S&P Global Ratings views the European food retail industry as highly competitive. In several countries, discounters have gained ground on the incumbents over the past decade, although these incumbents' market shares have started to stabilize recently. In this article, we analyze and compare four leading food retailers in Europe with strong business risk profiles and sound cash generation: Ahold Delhaize N.V., Carrefour S.A., Rewe Group, and Tesco PLC.

These key players have successfully managed to offset very high inflation through strong price increases over the past two years and are now turning their attention to volume growth. We expect volumes across the food retail industry to slowly start to pick up, as recent operational challenges due to high inflation, supply chain disruptions, and the rising cost of living have started to ease. This easing allows consumer spending to increase and retail prices to broadly stabilize.

The still tight labor markets across Europe are a mixed blessing for food retailers. On the one hand, wage increases inflate retailers' cost base, especially in the U.K., where the minimum living wage has increased for several years in a row and may continue to do so. On the other hand, higher wages mean more money in consumers' pockets, which, in turn, translates into higher spending.

Ahold Delhaize, Carrefour, Rewe, and Tesco continue to have strong credit metrics that support the current ratings (see table 1). This headroom should allow them to comfortably navigate any further potential macroeconomic pressure and changes in consumer behavior.

Table 1

The Four Peers Hold Significant Market Shares In Their Countries Of Operation

Ahold Delhaize, Carrefour, Rewe, and Tesco are household names in their home markets, where they hold No. 1 or No. 2 positions. Ahold Delhaize has a share of about one-third of the Dutch market; a share of slightly less than one-quarter of the Belgium market; and meaningful regional market shares in the U.S. Tesco is the clear leader in the U.K., with a market share of 27%, according to market research company Kantar Group. Carrefour and Rewe are the second-largest players in France and Germany, with 20.0% and 19.5% market shares, respectively, behind Leclerc S.A. and Edeka Zentrale AG & Co. KG.

In all these countries, discounters, such as Lidl and Aldi, play an important role and have gained substantial market shares over the past decade. However, as discounters' market share matures and weaker players scale down or exit the market, Ahold Delhaize, Carrefour, Rewe, and Tesco have successfully navigated the competitive landscape and have stabilized their market shares in recent years. In Germany, discounters have maintained strong market shares for a long time, but supermarkets have gained more market share, despite persistent price competition.

Different Geographical Footprints Create Different Macroeconomic Challenges

Following its exit from various international markets over the past decade, Tesco now has the highest geographical concentration, generating more than 90% of its revenues in the U.K. and Ireland (see chart 1). It still has a presence in Central Europe, but this remains small. Over the past year, Tesco's strong operating performance in the U.K. has offset the macroeconomic pressures on its activities in Central European countries such as Hungary.

Carrefour generates around one-half of its revenues in France, about 13% of revenues in Spain, where it is the second-largest player after Mercadona, and close to one-quarter of revenues in Brazil following the acquisition of Grupo Big (see chart 2). Carrefour's presence in Latin America provides diversification and growth opportunities but adds volatility to the group's trading performance. This is evident from the currency volatility in Argentina and macroeconomic pressures in Brazil in 2023.

Rewe has some concentration on its home market of Germany, where it generates two-thirds of its revenues (see chart 3). Internationally, Rewe is mainly present in smaller markets in Europe.

Ahold Delhaize has the largest presence outside Europe. The U.S. is its key market, representing 62% of sales in 2023 (see chart 4). Ahold Delhaize's U.S. subsidiaries are well entrenched in most of their regional markets. They also hold up well against much larger competitors, notably Walmart and Kroger. While this transatlantic position adds some currency risk, in our view, Ahold Delhaize's geographical diversification and competitive standing in the U.S. reduce its earnings dependency on Europe.

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Chart 4

Profitability Depends On Business Models And Competitive Pressures

Ahold Delhaize has the highest profitability of the four peers, with S&P Global Ratings-adjusted EBITDA margins of around 8.0%-8.5% (see chart 5). In our view, this reflects Ahold Delhaize's dominance in affluent markets and means it has to compete less fiercely on prices. It also reflects the optimal size of Ahold Delhaize's store format (supermarkets), scale benefits, and the company's product mix, with a higher share of private-label products. Ahold Delhaize also has high exposure to the U.S. market, which accounts for around 60% of its revenues. Historically, the U.S. has delivered higher margins than the price-competitive European grocery sector.

Rewe has an adjusted EBITDA margin of about 6.5%-7.5%. We think that this is the result of tough price competition due to the high share of discounters and some margin dilution from its operations in the convenience and travel segments. Rewe has increased its offering of fresh, regional, and organic produce, which we consider could help counter the competition from discounters. Rewe has also maintained the selling prices of its own-brand products in line with those of the discounters.

Tesco's EBITDA margin is roughly similar to Rewe's, at about 6.5%-7.5%, and reached a low point of 6.3% in the fiscal year ended February 2023, before improving moderately to 6.6% in 2024. This is a result of discounters' strong growth and increasing market share in the U.K., as well as price match schemes that balance out Tesco's scale advantage and format diversity. Carrefour has the lowest EBITDA margin of all, at around 5.5%, due to fierce competition in the French market, but also to because of a high proportion of hypermarkets in its store estate, which continue to face structural challenges.

Chart 5

Food Retailers Favor An Omnichannel Strategy

All four players have established a clear omnichannel strategy and have identified e-commerce as one of their key growth drivers. That said, e-commerce contribution to overall sales is subject to specific local market dynamics and generally reflects lower e-commerce penetration. This is particularly the case in grocery retail in Germany and France, compared with the U.K. and the U.S.

For example, Rewe generates less than 1% of its sales online, even though it is a clear leader in online food retail in its core markets Germany and Austria. Carrefour also has a low proportion of online sales--only 5% of total revenues in 2023. This compares to shares of online sales to total revenues of close to 10% for Ahold Delhaize and 13% for Tesco, which is the market leader in the U.K. when it comes to online supermarkets sales.

However, while e-commerce is a key driver of growth and market share expansion, it puts pressure on retailers' cost bases and operational efficiency, increasing logistics and fulfillment spending. The economics of online operations and efficient capacity utilization in stores and warehouses across their sales channel mix could increasingly weigh on the companies' overall EBITDA margins.

All Four Peers Have Contained Their Leverage Metrics Despite Their Large Lease Portfolios

The companies' adjusted leverage remains comfortable at the current ratings. Rewe has the highest leverage ratio, at close to 3.0x. We expect it to remain at that level for the next two years due to Rewe's continued investments in its German real estate portfolio, which is smaller than the portfolios of many of its peers.

Tesco has historically had leverage of close to 3.0x, but fell to 2.6x in 2024 and we expect it to remain around that level over the next year, in line with the company's public financial policy. Ahold Delhaize and Carrefour have kept leverage at around 2.5x, underpinning our assessment of their financial risk profiles as intermediate.

Leases greatly affect the retail sector, but there are some differences in lease structures and their impact on leverage (see chart 6). Carrefour has the lowest proportion of leases on its balance sheet, representing close to 50% of its adjusted debt, Tesco's has close to 60%, while Rewe and Ahold Delhaize have close to 70%-80%.

Chart 6

Rewe's Cash Flow Generation Lags That Of Its Peers Due To High Capex

Rewe has historically reported negative free operating cash flow (FOCF) after leases, including negative €248 million in 2023. We expect this to remain negative at about €100 million-€400 million over the next two years. We estimate that more than €1 billion of the planned investments will focus on real estate and acquisitions, are therefore more opportunistic, and could be pulled back if macroeconomic conditions deteriorate.

Rewe's capital expenditure (capex) as a percentage of revenues is around 3.5%, significantly above 2.0% at Tesco and Carrefour (see chart 7). Ahold Delhaize falls in the middle, with close to 2.9%. Ahold Delhaize has the strongest FOCF after leases, at around €2 billion per year, similar to Tesco with £1.6 billion-£1.7 billion despite its higher capex.

We understand that Tesco has increased its capex guidance for the current fiscal year to around £1.4 billion from £1.3 billion previously as it increases investments in store refurbishment, automatization, and logistics. However, this is still lower than the capex of Tesco's European peers. Historically, Tesco has made some expansionary investments via store acquisitions rather than capex.

Chart 7

High Shareholder Returns Constrain The Four Peers' Discretionary Cash Flow

All four players' discretionary cash flow to debt remains below 10%, mainly as a result of high returns to shareholders in the form of dividends and share buybacks, even during the COVID-19 pandemic (see charts 8-11). We expect shareholder returns to remain significant, in line with the companies' generous financial policies. Total returns are close to €2 billion per year for Ahold Delhaize, £2 billion for Tesco (excluding extra returns from Tesco Bank), and about €1 billion for Carrefour.

Rewe is organized as a cooperative, and in 2023, only paid minor dividends of €31 million to the five cooperatives acting on behalf of its ultimate shareholders. That said, since we adjust the earnings of the independent retailers, the residual €376 million in dividend payments in 2023 are, in effect, payouts from the independent retailers to themselves. We expect that overall adjusted dividends will remain at a similar level over the next two years.

Leverage at Tesco remains at the lower end of its publicly stated target range of 2.3x-2.8x, which corresponds to close to 2.8x-3.3x on our adjusted basis. Ahold Delhaize and Carrefour do not have a stated leverage target, giving them flexibility in their capital-allocation policies.

Generous shareholder returns at Ahold Delhaize, Carrefour, and Tesco create uncertainty around their future leverage. This underpins our negative assessment of the financial policies of all three companies. Rewe's shareholder returns are lower than those of the others, while its leverage is already approaching its publicly stated target of close to 3.3x. We therefore see less risk of Rewe's leverage increasing beyond its current level, given its commitment to maintain the ratings.

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The Four Peers Remain In A Good Position

Strong competitive pressures and a weak macroeconomic environment have tested the four food retailers over the past few years on numerous fronts. However, their leadership positions in their countries of operation--as well as their ability to withstand competition and support their profitability by implementing cost-saving initiatives, adjusting product mix and pricing strategy, and making operational improvements--have allowed them to maintain their strong market positions along with accumulating headroom under the credit metrics that support the ratings.

Financial policy and capital allocation remain key factors in our rating analysis, and we acknowledge each company's commitment to keep credit metrics steady while accommodating investment plans and shareholder distributions.

Related Research

• Tesco PLC Outlook Revised To Positive On the Back Of Strong Performance; 'BBB-/A-3' Ratings Affirmed, July 24, 2024
• Full Analysis: Carrefour SA, May 31, 2024
• Full Analysis: Ahold Delhaize N.V., April 26, 2024
• European Food Retailers Resilient Amid Operating Shocks, Feb. 12, 2024
• Tear Sheet: REWE Group, Feb. 6, 2024
• Full Analysis: Tesco PLC, Nov. 1, 2023