OREANDA-NEWS. Fitch Ratings has revised its outlook for the European retail sector to negative from stable as retailers face a challenging mix of fierce competition, fragile consumer spending and costly investment in technology.

The continued boom in online shopping is driving greater price transparency across the sector. Combined with ever-faster delivery times and better stock availability this will become an increasing threat to traditional business models in 2016. The impact will be greatest in the UK, where online retail penetration is high, and among continental European non-food retailers. The sector outlook remains stable for food retailers in continental Europe.

Beyond efforts to keep prices low, we expect retailers to continue investing in omni-channel platforms to defend or expand their market share. This implies high spending on technology and supply-chain improvements. But while investment in this area supports revenue growth, eventual profitability is uncertain and the ideal online business model remains elusive. Many retailers are still subsidising logistics costs associated with online sales to win customers.

The move online means retailers also have to adjust to lower footfall, which has left them with surplus space, exacerbating the challenge of relatively high legacy rents. In the UK the pressure on operating margins is exacerbated by the prospective increases in the minimum wage.

Consumer spending is also likely to remain fragile in 2016 despite the benefits of low fuel and food prices. Subdued income growth in the EU and the emerging markets to which European retailers have exposure, and high eurozone unemployment will continue to constrain spending. UK consumers are feeling slightly better off as a result of recent earnings growth, but high household debt means their spending is particularly sensitive to interest rates, which are likely to rise in 2016.