Amazon Highs and Lows

The third-party sellers that contribute to a majority of unit sales on Amazon.com Inc.'s site are diversifying their presence on other e-commerce platforms to reach more customers and capitalize off a coronavirus-induced online shopping boom, according to executives at those companies and analysts.

Many Amazon sellers were already expanding to other e-commerce platforms pre-pandemic. But experts say the crisis has prompted some sellers to accelerate those efforts and showcase goods on the growing third-party marketplaces of retailers including Walmart Inc., Target Corp. and eBay Inc. Others are looking to form new partnerships with shipping companies and e-commerce infrastructure providers like Shopify Inc.

E-commerce Expansion

The surge in online spending during national lockdowns enforced to delay the spread of the COVID-19 virus will have a lasting impact on consumer behavior, according to the CEO of Europe's largest listed warehouse landlord.

David Sleath, CEO of Segro PLC, said during a first-half earnings call that the levels of online spending reached in recent months are unlikely to hold as lockdown measures are lifted, but that shoppers' recent increased exposure to e-commerce would rapidly accelerate its growth.

Sector Impacts

The COVID-19 pandemic forced consumer products companies to adapt to sudden changes in demand and periodic supply chain disruptions, but large branded staple companies were prepared and benefitted from the crisis.

The industry has dealt with a faster-paced environment for at least the past decade because digital platforms and the availability of co-packers lowered barriers to entry. That enabled small to midsize, agile, and digital savvy competitors to take share. At the same time, consumer tastes and preferences changed more rapidly. Large branded goods companies responded by investing heavily into digital capacities and logistics to serve customers both online and offline, and to become more nimble.

Moreover, they shifted their focus from cost cutting to top-line growth, and repositioned their portfolios for faster growth through investing more in innovation, renovating products, and acquisitions.

Looking at the Future

Nike Inc. is doubling down on efforts to grow online operations in the wake of the coronavirus crisis, with plans to strengthen its own e-commerce platforms while intensifying partnerships with leading retailers such as Foot Locker Inc. and Nordstrom Inc. to drive digital sales.

The efforts are poised to create a more agile, digitally oriented Nike amid a pandemic and forced store closures across North America, Europe and China that led to a drop in revenue and a net loss in the company's most recent quarter, experts say.

Even before the pandemic, the global athletic apparel giant benefited from a robust online business that surged as consumers moved online while stores were closed for months.

Sector Signs

The retail and restaurant sectors have been under stress for years. The default rate of speculative-grade issuers in these sectors has been 10% since 2017, when the U.S. and Canadian economy was still in its expansionary period. This compares to a more typical default rate of 2%-3% in the corporate sector during such benign times. Secular pressures from the growth of e-commerce, increasing competition for share of wallet, and the generational shift of spending on experiences have weighed on the retail sector. In restaurants, competition from grocers' prepared food offerings, changing millennial dining preferences, and delivery cost pressures have challenged the traditional casual dining and quick service restaurant (QSR) models. These pressures and private equity piling on debt have driven many restaurant ratings down over the past several years.

U.S. Retail Property

If there was any doubt that a retail apocalypse was taking place before the coronavirus-related economic shutdown, it is now impossible to deny the retail space is facing profound change.

"Things are extremely fluid right now in the retail sector as a whole, and that covers all retail property types," Tom Dobrowski, vice chairman of Newmark Knight Frank's capital markets group, told S&P Global Market Intelligence.

The nation's malls and shopping centers are beginning to reopen after a weekslong closure to stem the spread of the coronavirus, but there will be many vacant shops and department stores, and there is no telling how long it will take for foot traffic to return. The last three years have already seen plenty of retailer bankruptcies as outmoded concepts shriveled, and analysts expect many more in the coming months.

EMEA Retail Property

European retail landlord Klépierre will not allow a turnover-rent business model to be forced on the company despite growing pressure from the retail industry, Chairman Jean-Marc Jestin said during a first-half earnings call.

The France-based landlord, which owns a portfolio of retail assets worth €22.83 billion across Europe has been severely impacted by the COVID-19 pandemic, which forced the lockdown of many of its properties. Many of its tenants have been unable to pay rent for the second and third quarters of 2020 due to the loss of income.

Re-Openings Look Unpromising

Department stores' probability of default has declined since the height of coronavirus-prompted store closures in April and after multiple bankruptcy filings in the industry.

The one-year median probability of default for department stores fell to 15.96% as of June 16. This was down from 43.85% on April 20 — the highest point for the sector since the start of the coronavirus pandemic. Yet the probability of default for department stores remains higher than the probability for the consumer discretionary sector writ large.

Recovery

The 2020 global corporate default tally has reached 134, after two issuers defaulted since our last report. The defaulters included Orlando, Florida-based consumer products manufacturer Tupperware Brands Corp. and Houston, Texas-based frac sand mining company Hi- Crush Inc.

With the default of Tupperware, the U.S. and Europe consumer product default tally has eclipsed the numbers of each of the last six years with 21 defaults in 2020 so far. Prior to the COVID-19 pandemic, consumer durables and apparel companies were already facing challenges due to changing consumer preferences and greater price transparency amid a growing online marketplace. There will likely be additional pressure, and we will likely see defaults among speculative-grade issuers, especially those with sizable near-term maturities due to limited access to the debt markets.

Consumer Changes

China's swift rebound from the economic disruption caused by the COVID-19 pandemic and continuing global travel restrictions look set to further increase both the level of spending on luxury goods taking place on the mainland and the country's importance to the industry's major companies.

Chinese consumers accounted for about 35% of the global personal luxury market in 2019, yet just 11% of the purchases were made on the mainland, according to consultancy Bain & Co. and Italian industry body Altagamma. Much of Chinese citizens' luxury spending has typically taken place in Hong Kong and various European cities during vacations.

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