Credit Insights 11/22: Sunday trading ban in Croatia – effects on retailers’ credit ratings

The Croatian government has announced its plans to introduce a Sunday trading ban. The measure has been discussed in public several times already, and although nothing has happened so far, such discussions continue to destabilize the investment sentiment.

How would Sunday trading ban impact Croatian retailers?

The largest negative impact of the Sunday ban introduction would be an increasing regulatory risk and a continued destabilization of the investors’ sentiment.

Among many conditions, retailers would be allowed to choose 16 Sundays when they could keep their shops open. This will likely complicate retailers’ operations and logistics, with an additional cost to advertise which stores are open on which days. From the staff point of view, this might result in more overtime and bottlenecks in terms of working hours allocation, all adversely impacting the quality of service and potentially lowering retailers’ profit margins. Regulatory scrutiny will also likely increase, putting the retailers at risk in case of non-compliance with stricter and more opaque regulations.

Investors’ sentiment will likely decrease, as constantly changing or unstable conditions will not help in attracting new investors. This can have a far-reaching negative effects, as investors in other industries could perceive such increased regulation as a negative factor when choosing the country to invest in.

Some offsetting potential lies in the shift to the online channel, as a portion of consumers might change their purchasing habits and shop more online. However, this will likely not be a material shift, as online sales penetration normally follows other patterns.

Which retailers are most at risk?

The impact of the Sunday trading ban on Croatian retailers would be uneven, as retailer’s size and a sub-sector will play a large role.

We expect larger retailers to be less impacted by the Sunday trading ban compared to smaller retailers. Large retailers normally have the scale and brand strength needed to shift demand from Sunday to other days of the week. While some retail chains might lay off a certain number of staff, potential extension of the working hours on other days of the week will likely result in work reorganization and perhaps a bit more overtime costs. The impact on labour costs remains unclear, as Sunday has normally been paid more. Smaller retailers, and especially mom-and-pop shops will likely see the most negative effects of this measure. Many of them have struggled during the pandemic, and this might be the last straw for some of them. Logistics will remain a challenge for smaller retailers, and lay-offs are much more likely to occur in this market segment.

Retailer’s sub sector will likely play a significant role in alleviating the impact of the Sunday trading ban. We see food retailers, drugstores, kiosk chains, pharmacies, and petrol stations less impacted by the ban, with some sub sectors even profiting from it. Food retailers and drugstores operating predominantly within shopping malls will be slightly more negatively affected, as the, from the location point of view, more diversified retailers. Kiosk chains and petrol stations could even see an increase in demand, as they will remain open throughout the year. The more cyclical sub sectors such as apparel retailers, electronics, home furnishing and DIY retailers will likely be adversely impacted, as consumers are accustomed to buy more during the weekends. While some of them will be in a position to partially offset the decline in demand through their online channel, the overall effect will likely be negative.

Effects on retailers’ credit ratings

We do not expect immediate major credit impact on the large retailers’ credit ratings, however, 7 out of 15 largest food retailers have already been rated B and worse, according to our analysis from April this year. (for more details please see the article on this link: https://creditanalyst.eu/credit-insights-03-22-food-retailers-the-risks-are-on-the-rise/).

Smaller retailers, and especially the more cyclical ones, could see their ratings more impacted in the short- to medium term. Many of them do not possess a developed online channel, and it takes time and significant investments to build one. More leveraged retailers could see their cash flow strained further, as they will likely loose a certain percentage of turnover, with significant difficulties in renegotiating the rent terms.

In case you need a more detailed information about specific retailer’s creditworthiness, send an email to mario@creditanalyst.eu.