Friday, February 1, 2008

Romania: The Future of Retailing

Oxford Business Group Latest Briefing

Romania's retail sales growth in 2007 is expected to top 15% once final figures are in and foreign-owned firms are rapidly expanding their operations in the country. Economic growth is likely to sustain this in the medium term, but high costs and saturation will put a brake on it in the future.

In the first 11 months of last year, retail sales volumes were 17.3% higher than the same period the previous year, according to the National Statistics Institute (INS). Food sales increased 27.7% and vehicle and fuel sales jumped 25.9%, while non-food sales not including vehicles and fuel grew 7.8%. Retail growth has been driven by growing incomes and rapidly increasing credit.

The Romanian retail sector is seeing ever-increasing participation from overseas players such as Kaufland, Metro and REWE Group's Billa and Selgros, which are all German, as well as France's Carrefour. Currently Kaufland, which operates more than 25 shops in Romania, is the market leader, followed by Billa and Carrefour.

Carrefour, the world's second largest retailer, has been one of the most obvious beneficiaries of the dynamic Romanian retail market. In 2007, the firm's sales in Romania grew by 54.5% on constant exchange rates to $1.3bn. Carrefour has 11 hypermarkets in Romania, with four opening last year alone as part of a $120m investment programme. Even discounting the new stores, organic sales growth topped 5%, one of the best performances in the Carrefour Group.

The French company is set to expand further in Romania, through new store openings and acquisitions. On January 29, the Romanian competition council gave the green light to Carrefour's $81.3m purchase of Romanian retailer Artima from Warsaw-based private equity outfit Polish Enterprise Fund V. Artima operates 21 supermarkets with a total area of 21,000 square metres, and its 2007 sales are expected to total around $140m. The success of a relatively new medium-sized independent retailer such as Artima, which was founded in 2001 by Romanian entrepreneur Florentin Banu, is indicative of the strength of recent growth in the country's retailing; Enterprise paid $25.1m for Artima in 2004. Since then, the company's sales have tripled.

Carrefour's large hypermarkets in Romania are often placed at the heart of shopping malls, particularly in out-of-town sites, or along major roads. The retailer's representatives said this model is suited to the way Romanians prefer to shop - as a social experience and an activity rather than a quick trip to make purchases, and the malls offer restaurants and cafes, as well as a range of other stores.

Following Carrefour's success, another French retailer, Auchan, opened its first hypermarket in Romania in November 2006, and now operates stores in Cluj, Pitesti and Targu Mures. The company invested $51m in its Bucharest location, which has a commercial area of 16,000 sq m and directly employs 800 people.

Auchan contends with a range of rapidly expanding rivals; Kaufland is to open at least ten more supermarkets this year, and Real, owned by Metro, is to add another 17 shops, taking its total number in Romania to 21, and its investment to $510m.

Auchan, Carrefour and their competitors and partners see continued potential in the Romanian retail market, despite the risk of the global credit crunch, to which the country may be more exposed than other Eastern European nations.

According to local press, Bucharest has one major supermarket (including hypermarkets) per 25,600 inhabitants, a figure that shrinks to one per 55,000 inhabitants for the country as a whole. Given that the survey defined "major supermarket" as one belonging to one of 19 chains in the country, the penetration of Western European-standard retailers is likely to be considerably lower. This, with the country's high growth, which is expected to be 6% this year, indicates there is enough space for firms to grow. A January INS poll to gauge the business sentiment among company managers across all sectors was upbeat about retailing and the potential for increasing employment in the sector.

However, retailers face not only competition from similarly ambitious rivals, but increasing costs. Wages grew by 16% in the first three quarters of 2007 and the government's 28% minimum wage increase in the 2008 budget is likely to drive on overall salary inflation this year. Furthermore, land prices for retail development in certain parts of Bucharest now top $1450 per sq m, according to local real estate firm Neocasa.

Such increasing costs have been blamed for a delay in some planned hypermarket developments in 2007. Additionally, Germany's Lidl has been eyeing the market for some time now, but has remained wary, perhaps also due to wage and land price rises.

The retail sector's performance in Hungary last year may give warning to those looking to invest heavily in Romania. Retail sales there fell 4.2% in the year to November 2007, despite GDP growth of 2.7%, according to the Hungarian Central Statistics Office. Hungary saw a rush of retailers enter its market in the late 1990s and first years of this decade, and has been seen as a benchmark of retail development for Romania.

The Romanian retail sector is growing strongly and is likely to continue to expand in the near future, probably in the double-digits this year. However, high costs may make retailers look again at their more ambitious plans in the medium term, and the example of Hungary indicates that this may be a wise choice.

No comments: