The End of Consumerism as We Know It

MAGAZINUL PROGRESIV

Being somewhat halfway towards consolidation, the Romanian food retail faces the hardest trial of its existence so far: the worldwide economic crisis which obviously leads to a drop in consumption. Since post-revolutionary Romania never experienced such an environment, producers, distributors and retailers react as they see fit.

 

How the grocery retail fell in H1 2009

2008 was a fairytale year for food retail. The expansion and development rates, both for retail, as well as for FMCG, were unprecedented, even though a slowdown was being felt towards the end of the year. Most product ranges recorded lower growth rates during Q4 of 2008, which allowed research companies to state that there was a general feeling of downtrading. As for retail, modern formats covered a larger percent of the FMCG market, especially concerning food items, which lead them to engross over one third of the market share. Two formats clearly advanced: hypermarkets and discount stores - the latter growing at an unprecedented rate.

Regarding the consumer, the "fairytale" was coming to an end towards Q4 of 2008. Having been used to an extremely easy access to obtaining bank credit, the Romanian consumer spent and bought almost anything, from houses to cars, from washing machines to LCDs. Starting October-November 2008, market studies compiled by GfK showed a decrease in optimism regarding the household financial situation and increased worries concerning the unemployment rates. In January 2009, one in two Romanians believed the economic environment would be worse than during the previous 12 months.

Forecasts would later confirm this by the end of H1 2009. After six months, the FMCG and the retail market can be summarized in a few words: a strong drop in sales, especially for non-food items, from detergents and cosmetics to electronics and white goods. Regarding groceries, consumers prefer cheaper products, while companies are faced with serious payment delays, partially caused and "helped" by a rise in financing and crediting costs. These phenomena lead to reactions from each player on the market, which we will analyze further.

 

Small retail faces big difficulties

Starting H2 2008, the real estate and automotive markets began to drop, especially on an international level. This was followed by a decrease in consumption for long-life products, such as electronics and white goods, clothing and apparel. Romania followed a similar pattern and by the end of H1 2009, the real estate market was at a standstill, while the automotive industry recorded a decrease of almost 50% in sales, similar to the retail market, which posted a drop of 30-40% in sales for non-food items and 10-20% decrease for groceries. Taking this context into account, a Nielsen study showed that traditional retailers were mainly concerned with recuperating their money rather than investing it in their business. The most frequent issues that small retailers began to be confronted with were increased buying prices (up 67%) and buying volumes (up 55%), in other words changes in prices offered by suppliers and producers. Changes in payment terms from suppliers (30%) and payment delays to suppliers (27%) were two other issues which concerned more than a third of retailers. These difficulties increased for medium sized stores (20-100 sqm) more than for larger ones, most likely because of the limited sale area, which implies a more careful choice for products displayed.

Therefore, stocks began to decrease sharply (62%), as well as buying volumes (57%), which were somewhat outweighed by smaller orders. Large retailers were outraged by the drop in non-food sales and by consumer preference for cheaper goods, which led to an increase in aggressive promotions for almost all products. However, the effectiveness of such deals is limited and cannot take the attention away from the fact that consumers have less money. At the same time, there was a decrease in territorial expansion, because of two main factors: a delay in investments in order to protect cash flow and a decision to wait for further decrease of real estate and land value. The same effect can be seen for shopping centers and malls. Those already active were faced with the requirement to decrease rent for their leaseholders, while all other projects were either postponed or suspended.

As mentioned above, the most successful formats on the market are the discount stores and hypermarkets. The latter because they benefit by a large range of products and small prices, while the former due to their price offer and to an improvement in terms of fresh goods. Also, the discounters were the fastest to expand this year, their number surpassing 200 countrywide. During H1 2009, all discounters posted turnover growth, both due to expansion, as well as in like for like terms. This can indicate a rise in consumer interest for this format, especially taking into account the decrease of household budgets, because of downtrading.

1

2

3

4

Legal updates

18 Martie 2010 Legislative Summary - February 2010 18 Martie 2010 Draft amendments to the Fiscal Code 17 Martie 2010 VAT refund procedure amendments 25 Februarie 2010 Legislative Summary - January 2010 19 Februarie 2010 Certification of annual profits tax returns 5 Februarie 2010 Changes brought to certain VAT statements 5 Februarie 2010 Draft amendments to the Fiscal Procedure Code

OPINII