to lose relevance. Even e-commerce, the standout winner of the pandemic years, is facing stronger headwinds: in many mature economies, the local retail market is moving closer to a balance between online and offline sales, driven by local factors such as consumer habits, urbanisation or infrastructure. The assumption that all markets will one day mirror China's record-high penetration of 28% is unwarranted.
Overall, sector risk remains elevated, with weak growth prospects and a heavier debt burden lingering from the deterioration of the retail environment of the 2010s and the 2020-2021 shock. At the same time, cash cycles are lengthening, now fluctuating between 50-55 days, compared to 45-50 days pre-pandemic. The key driver in recent quarters has been rising inventory levels, adding to liquidity pressures.
Food retail: resilient but shaped by shifting consumer behaviour
Food retail has proven more resilient, with sales growth of 3-4% in 2024. Profitability has held steady with EBITDA margins at 6-7% of sales, slightly above the pre-pandemic norm of 5-6%.
Since the inflation peak of 2022-2023, “trading down” has been a defining trend, with consumers maintaining purchasing volumes by opting for lower-cost alternatives. The shift has not necessarily eroded retailer profitability, especially those with strong private label offerings. Their growing penetration not only supports margins but also strengthens retailers’ bargaining power against branded goods manufacturers, allowing them to push for better pricing terms.
The focus on price has favoured the most cost-competitive retailers while putting others at a disadvantage. As a result, topline growth has been uneven, with varying performances across players.
Overall, sector risk remains close to its long-term average. While leverage is contained, rising funding costs have weakened debt service capacity, adding a layer of financial strain.
E-commerce, the second-hand market and retail space reconfiguration keep testing the retail industry
Apart from short-term cycles, the industry is undergoing powerful structural shifts, forcing retailers to adapt.
E-commerce remains a mixed blessing. While online sales continue to expand, profitability is elusive for many due to high logistics and fulfillment costs. A major development in this domain is the rise of global e-commerce platforms, particularly aggressive Chinese players which are reshaping the market.
The second-hand market is growing fast. Cost-conscious consumers and sustainability trends are fuelling expansion, but much of this growth bypasses traditional retailers, benefiting peer-to-peer platforms instead.
Retail space is being reconfigured. Changing consumer habits are driving demand away from certain store formats while boosting others, forcing retailers to rethink their footprint. Adapting to these shifts requires targeted investment, creating challenges for those heavily reliant on a single format.
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