Peer Comparison: European Food Retailers Resilient Amid Operating Shocks

We believe smaller and specialist retailers will find it more difficult to invest as much as larger investment-grade peers in delivery services and other online offerings that customers increasingly expect as standard but which come with significant upfront investments and costs. We think most online delivery operations are not fully profitable after all costs, which limits the potential for smaller retailers to compete aggressively in this space. In addition, the recent transaction in the U.K. between ASDA and EG Group and the potential Motor Fuel Group (MFG) and Morrisons forecourt deal, also highlight potential for sales of a portfolio of assets such as stores and fuel stations to manage elevated financial debt of sponsor-owned companies. We also expect grocers to

...- Prospects for Europe's food retail industry are stable, despite still high inflation, because its products are nondiscretionary. - Grocers with an investment-grade rating ('###-' or higher) are typically the largest among peers, hold a strong market position in their home markets, and have some geographical diversification. - Absolute EBITDA is rising on the back of inflation-driven sales increases, in spite of pressure on volumes. EBITDA margins dipped in 2022 and, although expected to rise, will not reach their pre-pandemic levels in the next two years. - Rating upside is limited by thin margins and high investment requirements in store refurbishment, network expansion, IT infrastructure, and logistics. - While free cash flow generation remains relatively robust, deleveraging for many listed companies is constrained by shareholders' expectations of regular dividends and complementary share buybacks. - Moderate market consolidation should continue, but at a lower scale and slower pace,...

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