EM Europe food retailers : Inflation driving a discounter market

Inflation takes-over higher base effect: Higher food Inflation is a key theme currently playing out across EM Europe countries. We expect food retailers to benefit positively in short term, adding to their top-line growth, thus cycling-out the high base impact of last year without significant challenges on profitability.

Household consumption could come under pressure next year as disposable income gets squeezed out, however economic recovery and possible growth stimulus could keep the impact limited, in our view. Also, many of our covered food retailers are
accelerating space expansion, to benefit from low rental rates and counter the push
from e-commerce players, which adds positively to next year’s top-line growth.

Discounters and small stores network marching ahead: Given that COVID-19 is still not out of picture and with high inflation trends, we see discounters and smaller store formats as key market share gainers. Value for money and need for convenience are key drivers and should define the trends in the short term. Across Turkey, BIM and Sok
stands to benefit from consumers’ preference for discounters, while in Poland we find
Dino’s small store network expansion impressive enough to continue supporting high LFL growth rates.

In Russia, there is already a widespread network of smaller stores, which are likely to remain the key growth driver, with decent space expansion. In grocery e-commerce, we see Migros and X5 Retail as strong incumbent players.

We like BIM (Buy), upgrade X5 Retail and Magnit to Buy (from Hold): In our view BIM
(Buy) is best placed to ride the high inflation environment in Turkey, with its strong
discounter image. We upgrade X5 Retail and Magnit to Buy, on a positive growth outlook and EBITDA margin sustainability as the market consolidates among top players. We maintain Hold on Dino Polska (share price up by c27% in last 3M) and Eurocash (profitability challenges).


HSBC Global Research