France Retail Overview: Characteristics, Developments and Prospects

FRANCE: NEW HEADWINDS EVEN AS ECONOMY STRENGTHENS

In this report, we explore the nature of French retailing and analyze recent developments in the industry. This is the second in our series of reports looking at retail trends in major countries. You can find our first report, on the German sector, at bit.ly/FungGermanRetail

The major issues impacting French retail in the recent past have been negative macro factors—sluggish economic growth and terrorism—and these are likely to continue to affect the industry in the near future.

In this report, we discuss a number of characteristics of French retail, including:

• The unusually premium positioning of its department-store sector, and the resulting stability of the sector in France compared with the situation in other countries.
• Domestic Internet pure plays provide competition to Amazon. And e-commerce in France takes a relatively low share in nonfood categories, which contrasts with the country’s substantial online grocery segment.
• The hypermarket format has shown sustained strength, and hypermarket retailers have successfully fought a price-led campaign against discounters.
• French consumers have demonstrated lackluster interest in spending on apparel, which appears to have benefited lower-price players such as Primark, H&M and Kiabi as well as fast-fashion giant Inditex.

First, we offer some context with regard to retailing overall in France, and discuss four prevailing structural factors that help shape the sector and its performance:

• Economic growth, previously sluggish, has improved in recent quarters. France’s propensity for economic reform has traditionally been low, although the government has recently implemented some liberalization.
• A recent spate of terrorist attacks in France and in neighboring Germany threaten growth in consumer industries and appear to be prompting a backlash against the political establishment.
• France remains the most-visited country on Earth, providing an inflow of demand for premium retailers. However, this is being impacted by repeated terrorist attacks.
• The UK’s Brexit vote to leave the European Union (EU) is likely to result in a softening of France’s economic recovery, even if there is no similar move toward a “Frexit” (French exit) in the future.

RETAIL IN CONTEXT: PREVAILING STRUCTURAL FACTORS

1. Consistently Weak Consumer Sentiment Reflects Economic Malaise

France has been beset by low economic growth for a number of years. However, the picture improved in 2015, when the country posted its strongest annual economic growth in four years, with GDP rising by 1.3%. The improved performance carried into 2016, with first-quarter GDP increasing by 0.6% quarter over quarter, compared with 0.4% growth in the previous two quarters.

However, quarter-over-quarter growth slipped back to zero in the second quarter of 2016. INSEE, the national statistics office, noted a sharp slowdown in consumer spending while gross fixed capital formation turned negative.

There is still a considerable distance to go to boost consumer sentiment. Over the medium term, confidence has been creeping up in France, albeit only slowly. The trend turned negative from June through August 2016 (latest), following the Brexit vote and terrorist attacks in France and Germany.

Higher unemployment levels are a depressing force on consumer sentiment in France. The country also sees a much greater cyclical trend in unemployment, which appears to reflect the influx of tourists in summertime.

France has traditionally had less of a free-market economic outlook than countries such as the UK and the US have had. Labor market regulations, designed to provide greater job security and other worker benefits, are generally perceived as hindering employment rates.

Despite France having had a Socialist president, François Hollande, since 2012, the country has undertaken some industrial liberalization, apparently prompted by the urgency of the economic malaise. Notably, the 2015 “Macron law” brought in more competition in industries; in retail, this has involved some liberalization of Sunday trading restrictions. And the 2016 “El Khomri law” was designed to liberalize workplace regulations such as working hours.

Yet some protectionist instinct remains: in June 2016, for instance, Paris mayor Anne Hidalgo vowed to be “intransigent” in fighting Amazon’s launch of its Prime Now delivery service in the capital. Hidalgo claimed that the rapid-delivery service “is likely to seriously destabilize the balance of Parisian trade” and said that she would fight for “the preservation of local shops.” Firms such as Uber and Airbnb already face restrictions on operation in France.

2. Terrorism Threatens Political Stability and Consumer Industries

In July 2016, France experienced terrorist attacks in Nice and Saint-Etienne-du-Rouvray. These followed multiple-location attacks in Paris in November 2015. A spate of terrorist attacks in neighboring Germany in July has added to concerns about security.

Following the Paris attacks, an analysis by the French Treasury estimated the total cost to the country’s economy at some €2 billion (US$2.1 billion)—equivalent to around 0.1% of annual French GDP. We look more specifically at the attacks’ impacts on tourism and retail later in this report.

In politics, the effect has been an apparent backlash against the Socialist president and growing support for far-right parties such as the National Front Party.

The pattern of frequent, sometimes smaller-scale, attacks is a new one for Europe. It is likely to lead to a sustained decline in consumer confidence, sporadic declines in shopper traffic and a softening of international visitor numbers; each of these is likely to hit the retail sector.

France’s Fédération Nationale de l’Habillement (National Federation of Clothing) observed that apparel stores based in town centers across the country typically experienced a 20%–30% decline in traffic in the week or so after the Paris attacks. And Unibail-Rodamco, a major commercial property owner, noted a “significant impact” on footfall in its Paris shopping centers: across France, its shopping centers saw visitor numbers fall by 4.3% in November and by 4.6% in December, compared to positive growth across the year as a whole.

Shopper traffic declines appear to have eased relatively quickly after terror attacks, while tourist numbers have taken a few months to bounce back. The problem for French retailers is that the newly emerging pattern of frequent attacks makes it much more difficult to return to normality.

3. Still the World’s Most-Visited Country

France sees more tourist arrivals than any other country, and around 84 million visitors arrived in the country in 2015. This is despite France being only the world’s 21^st-largest country by population and the 10^th-largest by GDP, according to the CIA’s World Factbook.

However, France had been seeing very slow visitor growth even before the terrorist attacks in November 2015. In 2014, international tourist arrivals grew by just 0.1%, to 83.7 million. Provisional data for 2015 from the United Nations’ World Tourism Organization (UNWTO) showed flat numbers of tourist arrivals.

Visitor numbers for 2015 are likely to have been impacted by the terrorist attacks in Paris late in the year; more recent attacks are likely to dent tourist numbers in 2016 and possibly into 2017.

Research firm STR Global, which monitors hotel performance worldwide, says that hotel booking levels tend to stabilize around three months after a terrorist attack and return to positive growth around five months after an attack. Paris suffered terrorist attacks in November 2015, and saw a recovery in hotel occupancy in the months after December. However, as with retail, in this context of multiple terrorist attacks, a return to a “normal” level of business is likely to be difficult.

Data from Eurostat for France as a whole paint a similar picture of a sharp immediate decline in hotel occupancy in December 2015, followed by a recovery within a few months.

Despite the volume of arrivals, and despite the services sector contributing a substantial 79% of total French GDP, tourism accounts for a relatively modest share of GDP in France relative to other Western countries.

And, while the country ranks first worldwide for tourist arrivals, it ranks only fourth for international tourism receipts, according to the UNWTO.

Nevertheless, the substantial tourist volumes are important for retail, providing a particular boost for prestige and traditional retailers as well as the travel-retail segment. We explore this impact in more detail later, when we look at the strength of France’s premium department-store sector.

4. Brexit Clouds on the Horizon

After the UK voted to leave the EU, attention turned to France and the rising tide of anti-EU sentiment in the country. Although France has been more immune to the migration crisis than Germany has been, sentiment toward the EU appears to have been hit by the Union’s handling of the crisis. In the spring of 2016, the Pew Research Center found that 70% of French people surveyed disapproved of the EU’s handling of the issue.

A Frexit has been touted as a possibility, with some politicians on the right calling for a French referendum on EU membership. Many, however, see it as very unlikely, not least because of the negative effect it would probably have on France’s already-weak economy. A French departure from the EU would be even more complex than the UK exit will be, due to France’s membership in the eurozone currency union. According to The Spectator, Banker Baron David de Rothschild recently said a Frexit would be a “disaster,” as it would mean leaving the shelter of Germany’s economy, returning to a heavily devalued franc and carrying the burden of debt equivalent to 96% of GDP.

The impact of the UK’s decision may have more immediate deleterious consequences for France’s economy. In 2015, France had a trade surplus with the UK of £6.5 billion in goods alone; this is a much lower surplus than that of some other European countries, such as Germany and the Netherlands, but it is considerable, and any downturn in demand from UK consumers or companies would likely hit French industry.

According to prereferendum estimates from Citi, eurozone GDP will be 100–150 basis points lower over the next three years as a result of Brexit than it would otherwise have been. However, Ireland, Germany, the Netherlands and Belgium are likely to be the hardest-hit major EU countries—meaning France may escape a major impact. Barclays, meanwhile, sees eurozone GDP being hit more severely, by 30 basis points in 2016 and by 140 basis points in 2017 compared to a non-Brexit scenario.

In July, France’s budget minister, Christian Eckert, said a slowing of economic growth in the UK could impact French GDP growth by a relatively modest 0.1–0.2 percentage points—although he did not specify over what period.

The counterpoint to all of these provisional estimates is that, so far, most metrics for the UK economy, and particularly consumer demand, have remained solid. We are not seeing (or not yet seeing) any Brexit-induced downturn.

RETAIL IN FOCUS

In this section, we focus on the characteristics of and recent developments in France’s retail sector.

An Unusually Stable, Premium Department-Store Sector

France has a stable, though small, department-store sector thanks to the premium positioning of most of the French department-store players. The stability of the French sector contrasts with the sector environment in several other Western countries, such as Germany and the US, which are dominated by midmarket players vulnerable to share loss to more specialized rivals and Internet pure plays.

The dominance of premium names in the French department-store sector has resulted in it being highly Paris-centric and heavily reliant on overseas tourists. The sector is dominated by four chains: Galeries Lafayette, BHV Marais (which is also owned by Groupe Galeries Lafayette), Printemps and Le Bon Marché. We estimate that stores located in Paris contribute slightly more than half of the total aggregate sales of these retailers:

• At Groupe Galeries Lafayette, the Galeries Lafayette flagship store on Boulevard Haussmann contributed 45% of the group’s €3.8 billion in revenues in 2015. Its contribution to profitability is reported to be even higher, at around 70%. This is despite the group operating 280 stores in total, including 57 under the Galeries Lafayette name.
• Two of BHV Marais’s four main stores are in the capital; it also operates five smaller stand-alone clothing stores in Paris.
• Printemps has a Paris flagship (also on Boulevard Haussmann) that is believed to contribute half of all the company’s revenues.
• Le Bon Marché operates just one store, which is in Paris.

Chasing Tourist Spend

The department stores’ marketing initiatives reflect their dependence on international customers: for instance, we understand that the biggest Paris stores, Galeries Lafayette and Printemps, chase tourist shoppers by paying commissions to the tour guides and operators that bring travelers to their shops.

Galeries Lafayette has been leading the charge in global expansion in order to tap international customers closer to their homes. In 2013, it opened stores in Jakarta and Beijing, and it plans to open a store in Milan. Printemps has been much less active internationally, but, in January 2014, it opened a smaller store devoted to luxury goods next to the Louvre museum.

Among other initiatives designed to attract tourist shoppers are the across-the-board 10% discount that BHV Marais offers non-EU customers and the automated tax-refund checkouts that Printemps offers.

• For more on the sector, see our June 2015 report Global Department Store Retailing, at bit.ly/FungDepartmentStores

Terrorism Threatens the Sector

The department-store sector’s reliance on tourists puts it at risk of a terrorism-induced downturn in traveler demand. The November 2015 Paris attacks hit shopper traffic hard in the short term. In Paris, Printemps and Galeries Lafayette saw visitor numbers slump by 30% and 50%, respectively, in the week after the attacks, according to press reports.

Historically, shopper traffic declines have eased relatively quickly after terror attacks, while tourist numbers have typically taken a few months to bounce back. But, as we noted earlier, the newly emerging pattern of frequent attacks makes it much more difficult for the retail and tourism industries to return to normality.

Local Pure Plays Challenge Amazon

In most Western countries, successful domestic Internet pure plays tend to be positioned as a complement to Amazon rather than as direct competitors. They tend to have a strong category specialty (for instance, AO.com is known for selling appliances and Zalando is known for apparel) or a strong focus on a particular demographic (such as boohoo.com’s focus on young shoppers).

However, France has given birth to a number of broad-range, pure-play retailers that offer a product mix similar to Amazon’s. And, in part because French shoppers have this range of choice, Amazon appears to be less popular among them than it is among consumers in neighboring countries such as the UK and Germany.

The major general-merchandise pure plays are Cdiscount (part of Groupe Casino), marketplace site PriceMinister (part of Rakuten) and Rue du Commerce (acquired by Carrefour in 2016). In addition, flash-sales websites have proven to be hugely popular in France, which has exported the format to the rest of the world; France’s vente-privee.com is the world’s biggest flash-sales site.

Cdiscount is Amazon.fr’s nearest competitor. But neither retailer splits out sales for France alone. Below, we show Groupe Casino’s and Amazon’s reported revenues for the segments that include France. In both cases, a number of other countries are included. However, given that the figures for Cdiscount cover four countries and the figures for Amazon cover nine, the data imply that their French operations are in the same ballpark in terms of scale.

Amazon’s reported numbers show that its websites in France, Australia, Canada, China, India, Italy, Mexico, the Netherlands and Spain contribute less revenue in aggregate than its UK, Germany and Japan sites each contribute on their own.

Given population data for France (66 million), the UK (65 million) and Germany (81 million), these figures suggest that French consumers underindex substantially on Amazon relative to their main European peers.

Data suggest that Amazon maintains a significant lead by site visitor numbers in France—but visitor numbers do not always directly reflect revenues. The visitor data show that French consumers are highly interested in flash-sales sites such as vente-privee.com.

As the visitor numbers above suggest, Rue du Commerce’s business is considerably smaller than that of Cdiscount and Amazon.fr. According to S&P Capital IQ, Rue du Commerce booked direct sales of €323 million in fiscal 2012 (latest reported) and its total revenues that year, including income from third-party sales, was €340.5 million, up 17.1% year over year. Carrefour completed its acquisition of Rue du Commerce in January 2016, bolstering its already-substantial presence in nonfood online retailing.

• For more on the flash-sales sector, see our September 2015 report The Zulily Acquisition in Context: The World’s Biggest Flash-Sales Sites, at bit.ly/FungFlashSales

Nonfood E-Commerce Penetration Lags Peers

It is further worth noting that France lags neighbors such as Germany and the UK in e-commerce. Just 6.8% of French retail sales were made online in 2015, compared to 7.9% in Germany and 13.4% in the UK, according to our analysis of Euromonitor International data.

Given France’s substantial online grocery segment, which we discuss below, this implies that the country underindexes even more sharply on online penetration in nonfood categories such as apparel and electronics. Our analysis of Euromonitor data suggests that some 12% of nonfood sales were made online in France in 2015; this compares to 13.6% in Germany and 21.9% in the UK.

These metrics reflect some brick-and-mortar retailers’ laggardly move toward multi-channel retailing. As one example, department-store chain Printemps moved into e-commerce only in 2013, through an acquisition of pure play Place des Tendances; yet even in July 2016 Printemps’s main site remains nontransactional.

A Substantial Grocery E-Commerce Sector

Despite lagging in e-commerce in nonfood categories, France has a substantial grocery e-commerce sector. In the West, France is second only to the UK in the scale of e-commerce grocery sales relative to total grocery sales.

At the same time, the shape of the e-grocery sector in France is quite different from that in the UK. While Britain has built a sector based on home delivery using costly fleets of temperature-controlled trucks, French retailers have focused much more on collection from store.

The UK and France each have one major Internet pure play in the online grocery sector that competes alongside store-based retailers. And, tellingly, while the UK’s main pure play, Ocado, has traditionally offered only home delivery, French pure play Chronodrive offers collection only from drive-through points.

Both the UK and France offer lessons to countries such as the US that are playing catch-up in online grocery. It is starting to look like the French collection-focused model is the one that is most desirable to transfer, given that it presents lower costs to the retailer. US retailers such as Walmart have been building out their collection capabilities and rivals such as Kroger have started to dip their toes into the e-grocery waters; these retailers are likely to look to France for learnings on implementing collection-focused offerings.

Brick-and-Mortar Grocery Retailers Build Out Their E-Commerce Offerings

Back in March 2014, the major French grocers offered 1,838 drive-through collection points in total, according to Nielsen TradeDimensions. By July 2016, this total had grown to 3,150, our research found. To put this in context, the French grocery sector had 1,573 hypermarkets and 7,829 nondiscount supermarkets in 2015, according to Euromonitor.

Our research found that Intermarché has expanded the most aggressively, more than tripling its number of collection points between 2014 and 2016.

Chronodrive, which is part owned by Auchan, has been cutting back: in May 2014, the company announced that it would close 14 sites that had “seen little or no growth in turnover or clients” and that were unprofitable. However, the net decline in its collection points to date has totaled a more modest eight.

In the UK, Internet pure play Ocado holds only a minority market share. The situation in France is similar, as pure play Chronodrive now looks like a minor player amid a surfeit of multi-channel grocery retailers. The trends from these European countries indicate that the online grocery market is set to be dominated by existing names from the brick-and-mortar world.

Hypermarkets Fight Back Against Grocery Discounters

France is the European home of the hypermarket format. Carrefour opened its first hypermarket in 1963 and it took some time for countries such as the UK to follow. In 2015, some 42% of French grocery sales were made through hypermarkets. This compares to 40% in the UK and 17% in Germany, according to our analysis of Euromonitor data.

While countries such as the UK have seen the hypermarket format struggle as more shopping (both grocery and nongrocery) has moved online and as consumers have turned to grocery discounters, hypermarkets have maintained share in France.

Fighting the Discounters

France’s nondiscount grocery retailers have fought a successful, price-led campaign against the discounters. Faced with faltering performance at its hypermarkets, Carrefour initially attempted an unsuccessful strategy of differentiation with fancy Carrefour Planet stores that included zoned departments and services such as hairdressers. Faced with a continued loss of share to low-price rivals, Carrefour abandoned this strategy and turned instead to the simpler strategy of lowering prices. The resulting price war between the major domestic grocers provided shoppers with fewer reasons to switch to the discounters, helping to halt the discounters’ market share growth from 2013.

Purchasing alliances—such as the ones between Carrefour and Cora/Provera, and Auchan and Germany’s Metro Group—have strengthened the pricing power of nondiscount grocery chains.

At Carrefour, the increased volumes gained through lowering prices appear to have more than offset any hit to gross margin, and operating margins have recovered in recent years.

This pushback against the discounters has been echoed more recently in the UK. Nondiscount grocers such as Tesco and Morrisons attempted to revive stores through fancy refits, only to see their loss of market share continue; it was only when these retailers abandoned the frills and offered consistently lower prices that their declines slowed.

French consumers’ attachment to the hypermarket format and to grocery e-commerce has also likely factored into the nondiscounters’ battle against the discounters. We think that the limited-line, private-label offering of stores such as Aldi and Lidl may be perceived as alien by many French shoppers who are used to big stores filled with an abundance of premium and fresh foods, service counters, and nongrocery ranges. And, in France as in other markets, online grocery services are a key competitive advantage against no-frills discount stores.

At the same time, we perceive the growth of online grocery shopping as the principal threat to large-store formats: e-commerce cannibalizes the kind of big-basket shopping that hypermarkets cater to. There is an argument that the focus on drive-through formats helps mitigate this, as it allows retailers to claw back some of the footfall lost to e-commerce and utilize their stores as picking and collection points at lower cost than providing home delivery.

Opportunities in Convenience

The boom in online shopping does, however, suggest that the convenience sector is set for growth. Modern, fresh-heavy convenience stores are the natural complement to online shopping, as they provide the means for local, top-up shopping between infrequent, big-basket online shopping. Yet France has a very small convenience store sector, accounting for only 3% of grocery stores’ sales versus 18% in the UK, according to Euromonitor. And it is only in recent years that companies such as Carrefour have moved into convenience formats.

The outperformance of Carrefour’s sales growth in this segment relative to its other formats adds further weight to our expectations that convenience is set to join e-commerce as a growth channel.

• For more on the convenience sector, see our December 2015 European Convenience Store Retailing report, at bit.ly/FungConvenienceStores

Weak Consumer Demand for Apparel

Even while total retail growth in France strengthened in 2015, apparel growth continued to weaken. Sales by clothing, footwear and textile specialists in France rose by just 0.2% in 2015, according to the EU’s statistics body, Eurostat. This rate was substantially lower than the level of growth seen in past years, and compares poorly to the growth rate in peer countries such as Germany and the UK.

Eurostat recorded 0.4% growth in total spending on clothing and footwear in France in 2015, among all types of retailers. But data from Euromonitor on clothing, footwear and accessories spending is even more pessimistic: category spending in France fell by 0.5% in 2015, the research firm says, marking the fourth straight year of decline. Reflecting the weakness in the category, apparel has lost significant share of total consumer spending over the past decade.

As in a number of other countries, affordable, international fast-fashion brands have been among the strongest performers in France. Store expansion at H&M, Inditex and Primark has bolstered these operators’ market shares. But Primark, at least, has also seen robust underlying growth: the chain’s owner pointed to a “strong like-for-like performance” in France in the first half of 2016 (latest) and stated that the country was its “most successful new market entry to date” at the end of 2015. Domestic value player Kiabi has also made strides, according to data from Euromonitor.

Market leader Vivarte, whose main fascia is La Halle, has borne the brunt of consumer caution. We chart the four biggest specialist operators below.

The outlook is for slowly improving growth in the apparel category, according to Euromonitor. But even this is expected to peak at annual spending growth of just over 1%. In this context, keenly priced players that target younger, more fashion-conscious demographics look likely to continue to outperform their more midmarket peers.

KEY TAKEAWAYS

Just as its economy looked to be improving, supported by a new wave of industrial liberalization, France is now facing new challenges in the form of national security.

Here are our key takeaways on the French market:

• Frugality is, largely by necessity, en vogue in France. As in other European markets, this is apparent particularly in grocery and apparel. Any renewed consumer caution would likely further support low-price retailers. Yet the grocery discounters have seen their market share broadly plateau, as nondiscount grocers have competed more aggressively on price. This offers a model to nondiscount retailers in other countries that may be tempted to fight back by differentiating their offerings or by adding extra frills.
• The robust upscale department-store sector in France is likely to experience sustained headwinds from successive terrorist attacks. Even when attacks take place elsewhere, Paris stores may take a hit from global tourists avoiding Europe as a whole. More broadly, consumer discretionary sectors may feel negative economic impacts from terrorist attacks.
• Meanwhile, there is ground to make up in nonfood e-commerce. Despite the relative strength of domestic online pure plays, the e-commerce channel in France underindexes in nonfood categories versus in comparable economies. This suggests that retailers that specialize in categories such as apparel could gain a competitive advantage by convincing consumers to shop across channels.