The Paris motor show opened last week with visitors outnumbered by car-industry demonstrators. Above, cars are displayed on the stand of the luxury sports car maker Porsche during the event. Thomas Samson / AFP
The Paris motor show opened last week with visitors outnumbered by car-industry demonstrators. Above, cars are displayed on the stand of the luxury sports car maker Porsche during the event. Thomas Samson / AFP
The Paris motor show opened last week with visitors outnumbered by car-industry demonstrators. Above, cars are displayed on the stand of the luxury sports car maker Porsche during the event. Thomas Samson / AFP
The Paris motor show opened last week with visitors outnumbered by car-industry demonstrators. Above, cars are displayed on the stand of the luxury sports car maker Porsche during the event. Thomas Sa

Retail shines light into the euro-zone's economic gloom


Colin Randall
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A recent glance at France 24's rolling news alerts at the bottom of the television screen seemed to sum up Europe's plight.

There were anti-austerity riots in Athens, GDP continued to fall "at a significant rate" in Spain, while French unemployment climbed above 3 million.

And so it went on. Given the obstinately gloomy backdrop against which euro-zone countries - and neighbours such as Britain - are trying to wrench themselves out of the debt crisis, it is little wonder the retail sector is under severe pressure.

Two days after those downbeat headlines, France and Spain both announced budgets designed to hurt with tax rises and spending curbs of €36.8 billion (Dh173bn) in France and further cuts by the beleaguered Madrid government.

And the Paris motor show opened with visitors outnumbered by car-industry demonstrators amid dire warnings of plummeting sales, over-capacity and the threat of further factory closures to come.

There has been little to cheer on the economic front since the credit crunch began to make itself felt in 2008. Hints of recovery in 2009 proved short-lived; after being battered solidly for four years, public confidence is at rock bottom.

People fear for their jobs, have already lost them or see income squeezed by pay standstills or reductions. Add the impact of higher taxes, coupled with an explosion in the prices of food, fuel and utilities and it is hard to envisage a spending-driven recovery.

"The principal issue is consumer confidence, or lack of it," says David McCorquodale, the head of retail and formerly the head of European transactions for the international accounting firm KPMG.

"It took a dive throughout 2008 and has never really recovered despite a slight lift at the end of 2009 when we thought we might be coming out of recession. People simply don't have the confidence to spend on discretionary items."

Increasingly, as domestic demand has declined, Europe has looked to more buoyant economies, notably China, India and more prosperous parts of the Middle East, to compensate, especially in the case of luxury goods. In Paris and other major European cities, shoppers visiting the big stores have noticed more sales assistants of Chinese and Japanese origin.

Even in some of these countries, however, there is mixed evidence on how well sales are holding up in the face of more widespread belt-tightening than had been expected and also some shifts in purchasing patterns.

But there are tales of resilience and progress to be found among the mass of depressing news from the high street.

On the day the fashion retailer French Connection reported a sales slump of 9.5 per cent in Europe, including the United Kingdom, and a first-half loss of £6.3 million (Dh37.3m), compared with a modest £700,000 profit in the same period last year, the news from an online competitor, Asos, offered a welcome contrast.

Asos revealed figures showing sales rose by 31 per cent to £141m in the three months to the end of August, with full-year sales increased by 38 per cent to £538m. And, whereas French Connection appears keen to offload underperforming branches as part of a review of retail activity, Asos talks optimistically about its outlook.

There is even that rare phenomenon of the current crisis, a Spanish success story. Inditex, the owners of fashion brands including Zara, Bershka and Massimo Dutti, has established itself as the world's largest clothing retailer. Recent results showed sales up 17 per cent and net profits, at €944m, 32 per cent higher in the first half of the year.

The group lengthened its lead on Hennes & Mauritz, the Swedish group better known as H&M, which has reported third-quarter profits lagging behind estimates.

H&M blamed "challenging" conditions in the fashion retail industry extending from macro-economists to the weather, Europe's summer heatwave apparently causing sales to dip.

But Anne Critchlow, an analyst at Société Générale's London offices, says the Spanish giant is different. "Inditex is fast-fashion so it has a compelling product, which sells whatever the weather, whatever the macro-economic conditions," she told Bloomberg News.

At the other end of the market, there are also bright spots.

Performance at the French luxury goods manufacturer Hermes seems to bear out the theory that even in times of crisis, the rich broadly stay rich while the middle class suffers as an easy target for revenue-hungry governments.

Hermès has raised its sales growth target from 10 to 12 per cent after recording healthy improvement in both revenue and profit in the first half of the year. And the sustained purchasing power of buyers in or from China, and elsewhere in the emerging markets, appears to be responsible.

But analysts are finding demand in east Asia temperamental.

The Reuters news agency said a profit warning from the British fashion house Burberry was the clearest sign yet that three years of booming demand for luxury goods was coming to an end. To the familiar obstacle of European debt crisis, Reuters added a less familiar problem: a slowdown in China.

However, it also pointed out some brands, such as Bottega Veneta, Prada and Yves Saint Laurent, were faring well while others, including Hugo Boss and Louis Vuitton were "starting to feel the pinch".

This appeared to support suggestions elsewhere that some Chinese buyers at least are not so much holding back as becoming harder to please and turning to more distinctive, perhaps even costlier items.

Mr McCorquodale says the money attracted from China, Russia and parts of the Arab world should help the key European cities of London and Frankfurt to weather the storm at the upper end of the retail market better than, say, Paris, Milan and Madrid. But he sees the squeeze continuing to hit the middle market with worrying consequences for a sector which, in the UK, "employs one in 10 of those employed".

Recovery seems some way off. Eurostat, the EU's statistical office, found while the slump in retail sales in Spain, 7.3 per cent down in July on the same month last year, predictably reflects that country's deep malaise, more robust economies are ailing too. The one-month Spanish decrease of 1.9 per cent was only fractionally worse than experienced in Austria (1.7 per cent), while sales also dropped by 0.9 per cent in Germany.

And the immediate prospects are hardly encouraging, with the euro zone at risk of a double-dip recession in the third quarter.

"Most working households have suffered from some form of income restraint at the same time as prices have risen sharply," says Mr McCorquodale.

"There is general agreement that we are in this for the long haul."