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June 10, 2008

International retailers eye Romanian growth

In spite of its relatively poor infrastructure and high inflation, Romania is attracting significant inward investment from major international retailers such as Carrefour and Metro. Mark Rowe reports.

In spite of its relatively poor infrastructure and high inflation, Romania is attracting significant inward investment from major international retailers such as Carrefour and Metro. Mark Rowe reports.

By many measures, Romania may not be as far along the economic development road as some other former Eastern bloc markets but the country’s retail sector has nevertheless witnessed extraordinary growth during the past five years.

That growth, coupled with EU accession last year, has not surprisingly seen the already considerable interest being paid to Romania by international retail concerns step up a few more gears. The likes of Carrefour, Metro and Delhaize see plenty of potential in Romania’s burgeoning retail sector and it is not hard to see why.

Between 2002 and 2007, retail value sales in the grocery retail sector rose by 134.5%, according to Euromonitor International, and are forecast to grow by a further 53.6% by 2012. Retail value sales through hypermarkets grew by as much as 1,777%, with a further 63% rise expected by 2012. Sales through supermarkets rose by 121% between 2002 and 2007 and are forecast to grow by 55.5% up to 2012. Meanwhile, the discount sector saw sales increase by 1,554% from 2002 to 2007, with 51.3% growth forecast by 2012.

Euromonitor International also reports that in the past 12 months, discounters have seen growth of 24% in retail value sales to EUR638m. In the supermarket sector, retail sales values increased by 15% to EUR1.06bn in 2007.

In the hypermarket sector, sales grew by 43% to EUR1.07bn in 2007. “Multinationals are aggressively battling for highest shares,” a Euromonitor spokesperson says. “There is still plenty of room for growth, with only three operators in the market. Carrefour maintains a clear lead despite a significant drop in value share with the entrance of Real in 2006.”

Carrefour, Metro and Delhaize are all committed to increasing their presence in Romania. The companies acknowledge that the Bucharest region already has a dense store network and the country’s west and north are the other most developed areas. Metro has pinpointed the Eastern part of the country as having strong farming and tourism appeal with big potential for the hypermarket sector.
 
The appeal appears to be mutual. “Beyond price and convenience, the range, the atmosphere and modernity are very important criteria for Romanian consumers,” says a spokesperson for Carrefour. “Before the arrival of the international banners of the ‘modern’ business, Romanians used to shop in corner shops, with very limited product ranges. The arrival of these new concepts of stores, with big organised spaces has dramatically changed purchasing behaviour.”
 
At the beginning of June, Carrefour announced plans to open eight new hypermarkets in Romania. In 2007, the Carrefour Group generated a turnover of EUR866m in the country. It currently has 12 Carrefour hypermarkets in Romania, five in Bucharest and seven in the provinces. In 2007, Carrefour acquired the Artima group and its 21 supermarkets, situated primarily in the west where Carrefour had no stores. Carrefour is to invest EUR6.3m in re-branding the 21 Artima supermarkets, which will trade under the Carrefour Express banner.
 
In March, Delhaize signed an agreement to acquire 14 La Fourmi supermarkets in Bucharest, through its fully-owned subsidiary Mega Image. A Delhaize spokesperson said it was focusing primarily on the Romanian capital, describing it as “a city in rapid expansion”. The 14 stores, which will be converted to the Mega Image banner, generated estimated revenues of EUR30m in 2007.
 
Metro, meanwhile, has announced plans to revamp its Romanian stores in response to what it describes as a “fast-changing” market. Metro has 14 Real hypermarkets, opened in 2006, and 23 metro Cash & Carry stores in the country.

In 2007, the German retailer achieved sales of EUR1.96bn in Romania, with Cash & Carry stores contributing EUR1.59bn, and Real outlets EUR367m.

“The Romanian market is already quite mature compared to other markets in (South) Eastern Europe, but still offers a high potential for the expansion of retailing companies,” says Metro’s Moritz Zumpfort. “The increase of income, the growth of tourism and international investments, the cheap but qualified labour force, as well as EU accession, make Romania a very attractive market. We still see a reasonable potential for further growth since the local economy is developing soundly and disposable income is increasing.”
 
However, Metro recognises that challenges remain. “The expansion of big retailing companies and the economical boom have already made the Romanian market very competitive,” Zumpfort adds. “The infrastructure in several regions is rather embryonic. Also, the Romanian market is quite fragmented into many small local companies that produce in small scale. At the same time, prices for land plots are growing quickly. The high emigration rate makes it difficult to find specialised employees, and Metro has had to adjust salaries and offer flexible remuneration packages.”
 
According to a spokeswoman for Carrefour, inflation is another problem facing those looking to develop in the country. Inflation in Romania is high, running at 8.62% in April. “The increase of inflation raises problems for distributors, the suppliers and the customers. For solid and well adapted companies, significant inflation can be difficult, but surmountable.”

Clearly, Romania is not without its economic problems but the presence of these major international retail groups is testament to the potential the market has to offer.  EU accession may have resulted in a shortage of specialist labour, but the benefits greatly outweigh the negatives, and some powerful international retailers are backing their belief in the country’s potential with significant investment.

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