As well as domestic austerity UK retailers will have to deal with fallout from the continent and the impact it is having on consumer sentiment.

As well as domestic austerity UK retailers will have to deal with fallout from the continent and the impact it is having on consumer sentiment.

The weekend saw a rare win for an embattled Eurozone. Perhaps inspired by the turnaround in fortunes of the national football team, the Greek electorate returned an ostensibly “pro-bailout” government.

While not exactly a resounding vote of confidence, it does mean that the single currency can hold itself together for at least a few days longer.

But the story has a retail element too. Even before the election Carrefour, last Friday announced plans to pull out of its own joint venture in Greece, selling its stake for a nominal one euro to Greek partner Marinopoulos.

Perhaps Carrefour was expecting the electorate to vote against the Euro. Or perhaps the French retail giant, which has exited a few countries in recent years, has enough to cope with elsewhere in Europe, notably at home, without worrying about the ongoing tug of war in Greece.

On this side of the channel retailers are also struggling to come to terms with changing conditions. Although the inflationary pressure of recent years is easing, fiscal austerity, a weak labour market and constrained credit already weigh heavily on the wallets of shoppers. These drivers come without the economic uncertainty that the Eurozone has brought to British consumers.

Uncertainty is probably the key word when it comes to the impact of the Eurozone crisis on UK consumers. Even assuming containment in the Eurozone the UK retail outlook is weak, but an escalation in Europe, either through a country like Greece exiting the Euro or through a higher profile emergency bailout in Spain or Italy will trigger much greater turmoil.

Further crisis with our biggest trading partner would not just hit the sales of retailers on the continent but would inevitably lead to marked rise in UK unemployment and further deterioration of market sentiment, especially as the vulnerability of the financial services sector would squeeze consumer and business credit even more tightly.

While the UK watches and waits over Europe we are already seeing some changes in behavior as consumers become savvier, some of which are underlying, but all of which are being accelerated by weakened overall sentiment.

Retail volume growth - the UK and PIIGS in 2012
Source - The Economist Intelligence Unit

Comparing prices and buying online are hardly new ideas when it comes to changing habits. The UK is already leading the world in online shopping and searching for bargains is becoming something of a national pastime.

The emergence of dedicated sites such as Groupon and the increased point-of-sale access to price comparisons using smartphones are all informing purchase decisions. This is coming largely at the expense of a high street that has been struggling to reinvent itself since the demise of iconic chains such as Woolworths.

Additionally mainstream retailers are becoming a squeezed middle as consumer habits polarize. Kantar Worldpanel figures over the last few quarters have shown a creeping growth in market share towards both hard discounters such as Lidl and Aldi and the more premium offerings of Waitrose.

Shoppers are economising on staples so that they can still afford the luxury brands that they grew accustomed to during better economic climes. A proliferation of pound shops has some wondering whether consumer habits will revert when incomes recover.

In the shorter term coupons, discounts or dedicated price comparison providers such as Mysupermarket are making the mainstream retail landscape even more cutthroat, a consideration that will only be exacerbated as Euro-uncertainty continues.

With a difficult domestic market UK retailers can be largely thankful for the lack of exposure among affected Eurozone countries. Although Tesco has a presence in Poland, the Czech Republic, Slovakia and Hungary, as well as accession-hopeful Turkey, these markets offer less risk than in Western Europe.

In fact, since Tesco exited the French market completely in 2010, Eurozone exposure comes mainly from its 137 stores in Ireland, where the crisis has largely passed.

More significant risks lie in currency, investment and financing, factors which Tesco accounted for when revealing that it was making contingency plans for a Eurozone break-up last December.

Of the other key UK retailers exposure is generally even more limited, although M&S may be regretting it’s 2010 decision to reinvest in stores in mainland Europe after leaving the continent in 2001.

Although the key current European contagion is uncertainty the UK retail market is expected to fare better than the Eurozone, even if the crisis does escalate.

The contraction in retail sales in 2012 will be much shallower than in countries directly affected and the UK is expected to see a modest return to growth next year, even as Eurozone economies continue to struggle.

Not only is retailer exposure slightly insulated, but the UK will also receive welcome boosts to spending from the Jubilee and from the upcoming Olympics.

These events could prove timely for retailers looking to balance the books, especially if the poor weather continues to act as a dampener on summer spending!

  • Jon Copestake is the lead retail analyst at the Economist Intelligence Unit