ERNST & YOUNG SRL

 | 

MARIUS VASILESCU

  |  13.11.2013

Consumers and retailers still not on the same page

Recent news sees retailers announcing the launch of a significant number of convenience stores, as well as expanding in the large commercial areas sector, which appear to follow the trends governing FMGC sector this year.

ERNST & YOUNG SRL

MARIUS VASILESCU

MARIUS VASILESCU

MANAGER - TRANSACTION ADVISORY at ERNST & YOUNG SRL

 

MARKET OVERVIEW 
The first half of 2013 has brought increased market share for hypermarkets and discount stores, formats that had the fastest expansion. With these developments, retailers appear to plan carefully for their presence in the markets when the consumption levels will kick back. The BMI report for Q4 2013 estimates a consumption growth of 23% by 2017, lower than the regional growth, averaged at 39%. These trends are in line with what was projected for FMGC sector for the last year. Thus, it appears that mainly, large retailers will continue to focus on their constant expansion in order for the network to generate opportunities to anticipate and meet new customer need, in order to attract new customers, but also gain loyalty. 
 
 
Considering the latest evolution of the economy and of the retail market in particular, the forecasted trend of new developments looks like a tall order, as this year, an important development in the FMCG market could be the shift to the saturation stage. On the other hand, with the consumption increase being less noticeable than the commercial areas expansion, retailers find themselves in the position to develop new strategies capable of dealing with the demand’s specificities and with the constraint that in today’s market for a constant consumption in terms of volume, the market would record a decrease in value. 
 
 
In a world where time is becoming more and more essential in any decision making process, a primary concern for retailers should be the proximity of the stores. A potential trend in meeting demand will be to move towards small towns, where the convenience stores format, small sized, can be easily integrated with service and product offerings developed according to these locations. 
 
 
THE PORTRAIT OF A ROMANIAN BUYER
An important consideration when drafting development strategies by the retailers is given to the profile of the Romanian consumer. Its most relevant feature continues to be the focus on price, making him a careful shopper, looking for the best deals. The balancing feature to this budget driven behavior is the consumer’s (un)willingness towards spending significant time in a shopping experience. 
 
 
As a consequence, the private label segment recorded an increasing demand, due to the lower price compared to the established premium brands, while benefitting from the high notoriety and good image of the private label brands. According to GfK, the share private brands held on the Romanian consumption market increased from 8% in August 2011 to 11% in August 2012. It is estimated that the success of the private labels will continue during next year, with the private labels cover an even wider category of products. 
 
 
Apart from private label, another variable that can influence the evolution of consumption in 2013 is the increasing footprint of domestic goods in terms of product-list coverage. The “Made in Romania” concept is gaining in size and strongly differentiates from other brands in the consumers’ minds. Moreover, Romanian brands are taking back the top positions in terms of brand awareness and loyalty because their emotional heritage, that allows them to capitalize on the Romanian values. 
 
 
In order to gain customers loyalty, this year, retailers are expected to continue developing loyalty programs, aimed at increasing the customer’s visits to the shops, or boosting its purchase appetite with schemes granting bonus points, immediate discounts or prizes. The actions set to attract new clientele as well as to gain and maintain loyalty of customers lead on short term to increased operational costs and thus lower profit margins. This impact is visible should we assess the profitability levels of the seven most important retail chains: four of them registered a 1% decrease in their gross profit, reaching 33% in 2012, compared to the previous year. 
 
 
ONLINE TRADE, A POSITIVE SOLUTION FOR BOTH CONSUMERS AND RETAILERS
Currently, the household spending on for daily use goods is divided almost equally between modern retail channels and the traditional ones. However, looking at the data for the first semester of 2013, it appears that the dynamics of retail expansion can guarantee only an increase in market share of modern retail formats. 
 
 
The concept of ”impulse shopping” has not yet disappeared, but it feels like shopping planning is starting to take a place in buyers’ lifestyle. This may be one of the reasons why online shopping for FMCG becomes more and more common. Growth factors of this phenomenon include the development of means of communication, variety of ways to order products directly online and access to online trading platforms. 
 
 
There is still a fairly large distance between technologies adopted by retailers in Western Europe and those in Romania. Online commerce is developing in smaller steps, but customers’ interest for this type of shopping is moving up. In the digital space, the focus stays on the online platform, translated into a wide range of gadgets that customers use: mobile phones, laptops or tablets. 
 
 
The technology had already had an important impact in the retail business through extensive use of mobile platforms, both for back-end activities (logistics, inventory management, sales, customer relations) and in the front-end, directly (selling mobile terminals, mobile payments) and indirectly (mobile platforms used by couriers and other service providers). Still, retailers and FMCG manufacturers do not use intensively and “at the full capacity" online shopping on social networks and mobile commerce site, for example. Should this shopping method gain more and more affiliates, it will extend its presence in the retail market and it will influence the retail operating model. 
 
 
ROMANIA, A HOTSPOT FOR FOREIGN INVESTORS? 
Last year, slight recovery of the economy determined intense activity of several foreign investors for real estate opportunities under the vision of continuing spending habits for food and drink segments. In fact, investments have made this past year lucrative for emerging markets. Companies like Nestlé have capitalized on the opportunities presented by such markets – 40% of Nestlé’s sales are in emerging markets such as Romania. 
 
 
While the number of hypermarkets and cash and carry stores remained relatively constant, the number of supermarkets and discount stores grew at a rapid pace in recent years. However, by July 2013 only three players (i.e. Mega Image, Carrefour and Profi) expanded aggressively, representing 71 out of 84 openings. Lidl and Penny Market expansion slowed down during 2013. Based on ZF estimates, a total of 1,081 stores and investments of up to EUR 60 million were registered by July 2013 .This is yet another sign that these operators expect an increase in consumer appetite. 
 
 
Certain categories of retail business continued to expand due to significant increases in turnover recorded in the last couple of years: food segment (supermarkets, hyper and mini-market), fast food units (KFC, McDonald's, Subway, Shawarma Dristor ), fashion (H & M, Inditex, Takko ) and shoes - medium category (CCC, Deichmann, Otter, Clarks etc). 
 
 
Another form of business development, visible in the FMCG sector in 2013, is consolidation through mergers and acquisitions. Besides the synergies factor, weighting a lot under unstable market conditions, consolidation processes tend to constantly involve human resources restructuring, which has been a sensitive subject in the last years. 
 
 
LOOKING FORWARD 
Slow increase in consumption per capita may lead to operational difficulties for some players in the market that may try to consolidate or face bankruptcy or insolvency, while other retail chains will continue to develop aggressively. It appears that important moves will be changing the retail market in the years to come. 
 
 
Creativity may be one of the keys to success: new service opportunities or hard discounters willing to meet customers in a creative and enjoyable environment both online and in conventional stores may. Implementing and adapting the strategies used in the developed markets and being patient in educating the customer towards these new instruments should be the next trend, where the retailer moves towards to customer and tries to adapt and accommodate its needs rather than sitting in expectancy until the consumption will reach pleasing levels.

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