Italy: Western Europe’s least welcoming retail market?

Author: Antonia Branston

Date published: 16 Jul 2009

Italy's international reputation is built on sleek, chic design from fashion and furniture to cars, but despite its expensive image foreign retailers have been failing to strike it rich.

In April, Carrefour became the latest multinational retailer to re-evaluate its Italian operations, following Conforama's closure of part of its furniture retailing network, Kingfisher's disposal of Castorama Italy and the well documented decline of DSG International's UniEuro chain. So what is it that makes the Italian market so tough?

Modern retailing formats struggle to make an impact on the Italian market

The Italian retail market has several key characteristics. It is highly fragmented, with the top 10 retailers generating only 20% of retail sales in 2008 compared to 29% in Spain 43% in the UK. International retailers still have only a limited presence, even though Carrefour, Auchan and Spar have all gained a place within the top 10. Internet retailing is growing, but has so far gained less of a grip than in other West European markets, accounting for only 2% of sales in 2008 in contrast to an average of 5% for the region as a whole.

For a long time, larger chains were discouraged by the difficulty of gaining planning permission for larger format stores, but although this has become somewhat easier since the relaxation of planning guidelines in 1998, Italy remains a less developed and more traditional retailing market than most of its Western neighbours. The impact of modern grocery formats, for example, has been limited: although discounters and supermarkets have generated much of Italian grocery retail's limited growth over the past five years, hypermarket sales remained flat, while the independent small grocers channel more then held its own against the threat of convenience store sales, and food/drink/tobacco specialists reversed several years of negative growth in 2008.

Italian grocery retail, sales breakdown by modern/traditional channels, 2003-2008

Euromonitor International

Carrefour scales down in southern Italy

Carrefour, while not abandoning the market where it is the second largest grocery retailer after Coop Italia, is scaling back its presence in the poorer southern half of the country from 12 hypermarkets to six. As well as allowing the company to focus on the richer north, a more geographically compact store base should also help Carrefour achieve the EUR1 billion savings in operating costs for France, Spain, Belgium and Italy that it has targeted.

Dark clouds for Italy's economy are a silver lining for discounters

The Italian economy entered into recession autumn 2008 - its fourth since the turn of the millennium - unemployment is rising, consumer spending and confidence are both down and public debt sits at over 104% of GDP. Perhaps not surprisingly, this April Italy continued to register the steepest overall fall in retail sales in the Eurozone.

Given these factors, it is not surprising that one area of Italian grocery retailing has remained highly attractive to international operators: the discounter channel. As Carrefour steps away from southern Italy, Penny, Rewe's discount banner, is expanding into the region: recent full year results revealed that Rewe achieved a 9% rise in Italian sales to EUR 1.2bn in 2008, but Penny revenues performed even better, up by 10%. Auchan too has been expanding the Simply Market discount banner that it launched in 2006. The Simply Market network reached 174 outlets in 2008, but this year will receive an even bigger boost with the conversion of Auchan's entire network of Sma supermarkets to the Simply Market banner. Meanwhile, Schwarz Group's Lidl, ranked third in the channel but consistently outpacing the market leaders, Eurospin and Dipiù, in terms of growth over the past three years, has focused on widening its offer with the addition of energy supplies and insurance services.

Long-term recovery still in doubt

Long term, the prospects of the Italian economy are even more worrying for retailers, as two mainstays of the economy, manufacturing and tourism, face decline. Rigid labour laws and a lack of innovation in manufacturing has created a low-skilled workforce vulnerable to competition from lower-wage markets, and an aging population means that the number of workers is declining at the same time as the social burden rises. Meanwhile, although it was once the world's most popular tourist destination, over the past three decades Italy's ranking has fallen to fifth. These factors mean that retailers in the Italian market face an ongoing struggle that a global economic recovery will do little to alleviate, which goes some way to explaining the disillusionment of Conforama, Kingfisher and DSG International.

Future in doubt for DSG's UniEuro chain; brighter for Kesa's Darty

Fewer young consumers, for example, will negatively impact sales of technology products such as audio-visual systems, computers and 'gadgets', damaging the prospects of DSG's UniEuro and PC City big box outlets. However, while DSG's review of its Italian business continues, with a market exit the likely outcome, rival Kesa has been far more positive about its Italian operations. Announcing its preliminary results for the year to April, Kesa said that the 14-store Darty Italy chain had improved its position in the market, demonstrating positive like for like sales and an improvement in gross margins. Four more stores are planned over the next fiscal year.

Kesa's approach to the Italian market has contrasted with that of DSG International. While DSG entered the market, all guns blazing, with the acquisition of the 88-store UniEuro chain in 2002, Darty Italy has only 10 stores since entering the market in 2005, with another four planned during the current financial year, based around Milan and Turin in order to target the richer consumer base in the north. Kesa has focused on buying established family owned stores and simply rebranding them to Darty rather than trying to build a new chain from the bottom up. Interestingly, in Spain and Portugal, where Kesa followed a similar strategy to DSG in Italy by buying the 60-strong Menaje del Hogar chain, Kesa too has been suffering big losses and is now restructuring the chain with the closure of 20 outlets.

Further decline in outlets needed for retail survivors to prosper

It has become something of a cliché in this credit-crunch hit environment to say that it will be a case of 'survival of the fittest' for retailers, but this is particularly true for Italy.

During 2004-2006, growth of outlets and selling space generally outstripped the performance of sales, leading to declines in both sales per square metre and sales per outlets. The situation only improved after a dramatic slowdown in outlet growth coincided with a rise in sales as the economy improved.

Total store-based retail sales, Italy: year-on-year growth breakdown 2003-2008

Euromonitor International

If sales decline during 2009, as is now likely, any sort of positive growth in terms of sales per outlet or per square metre will only be feasible if the store base becomes smaller. On the positive side, when retail sales do begin to recover, the retail landscape is liable to be more consolidated but much less crowded, with the retailers left standing benefiting from an enlarged market share.

For further insight, please contact Antonia Branston, Retail Analyst: antonia.branston@euromonitor.com