The expansion of supermarket chains and their entry on the Romanian market will prompt, in the next 2-3 years, fundamental changes in Romanian commerce. Superstore chains will grow fast, while small retailers will dwindle drastically.
Changes will not be limited to commerce; they will also affect both the distribution of commodities and consumers' behaviour. In fact, the structure of distribution in Romania mirrors the structure of commerce. The large numbers of retail outlets - kiosks, booths, etc. - makes distribution difficult and costly. As more goods are delivered to supermarkets, the rules of the distribution game are changing, too.
Nikos Vorlas, sales manager for Elgeka RomOnia, a consumer goods distribution firm, says the Romanian market for distribution services is quite fragmented. There are relatively few national distributors - who sell consumer goods to the whole range of retail outlets: from small shops to major networks and bulk traders - and the number of local, regional or in-house distribution companies is much higher.
"These very aspects are about to change once the major networks kick in, which, due to their negotiation tactics and strength will forever change the structure and relations between distributors and the universe of sales outlets," says Vorlas, a professional who acquired experience on markets in Poland and Greece, where similar changes took place.
Major superstore networks seek to work with only a limited number of suppliers - which does not mean a limited number of products - because they need to make management and operation efficient. "Consequently, smaller producers and distributors will be unable to become suppliers to networks. The wider product range a distributor has, the more chances he has to be chosen," Vorlas explains. This is a positive aspect both for the distributor and producer, he adds.
A major distribution firm will supply a range of products which represents a significant proportion of the network's turnover - granting them a negotiation lever - and the producer who distributes products through this firm will also inherit this level. "Of course, in turn, the distributor will be forced to grant special conditions to these major clients - payment deadlines, special discounts, investments and increased involvement in promoting products at the sales point, etc. - and because few distributors can afford such flexibility, we can expect many of the smaller ones to falter on the market," Vorlas continues.
Since serving smaller retail outfits will no longer be efficient for large distributors, he predicts that those outlets that will survive - kiosks, for instance - will be served by minor distributors. "Wholesale markets, which are so popular now in Romania, will shrink or disappear."
In Poland, for instance, wholesalers have associated and changed profile to cash & carry ventures. On the other markets penetrated by the major networks, small retailers were forced to associate to represent a greater buying power in their relationship with suppliers.
Dragos Rosca, project manager at the Roland Berger & Partners consultancy, says distributors will start losing the added value afferent to product sales and promotion, and in time will become mere suppliers of logistical services - warehousing, storage ad shipment. "The question is: how many of them will be able to make a profit, because logistical services are done with much smaller profit margins," says Rosca. In Hungary, he notes, no one will negotiate with a store every time they have to sell a product.
The supplier and the store chain sign a year-long contract that establishes quantities, prices, delivery terms, etc. "Thus, a large firm can sell $100-200 million worth of commodities with four or five salespeople, whereas in Romania, for the same amount, a firm would need dozens of employees. It is an absolute change of system, which is barely starting here."
Consumers decide pace of change
Other market observers consider a rate of changes that will depend on consumers' reaction. According to Andreas Stefanovszky, director general of Procter & Gamble Marketing Romania, as consumers stop buying from small stores because they prefer a supermarket that opens up in their area, P&G will cease to deliver its products, and will have to restructure its internal sales force.
"But all these changes take place gradually," says Stefanovszky, adding that Western chains use to announce plans for 10 stores, but end up opening just half that. "All we need to do is foresee these changes in our plans. As a rule, when a supermarket opens, our products are already on the shelf, because we know what happens and we contact the chain owner beforehand," says Stefanovszky, adding that to P&G, all of this is "business as usual."
In turn, Nikos Vorlas says that all changes in the retail and distribution business will come gradually and will probably gain a local tint, dictated by market conditions in Romania. "An important factor that influences the rate of change is the sales volume generated by the big store networks," Vorlas points out.
Newcomers enjoy a beaten field
Retailers entering the market will not have to start everything from scratch. First of all, those who opened the first professional supermarkets have accustomed their suppliers to the workings of modern commerce. Second, the present market players have had to remove the perception that supermarkets are expensive, and distributed - by direct mailing - brochures announcing, for instance, special price offers. In fact, an April study by marketing and research firm Daedalus Consulting revealed that one out of five urban inhabitants do their shopping regularly - at least once a week - in a supermarket or mini-market.
An American businessman with a company in Bucharest recalls that when the first La Fourmi supermarket opened, most buyers were foreigners, and the few Romanians were heard saying, "This is too expensive for me." "Now it's packed with Romanians," our American continues. Dragos Rosca adds: "It was the first supermarket in Bucharest. When it appeared, it seemed a luxury store, and most buyers were Diplomatic Corps or expatriates. Now, most of the buyers are Romanians, because a product costs exactly as much as in the kiosk outside the supermarket."
Rainy days ahead for small retailers
Sooner or later, the most affected by rising competition will be the small retailers. Many of them will disappear; those who will remain will be just enough to cover the segment they represent: outfits that "sell" best on their proximity to the client, being closer to home or along the way, and where consumers make emergency or low-volume shopping.
Dragos Rosca: "Those who will suffer most will be the stores organised and run in an old fashion, or without the know-how needed to operate a supermarket. And the know-how in the retail business is extremely developed; it has long years of development behind it." He reminds that retail is a business where low margins earn immense fortunes, but in Romania, the private system has attempted to make fortunes out of big margins: "A supermarket in the West has a surcharge on products in the order of 3-4%, maximum 5%; the profit comes from managing very large volumes of commodities."
In fact, from the producer's point of view, another great disadvantage of selling in many small shops comes from the fact that there is no control over the price the product is sold for, therefore a single price cannot be charged across all retailers.
Major producers have begun, at least a year ago, controlling their prices, but they managed to do so only with professional store chains. Andrei Filip, project manager at Roland Berger, notes: "In Romania, as in the West a few years ago, pressure is appearing from the producer on the market price - hence the emergence of the most suggested retail price, which is advertised on television."
Dragos Rosca points out that, if the price of a product on the market does not reflect its characteristics or qualities, it can ruin an entire marketing effort. If a booth or a store decides to sell it 40% over base price, the product will command a negative perception in the eyes of the consumer; if they sell it cheaper, it might be associated with a low-quality product. "This is why all price change decisions must be made by the producer or in common agreement with the producer; otherwise, the market effect is devastating," concludes Rosca.
In the West, the idea is not to cut prices - aside from very rare occasions, on products that are not stamped by the mark of price, such as fashion clothing - but to offer more commodities for the same price. "Such marketing policies can only be practised if the producer has 5 networks: he meets with their representatives and presents the promotion for the following period. But he cannot meet with thousands of retailers, and for this reason big companies have problems in Romania in following the price and the way the product is promoted on the market," Rosca says.
Supermarkets may benefit local producers
To many of the local food producers, contact with a Western supermarket chain means recognition and the chance to develop along with the market expansion, especially that major retailers buy most of the foodstuffs locally. Clemens Petschnikar, director general of Billa Romania, says: "The penetration of international retail networks on the market will have a positive impact on the local food industry, on all accounts. To succeed on this market - both us and our competition - we must buy Romanian products."
The explanation is partly for the fact that this is what the Romanian consumer wants to find on the shelf, and on the other, the fact that local products are more easily available than imported ones, and are often cheaper. In fact, in the food industry, the efficiency of production grows dramatically, allowing many producers to export, too.
Dusan Wilms, director general at Metro Cash & Carry Romania, said Metro is very strongly oriented towards local production and encourages its local suppliers of fresh foodstuffs. If an area in the country has a particular diet peculiarity, Metro must be able to offer those foodstuffs to shoppers. "With every new store opening, the supplier will grow with us - developing its production capacity and getting the chance to deliver the product not only locally but throughout the country, too," says Wilms.
Ada-Victoria ?ura, manager and co-owner of dairy distribution and packaging firm Traian One Impex SRL Bucuresti, says that MegaImage and Metro have been the first to recognise the kind of services the company was rendering - the so-called "food service."
"In the case of the other stores we are working with, we were the company that persuaded them of the advantages: that the package allows purchases in a smaller volume, that it is sanitary, that it saves time for the consumer, etc. A landmark recognition came from the discussion with the Carrefour representatives. They said: "We need you," and argued with the large number of items - around 90, which we constantly have on stock, winter or summer, which, for an unstable market like our own, is a performance - with the packaging, product quality and service quality," says Ada ?ura.
Although it would have been easier to work with two or three big superstore chains, the company's policy is to maintain an array of sales outlets as diversified as possible. The company does its own distribution and serves some 500 sales outlets - most of them in Bucharest and in the Beach area.
Half of the production is delivered to fairly small but trusted stores. As the chains the company has contracts with - METRO, Billa, MegaImage - expand, supplies broaden to the new stores so they can increase output. "The fact that we were already present in Constanta when Billa and Metro came was an advantage: we did not have to make extra efforts or sign a distinct delivery contract," Ada ?ura maintains.
Major retailers will shape consumer preferences
Services and the increasingly diversified supply of commodities brought by professional traders have an impact on consumers' expectations and tastes, which, sooner or later, is felt in the structure of consumption. For the next several years, Ada ?ura expects a rise in the demand for dairy products and more diversified consumer tastes.
"Western retailers are bringing with them this modern tendency in the food industry, to prefer lighter proteins. Leaving aside bread, which is a special case, meat and meat products are keeping the first-necessity market afloat. I think consumer preferences will be diverted towards the 'white sector,' and from this point of view I still think our company is well positioned.
"I also think tastes will begin to nuance and stratify, because, unfortunately, the dairy market has preserved in the last ten years roughly the same preferences: raw yoghurt, two or three slices of cheese, cow cheese, and little more. And French superstore chains are expected to produce a particularly strong diversification of tastes. I think next year we will not have to spend largely on advertising, because the mere fact of us being present in some of these stores will be sufficient," Ada ?ura concluded.
Pentru alte știri, analize, articole și informații din business în timp real urmărește Ziarul Financiar pe WhatsApp Channels
