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Criteria I Corporates I Industrials:

Key Credit Factors For The Retail And Restaurants Industry

Irt[sy CEdit ardt.b:

Ana Li, CFA. Nq York ( l) 212-433-6€9s i ma.lr@sLndard.ndpoo6.coh

Rlm Ran'm, Lnndon (41) 2G7l 76-7a62: 6d dt@@nMddttindpoo6


S.6!ri.ry CEdit An lrtrl

Ulli.r Chioq Hong (!ng (052)25313530: lillio chiou@sedddmdpooBcon

Mdk Puccia, N4 Yo.k



hr (man. Londo. (4.r) 2G7176-3613, paskeme@stodrrd.rdp@6

1l ) 212-,133-7233:

CESoiE Bud, New York (l ) 2 l2-,133-,4 I 22i gregoiEbu€t@slandard.ndpoom.com

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Pan l-Business Pisk Analysis

fhrt ll-Financial tusk Analysis

Part lll--Rating Modifi ers


Criteria I Corporates I Industrials:

Key Credit Factors For The Retail And Restaurants


(Ad qN tld.: This nt tio drticle supetw.ld th. oni.le 'K.y cmlit Fd.7o6: Baines And Fi1arcial Rbk5 L Th. Radil

lndutir," ptbli ed Sept 18,2008.)

Sroddd & Poor's RarinSs SeMces is rcfining and adapting its methodology ed NDptioN fo. rating rctail

companies, includirg Estaurdts, automorive

reraileB, dd food dktnbutoB,

on a Slobal bab we aE publishins this

adicle ro help mek.r panicipants bener udeBllDd our appoach to revidils key crcdit factors in th€ rctailinS industry This cdreria is elat€d to ou corpoEt€ critena (se 'CorpoEte Methodolos/ publbhed Nov 19. 2013) a!

eeu 4 to "Pnrciples Or Cndit Ratings," published Feb 16,2011


Thae diteria appv ro aI r€tail compani$ We defim retan companies as conpanis thar 3eU Soods or sruics

direcrt to the individual co.suner thDuah stoEs, @talogues, or onli!. opsatios-or

a cohbiEtio! of the

ch@els We include Blaurets,

automotive rctail€B, and 9rc.ery $,holesals in this Key Crcdn Facto6 SiEn that

the tundam€ntats of operanng these bulin$3es

are ldgely rhe $me aE g€neral rctailing with similai uit economics


Srmdaid & Poor's is updating its qitBia for analyzi.g retail cmpanies,

supersed$ "Cntetu: Key Credit FactoF: EBin$s And Financial

view retail 6 an "interm€diate fsk" indusrry under our n*.rited6, Biven irs 'inrermediate" cyclicality a*sment and

"inrermedjare' r ompernive ns* and grcwrh as$smenr

applying ou, gen€.al corponte qitena This

Rjsks In The Retail IndBtry." Sept 18, 2008. We

1 In asse$ing the competitive position of rctail compeies, re put pandlar emphBh on the compdies tuerchddising strareg)e, producr difi€renriadon, ha.kel positior rclative to pee.s, and opsating efficiency

Il the prclinimry csh flow lqeESe Nessment is intemediate

or strcn8e( we ge.erally use disc.etionary cash flw

(DCF) to debt or fre operating

cash flow (FOCF) to debt as the supplementsl Bti6. If the preliDinary c8h flow

l4erase a*ssfte.r i3 signincmt o. w€aker. EBITDA to inter$t will be siv.n greter importse as we ro@ more on

th€ir ability to *trice thct interet butdo.


lj The impacr of the new corpo.ate citeria on ratinas is dsdibed in th€ aiteda anjcle 'Corporate Merhodology,'

published on Nov 19,2013.



Clit ria I Corporates I lrd6,'idls: X.r Ctrln racb$ fol The Retail Ard Rstaoahk lndrcnr


Th€!. oteria sre effEtive immediat€ly on the dare of pubtcation.


Part l--Business Risk Analysis

ladultry Rid.

Withjn rhe hmeaork of Sr.ndard & Pooir crneria fo. alsccrinS

indwtry risk we vi{

daninS e m 'inremedjare'

i,3k indurtry (@tegory 3). Our indury .ist Nessent for Erail ompani€3 i, derived liom oa view of rhe reSrn.nrs

inlemedi.r€ dcSrc€ of cyElicdity (caregory 3), and oul a$.&nnent thst the indutrys risk is intemdiate (cateSory 3)

int rm! of compditive nsk ed gro$tlr

In our opinion, onerdy rared compadis in the rerailn8 indBry usually have Dedim risk compded ro orh. irdutries and sectors. INetment grade issueE t€nd to operate in developed markeB, hde good marker posnDn with

l@din8 market share o! reI denned niche posnion in its subsctor, or de fosed on les disretjonary prcducr

cateson€s such as food tud dru8s. CoNersV, it is dirlelt for a compmy opeating



in highly volatile and

to achieve a

maiketi with ndrow market pre*nce dd ,ocused on g.owing ir,s sto.e bas

rating, even with a coBenatively leveraSed capital structure.

I0 Tlere is a wid€ di.spetsion on rhe risk p.ofles of rhe subsectors withjn the retailing indusr.y Much of what rated

rctaileE $ll to con$heB rcpresnts a highly disqetioury purchse-cspeialy over the shon term Sub8€ctol8 thal

haw simila' rajt! and comp€te drrcctly wnh each othtr @ be Sbuped for purpo*s ofindustry dsk anallsis. We

gbup the fouoeing slbs€ctors for dalyric purpo*s, hnked by the sob*ctois dsk prcfle:


Dis@unteB, $p.rmrkets, phatmcie, ud conveoieDG

stoB (includils gB rctailing op€6tions):


D€panm€nt stor6 ed specialty storcs;


Auromotive retaileG

11 Wech acte.ize the.isk prcfile ofthe deout srbsedor as trrcn8'beca8e ofts good market sharc Browth

pr6pe.rs, while we vi4 the nsk profite ofthe spemarket subBector s "stietactory' to'fan'based on rhe elatively

sr.ble narure ot food €tailing. On the other end of the spe.truh, w. view rhe rbk prcfile of Bpectalty appdel rerailing subsector a "weak" ding to the high discretionary nalure of the product category in a very tagmented dd

comPedrive indusrry.

Cyclicality a3s6sment:

l2 Wb sgs

the cycticality of rated retan companies a intermediare

(category 3) based on ou tualysis of cldical

p€st('ro'trcu8h (PT'D decline in Benue and prcfilability acMB sectoB Dd ovr tifre. Key dliveB ofcyclicality

include coNmer confdene; ummplolmenr Erer horhold indebtedne$. coGuher s?endin& Saoline pnc6r and

dailabilty of coi$rner c.djt. Th€ effect of cyclcdiry is th€ main nsk difeEntiator bet@ subtedoB.

In Seneral,

Cntdo I Corpontzs I ln l6ni4k: Ke-r Gedt Fa.tors for'Ihe R.tail And Rqtnututts Indunry

we erpect spe.markets, Pharmacig, md Seneral me.chandls. drscounters to lemain Ie$ cyclicaly aJiected by

declinins con$mer speodinS because tlrei! bro6d product offennss arc le$ disc.etionary. DiseuDte6 als o,Ie! a

good value prcpostion- rhey emphsize b6ics dd conmables, and benent iiom con$me.s fadin8 dom during

dmes ofconomic slowdom. Thjs is in cmtrast to dbcrctionary cateSodes $ch as home imp@vement. appliances, and espeialy apparel @iegones, ehjch,ere weak thloughout the rcc€ssion in 2009

r 3 In aI sbsectoB, sles 8rc$ri and volume arc ctuical to prcfirabiury,

becaBe of the hish fiied cost be

d PrcPerty

inteBity oI these buinesses (i.e., hia operarjng leverase). The neSative impact of merchandke mi$teF i5

conpounded by this high opeEtins lqeraS ReraileB atso ned to continually iryest in new trores, mdenale costly

renovatioB of exisdns prcpenies to maintain existing sales, ed expand Seogmplicaly

makes the buines capital- ed borwing-inte.rive. Atso, ourdated and/or poorly maintained slores de sc€Ptjble

to naterial sal$ ercnon

to dnve sles 8rwth. This

1 1 The rerail indurry ha demonstrated

a Ddju

de8.ee or cyclcrliry in @€nue dd prcntability. which are Mo k€y

me6ues we use to derive an industrys ry.li.aliry assmeDt. Based on ou! a.a\8is of glob.l ComPustat data,

letsle.s experienced srcepest decli.e {3

eerage PtI decline in EBITDA margin of 7. l% dunng reeionary p€riods ed st fered thc la4ett drop. a FrT

a. ave.age FrT decline in revenues of 0.4% during .ecsionary penods sin@ 1968, and tb€

I 8% duins the domturn liom 2007 to 2009 Abo tince 1968. retail comPanies etPdienced an

EBImA ma.gin declineoI13%,

dui.g the l9?2-I975 domt n With an aveE8e drcp in Evenue of 0.4% and e

we.ase proftability deline of 7. l%. retsil companies'

cycli@lity as5€*frent clribates ro d inrermedjate

(cateSory 3)

risk We generally onsider the high€r the lelel of crljcality in an indutry the mo.e this facior will @ntribute to

credit nsk oI entities ope8ting

may be mirigated (or exacerbated) by m indBoy's competitive dd Srowrh e

in that industry HNoer, the @ersll e,Iect ol cycUcality on an indu,grry's


rirk profile


rkk and groulth assessm€nt

I s We view the rctail indristry as having a 'intcrmediate'

(category 3) comp€titive ruk and 8r*1h asssment. To

asN competitive risk and srcwth, we ase* four subfactoB as low, medium, or fuh nsk. Thee sbfaclore are

EffectivenesB ofindustry beners to entry:

Level ed t€nd of industry p.ofit m gins,

tusk of secular .han8e and substitution by prcducts, sewices, and technologies:


Effectiveress of r€tail bdusrys balri.Is to enEy-M€dium RisI

I 6 The retail indwtry b hiSltly competitive md fta8D€nted with f4 blrneB b entry, although cenain ebsectoB-such

a lood md drug retailing-'e€ dominared

by larSe playeB with sig.ifcanr market share .nd sc.le, wble oth€rs hNe

esrablished $rcn8 brand rc.o8nirion creating cusrohd loyalry

1 7 Industry coNolidation

ard orSdic srorc gro$1h crcated ,rElct lcadeE in food and dru8 .et jlng. Mdket

conen$atjon rai*s the barneB ro ent y as larSe chains with &ale and emcienor csn idcst in pn e to attmct

ruiohers In addition, much of the U.S. supermdker indu!try is unio.ized ehich nsdt3 in hjOer opsating cost! and

a thinler prcnt margin.

18 Reiailing is somewhat

capital intensive given the ned to continuously iNest in store development In the U S , store


Clitelid I Colporates I lrtllstiak: Key Cred't fd.tors FatTh. Reta'l And R6tout4"ts ladustt

rcnovatjoo proBarns @ highly impo.rant 8iren the rclative maturiry of rhe Mket, and a key factor in at le$t

mintaininS lrket slE . Succe$irl ltore rcrFEtion prcgram! can drive store tmffc and $lcs. A lack of store

ime$ment, coNerltly, can drive asay @tmeB ed lo* @stoftr loFlty Te.hnology to $ppoft ornine opeatjodg md 3n effcient s.ppv cbajn ako rcquire liable @pital iNcarnenr

19 Big-box rctaile.s dohinal€ specialry cateSode such a home imprcvement, elecnonie,

ard oflice suppliB This hd

created intense p.ice competition for smalei or regional players Those that &e unable to coDpete on price ned to

dilferentiate themselver

in order to $cceed.

20 Alto retailers face hjgher bar.iers ro entry gi!e. that automakers contrcl the nMber snd location of f@chies. Automakers Ee senerally prchibned ftom diEct auto sdes by deller ftandise laws ed Senerslly rely on auto dealers

to reach lh€ conMer Civen Oeir rcle. auto rctailers have Saircd effective tsftonal monopolies

manufactlreB. Bur e arEy of other vehicle olterinSs ftom comp€tltors lmirs the benelns of this ftard8e sEucture

Lev€l ard trend ofindunry profit naryiE-High Risk

2l Ongoing omperirion prerslres retaleE prcfitabilitl. The rapid grcwth ofthe discomt segfrent, palticularly in food

liom ther

retailing, ha pres&led gloss ma.gin fo! many tladjtional glocely operatoB as they need to l@er prices to remain

competitive. Bie-box category kjlleN with high volme sales pe. srorc also put inten* press re on smalle. pla),e.s

22 lvhjle comodity cost in@s

could p.Nre prcfit Dargins in tl'e shon term, reEil and rlst8uEnt opeEtoB


be€n nimble in pding pan ofthe cost inoe.se b consMels and adjlning then osi strucnre to ablorb dlese


Throir8h pncin& BtauEnts @ diEt c1latom.E to parts of the mmu wlErc meAB lre les exposd to

cotMo&y pn e ris

In Europ€, how€ver, weak c.ding coupl€d wirh inftaed cdp€rjt on have Eemly rc$tred in

maDy retaileB aborbint or uMble to pN i.put @st incr€aes.

23 Successtul inventory mana8ement

can help ljmit markdoM nsk lor speci6lry rcraileB tutaileB cd gen€ralty Ebound

ftom a single weal seuing seaon by fixing merchandising

i$ues and achieving better marSins in lhe next sellins

seaen. For dmple, durinS rhe most rcc€nt reession. rctaileE reduced inventory purches dd enhmced €sh flow,

reducins markdoM .sk and lowenng theii deral cosrs in liShr of weak sal6

21 Alto rctails have a diveM r*enE sireM that includ$ a hi8h-m.sin pan! dd *rie

bBin*. whjch affods the

potstial for co.!,slenr cash generatio. despne €conomic sinSs that @n reduce O!€ volme of vehicle sa16 d/or

lower maigiB on nd and Bed vehiclB. PErts and seMces can gerefrte 40Pl to 50% of prcft. which cm covs abour

sopl. or*Iins. se.e.al, and administniive

(SG&A) erPenseg

25 Auto retailes a.€ dependent on automskds'

captive linance companies

or thid-party lendeB to provide credit dirccdy

ro cotlsmeB fo. th vehicl€ purchNe The cost and availabitity of @dit can .onstran/dlive

mmufacturer inchtive to the consumer

Risk of seorlar chang. lnd suhtitutior of etailinS by product3, s€r"vic€3, ard techologi€s-Medium


sales, ,3 can

26 tlb viry the risl oI sec,ultu chlnge dd sub6ritutjon

by producls,

seric6, and tecrnoloaies a "m€dim." Vlhne tle

risk hom or&ide the indosry ir Id, there is inftsing rBk within the indusEy as o.Ine sal6 are risina at a faste.

pae thm bnck{nd-monar leiail sales.


/Mrrf, osDNcT

C/itetia Corpont s I l".lurtuh: Ke.! O


Fa.tor Fu The Retail Aill R8ta$drts lld|stry

27 Wlile there is a well-etablished conMer trend lavonng Bhopping online, bnck-and-monar rctaileB continue to be rhe prihary disrriburion channels Futher, many retaileB are blendinS their bnck-ud-monar stores with therr odine

operarioru Bnd, in lhe process, growing th€t mulrichannel


28 Some Mnufact@B h&e dweloped then oh djenibution cnannek to sel ro corrm€n direcdy, but this ha had lmned impaet on letailng.

2s Substitution

rirli ro. auto rctailrs b relatively low d we[ Only a ehrive, smal portion ol lhe U S popu]ation ha

acc$sible, reliable puuic trosportation. Thereforc, the vast majority is reldt on a P.ivat vehicle. This is by dBiSn

ln rh€ U.S , the v8t majority of rcads ed inteBtate highwa,ts werc desiened and comtructed lor the modem

autonobile. In Asia. alrhough public transponadon ir more widely awnabb given a hjehs density of populaton, pdEte vehjcle penetmtjon is srjl very ld.nd ha morc @m to grew

Rbk in r€tail hdurtsy grosth trerds--Low RbL

30 Retan indlstry sales trends de closely corel.ted with macrceonomic trends. In marue dev€loped m{kets, GDP

Srowth in itsll is smetimes not a good proxy for .etail sale. SMe-3tore o! like-torlike $l$ @tr be much more *tritive to consmer con idence and xpdations about unemployment ed discrcriooary income. This is aidenced

by a modest retsil sal€s decline in the recent e@ohic dofttun in the Us and eEozone dlrin8 2009. In Asia. we rend to se rcrail sales g]w fat€r than ohn line with GDP ge1i'



A retailels sralegy to achieve top-line grcwtt fron its store expansion strate$/ can also have a significdt impad on

i$ operating profile Large rnitinationals, including many Eurcpean retajlers, have expanded thei. footprint to emerging mdkers wheE th€re is higher growth potential comparcd to rhe core developed markets

32 The U.S retail lm&cape is mtuE dd ovrstored (mother sEy of 3lying 'exceis capacity') and exhi,hirs low grosth .atB. Sale grcwt} IarSely @mB fiom the exiding storc bae or 3eesroE sl6 Mam trcndr arlecr se+storc or Iikeforlike $1e., prcdomindtt lf rcrail !.ies grow, rhey erow throud expaffion-+specia,Uy €taileB that e inr€rnarionauy pMcnt, hn abo retaileB *to expand their distribution chmnels (for exmpl€. to online).

33 We viry Ewpean retril m kets a! very diveBe with varying operatin8 and competitive dyDuics. utich vstly influene the 8.ost pauer.!. That eid. re would as$ retail marklrs, panioldt in Westeh Euope, as largely maturE but sufferins lss frm exes epaciry rhe iD rhe U.S Comprirjon ton both Gtablbhed rctaneB and ns

enrants rcmains fiere. and 14 to modetute increa.re in rare-store sales srcwth @n be luSev amibured ro imp@ed

consma sFndinA trctrd! o. better operatDml exeotjon. Cootinued onrine dd Bultichunel grcwth should also aid the top line, toSether with modeEre conniburion hom srore erlpansion BtrateSies.

34 The A6iu .etajl market b hjghly n'aSmented dd competithe but thioly peoetrated

and expenencing

rapid grcwrh

mainly driven by incr.Bing disposble in.om€. price irflation, urbdiztion, md highe. populsrion RetaileE are expmdjng thei. stor€ neMorks aggresivety ro incEee cdsa€e

35 RetaileB seuing l$-dilcretionary prcduct , such s food and dru8s, de less sceptible ro economjc domrurB than

those in home impr@emelt ud apparcl, where @BMe6 @n poltpo.e puchses when rimes beome tou8h. The

restauhnt sector is also hishly dbcretiona.y

The commer cd eat at ho(e.

rorrrrrEr rr, r0rr a

Cfltela I Corpoldres tndusrriak: Key Credn Fd.tors fa/ The Retail Antl Rest4'/ants lndustry

36 The effect of cycle.liry i3 the main risk ditreMtiator betwen subsctoB in rctail. We expect sp€cialry reraileB *llh8

moredb.raionaly product! to exhibit moe prcnouced $in83 in rales based on dleSes i. conomic actility in


Country rtuk


we defne 'country.isr

as the brcad Eng€ ofeconomic, institutional, financial m ket, ed legal tuks rhat dise tom

doinS businss with or in a specific country and can aflect a non*olereisn e iry's crcdit quality The crcdit nsk ior

wery rated entity and traNction is inluenced to va.yinS degre3 by th6e R?es of country*pecific dsl6.

38 h a3sBsing coutry dsk for a rctail @mpmy our analysi! l)g rhe sfie m€thodolog], a wirh other orpoEte iseB

(se the @rpoEte criteda)

Comptitivc pGition (including proftability)

39 Under ou @rpo


crit.na. a companys comp€titive position is asesd 6 (1) qceU6t. (2) strons. (3) stishctory

(a) fair, (5) weak or (6) wlnerabl€ In asssin8 the compedtive position for rctaileB, we raid

an individual

Competitive advetaSe:

Scale, *ope, ed diverciry; Operating eficiency: and

40 The fi6t rtuee c$mgonents ar. indepo&ntly assess€d a! eith.r ( l) stM& (2) $rclg/ad.$atc

(3) Edequte, (4)

adequate/re& or (5) rca*. ftofrabtliry is ass6€d rhrcugh rhe combinarion of rhe l4€l of profirabiliry dd rhe

volatjlity of prcfitability.

4 I

After asssinS competitive advantage, scale, scope, diversity, md opratine elficiency separately. wE determine the

prcliminary compelitive position asessment by ascribing a spei,ic weight to each component.

The applicable


cofrpetitive posirion goup profile (CPGP). The CPCP $signed to retaileB is

"BEnded PrcducB ed Seryice" a retailing is @trsuer facinS and opeEtes bsed on .eputatioN lor its prcducts and

*dic6. While the indusry i3 abo.omewtEt capiral intensive, md r€tan€616e th€n $orcs &d therefoe do not

ned to comit substetial amout of @pital. We appty a CPGP with a weighlins of the thE conponmts a ioll(*s:

comptitive adBtage (4570); scal, scope. dd diveBiry (3e/.)i and op€Eting emcjency (2s%). Prcfitabnity is Nesed

wil depend on Oe company's

rhrough the combinarion otLv.l ofproirabinty mdvolatility ofprcitability, matrix (refd to ou orporat€ methodology, 'Prcfitability As4sment Marrix").

d we NN

prc,itability bas€d on a

12 \ Ihen datzing a retaileis competitive p6ition, we pur partidls emphdis on the compey's competitive adva.lage

In ou. vie-, the comp.nys m.rket poetion agai.st irs pee6, its oerchandising stratery, and ns ftack re@rd in

SDwinA ils !.les b6e arc key lactoB that Day mitrgare sales pressrc duing a cydjcat dNntum or hiShly comP€titive


tirae scale ce @mhand pnong power ard abilry ro leveage c6t. Mane6 of op€Etin8

effrciency-ilcludjlg c@t srructue, rcrking @pital heaS€frent, and teclbolrgy


gmeraty *condary


Cnbb I CotpordEt I lnduttuk: Key Credit [d.to6 For Tb. R.tail And R5taudnts ln.luttty



43 Our dsessmenr of a rcrailer's competirive advanrage is bued on the iollowing subfacto.s:

MerchmdisinS sratery. Whether th. stralery is Iool3ed on a niche or on a @te8ory $ccestul merdtaDdisint is cled, focEed, &d @Bistmt flough to mintain custofr€.lc,yalry

Dme@tjation ol conccpt/poatucr/shopping

s?eofi c crlltomer seSment.

Brand reputation and marketing Srory pnEte or exclusive bre& ce @Dmed pnc€ premitlms and alloe lot abde-average margns while burding Gtomer loyalt).

Pro&ctlserviceJev.l quslty tutajle8 that ofier the right balance of quality od pnce p.ovide a compeling vatue

e)p€nde, and positionjn8 vers coDpctitors can €ffectiveb larSd a

4.1 whethe. the staregy is brcad or Brw, a rcrsile/s fre.chandilin8

stmlesr dd brand mageme e


spets of the bEin6s nsk oalysis a thes€ can set the foundation for overal @mpetitive position

'15 A r€tailer with a strcng o. strcng/adequate competitiv advantage assessm€nthas acombination ot

Con*tendysuccessin hercbed:sinSstlate$.

CompelinS value proposirion

of its prcdu.rs or *Niceq

Highly ditrerentiated concept or prcduds;

Succsn prcduct/bBnd posidonins:

A etrcns con$mer frechie;

Succ$stul online 3trateg a.d e pladorm lo spporl tutrtre channels:

Strong stor€ development with att'aclile storc locationst and

For auto retajlers, operation

ol a vanery of desirable ftanchises with diveBe bred exposu!€

.16 A lel&iler with a reaI or adequate/weak ases$ent of its compettive advantase typically ha a cor'iination of

Uttle concept/prcdrat

WeaI b.dd positioning relative to pe€rs:

Lo{ value propositio ofits prcducts/seNic$:


Weak track rcord ol slore development,

or ents hom cenain markers due to failed expmsions;

Lack of signin@t odine pres€dce to rupplement its rerail oper.rions; dd

Fo. auto retaileB. conentration of fEchi*s and bred expo$re


MeEhddising success can be achjwed thrcu8h a vanetyofnethods Mosr Etailm l()s on a distinct niche, prcduct

c3te8ory or conveniene. Whether the sirareg is niche or @leSory-dominet, the merchandising stEtegy needs to be

clear, focDsed, and consittent becaEe deviatioN can loe custom€r loyalty and market share lo competitors.


A strcng @!t!mer frmchi& is &e resulr of lonS-term merchandbing $ce$ and bEnd management

that c@te Nah

@!l!mer acceptace ed loyalty Frcm a credit amtysis pers?.ctive. a .tren8 eolrlmd rranchise suppons co6ktent

healrhy salB &d prctu 8rcwth.


succesin retajlers prcvide a compeuins ldue proposnion RetaileB thar offe! the nght balance of prcducr qualiry and

price prcvide a convincing redon to shop ar thet sto.es, and generally have a strong or st onSladequate

Selecting appealinS producb and efiectively displalnS dd oekering them wil attract high tutomer Eafic

Intoducjlg new nem and moving jnto n* cate8ories dd pnce poinb cd reinvigo.ate s.les &d i6age. Ho{ever,


www.$ DADATPoon3.CO


Cnbid I Co,?otdt.s lndustidk: Xe.! Cretln fa.lots [o/ The Retal Ann Rest !runts Ind$,.l

srockin8 merch3ndis

sbpar sales and genenly rsults in a weak or adequate/weai( codpetitive

ud Nonmedts rhat .liffer liom @sromeB' expectarior3 or image of rhe stor ce lead to

advantage ssessment.

50 R€taileB difier€nriare them3elves by ofiering unique prcduct desi8n, qualiry prcducls. sood sewice. conpetting

a$onmenl, and appealing presentation DiffeEntiation is oten the key to success in a crcwded market Given rhe

inteNe .ompetition hom big-boi pla!'€6 in a,lm@t qery prcduct category a smallregional or nich€.etailer ttEr is

u.able to @mpete based on priee wjl Deed a high degree o, diffcrentiation to reeive an Nesmenr of stbng or

5 I

To pB.

dbomters nom gaining nDrka shar6 o. to itrlI'Be pne,perception dodg Gromersj rerailers hde

bee. epandinS their pictelab€| md erclusive offenn83 Th€.€ producls, when &cce6siirl. rypicaly boost volue

8@wth a crom€B @ afford to puidre more. In addition, prilatc+b.l soods cery hisher mrgiB rhan bred.d

prodlcls a! th.y aE tailormade for the rctailer, prcduc€d ,D lokr rtock-keping units (S(Us). and c'rry loecr mark ring @3t3. Crcce6 dd drug chajG rhat inoear. Oe p€nctration of rhet privatelabel prcsEN seneElly g€r a

slronS or stronS/.deqrr.te agsqe

52 Sp€cialry reraileB hae also develop€d private bra.d! tdgain8 a niche market that compete agajBr national bran.ls. Some specialty rctailss have ale &hiwed a hislny difierentiated prcduct mix dd stoE expe.ience tar8eting specific rutom.r *8Dents. We view th€se developmenrs favorably, aB thcy represent a competitive advantage that allows ior

above-avera8e src$ marsins $tile buildjns rutomer loyalty

53 Retail compani$ must regula.ly rciwest in their propsties, or build new prcpenis to increBe sales and maintain rhe .eldance of the storc concept. lnvescnent beFnd normal mainren.nce spndin8 ir often requird ro pedodically

eimiSorat€ a prop€rr, espe.ialy in more competitive malkets Store remodelinS prcglam arc citical to attract oatom.B 8nd maintain competitivenes. A rell mainlained store be witi o atftactiE storc layout @n b€ a

comperitive adEntage OurdaGd ddor p6rt maintained

stoles. on the other hod- @ susceptibl to msterial ssles

erdioB, on b€ . coftp€ritive disadvantaee. and pil Se.erally b€ as$ed 6 wea] or adequte/weak

s4 Onlire sales tmain a small perentaSe of der.I €tail s618, but aE gwing at a much fasrer pac€. ln les?onse,

etail€F have inoeased $€n iN61,n€nrs in th€ o.Ine channel ln our bBiness rtk NBment, we vi@ iN6tmenr

in the online chamel faorabv We do not necsd y vi* a lack of oiline iflesllnedt uifavo.ably

as long ar overall

8rcsth procp€cts rcmain heaIlry and the .elaile! is e,eandin8 its "brick and morte" storc b@. We beliqe rerail

sbs.ctoB. $ch a discount stores, maintain 8ood storc grcwth pot.ntial snd, thereforc, signmcmt online inveshent

is not critical. For other more marurc scto6, such as dep.nm€nt stores, in contrast, broadening

importanl to sales erowth given &e lack of storc ero{th potential.

the onli.e channel is

Scrle, scope, and diversity 55 Retailing is BeoeElly fragmentd, but ir cenain sbsectoB, $ch as $permdkets and drugstores, ldge retaileB can

comad a wry sisnificant share of the overal markd olher ectors. such a specialty apparel or hard Soods a.e

highly fhSmented md ad the ldgest playeB ody rccount for d very smsll po.tion ofthe ove.al frdker

s6 Si2.

.ion. docs not ellse prcfitabibty and grcwth I h@der, hrSe $al€ sXos comp&i6 to sprcad @r @sr! and

eljoy moE e@nomis of s.ale the dE smFiroB. Sia @n povide cconornie of scrle in .lisniburion, advenilin&

Clniid I Cor,otdres I Indust/idk: K., Cle.lit Fdcto\ tot 'rhe Retoil Ald R.stdutunts lndtstry

overhead, ud inlomatio! systems Impoont mark r sharc l@de.ship al5o crcares cl@t with suPPleB to obBin

57 Our sele, scope, ed div€rstry arsessmenr ir.orpoEte:


Divelsity of product or serie rdge.


Gesraphic too9int oI srorc be and pGp.cts oI core mai.ets For EuroPea. markeB offe$ hidr 8roMh prcspects than th matDre home Mkets

rctaileB, a Pee.ce in emeryrnS


volmes, size, market shee, or niche position in chosen seSnenr.


Relative atrractivens of rhe mrkets (i.e., si4. d€Dogrdphics, exp€cted gwth, ed intensily of competition)

sE A stronS or strcn8/adequate 6s$ment olscale, scop€, dd diE6ity t]"ically coDbines






Sizable maker sharc leadeEhip i! the ret ileis co.e markets or indatry s!bse6o.

Larse scalc that comman& st.ong barSlining power with $FplieB.

Ab rty ro levetuSe lrkedng dd other op.nting @sts.

A $ccestul niche position within a $hecto,i a @teSory leade.

For Eurcpean ed Asian rctaileB, geogEphic dive.siry wirh presence in hi8her-growth emerginS mdkets given the

limited size of the domestic mark€t, or exposurc to dilfercnt r€gio.r {irh .liffeEnt coMption rrcnds, helpinS lo



For larSe auto retailers, gro{th through succe$tu| acquisitioN, with the scop€ and scale for technolosy orat enablet

more eficienr op€rarions

In the reslrumt indatry ompariy.peEted sd ft.nchi*d rcnauEnts g.netilly coDEibue a signifi@t

percemaSe of rcvenE ro advenising tunds. As s rBult. luc€ b.e& rend to hale ldge advenising budgets md @

market then prcducts ed prcmodoB morc aSSesively thaD smaler braDds

59 A weak or weak/adequate Nssment

of s$te, s@pe, ud diveEiiy typically is characte.ted bl.


l reak marker position in a crowded sector



Lack of lcale and lN bdCaining power with rupplieb.


PBm.e of siSnincantly

$ronger playe$ in core markets.


Ma*€t 3h!rc los ro srrcng€r play€6 in it! core mrk€ts.



For Euopce ald Adu rctaileB. lack ot s.o8.apr'ic div€rsry hde or no pre


iD high€rewtn em€rCng

marke$, or Dnle or.o divellity in differcnt rc8ions wirh differtnt consunFjon tcnds to midgate volatrIry.


For at to rctailers,lack oferomh throud acqui,3itioB md lack ofscale ed sp€ for tehnol rtomabl.h@


For Braurants, smaller or regioml bran& Iack sele and s@pe that could result i! Bmall adve.tisin8 budgeB that

hindeB the ability to prcmote products.

60 In terms of geoS.aphi. diveBity, re beliwe retail compaDes should operate in frultiPle regio6 allMd the world

holdins leadins markel positions: or be well spead a@s ole sjzable m.kct (rot ermple, the Us. or China) with

lirde conclnttation in sy parti@lar star€ or r€pon. Hdever, geogEphic diEBity that lack! gd p.ofitability is not

meein8tul. ad weu diveBifed rctail€rs @ s(ruSgle b.qr of p@r store or m.r.rlandiirg e@tion Lil(ewire,

sigDjfcant conenration in ore sta(e or rcpon @n be vi d 6 urdryorable: h@!ve., nmerous regionel ntailels

have achieved srrcng rcgional mrket shaE despne fimited geographic dteBity

6l Generally, brand diversiiy does not play antmporlut role in ou ratings process A retail compdy may operate or

Crn ia Cotpototcs I tndqtti4b:

Ke, Ctetlit Facto^ For The Retail A4d Restaunrrs ladrstly

manage nnltiple conceflr, and rh€8e may be in ditferc.r sub3etoB or hde quite diErSlnt prcduc't ofle.inss ed

p.ie points But i, fa.t. dcveloptnclr ud tlEaaemelrt ol smrler bnn.ts can occlf,y mrmSemnts time dd

@urce. so dEt the prihary b@d opeBtioB msy suffe. StiU. re wodd view a singula! concefl rhat i5 $F*ry

pnitioned a @fsvorablc.

62 In terms of concept diversiticaton, we bela€ the .etailer should have breds that have domina

positiom in the

po.rion of operathg income. ldeally the multiple concepts

niche segments they serve and account fo. a significanr

tarSet djsrjnct stomer or prcduct se8ments and the grcwth of one does nol cannibalize on the sales of anodet

Op€ratiDg efhciency

63 Blt.il cofrp.i,les diveBe re.to6, md opeEting m€tn6 for each seclor can vary widely. Thcnforc,



be hade with Fss in rhe sam slb!ctor ,ith simil& prodkr mix, cct strEtre, and Se raphical opeEtioB. To


op€Ering efficiency

we rypi.dly rack


Same store sles or like{orlike Bales:


Sales per square footi




Accomts payahle dqsi


C.sh co e6ion cyclesi ed


For au(o rclaners, rc l@k at the Edo ot SG&A to grors proirs

64 Strcng or strcng/adequat opcmting emo€ncy ir chtracterized by:


A @Distent p@itive trend of sme.store sales grcwth that loeragB a growing 6xed co3t bas


Hicherthan-alera8e unit-l4el prcductiviry comparcd to peert, such as salB per squde f@t for retailers ed

avense unit volurne (AW) ror restauants.


a @si$ent tmd of glw megin indi@tes st oDg work nS capital meagement. This is Prfticulely moE

importar for *enal rctaiLrs


A Nmptitive con $rucrur. (SG&A as a percent ofsalB) dd ability to adiust co$ lrrudurc in penods ofhlins


aDo!-nvraee prcfit mdSin (EBITDA marsin) from cln istmt ssl6 Srowth to lssase a highry fixed exPe@


Emcient mrking capital maiag@crt leadrng to higher inventory turu and limrtd mdkdom risk


For auto r€tailers, a high d€gr€e of Ntomation int€Sdting op€rations and ssles. pDvidirs curent mrket data lo th sales fl@r for beaer pricinS, and gathenng cEtoher informtion to d.ive sales for the parG ud setuice segment


Also fo. auro .elailers, exelent relarionships

with prcfrtable automalcrs, lo

inS that th€e aulofr6kers t}?icaly

pMide fl@. pla. frnanong for th€ Ehid€ invotory ed have veto P(,w ovq the amrdin8 ot ftanchit€s to


Fd rsta1lfut3, a hioer mi, of hanchisd uits rcsults in l€s exposue to @lmodity c!8l fluctuatioG dd packaeDg ud bbor co3ts, and thu offe6 a moE predict.bl

65 \r/eak or adequate/weak operating

ernciency combines:


iovrrlrRrr,2013 rr

Critqia I Corpolat6 | lndusniak: Ker Crtdit Fa.toB lol The Retail Akd Restaarants I dustry

Sme-stor sales trends thst lag pee6 or or 6JE declining .oBistently, indicating market slarc Io$.

Prcftability coosistently

bel@ pe€rs due to subpar sales kends or les ompetjtiv€ cost structurc.

Less competitive ratio ofSG&A to sa,les becaute ofhieher rent or labor expenses High volatiliry ofgrcss malsin, indicaung poo. inventory mdagement.

Lryerthan-sveragesates/sq ft. indicatingmderutiladas€ts.

Lack of a compreheBive online smreg/ or ljtde presehc€ in this grcst chann€I. Wak worhnS capital managemen! resDtring in g.eater inv€ntory investment, l@er inventory tu ns, and