Europe's struggling retail sector looks ill-prepared for new energy price shock

A surge in ​energy prices since the start of the U.S.-Israeli war on Iran piles further pressure on the retail sector ‌in Europe, already struggling with weak consumer demand and diminished spending power.

Shares in retailers, from Zara-owner Inditex to Britain’s Marks & Spencer, fell on Monday as investors and analysts expected a knock-on impact from higher petrol and gas prices, even as the sector has barely recovered from the inflation cycle triggered ​by spiking gas prices after Russia’s invasion of Ukraine.

Food manufacturers, supermarkets, and clothing retailers all hiked prices significantly ​in the wake of the last energy price shock in 2022, but the picture today is potentially ⁠worse with the euro zone and UK economies barely growing.

Retailers have also faced the additional costs and disruptions from a global ​trade war launched by President Donald Trump last year.

“If prices go up now, consumers might react more strongly given that demand ​is already in a fragile state,” said Christian Eufinger, a professor of finance at IESE in Barcelona who has researched how energy price shocks feed into consumer prices.

When the Ukraine crisis hit in early 2022, demand was relatively high as economies emerged from the pandemic. Now, after years ​of high inflation, people have less money in their pockets, Eufinger added.

The retail and consumer goods sector was already the most ​distressed in Europe before this oil price surge, according to an index published in January by restructuring law firm Weil and based on ‌indicators including ⁠reduced profitability and rising insolvency risk.

CHAIN REACTION OF COST PRESSURES

The most immediate impact for retailers is the cost of trucking goods around, with road transport typically accounting for 5% to 10% of a retailer’s operating expenses, according to Francesco Gangemi at consultancy Simon-Kucher.

Energy-intensive refrigeration, air conditioning, heating and lighting in stores add to costs for supermarkets and malls.

The sudden surge in oil has ​also driven fertiliser prices up, directly impacting ​food producers.

“A cost‑driven inflationary ⁠spiral appears almost inevitable, starting with rising transport costs that affect the entire supply chain, from farm to table,” Massimiliano Giansanti, president of Italian farmers’ group Confagricoltura, told Reuters.

Clothing retailers are likely ​the most vulnerable to rising inflation, as fashion is the first thing people cut spending ​on when prices ⁠of food and other essentials rise, Simon-Kucher’s Gangemi said.

Analysts at RBC cut their forecasts for M&S profits, saying the spike in oil and gas prices will likely drive British households’ food, transport and energy bills up later this year.

Britain’s retail association called on the ⁠government to ​help limit the impact on consumers.

“It is more important than ever that ​government keeps other inflationary pressures within its control to a minimum to protect households,” said Andrew Opie, director of food and sustainability at the British Retail Consortium.