Turkey Food Retailers: Margin pressure but growth momentum maintained

Short-term pressure: We expect to see higher gross and EBITDA margin pressure for all food retailers in 1Q23 as they grapple with challenges such as inflation pass-through to prices (fixed prices for core staples during January 2023), high wage increases and one- off impacts from the devastating earthquake in February 2023. Nonetheless, we expect top line growth to be robust at c94%, supported by c69% of food inflation for 1Q23, increased footfall for discounters, space expansion and higher volumes from a 10-day shift in Ramadan, plus additional demand post the earthquake. See preview on page 4.

Growth momentum maintained: We expect top line growth momentum to be strong for all three companies despite increased challenges. Structural growth opportunities imply that organised food retailers can maintain their growth trajectory while limited competition beyond the top five players should aid in market consolidation, as seen over the years. We think discounters will continue to see positive traffic growth due to the trade-down environment while Migros should benefit from its attractively priced essential product sales, higher space expansion and extended reach through the online platform.

Headroom to absorb cost challenges: Turkish food retailers have enjoyed strong margin gains since 2020 and have ample headroom to absorb cost challenges. We expect gross margin pressure to be more pronounced in 1Q23 (partly one-off in nature) and then ease, especially in the second half. For opex, possible further wage increases could add pressure (while fuelling inflation) while rent, utilities and transport expenses should be at a more stabilised level and even beneficial with operating leverage on their side. There is some uncertainty arising from the effect of the early retirement pension plan (negative) and insurance proceeds for stores damaged in the earthquake (positive).

Constructive on the sector: We think Turkish food retailers present a compelling opportunity as all players are able to deliver on their respective growth strategy with more or less sustainable EBITDA margin levels. EBITDA growth remains well supported, beating inflation levels thanks to structural space growth opportunities. We increase our TPs for Sok and Migros with stronger Q1 expectations, and maintain our TP for BIM.


HSBC Global Research