EMEA Retail And Restaurants Industry Overview, Credit Trends, And Outlook Oct. 16, 2020 Key Takeaways – COVID-19 has transformed the retail sector, with an accelerated transition to e-commerce and "omnichannel" platforms becoming increasingly indispensable to support the bricks and mortar stores. – Apparel retailers and the travel retail channel have suffered the most, while grocers, DIY, and home improvement retailers have seen a significant increase in their top line. – Retail sales have picked up pace in the third quarter, with online sales rising sharply. Higher logistics and transportation costs will dilute profitability, with retailers incentivizing click and collect to encourage footfall.. – The restaurants and pubs sector will remain under pressure for the foreseeable future, with government support and measures offering some short-term relief. – With around two-thirds of the portfolio affected, the pace of negative actions slowed in the second half of the year. Over half of the issuers we rate in the sector have a negative outlook or are on CreditWatch with negative implications. – Ratings have transitioned toward the lower end of the spectrum, with a higher number of defaults. Solvency remains a growing risk for 10% to 15% of speculative-grade retail and restaurants, with unsustainable capital structures, particularly once official support programs taper off. 2 Contents European Macroeconomic Overview 4 Retail Industry Trends 7 Rating Actions And Distribution 17 Selected Issuers 23 ESG In Retail & Restaurants 30 Analytical Contacts 32 3 Macroeconomic Trends Europe European Macroeconomic Overview Top European Risks – The resurgence of the virus across Europe support Economic costs mount without a COVID-19 vaccine and continued fiscal support our expectation that the hardest-hit sectors will not recover to 2019 levels until 2023 or later. Risk level Very low Moderate Elevated High Very high Risk trend Improving Unchanged Worsening – COVID-19 has led to the deepest recession since the Great Depression. The path to recovery remains very Insolvency remains a major concern for more vulnerable corporates uncertain in its timing and trajectory until an effective treatment or vaccine is in place. Risk level Very low Moderate Elevated High Very high Risk trend Improving Unchanged Worsening – A record level of companies rated 'B' and lower as we entered the pandemic will result in speculative- Global trade tensions still cast a shadow over the global economy grade default rate to rise to 8.5% by June 2021 from Risk level Very low Moderate Elevated High Very high Risk trend Improving Unchanged Worsening our latest estimated default rate of 3.8%. Real GDP Forecasts Extended uncertainty inhibits consumer spending % year-on-year 2019 2020 2021 2022 2023 Germany 0.6 (5.4) 4.7 2.4 1.6 Risk level Very low Moderate Elevated High Very high Risk trend Improving Unchanged Worsening France 1.5 (9.0) 7.7 2.8 2.2 Italy 0.3 (8.9) 6.4 2.3 1.5 U.K. and EU fail to negotiate a free trade agreement by year-end Spain 2.0 (11.3) 8.2 4.3 2.6 Netherlands 1.6 (5.2) 3.8 2.9 2.2 Risk level Very low Moderate Elevated High Very high Risk trend Improving Unchanged Worsening Belgium 1.4 (7.6) 5.5 3.4 1.8 U.K. 1.5 (9.7) 7.9 3.0 2.0 Risk levels may be classified as very low, moderate, elevated, high, or very high, and are evaluated by considering both the likelihood Switzerland 1.2 (4.3) 3.9 2.8 1.9 and systemic impact of such an event occurring over the next one-to-two years. Typically, we do not factor these risks into our base- case rating assumptions unless the risk level is very high. Risk trend reflects our current view on whether the risk level could Eurozone 1.3 (7.4) 6.1 3.0 2.0 increase or decrease over the next 12 months. Source: S&P Global Ratings. Source: "The Eurozone Is Healing From COVID-19," Sept. 24, 2020, S&P Global Ratings. 5 Consumer Confidence | Improving But On Shaky Ground – Government support in the form of short-time work schemes should ensure the rise in unemployment remains contained in 2020 and early 2021, helping business and consumer confidence recover further. – Consumers' expectations are improving, driving higher retail sales in Q3 2020. Consumer Confidence Balance Unemployment, As A Percentage Of The Active Population Eurozone GER ESP FRA ITA U.K. Eurozone GER ESP FRA ITA U.K. 30 5 25 0 (5) 20 (10) 15 % (15) 10 (20) 5 (25) 0 (30) Jul-19 Jul-20 Jul-15 Jul-20 Oct-19 Oct-16 Apr-20 Apr-14 Apr-19 Jan-20 Jan-13 Jan-18 Jun-19 Jun-20 Jun-13 Jun-18 Feb-20 Feb-15 Feb-20 Dec-19 Dec-15 Aug-19 Aug-20 Aug-17 Sep-19 Sep-14 Sep-19 Nov-19 Nov-13 Nov-18 Mar-20 Mar-17 May-20 May-16 Seasonally adjusted data, not calendar-adjusted data. *Data for Italy in April 2020 were missing, Seasonally adjusted data, not calendar -adjusted data. Source: Eurostat. therefore the line was smoothed on this data point. Source: Eurostat. The indicator represents the balance, i.e. the difference, between positive and negative answers (in percentage points of total answers). 6 Retail & Restaurants Industry Trends Sector Overview | Comparatively Resilient, But Long Road To Recovery Liquidity: Adequate; Solvency doubts for some Apparel & general retail: Omnichannel focus is paramount The pace of downgrades has Longer-term disruption as shopping habits change. Top lines: Still down by about 10%-25% slowed; one-notch impact • Need to mitigate cash costs at bricks and mortar stores. • Lower footfall versus e-commerce growth. for the majority. • • Competition remains intense despite weak top lines. Working capital • Tough balancing act as demand picks up slowly. Restaurants & pubs: On-trade consumption remains weak Ratings: 'B-' and lower; Some Higher costs • Pubs and casual dining severely affected. capital structures risk • Keeping a lid on operating costs is a struggle. becoming unsustainable. • Quick service restaurants could bounce back with changes. • Highly leveraged capital structures. Rents: Landlords push back on variable rents • Deferrals or quarterly payments in many cases. Spike in demand highlights Grocers: A bright spot; margin uplift subdued • Rates holidays offer some relief. operational challenges in • Robust demand for staples: Private labels versus brands. scaling up e-commerce and • Capacity issues and higher costs limit earnings growth. Financial policy: "Obvious" self-help supply chain capacity. • Hypermarkets/supermarkets--sharp drop in nonfood • Shareholder returns cut. sales. • Capex (especially e-commerce) hard to reduce. − Rating actions on approximately two-thirds of the portfolio; discretionary, apparel, travel retail, and restaurants most affected. − The rift between essential and discretionary retail has widened. − For nonessential and discretionary retail, the timeframe of recovery of (run-rate) credit metrics to 2019 levels is beyond 2023. 8 COVID-19 Will Shape The Future Of Retail − As countries look to ease the restrictions and open Retail Rebooted: Trends That Will Dominate their economies, beleaguered retailers have to rapidly adapt to doing business in a pandemic. - Greater and more frequent customer interaction, across platforms - Clear customer proposition around convenience and value Sales Process - Fewer SKUs for essentials; targeted offering for discretionary goods − We foresee far-reaching and lasting effects on the - Transactions facilitated by epayments, delivery options, and easy returns business models of most retailers and restaurants. − These will transcend the selling process; relationships - Omnichannel capability will become indispensable - Move to “Phygital”: stores will only be a part of the wider marketplace with customers; and changes to product mix, supply Omnichannel - Right sizing of store portfolio chains, store bases, and store configuration. - Investment in dark stores, picking facilities, and warehousing − Credit quality will to a large extent depend on how - Diversified and more visible supply chains these companies adapt, evolve, and reposition - More risk-based and sustainable approach to sourcing themselves in a dramatically changed environment. Supply Chain - Balance between time, cost, and quality with customer expectations - Build credentials around quality, traceability, and provenance − The biggest challenge will be to invest in and fund this transformation, while dealing not only with the - Lower operating leverage, with more cost levers and flexibility pandemic, but also with an acceleration of the digital - Link level of customer service with product margins disruption that most of the sector has endured in Cost Structure - More turnover-based rents; flexible lease terms, easier exit clauses - Less onerous rates and commercial property taxes recent years. For more information, please refer to: SKUs—Stock-keeping units. Source: S&P Global Ratings. https://www.spglobal.com/ratings/en/research/articles/200527-covid- Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved. 19-will-shape-the-future-of-retail-11500756 9 Eurozone Retail Sales | Standout Sectors Eurozone Retail Sales Food, beverages, and tobacco • Most grocers were able to operate through the lockdowns Apparel* IT equipment§ Food, beverages, and tobacco± because they were considered essential retailers. 140 • The closure/restrictions on restaurants and bars, and social-distancing measures, increased demand for in- house food consumption and grocers' footfall. 120 Apparel 100 • With social gatherings being discouraged and people 80 working from home, demand for apparel dropped substantially in Q2 2020. 60 • Child, lounge, and sportswear performed well, in contrast to occasion and formal wear. • Trading during the summer recovered, with larger brands, 40 such as Next, reporting a strong and increasing pickup in sales. Index Index of turnover (2015 = 100) 20 IT equipment, DIY, and home improvement 0 • The shift toward home offices increased sales of IT equipment, which are now above prepandemic levels. • DIY retailers, such as Kingfisher, Hornbach, and Maxeda, also reported sales surges, as consumers spent more on *Retail sales of textiles, clothing, footwear, and leather goods in specialized stores.