Sharing in Romania’s retail promises
Elsevier Food International, Vol.9, Number 3, September 2006 Jürgen Kneiding and Klaus Schwarz
In the 1990s, Romania’s recovery from the devastation caused by Ceausescu’s dictatorship turned out to be a slow motion process. Adaptation to market economics requirements and the necessary privatisation process were slowed down due to indigenous interest groups and political power play. In those years Romania’s economic structure was by far the weakest, when compared to neighbouring central and eastern European transformation states. Still, agriculture accounts for 14 per cent of GDP and employs 35 per cent of Romania’s active working population. By comparison: the EU average is five per cent.
Income inequality
After the hiccups in the early 1990s, Romania engaged in a process of economic transformation. The ensuing process of privatisation is now nearly completed. The Romanian government is actively withdrawing from trade and industry, and in recent years there have been large privatisations in the energy and banking sector. Since the year 2000 Romania’s economy has been growing, with 2004 accounting for a record GDP growth of 8.3 per cent (see figure 1). This put Romania in the lead among the new EU members and countries – like Romania – that are a candidate to join the EU. One should, however, take into account the very low starting point: in 2004 Romania only reached its GDP levels of 1989, when the country shook off the strangling dictatorship.
Productivity increases in agriculture and a rise in private consumption contributed to Romania’s record GDP growth in 2004. Despite the devastation in the spring of 2005 and 2006, when floodings of the river Danube caused damages exceeding €1 billion, Romania is set to continuous economic growth.
Nevertheless, Romania’s improving economy has not yet led to a nationwide rise of the standard of living. The country belongs to Europe’s poorest, with per capita disposable income in 2004 being only 31.5 per cent of the average disposable income in the 25 EU countries. Moreover, there is an apparent income inequality. The Bucharest metropolitan area accounts for 80 per cent of Romania’s economic performance. There and, to a lesser extent, in other large cities in Romania income levels have improved strongly. But the countryside, especially in Romania’s southern and eastern regions, is still extremely impoverished.
Foreign retailers
Contrary to central European markets like Poland, Hungary or the Czech Republic, foreign retailers did not flock into the Romanian market. But this is likely to change when membership of the EU, scheduled for January 2007, becomes a fact. First though, Romania has to overcome problems which up to now have deterred foreign retailers from setting up shop in large numbers. Red tape and corruption are notorious problems which are unlikely to have disappeared altogether, even when Romania becomes an EU member state.
A known example is the German retailer Tengelmann, who delayed the opening of its first Plus discount stores several times due to corruption. Tengelmann started in Romania in April 2003 but it took until November 2005 to open its first 11 discount stores. Tengelmann expects to have some 30 stores this year and has set itself a target of 120 stores by 2010, investing €200 million. To facilitate its growth, Tengelmann built a depot in Ploiesti, a town in the Bucharest region.
The cash & carry concept is often the most suitable for market entry in an emerging market and this is what Metro Group bore in mind back in 1996 when it set up shop in Romania. There are now 25 Metro cash & carry stores in Romania, with sales of €1,576 million. Metro is now adding the more sophisticated hypermarket format to its Romanian operation. It sees a lot of potential for its Real,- hypermarkets in Romania and intends to have 15 stores in most of Romania’s main cities by 2008. In March 2006, the first Real,- hypermarket was opened in the town of Timisoara. Some 70 per cent of the store’s 30,000 items is sourced locally. “We see a great potential in this country for our hypermarket concept,” Metro Group’s chief executive Hans-Joachim Körber said at the opening of the store.
In 1998, German retailer Rewe joined the early movers in Romania when it opened the first Billa supermarket in Romania via its Austrian subsidiary BML. Over the years Rewe has developed as a multiformat player in Romania with, according to PlanetRetail, 13 Selgros cash & carries (sales: €445 million), 30 Billa supermarkets (sales: €262 million), seven large discount stores under the banner XXL Mega Discount (sales: €77 million and an average size of 3,000 m²) and 25 Penny discount stores (sales: €72 million and an average size of 750 m²). The discount chains Penny and XXL Mega Discount will be of vital importance to Rewe’s growth ambitions. According to the Romanian press Rewe will invest some €200 million to realise 50 discount stores by 2011.
Carrefour very ambitious
In 2000 Belgium-based retailer Delhaize ventured into the Romanian market by acquiring a 51 per cent stake in the local retailer Mega-Image, which was established only five years earlier. Delhaize currently operates17 Mega-Image supermarkets and one Mega-Image City, which is a convenience focused supermarket for city centres. It intends to have a network of 21 stores by the end of 2006. Last year Delhaize announced continuous expansion in the coming years, at first in Bucharest but after 2008 outside the capital, across the country.
Louis Delhaize is also from Belgium but despite the similar name a different retailer. It has been active in Romania since 2001 and currently has two Cora hypermarkets and 24 Profi discount stores. Louis Delhaize is building its third Cora hypermarket (20,000 m² and 1,200 parking spaces) in the city of Cluj-Napoca. It intends to build a chain of 14 hypermarkets in Romania.
With Carrefour, who set up shop in 2001, the Romanian market has a very ambitious player which will surely play a leading role in at first developing the market and at a later stage in consolidating the market. In 2004, Carrefour’s sales in Romania increased by a spectacular 100 per cent. The French even said to have bypassed the break-even point. Writing black figures already three years after market entry is surely remarkable. Should Carrefour succeed in doubling its number of hypermarkets from four to eight by the end of this year, then market leadership in Romania will come within reach. Up to 2010 the French have set a target of 15 hypermarkets, a number that should be reached via organic growth and not via acquisitions. Moreover, there is not so much to be acquired in Romania nowadays. The maximum number of Carrefour hypermarkets in Romania has been set at some 20 to 25 and the retailer’s early mover status may well be a bonus. A side-effect to the acquisition by Carrefour of the Turkish retailer Gima in 2005 is that Carrefour also purchased four supermarkets in Romania, operating under the Gima Superstore banner. It remains to be seen whether Carrefour will remodel these stores into its own Champion supermarket concept.
With its Interex operation, the French independent retailer Intermarché intends to become a distribution leader in the Balkans. In Romania the first Interex store was opened in June 2002 in the town of Ploiesti. It took 2.5 years to add another store (in Giurgiu, opened December 2004) and now there are six Interex stores, with four more to be opened by the end of this year. According to the website Major Companies in Romania, total 2005 sales of Interex were €36.9 million, while net profits were €148,400. Black figures, but only 0.4 per cent of sales.
Discount opportunities
German retailer Schwarz Group has a reputation of being an agent of change in any market it enters, either with its Kaufland hypermarkets or its Lidl discount stores. The first Kaufland hypermarket in Romania was opened in October 2005. Bucharest Daily News quoted the country manager Günther Grieb as saying that in the years up to 2010 there had to be 50 Kaufland stores in Romania. Schwarz Group targets cities with at least 150,000 inhabitants for its Kaufland stores which are approximately 3,500 to 5,000 m² in size and have a per-store investment level of €8-10 million. Investment levels are said to have now reached €150 million for the six operational Kaufland stores. This year additional Kaufland stores will be opened in Targu Mures, Galati and Suceava. Grieb also referred to the towns of Bistrita, Constanta, Hunedoara, Satu Mare, Targoviste and Zalau as future locations.
In January 2006 the Romanian press reported that Schwarz was to introduce its Lidl discount chain in Romania, for which Schwarz already bought land plots and signed lease contracts in towns with at least 30,000 inhabitants. On 24 May this year, however, PlanetRetail reported that Lidl decided to freeze its intentions to enter both the Romanian and the Bulgarian market. Lidl of course did not comment but the reason for this move may well be the notorious corruption in combination with skyrocketing land prices. PlanetRetail states that Lidl itself is responsible for the latter as it acquired several plots at highly overrated prices thereby driving land prices upwards.
The decision of Schwarz to put its plans for Lidl on ice is good news for retailers like Tengelmann (Plus), Rewe (XXL Discount and Penny), Louis Delhaize (Profi) and several local retailers. The average Romanian’s low purchasing power is a factor which will surely benefit the discounters’ strategies. That is why Tengelmann (Plus) and Rewe (Penny) are focusing on the country’s south-eastern regions first, before rolling out their store networks nationwide.
Portuguese retailer Jeronimo Martins is also said to be interested in Romania with its successful Polish discount chain Biedronka.
Lithuanian retailer VP Market has been operating in Romania since December 2004 when it opened six Albinuta soft discount stores. Currently there are eight Albinuta stores and the number is expected to grow in the near future.
Local retailer Minimax Discount is a joint venture between Romanian and foreign investors.
Founded in 2003, the young company has ambitious plans to build a store network across Romania’s medium and smaller sized towns. In April 2005, there were three stores (in Slatina, Urzineci and Tragoviste) and this year the retailer expects to have some 20 stores. The target is set on 100 stores nationwide for the end of 2007. The company’s management is well experienced, as Minimax Discount is managed by two Germans who used to work for Rewe in Hungary. With a size of 14,000 m² its central warehouse in Bucharest has the potential to service a larger store network. Also worth mentioning is a government-owned operation named Economat which was founded in December 2001. It sells basic foods between 10 to 30 per cent cheaper than regular food stores and targets low income families and pensioners. Given the fact that many Romanians live in such low income conditions a national roll-out of the concept can be expected.
Competition heating up
Univers’all is a local retailer that positions itself as a truly Romanian company. Currently it operates one hypermarket (in Bucharest) and six supermarkets. The supermarkets have an average selling space of 2,500 m², employ 100 people, have 12,000 SKUs, and 6,000 customers a day. Annually Univers’all intends to open three new stores.
Local retailers will have to deal increasingly with foreign competition as it is evident that Romania is on the agenda of a growing number of multinational companies. Slovenia’s market leader Mercator has scheduled its entry in the Romanian market for 2008. Furthermore, French retailer Auchan and Spar International also have concrete plans for market entry.
Auchan is currently building its first mall-based hypermarket in the southeast of Bucharest, which is expected to open in 2007. A second Auchan hypermarket is expected to follow soon. Spar International announced that a local franchiser would start a Spar operation in Romania. This local partner named Astral Impex was granted the Spar franchise in May 2005. It has opened a subsidiary Spar Romania and currently the company is building its operations in the central and western part of the country. “The licensee has been progressing slowly with development of sites in Bucharest and has been focusing on building up a good operation in terms of distribution centre and services before opening supermarkets,” a Spar International spokesperson stated in June. “They will open a store in the next three months and believe they will open a second store before the end of the year. SPAR’s supermarket format will be used, so the stores will be between 500 and 1,000 m² in size.”
Romania has been discovered by the multinational retailers. Being fragmented and underdeveloped, there are still opportunities in this market, but newcomers need to move fast as especially Metro, Schwarz and Carrefour are ambitious to quickly expand their operations nationwide.
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