http://rbd.doingbusiness.ro/articles/increasing-purchasing-power-and-growing-appetite-for-spending-and-consumption-within-the-next-3-5-years/5553




Increasing purchasing power and growing appetite for spending and consumption within the next 3-5 years

Q: The world is changing after the crisis, even in terms of consumer behavior. What are the main changes we are witnessing regarding the consumer’s appetite for spending that will drive the retail commerce in the next 5 years?

 

Adrian Ariciu: First of all, 2015 was a good year for consumption all over Europe. With economic growth of more than 4% at the EU level, reduced unemployment rates and low interest rates, consumers tended to increase the appetite for spending and avoid savings on disposable income, all in the benefit of the retail sector.

 

Consumer's appetite for spending in short term is driven by many factors, from consumer price index evolution, inflation and local currency fluctuations up to fiscal changes.

 

In the mid and long term, such factors as changes in disposable income structure and debt level are important to raise the propensity for spending. In general, in 2015, the purchasing power of citizens of the EU member states has increased by 3.7%, reaching a level of EUR 16,000 annual per capita, according to a GfK study.

 

People need money, confidence and comfort to spend beyond the core basic needs. And this trend of increasing purchasing power and the appetite for spending and consumption is foreseen to continue within the next 3-5 years.

 

Q: Can we talk about a ‘universal consumer’? From you experience, what are the main differences between the Romanian consumer and the Ukrainian ones?

 

Adrian Ariciu: The consumer is becoming much more selective in his choices, thus more demanding on product's performance and value generated by retailers. On average, consumers visit three shopping places a month for a regular food basket, and this number is increasing. On one hand, this helps compare products and shopping places, make better choices and push retailers to improve their offers. On the other hand, this is the way to offer new things to the consumer, products that he or she did not think of before.

It is hardly possible to talk about the ‘universal consumer’ and his profile, and I would avoid such definition.

 

The majority of us are eager to pay for emotions and memories when buying something, including food products. Consumers all over the world, in all stable economies, like fancy retro styles, traditional recipes, eco-trends, goods from local farmers. At the same time, we see that functional products are improving over time and international FMCG companies are trying to create standard global products.

 

Such consumers’ behavior can have the roots in the past decades, when access to food was limited and suddenly abundancy in availability and variety of choice creates new habits of overspending, especially during seasonal events or festive periods.

 

Unfortunately, we, Romanians, throw away a lot of food which is bought in excess. And this does not mean that next time we will buy less. Seeing this, retailers and manufacturers encourage stocking up.

 

Purchasing power index is low both in Romania and Ukraine, as well as in other East European countries. Romania is coming from 2015 with a retail turnover growth of 4.7% and Ukraine is coming from -24.2% in real terms, according to GfK recent studies. As for the Ukrainian consumer, he is sensitive to local currency devaluation, political and economic uncertainties – these factors dampen consumption mood. Now Ukraine sees calm after the storm, with a minor decline of retail sales of 1-2% in real terms foreseen for 2016. Romania will continue to take advantage of the VAT decrease in accelerated growth of retail, reaching +6-7% by the end of the year.

 

Q: The countries in Eastern Europe are subject to a lower spending power than their Western counterparts. Are these countries more interesting in terms of consuming? On a scale from 1 to 10 (where 10 is the highest achieved performance in terms of retail), where do countries like Ukraine and Romania stand? Please detail.

 

Adrian Ariciu: Indeed, purchasing power index per inhabitant is much lower in Ukraine and Romania in comparison with the average EU index. However, we have to look at other indicators to understand the potential of retail development and attraction of further investments.

 

In Romania, total retail spending versus total household private consumption is low, with 29% share, close to the EU average, and retail share is going down. Consumers are spending more money on services, travelling and recreational activities. Coming back to purchasing power per capita, the higher it is, the greater amount of money they spend on other than basic needs, such as food.

 

In Ukraine, the share of retail expenditures in the average household private consumption is very high, up to 64% in 2015. Consumers are looking for big savings in leisure, travelling, services, clothing, and focus on basic needs.

 

Disposable income per household is another indicator to follow, because usually retailers target a household and a family as a consumption individual point.

 

The penetration of cars, phones and TVs to 1,000 households are indicators to consider, too, when making the strategic planning.

 

It is worth to mention retail market size and landscape. Romania and Ukraine are less developed markets versus EU in general. Romania has 0.69 square meters of retail space per capita; Ukraine has less – 0.42 square meters. And the productivity of retail space should be considered, as well; it is less than EUR 2,500 per square meter per year both in Romania and Ukraine.

 

This creates pressure on retail formats, sizes of the stores and, of course, the fight for a better location. From another perspective, we see cities in Romania with retail concentration similar with mature markets of Western Europe, e.g. Bucharest with 1mill+ sqm retail space and still new malls are under construction. Thus, it influences the lifecycle of some retail formats, creating pressure on big formats and encouraging proximity formats growth, due to less time spent in the store. People tend to go to big retail formats for experience and integrated services, and to small formats for basic baskets, food-driven.

 

On the other hand, analyzing consumption in different product categories versus other countries, identifying the gaps and growing categories, developing cooperation with manufacturers is essential for retailers to grow their business for the future. We say that it is not enough to meet the customer’s needs, it might be too late; sometimes we have to create new needs.

 

Q: As defined, an equation is a statement that the values of two mathematical expressions are equal. On the left side, we have super-cheap money provided by an accommodative monetary policy and the fresh memory of the crisis. What do we have on right side of the equation?

 

Adrian Ariciu: Specifically for Romania, the negative CPI, increasing spending and debt level of population. In 2015, the Romanian economy was growing, based on consumption growth; the same trend is foreseen for this year. In the long term, such trend can be dangerous. Especially when taking into account that mentioned indicators in the equation are influenced by one-time effects like VAT decrease, or cheaper energy and fuel.

 

In order to sustain robust GDP growth, the production volumes in agriculture, transport, construction sectors should be growing, as well.

 

Q: What are the tools that the cash & carry entities use in order to adapt to the consumer needs?

 

Adrian Ariciu: The top-of-mind reasons that predetermine consumer’s choice of the store are location, assortment and price. So, you can create a marketing mix which is scoring well on all 3 elements versus your competitors, or choose one and build on it and for customers to associate you with. I would rather prefer the second option and bet on the price element.

 

Q: How do you use technology and digital transformation in your strategy in order to satisfy the consumers and to please the shareholders, at the same time?

 

Adrian Ariciu: This is my favorite question; these days, it is very popular in the retail community. On one hand, it is necessary to listen to the customer and know his expectations. But, if you used to send your customers a leaflet with your offers for the last two decades, they will probably say they like it. So, on the other hand, we have to surprise the customers with innovations, including those in communications. E.g., METRO Ukraine chose to stop sending printed materials to the customers and focus on digital channels. In the digital world, we are communicating with a broader audience, bringing more customers to the store and, at the same time, the cost per contact is going down.

 

Q: The shopping experience has changed a lot. People have alternatives to the wonderful ‘buying experience’ they had when they actually shopped exclusively in stores. What drives the new buying experience, online?

 

Adrian Ariciu: The online shopping experience and the traditional retail experience are driven by different factors. And the online one is linked to technology development and people’s readiness to test new things. If you have the technical capability, you start the online channel; if you don’t have it, better wait and invest on it before start up. Just think to Amazon Dash, or goods delivery by car without a driver or by a ... drone. Beside this excitement generated by the online supply model, the majority of the customers are likely both to explore and order from online platforms, and shop with traditional retailers, because of the human touch there. The non-food sector is a champion in e-commerce in many countries. On the other hand, even advanced online markets, like the U.S., do not manage to sell online more than 10% of total food sales volume.

 

Q: From an executive point of view, taking into consideration ‘the new business equation’, what are the most important variables in terms of understanding the future of business?

 

Adrian Ariciu: Some of the above mentioned – purchasing power index, consumer confidence index, retail share from total household private consumption and retail size and productivity are macro indicators to understand the potential of the market. Among others are labor market trends, inflation rate, GDP development, monetary and banking policy.

However, our business remains simple, we buy and sell goods, and our customers continue to consume 3,000 calories per day. We just have to make sure that we meet their needs, better than others, day by day.