New EU members Romania and Bulgaria: A mixed bag of hope and scepticism

Critics have argued that Romania and Bulgaria are not yet ready to take such a major step. Both still have major obstacles to overcome, among them rampant corruption and organised crime. To ensure that they do not neglect their responsibilities, both new member states are required to report their progress to the Commission every six months.
Both countries' EU accession is a symbol of economic progress in south-eastern Europe. With respective annual growth rates (CAGR, 2001-2005) of 4.8 per cent and 5.7 per cent, Bulgaria and Romania are well ahead of the EU-25 (1.6 per cent).  
Long before EU accession, the major players of European retail such as Carrefour and Metro had discovered Romania and Bulgaria as interesting markets with enormous potential. With western investors, modern retail concepts came along. The combination of growing consumer confidence and pent-up demand for big ticket items such as household appliances and western brands, led to skyrocketing consumption between 2000 and 2006.

Boom markets’ weaknesses
The retail boom is all the more astonishing in light of the low annual per capita income in Bulgaria (€1,319) and Romania (€1,112). In contrast, the average per capita income in western Europe amounts to €14,000. Clearly, the average wages that appear in official statistics are not the whole truth. To explain consumer attitudes and buying power in the new EU member states, income disparities between urban boom regions and rural areas must also be considered. Unofficial sources of income also play a major role: wages earned ‘under the table’, payments in kind and money wired from relatives living abroad are not included in official statistics.
Despite the potential and enthusiasm that both countries offer retailers, there are several weaknesses that should not go unnoticed: 
• The infrastructure, particularly in Romania, is still partially very shaky: Potholes in the country's roads slow down traffic to a snail's pace, and drivers have to be adept at the art of car slalom. In winter, many roads are impassable. To improve the situation, enormous infrastructure investments are required in the coming years.
• Sourcing materials needed for production is difficult, not only because of inadequate infrastructure, but also due to poor quality.
• Corruption is still rampant, as is the resulting organised crime. Legal uncertainty is a stumbling block in everyday business, for example when it comes to property ownership rights.
• The real estate market is characterised by a ‘gold rush’ mood. In 2003, the price per square metre of land in Bucharest was €80 but has now soared to €800. Prices no longer reflect economic reality.
• Red tape is still prevalent. German retailer Tengelmann, for instance, was only able to open its first Plus store a year later than originally planned. It faced a bureaucratic nightmare having to deal with over 30 institutions before all of its papers were in order.

BULGARIA

With an average annual per capita income of €1,319 Bulgaria is one of the poorest countries in Europe. Despite this, luxury shopping malls with over 20,000 square meters of shops are opening in Sofia and surrounding areas. Investments are also being made in shopping centres outside the capital. In Plovdiv, the Excelsior mall has 100 boutiques on four floors, and similar projects are planned in Varna and Burgas.
While Bulgarians certainly look at the price of the products they buy, most are in fact extremely brand conscious with a clear preference for foreign products. Still, 80 per cent of Bulgarians plan and budget their expenses and most people's budgets are too small for impulse buying. Bulgarians are enthusiastic consumers. When they really cannot afford something, there is always credit.  Growing private consumption has partially been financed by consumer loans. The Bulgarian Central Bank has now recommended that banks be stricter about handing out loans. As a result, consumption growth has recently slowed down, dropping to five to six per cent in 2006/2007 from 14 per cent in 2004. 

The retail environment: medium-sized markets take the lead
Bulgarians' buying habits are gradually changing. Consumers are becoming more demanding. They pay more attention to quality and are increasingly willing to pay for it. The supermarket remains the main store of choice, because it is generally close to home. Since many Bulgarians do not yet own a car, suburban hypermarkets are simply not accessible. But this is set to change.
The number of small supermarkets and mom-and-pop stores is shrinking. Medium-sized markets have taken the lead in food retail. Billa (Rewe) wants to increase its number of stores to 50 by 2010, while Hungarian retail chain CBA – which mainly operates supermarkets and neighbourhood stores – already has 50 shops. Lithuanian retailer VP Market is planning to open T-Market supermarkets in all major cities. At the moment, Fantastiko and Piccadilly are the most important players on the Bulgarian market.

Large supermarkets and hypermarkets are now also gaining ground. In just four years, the number of hypermarkets in Bulgaria has grown from four to 30. The most important retailer in this segment is currently Schwarz Group with Kaufland. But the competition is intensifying, as Dohle and Migros Türk with Ramstore are also active in the hypermarket segment.  It remains to be seen whether Migros Türk, which has been operating in Bulgaria since 2001, can keep up with the competition.
In contrast to the situation in Romania, no discounters have appeared on the Bulgarian market yet. However, a number of well-known players are already in the starting blocks and are planning to open stores there, among them Penny (Rewe), Plus (Tengelmann) and Lidl (Schwarz Group).

ROMANIA

There is no such thing as the typical Romanian consumer. Just like in many other CEE countries, there are widely different groups of consumers. At the bottom of the income pyramid, there are retirees whose budget is so tight that they cannot afford both heating and an evening meal. The winners of Romania's economic reform are at the top: millionaires who are happy to openly spend their fortunes. However, the majority of Romanians, who lived the reality of widespread scarcity under Ceauşescu, are now experiencing an entirely different phenomenon. While the shelves used to be empty and their wallets full, the opposite is now true for many people. 
At least in Romania's cities, the recent economic boom has led to the emergence of a middle class with increasing buying power. While retirees have to make ends meet with an average monthly pension of €110, teachers and doctors earn about €200 a month. And employees with coveted management or IT qualifications have much higher salaries. This is the group that buys most of its products from modern retailers.
Especially in major cities, shopping at neighbourhood stores or markets is becoming less attractive, while major supermarkets, hypermarkets and shopping malls are growing more popular. These formats are expanding in Romania: in the second half of 2007, at least one shopping centre is expected to open each month. Not only in Bucharest, but also in the country's other big cities.
Romanian farmers are not the only ones to produce their own food. For almost half of Romania's population, self-sufficiency is widespread. Even in the outskirts of major cities, grazing goats and chickens in people's gardens are a common sight. And many people also cultivate their own vegetables to save money.

Retail environment – big European players dominate the top segment
Metro Group is one of the pioneers on the Romanian market. The group opened its first cash and carry stores in the country in 1996 and has since opened 25 more. In March 2006, Metro Group opened its first "Real,-" hypermarket in Timisoara, and 14 more are set to follow by 2008. Rewe was also active in the Romanian market at the end of the 1990s: it first opened "Billa" supermarkets, and has since introduced other formats. It now has 13 Selgros cash and carry stores, 30 Billa supermarkets, seven XXL Mega Discount stores (3000 m2 each) and 25 Penny discount markets.
Tengelmann has entered the Romanian market with its "Plus" chain. The first 11 stores opened their doors in November 2005, and the 34th Plus opened at the start of 2007. By 2008, a network of 64 stores will be set up, with stores mainly in towns with populations of over 20,000.
Experts agree that hypermarkets will eventually play the leading role in Romania. At the end of 2006, there were 38 hypermarkets in the country, and that number is expected to double by the end of 2007. In this format, Belgian and French retailers have already secured a spot on the map next to the Germans, for instance with Delhaize, Cora und Carrefour.
The hypermarket has also exceeded all sales expectations, selling three times the amount forecast. Given these promising results, Carrefour intends to increase its presence in Romania. The French retailer is planning to open up to 40 stores in cities with more than 200,000 inhabitants. In contrast, German Schwarz Group's Kaufland is focusing more on smaller towns. In 2006, there were 18 Kaufland supermarkets, and ten more are planned for 2007. The warehouse and administration are also being expanded, and Schwarz Group intends to invest €400 million by the end of 2007.
Contrary to the situation in competitive markets like the Czech Republic and Poland, the big players in Romania and Bulgaria are not yet fighting each other for market share. No single retailer has achieved a double-digit market share in these countries. Even Metro, a heavyweight with its market share close to ten per cent, generates most of its sales with small, independent wholesale customers. The strongly fragmented market is currently characterised by small, independent shops and street markets.

Conclusion
In both Romania and Bulgaria, EU accession has sped up developments that began several years ago: consumer habits are changing as consumers with increasing disposable incomes become more demanding and expect modern stores that offer a broad range of products.
However, beneath the surface of this new-found prosperity, it quickly becomes evident that fast development has left some people behind. While those who have been able to adjust quickly to social and economic change have benefited, others, like senior citizens, rural populations and the uneducated, have not.
Even if not everyone has yet been able to reap the fruits of economic transformation, nothing can stop the process of change. Romania and Bulgaria will become increasingly attractive to foreign investors, particularly because the obligations of EU membership will lead to a better legal framework. A decisive factor in the future success of businesses in both countries will be whether changes in the retail environment are lasting. Will Bulgaria and Romania be able to maintain consumer enthusiasm, or will consumers quickly become bogged down with debt? Will the next generation have better employment opportunities and higher wages? Will it be possible to fight corruption in the long term? While Bulgaria and Romania have taken steps in the right direction, much still needs to be done. In the meantime, investments and developments in both countries must be monitored closely and actively supported.