The rush for additional selling space continued to be the main trend in the last year, and we will continue to see consolidation in the sector. Selling surface of modern retail increased by 50% in the last 3 years, despite the double digit drop in consumption. The most active players Kaufland, Lidl, Penny Market, Auchan or Mega Image have added more than 50% to their selling area in only one year, during 2011. And 2012 started more furious than ever, with 42 new stores in the first quarter. The same pattern was followed by the Do-It-Yourself sector, Romania recording the second largest expansion in the Central Europe in the last 3 years, despite the 20% decrease in the DIY market.
The most interesting trend is the rise of the local convenience stores: the ones that survived the first recession years have maintained the number of stores and even invested in new locations. Domestic players are mainly small, specialized networks developed by meat processors as an adjacent distribution channel of their products and for cashflow improvement.
Investments to continue, as the market records a slight recovery
As everyone is betting on the increase in the private consumption and on the shift of consumers from traditional to modern retail, it all comes down to fighting for the pole position in a race with a postponed start. An expensive pole position, but big players seem to be willing to spare no expense.
Somewhere in the corporate headquarters, Group CEOs and CFOs have drawn up their business plans, and have concluded that Romania is the place to be, once the recession will end. They have taken into account the real –estate opportunities created by the market downturn and by the availability of attractive locations, abandoned by local players going bankrupt. They have also considered the population size (and statistics show that Romanians spend half of their disposable income on food, drinks and tobacco), and the low degree of penetration of modern retail and private spending, compared to other European countries. Take all these factors into equation, and the conclusion is obvious.
But is it?
Everyone is predicting that consumer demand is likely to return in the long term. Retailers are arguing the potential of the market is great, so they continue to announce impressive capital expenditure budgets. But what does long term mean – (is it 3 years? Is it 5 years? ) and what are retailers’ growth expectations – are we thinking at the pre-crisis peak levels?
Why not happen now? For a start, let’s remember that the growth in the retail market in the boom years has been fueled by a rapidly increase in disposable income (not correlated with productivity) and most important, by credit availability.
With an un-restructured banking sector, and continued increase in the non performing loans, banks have their own issues to sort out first and some of them are reducing their retail operations. That means we will not see anytime soon bankers willing to lend in the same relaxed manner as before. On the other hand, consumers have learned to be more prudent, as consumer confidence is rather low: population cash savings have increased, but are sitting in bank deposits, instead of fueling consumption. According to the latest study performed by GfK, although the willingness to make major purchases has risen in the last months, it is still at a very low level.
The austerity measures from 2010 and especially the salary cuts in the public sector have had their direct hit in the households’ consumption. The average salary level increased in August 2012 by only 1.5% (in real terms) compared to the same month one year ago, hardly a sign of recovery. This year, the new Government had increased salaries in the public sector, and a new rise was recently announced for December this year, a predictable move, given the upcoming parliamentary elections. However, this would not be enough to boost consumption, as the private sector was also faced with salary corrections.
And yet, the key indicator in this sector - consumption of food, drinks and tobacco - has increased this year. In the first 8 months of the year, retail sales increased by 4.3%, compared to the same period in 2011. A higher growth (+9.3%) was reported on sales of fuel and consumption of food, drinks and tobacco (+4.5%), while non-food trade increased by 1.9%.
Could this be the revival sign that everyone was expecting? Modern retailers have already announced increased revenues last year compared to 2010 (driven by an expanding network). However, the August 2012 retail index represents only 55% of the August 2008 level. Assuming a constant 4.5% year-on-year growth, it will take 15 years to reach the August 2008 peak level (this is however, only arithmetics, the economy might surprise us).