German retailers hopeful of upturn
prices, German retailers are hopeful that 2004 will see a return to
growth, albeit at a relatively low level.
Hermann Franzen, head of the German Retail Association (HDE), said that there were some signs of an upswing in consumer confidence in the first few months of 2004, but stressed that initial predictions were for an improvement of just 0.5 per cent in retail sales for 2004.
Speaking at the annual HDE press conference this week, Franzen said that the first six months of 2003 had led retailers to hope for a return to growth in the year as a whole, but that these hopes had been dashed by a poor performance in the second half of the year. Total retail turnover in July-December was some 2.1 per cent lower than in the same period in 2002, leaving turnover for the year some 1 per cent lower.
Christmas was particularly poor last year, with sales in November and December just €6.2 billion higher than in the first 10 months of the year - some 25 per cent less than in 2002 and half the level seen in 1999.
With disposable incomes increasing just 0.9 per cent during the year and prices increasing by 1.1 per cent on average, purchasing power decreased by 0.2 per cent in 2003, and Franzen said that the government needed to do more to stimulate growth in the German economy in 2004 if the situation was to be redressed.
Despite his more optimistic outlook for 2004 as a whole, Franzen said that a recent HDE survey of German retailers showed that 58 per cent of them considered current trading conditions to be bad, with just 20 per cent calling it good and the rest remaining unsure, and Franzen warned that many companies, in particular smaller retailers, remained at risk of bankruptcy if the situation did not improve.
He pinpointed in particular city centre retailers, which account for the majority of German stores. Some 67 per cent of those retailers who said they saw a reduction in profitability in 2003 were located in city centre locations, the HDE's director said.
What growth there was in 2003 was modest, Franzen said, with nearly two-thrids of those companies whose sales increased seeing gains of less than 5 per cent. As for those who saw sales decline in 2003, the vast majority (75 per cent) saw reductions of between 3 and 10, with a fifth posting losses in excess of 10 per cent.
As for profits, more than 20 per cent of German retailers saw an improvement in the second half of 2003, with a third of them registering gains of more than 10 per cent. Around 25 per cent of retailers maintained profits at the same level as 2002.
More than half the German retail trade saw declining profits, however.
Cost-cutting was the main focus of many retailers' strategy in 2003, Franzen said, with more than 50,000 jobs being scrapped as companies rationalised their activities, the biggest single figure in one year. Job prospects in the retail trade are unlikely tio improve in 2004, he added, with a third of those retailers questioned by the HDe said they expected more job cuts in the first half.
A relaxation of the rules on pricing saw many retailers introduce low-price strategies in a bid to attract new custom, but Franzen said that the heavy discount had brought no advantages in terms of increasing overall sales. In contrast, the shift in spending patterns to major discount chains was one of the principal reasons for the worsening situation of city centre stores, many of which are too small to offer the same discounts as larger chains or to spend as much on advertising their low prices.
"Discounts are like medicine," Franzen said. "In small doses they can be extremely beneficial for both trade and consumer alike, but an overdose can be fatal. Our research suggests that retailers who cut the prices of up to 10 per cent of their products are more likely to see continued profit increases."
"The bigger the discount, the lower the profit growth. Retailers who sold more than 30 per cent of their stock at discount prices nearly always ended up with reduced profits. Everyone realises that discounting is not the long-term answer, but few companies seem willing to take action to address the problem at the moment."
