By Adrien Guerin, Senior Analyst, Corporate Ratings

Longer term, the picture is less clear, given the uncertainty about the duration of the war in Ukraine and its impact on economic growth in Europe.

In a long-running trend in the sector, retailers have tended to reverse their international expansion of the 1990s and 2000s into emerging economies to focus on markets nearer home. Russia has been a case in point. Castorama, the French unit of UK home-products company Kingfisher PLC, left Russia in 2020. Dutch clothing retailer C&A exited Russia in 2017. German supermarket operator REWE Group withdrew its Billa food retailing-brand from Ukraine and Russia in 2020 and 2021 respectively. (See Scope’s Leaner but meaner: Europe’s retailers refocus)

However, some European retailers have a significant presence, among them the privately held French retailers owned by the Mulliez family, including supermarket operator Auchan, sports-goods company Decathlon and home products supplier Leroy Merlin.

Auchan, the biggest of the three, divested its Asian units in 2020 to refocus on western Europe, leaving a significant portion of its sales generated in France (53% in 2021). The rest is split between western Europe excl. France (19%) and Central and Eastern Europe (28%). Auchan doesn’t provide a country-by-country split of revenues outside of France. However, Russia is home to the second largest number of Auchan supermarkets and hypermarkets after France, responsible in our estimates for around a fifth of yearly group revenues, equivalent to EUR 5bn to EUR 6bn.

Auchan has relied on Russia for growth to help offset more sluggish activity in France, not least last year where Russian sales grew like-for-like by 4.5% compared with a pandemic-related 4.6% decline in Auchan’s home market. Auchan has planned to capitalise on a partnership with Sbermarket, a unit of Russian lender Sberbank which is one of the banks targeted by international sanctions, to boost e-commerce in Russia. Auchan aims for e-commerce to account for 20% of local revenue by 2023 versus 5% in 2021.

The war could have deep consequences for foreign-owned assets and foreign companies in Russia. That said, Auchan’s “renaissance” restructuring plan and debt reduction since 2019 should help mitigate the impact of a loss of revenues in Russia. Auchan has modest exposure to Ukraine, through 17 hypermarkets and 8 supermarkets.

German wholesaler Metro AG and its electronic-goods spin-off Ceconomy AG (BBB-/Stable) also have exposure to the Russian market. Metro generated close to 10% of its 2020/21 sales in Russia and is vulnerable as a wholesaler supplying local supermarkets. The group has also closed 16 out of its 26 Ukrainian stores. Ceconomy’s exposure is more limited, through a 15% stake in Russian retailer M.video from which it receives a small annual dividend of around EUR 50M.

The speed and scale of international economic sanctions imposed on Russia suggests a sharp rise in various risks for foreign and domestic retailers operating in Russia. In Ukraine itself, the Russian invasion is turning much of the country into a war zone, so the risks are of a different order.

International sanctions are disrupting the supply of goods to Russia. Retailers on the ground can at least partially offset this risk with recourse to national procurement for those goods which can be substituted. Branded goods from international consumer goods suppliers will have a more difficult time finding their way on to the shelves. Retailers reliant on international brands, particularly premium brands, might struggle to maintain sufficient inventory to keep their business running. The supply chain represents a high risk for retailers in Russia

Operational risks remain relatively low for local retailers. International retailers might see however higher risks in the form of retaliatory Russian government sanctions or even nationalisation.

However, on the sales front, retailers are likely to be adversely affected by the crisis facing the Russian economy through a decrease in households’ purchasing power, linked to a broader slump in activity and the rapid loss in value of the rouble against major currencies. We are likely to see changes in consumer purchasing patterns. Discretionary retailers look the most vulnerable as consumers postpone non-essential purchases. Our risk assessment ranges between medium (for non-cyclical retailers) to high (for cyclical retailers).