2022: The year of the discounters
As the first quarter reporting for the year 2023 is approaching and the year 2022 has been put to rest, it is a good time review 2022 to see who performed best and maybe put some thoughts on the coming reporting season.
To summarise the year 2022 into five main topics, they are as follows:
1. Price, price, price
The growth of inflation and interest rates dominated almost all retail markets in 2022. The subsequent emphasis on price has put new pressure on retailers. They have had to find ways to become more efficient in their operations and capital spending. The squeeze on new funding led many retailers, especially online pure players, to change direction. The heavy emphasis on price also led discounters of all flavours to grow rapidly, whether it be in on food or food retailing.
Top news story on the topic: In the UK Aldi went on to drop Morrisons from the Big 4 (2.9.2022)
2. Inventories easing
The year 2021 was marked by the rapid rise of inventories for retailers throughout the Western world. As the pandemic lockdowns started to ease up in 2022, inventory problems also eased up. Many retailers were able to clean up their inventories. However, this led to a rapid decline in profitability for many retailers that took drastic action against the inventories.
Top news story on the topic: Target and Walmart got hammered on Wall Street for inventories (20.5.2022)
3. Online continuing to grow
The inflationary environment combined with the easing of the pandemic lockdowns led to a plateauing and declining online retailing. This was also partly driven by the heavy focus on price. Many discount retailers are not selling online at all or with limited services. Despite the decline in some markets, in the US, online continued to grow. It has grown throughout the pandemic and post-pandemic and is now the most significant retail market segment.
Top news story on the topic: US online retailing surging ahead (25.1.2023)
4. Electronics in trouble
Of the main retail categories, electronics retailers have struggled most to grow. This is a long-term trend as electronics have been the category with the lowest growth rates since the 2008 financial crisis. However, during the pandemic, people spent a lot of money refurbishing their home offices with new electronic devices. After the pandemic, the category has returned to decline.
5. Restaurants grabbing “share of stomach”
The long-term trend in the US has been the growth of restaurants and how they have taken a more substantial share of the money spent on food. After the pandemic, restaurants have returned to the pre-pandemic revenue levels and continue to grow faster than the grocery industry. Restaurants were the fastest-growing category in the US retail market.
How about different retailers?
This part aims to identify some of the best-performing retailers in each main retail category. Last year saw some very good performances by retailers from different sectors. A handful of outliers are pointed out in this section, companies that were able to grow somehow differently than the majority of their peers.
Grocery
Grocery retailing has been the best-performing category as customers tend to focus on buying the essentials. This has happened during an exceptional time like the pandemic or an exceptional time like high inflation. Within grocery retailing, some companies have been losing market share significantly, whereas others have been able to grow fast. As mentioned above, German discounters have grown rapidly in almost all markets.
Outside of the discounters, a handful of traditional grocers have been able to grow alongside the discounters. Here are three of them:
Prisma in Finland was able to outgrow Lidl as a big incumbent, unlike Tesco or other major incumbents. The strong price focus of Prisma, and especially the handsomely rewarding loyalty program, were the main reasons why Prisma was able to outgrow Lidl.
Probably the fastest growth has been seen by Willy’s in Sweden. The company has been one of only a handful of groceries that have outgrown even inflation. Especially during the second half of last year, the company grew by more than 20% per quarter.
The third notable incumbent that has been able to outgrow German discounters has been Albert Heijn in the Netherlands. The company is even more exceptional as Albert Heijn is considered a quality leader. Many quality leaders, such as Kesko in Finland, ICA in Sweden and Sainsbury’s in the UK, have all suffered during inflation.
Fashion
Fashion retailing suffered severely during the pandemic but bounced back during the pre-pandemic time in 2021. However, there is a lot of variation in the performance of fashion retailers. When considering the best-performing fashion retailer of 2022, there are multiple good alternatives, such as Next in the UK or Uniqlo in Japan and Lululemon in the US. However, two companies stand out: Inditex and Nike.
Both have been able to grow on top of the robust 2021. However, the companies succeeded in a bit different domains. For Nike, the strong performance comes from the direct channel, especially their digital selling prowess. Nike has been able to increase the share of revenue coming from direct channels significantly, and it surpassed 40% of the total revenues in 2022.
Despite Nike’s strong performance, the best-performing fashion retailer in 2022 was Inditex of Spain. The company was able to outgrow its main competitor H&M from Sweden, with strong revenue growth, especially strong growth and profitability.
DIY
After the stellar performances during the pandemic, the home improvement category struggled somewhat during 2022. For example, Home Depot is one of the best lead companies in retailing. Even Home Depot has been struggling to match 2021 Levels of growth with a somewhat lacklustre growth performance. Similarly, many other DIY companies have struggled to match the pandemic times.
In the Nordics, the DIY segment of Kesko has been a strong performer over the years. Even Kesko has struggled to maintain growth in the business-to-consumer segments. The business-to-business segment with Onninen has continued to grow by double digits. The more important part of that growth is how profitable it has been. Alongside growth, the Operating margin of Onninen has kept climbing, reaching 7,6% last year.
Onninen has produced a majority of profits within Kesko DIY. The acquisition of Onninen has been one of the best retail mergers and acquisitions over recent years.
Online
The year 2022 was not easy for online retailers. Many big names that grew rapidly during the pandemic (Amazon, Zalando, online grocers…) saw revenue growth stall or decline. Some big online players did continue to grow. Online marketplace provider Shopify, Chinese fashion retailer Shein and Chinese marketplace Pinduoduo (Temu in China) were among the significant growers of 2022.
However, one could say that one of the most outstanding performances came from the German meal kit company HelloFresh. When almost all other meal kit companies and online grocers declined, HelloFresh grew rapidly. The other notable aspect of HelloFresh’s performance is that it is among the few companies selling food online that can show profitable growth.
Discount
Discount retailing has been an obvious growth channel with the rapid inflation growth. Despite that, many general merchandise discount retailers have struggled to achieve 2021 levels of revenue.
Many companies were still growing rapidly, such as the American discounters Dollar General, Tractor Supply, Five Below and Costco. Normal and Puuilo have grown rapidly in the Nordics, albeit from a small revenue basis.
However, probably the best-performing retailer in the discount segment can be said to have been Action from the Netherlands
The company has grown rapidly for quite some time. On top of the high growth, Action accelerated growth to 29,6% in 2022. That was the highest growth figure since 2016.
Action has been hailed as the best-performing equity deal ever in the UK, and the company has already reached revenues of almost nine billion €. That has been achieved with a healthy and improving operating margin: 13,6%.
There is also still a lot of room to keep on growing. The company has only a few stores in many of Europe’s big markets. 445 stores leave much room for expansion in Germany, and only for stores in Spain or 10 in Italy, leave much room for further expansion. The company hasn’t even entered the UK yet
