Monday, June 2, 2008

Romania: Retail Growth Continues

Oxford Business Group Latest Briefing

With the Romanian retail market enjoying double-digit growth and potentially doubling in size over the next three years, retailers are enjoying heady days indeed. Over the medium term, expect hypermarket chains to start looking to consolidate by expanding to smaller cities and honing their strategy for the Romanian consumer market.

Romania's retail market could grow by 100% by the end of 2010, Alain Thys, managing partner of Future Lab, a Belgian consultancy, told a press conference on May 27. Last year, sales in the fast-expanding retail sector were worth around $48.5m, and Thys expects growth of 16.5% to $59.4bn in 2008, a slight slowing from 17.8% last year and 24% in 2006. He added that in the long term, Romania could see retail sales climb to $210bn, equal to the level currently seen in Belgium. As Belgium's population is half that of Romania's 22m, this assessment might be seen as damning with faint praise, but given that Romanian income levels are less than 40% of the European Union (EU) average, and that Belgium is one of the bloc's wealthier countries, the forecast looks more favourable.

In the first three months of this year, retail sales increased 15.9% year-on-year, according to statistics released by the National Statistics Institute (INS) in May. Food sales grew 14.3% compared to the same quarter last year, while non-food sales were 17.3% up. Overall sales in March were up 11.2% on the same month in 2007.

The quarterly performance of individual retailers has also been striking. France's Carrefour, the world's second-biggest retailer (after US-based Wal Mart) reported that sales at its 11 hypermarkets totalled $361.8m in the first three months of 2008, representing growth of 36.8% on the same period last year. Like-for-like growth - that is, growth excluding the effects of store expansion - was 9.8% in the year to the end of March. Last year, Carrefour achieved overall sales of $1.3bn, up almost two-thirds on 2006.

According to Thys, Romania is in the first stage of retail development, which has entailed international retailers bringing in their models from abroad. Significantly, he said that the second stage would involve these firms tailoring their shops more specifically to the local market.

Carrefour's success in Romania is partly attributed to the fact that its strategy of locating its hypermarkets as the centrepiece of malls suits the local shopping culture. According to Carrefour sources, Romanians enjoy shopping as a social day out, browsing different shops and perhaps enjoying something to eat in one of the on-site hot food stands.

Carrefour is not the only retailer to flourish in Romania, but for the time being, there appears to be enough growth in the market to accommodate the various players' ambitious expansion plans.

For example, in March, Real, a German hypermarket chain that is part of Metro Group, announced it had achieved sales of $574.18m in Romania in 2007, its first full year of operation in the country. The retailer sees considerably more scope for growth, and is therefore planning to increase its number of hypermarkets in Romania to 21 by the end of the year, from 14 at present. To achieve this, additional investments of more than $220m will be made, according to Tjeerd Jegen, managing director of Real Hypermarket Romania.

Other international retailers in Romania, which include France's CORA, Germany's Kaufland and Dutch firm Spar, are also likely to look to consolidate their position on the market. With wealth spreading quickly to smaller cities, some perceive a race to be the first hypermarket in a particular area, thereby grabbing an early advantage. Others may wish to optimise profitability by tailoring their current network, rather than undergoing an aggressive branch expansion, as they look to a future in which growth is less heady.

In the medium-to-long term the market will mature and a tougher battle for market share will commence. For the time being, however, there is enough space in the market for retailers to flourish and develop their strategies for the future.

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