The European retail sector is once again under significant strain as a fresh surge in energy prices compounds the difficulties it has been facing. This latest increase in costs has been triggered by escalating tensions following the outbreak of the U.S.-Israeli conflict involving Iran, which has sent shockwaves through global energy markets. Retailers across Europe, already grappling with weak consumer demand and reduced spending power, are now bracing for another challenging period marked by rising operational expenses and cautious shoppers.
On Monday, shares of major retail companies, including Zara’s parent company Inditex and the UK’s Marks & Spencer, experienced notable declines. Investors and market analysts are concerned that the upward pressure on petrol and gas prices will further dampen consumer spending, which has yet to fully recover from the inflationary pressures unleashed by the spike in energy costs following Russia’s invasion of Ukraine last year. The retail sector’s recovery remains fragile, with many businesses still adjusting to the aftershocks of last year’s energy crisis.
During the previous energy price surge in 2022, food manufacturers, supermarkets, and clothing retailers were forced to raise prices significantly to offset increased costs. However, the current situation appears even more precarious as the eurozone and the UK economies show minimal growth, limiting consumers’ ability to absorb further price hikes. Adding to the complexity, retailers have been contending with the fallout from a global trade war initiated by former U.S. President Donald Trump, which has disrupted supply chains and increased costs across multiple sectors.
Experts warn that if energy prices continue to rise, consumer reactions could be more pronounced this time around, given the already fragile state of demand. Christian Eufinger, a finance professor at IESE Business School in Barcelona, highlights that the economic environment today is markedly different from early 2022. Back then, demand was relatively robust as economies were emerging from the pandemic-induced downturn. Now, after enduring prolonged periods of high inflation, many households have diminished disposable income, making them more sensitive to price increases.
Prior to this recent spike in oil prices, the retail and consumer goods sector was already identified as the most vulnerable in Europe. An index published in January by the restructuring law firm Weil underscored this fragility, pointing to declining profitability and a growing risk of insolvency among retailers. This paints a worrying picture for the sector as it faces a potential chain reaction of cost pressures that could further destabilize businesses.
One of the most immediate challenges for retailers is the rising expense of transporting goods. Road freight, which typically accounts for between 5% and 10% of a retailer’s operating costs, has become significantly more expensive due to higher fuel prices. Moreover, energy-intensive operations such as refrigeration, heating, air conditioning, and lighting in stores add to the financial burden, particularly for supermarkets and shopping malls. The surge in oil prices has also driven up the cost of fertilizers, which directly impacts food producers and, by extension, the entire supply chain.
Massimiliano Giansanti, president of the Italian farmers’ association Confagricoltura, described the situation as a likely “cost-driven inflationary spiral” that begins with rising transportation costs and cascades through every stage of the supply chain—from agricultural production to the consumer’s table. This inflationary pressure threatens to push prices higher across a broad spectrum of goods, further squeezing household budgets.
Clothing retailers are expected to be particularly vulnerable in this environment. Francesco Gangemi, a consultant at Simon-Kucher, explains that fashion items are often the first expenses consumers cut back on when faced with rising prices for essentials like food and energy. This shift in consumer behavior could lead to reduced sales and profitability for apparel brands, exacerbating the sector’s challenges.
Reflecting these concerns, analysts at RBC have revised downward their profit forecasts for Marks & Spencer, anticipating that the surge in oil and gas prices will increase costs for British households across food, transportation, and energy sectors later this year. In response, the British Retail Consortium has urged the government to take measures to mitigate the impact on consumers. Andrew Opie, the consortium’s director of food and sustainability, emphasized the importance of controlling other inflationary pressures to shield households from further financial hardship.
As Europe’s retail sector navigates this complex landscape of rising energy costs, stagnant economic growth, and shifting consumer behavior, the outlook remains uncertain. Retailers must find ways to adapt to these mounting challenges while governments face increasing pressure to implement policies that can stabilize prices and support both businesses and consumers during this difficult period.
