BusinessMagazin

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  • Tourists in the country of the crisis

    On a daily basis, the press from around the world paints the situation in the United States in bleak colours. Consumption has gone steadily down over the last six months, the most famous shopping avenues (Fifth Avenue, Rodeo Drive) are empty, restaurant owners long for the times when Wall Street execs would spend impressive sums in their restaurants and – an utterly unconceivable fact in regular times – Wall Street wives have forgotten all about 500-dollar dinners, and have started to take… cooking lessons. On the other hand, the United States has turned into a destination coveted by tourists, who, stimulated by the still weak dollar, choose to spend their holiday there.

    Business Magazin has talked to Romanian managers who spent their holiday in the famous travel destinations in the USA, and were able to feel the pulse of the crisis in its very core. Alexandre Eram, general manager of SonyaMod, a company that distributes international brands such as Peggy Sue on the Romanian market, and owner of the Z stores, travelled to New York for Christmas. ”Surprisingly, I found a normal country, especially since I was expecting things to be much worse, given the way the press had reflected the crisis. But when I saw the huge queues in stores, I started to wonder where the crisis was,” recalls the manager. However, the manager does not rule out the possibility that things may have changed after the holidays.

    ”I have talked to several American friends, and they told me that one cannot really tell if there is a crisis or not at Christmas time.” Sorana Savu, managing partner at communication agency Premium PR, who spent a two-week holiday in Miami in January, says that the American response to the crisis depends a great deal on the city and the region. Savu has chosen Miami and Fort Lauderdale for her holiday this year, an area she says is favoured mainly by American senior citizens. ”I think it’s absurd that in a city where you see Lamborghinis, Bentleys and Ferraris on the streets, which are expensive by American standards, employees of luxury shops should be very surprised to be dealing with receipts worth several hundreds of dollars. They said the only ones still buying were Europeans and Brazilian tourists.”

  • Inactivity is bad for business

    Coming from Herwig Burgstaller, vicepresident of Volksbank Romania, the announcement according to which the bank ”will turn overdraft into its main product” can seem a little odd. Over the last two years, the Austrians have stood out due to their aggressive approach to the market of lending for individuals with real estate assets put up as collateral, and this product in fact saw the bank go from being a small player to the third largest bank in the Romanian banking system.

    In 2008, the assets managed by the Austrians outgrew the market four times, amid an around 95% exposure to real estate. However, since the beginning of 2009, the bank has not granted any new mortgagebacked loan, according to Gerald Schreiner, executive president of the bank, given that clients are no longer rushing to banks, and that developers are no longer launching any new projects. This explains the change in strategy that Burgstaller is suggesting, but players in the entire banking system are in fact changing course as they go along after it became clear that the lending market is blocked (or merely it slowed down very abruptly, as bankers prefer to say).

    Under the circumstances, it is obvious that the thousands of credit advisers hired in the past few years (around 20,000 out of the 72,000 employees in the banking system, according to estimates made by Paraschiv Constantin, president of the Banking and Insurance Trade Union Federation), have to sell other products, at least for the time being. Similarly, keeping the over 6,500 branches and agencies in the banking system (of which over 1,000 were opened last year) does not make sense if they do not fetch a profit, instead entailing only costs. Shutting down a branch is, however, not an easy decision to make, considering that the investments involved in its opening were by no means insignificant.

    ”There will not be large-scale closures,” says Santiago Pardo Jimenez, a partner with Deloitte’s auditing department, in a talk to BUSINESS Magazin, arguing that ”they still have good business to do here.” According to him, sales will concentrate more on simple, lower risk products (such as cards, current accounts, Internet banking services), combined with a sharp focus on efficiency.

  • The offensive of discounts

    Whereas retailers in the United States have been betting on significant discounts even for new collections, the answer of the European groups, which adamantly reject this policy, was to revive their secondary lines of business. Between American discounts and European’s stubbornness to keep the traditional sale periods, is the consumer that can be lost in the low price spiral. Raluca Banciu, general manager of Alliance International, which operates the Paul & Shark store on Calea Victoriei recalls that she has lately happened to see some clients, especially foreign ones, demand a discount for buying a product from the spring/summer collection of the brand.

    ”We only offer loyalty discounts for frequent shoppers or for those that buy high-value products, but we cannot offer discounts for one or two products of the new collection,” the manager says. The type of consumer the Paul & Shark manager is talking about has been educated lately on a market where repeated sales, outside the traditional periods, have been promoted as a way to overcome the crisis. Still, this can have a boomerang effect, because the discount policy has also changed the consumer’s behaviour, who, once accustomed with permanent discounts, will have a hard time accepting – if ever – the full price. Scott Malkin, chairman of Value Retail, who built a one billion-euro business by selling products of luxury brands in outlets, says that discounts in the US are example of panic and desperation that can drive consumers away.

    After a recession, consumers tend to revert to the practices of the past, but in the case of such a crisis, they simply reject them. Retail specialists in turn are now wondering whether shopping was changed forever by the policy embraced in the wake of the financing crisis – the strategy to drive sales has relied on discounted price tags even for new collections, an approach that has never been seen before.

  • Meat from head to tail

    The biggest problem that Tudor Neculoiu, owner of meat producer Sergiana, had with a representative of the Romanian authorities, occurred when a quality control officer wanted to fine him because the amount of soybean contained was not featured on the salami label. The incident took place in one of the three stores which Tudor Neculoiu had opened in Bucharest, in an attempt to develop in Bucharest the Sergiana butchery model tested in 27 stores in Brasov and the surrounding area.

    ”Eventually, the inspector understood that we weren’t using soybeans or other additives in our charcuterie, and left us alone,” Tudor Neculoiu recalls about his experience with Bucharest – a market he has not placed a lot of faith in, anyway, given that he has already closed two of the three stores here, and that the Capital is not on the list of future openings. ”In the provinces, the market is the preferred place for shopping, but we discovered that in Bucharest – which is a very difficult market, anyway, primarily as far as supply is concerned – things are quite different; everybody goes to the supermarket for shopping,” says Neculoiu, who thinks a lot of the charm of the traditional way of shopping is lost in this way.

    The word ”traditional” is echoed throughout the interview that BUSINESS Magazin did with Tudor Neculoiu. Tradition is in fact what inspired him to go into business in the first place, and his first plan took shape when Tudor Neculoiu was travelling across Europe with a traditional folk dance ensemble: ”When I saw the Bavaria and the Tirol area, I realised it was very similar to the place where I was born, Poiana Marului, and I realised that Romanians could also make money from rural tourism”. Neculoiu at the time was dreaming of building a tourism complex which would include a bakery, a milk plant and a charcuterie plant, in order to offer traditional products to foreigners coming to the Brasov area, like he had seen done in Western Europe.

    In the early 1990s, he opened a bakery in Poiana Marului, whose profit he invested in a meat plant. The projects grew, but tourists failed to rush in. Because his dream of having a business in tourism did not come true, the businessman thought about turning it into something else, so, over a 20-year period, he built a group of companies which includes a pig farm, a slaughter house, a charcuterie plant, a 27-store chain and 5 restaurants.

  • Come get the money

    ”If I knew where to find 200 million euros now, I would have no trouble investing them tomorrow,” says Dragos Cabat, managing partner of consultancy and financial brokerage firm Financial View Consulting, referring to the requests for funding that he gets from his clients. It is true that some of the applicant companies are ”hard to finance”, because they pose a greater risk to investors, Cabat admits, ”but many of them are good companies, with solid business plans.

    ”The increasing need for cash of the companies the consultant is talking about can be easily explained in the current economic context. On the one hand, the entrepreneurs are faced with an economy affected by increasingly more constraints: flows of cash among partners are choked, payments are delayed, orders and sales are going down, due loans are harder to repay. On the other hand, most bankers are no longer willing to grant them new loans and even reduce the lines of credit they approved in the past. Under the circumstances, the offer of the private equity firms, investors that buy into a company, help it develop with funds and know-how for a while and then sell their stakes for profit, is becoming more and more interesting. For many years, entrepreneurs had been reluctant in accepting the offers of portfolio investors, partly because they were doing well and prospects were good, while a partnership with an investment fund would have meant losing independence in the running of one’s business.

    Things have changed now. Even though the economy is going through a rough period, private equity firms are not doing bad at all: whereas in the past years they could miss a lot of deals because entrepreneurs could get loans from banks, today, a series of old talks could be resumed, says Cornel Marian, chief executive of Oresa Ventures, a Swedish private equity fund and one of the biggest in Europe that has been present in Romania for over ten years. Now that bank loans are either frozen or too expensive to get, and the stock market is no longer a solution to raise capital, investment fund managers can afford to be more selective than ever. Beyond the abundance of companies in need of financing, good deals are hard to find and conditions imposed by investors are not easy. The basic criterion is not the price of a company, but the profit that can be made from it in the future.

    ”No company is cheap enough if it’s a bad company,” says Mihai Sfintescu, manager of 3TS Capital, which operates two funds in Romania, 3TS Central European Fund II (100 million euros in capital) and 3TSCisco Growth Fund III (30 million euros). Although selling their business for a competitive price is very difficult for entrepreneurs now, the funds cannot be sure they will able to sell their stakes for profit in two or three years, either. However, if entrepreneurs (or some of them) are not willing to take a lower price, the investment funds are in no rush, expecting the number of opportunities for cheap deals to increase as the problems of companies worsen. The investment funds that sit and wait for opportunities might find out that they missed out on good deals, especially if the bank financing option becomes available again to entrepreneurs. Or maybe the deals are already happening ”silently”, after all, as Marius Stancescu, chairman of consultant and M&A broker Riff Holding, says: ”The sale is a difficult moment, which can affect the commercial relations with clients or suppliers, with business partners, therefore it is only natural that most such deals should be made behind closed doors.”.

  • Life with no bonuses

    ”Every year I learn only one word in Romanian. When I got bonuses, I learnt two,” says with a smile Rand Sherif, the man who has been running the biggest business on the distribution market, Interbrands, for almost ten years now. The company, which was tenth in the ranking of the biggest private companies put together by BUSINESS Magazin in mid last year, is the only business in this field that exceeded one billion-euro sales, far ahead of the second leading distributor on the market, Top Brands Distribution, a 230 millioneuro business.

    The Interbrands boss will surely not learn more than one word in Romanian in 2009, given that his company did not manage to break even last year, after having posted 0.7 million euros in losses in 2007. After all, regardless of the size of the company and of the volume of sales, most distributors posted losses in 2008, as well, after having seen their profits decrease in 2007 below 2006 levels. Rand Sherif, however, is cautiously optimistic, as he likes to say, and points out that 2008 was a good year for Interbrands, though, in which the company grew by 23% in RON (Interbrands posted 12% higher sales last year than in 2007, reaching 1.17 billion euros, but also saw its operating income halve, to around four million euros).

    Although he says he anticipated the effects of the crisis, Rand Sherif admits that their extent was greater than he had expected. ”I anticipated an increase in the cost of capital but not the extent it has eventually reached. I also anticipated the depreciation of the RON, but not this low.” At the end of last year, prompted by the changes on the market, Sherif attempted to remodel the strategy, focusing on reducing the financial risk and costs. Interbrands has loans both in RON and in euros, ”a form of hedging that has both advantages and disadvantages,” Sherif says. Interbrand’s boss is now considering an increase in the loans in RON, even though their costs are higher. He says that this way the company will not feel a too powerful impact of the depreciation. The loans would not go towards investments, however, because Rand Sherif feels this is bad time for such a thing.

  • Growth comes from convenience stores

    This is what Vladimir Vava, chief operating officer of Metro Cash&Carry has noticed. He sees in the customers’ ideas a positive trend for the group’s business. He also sees a potential achievement of Metro International’s target for Romania this year, which entails keeping costs at the same level, keeping profits at the same level, boosting sales and offering support to customers. Simply put, Metro International’s target does not take the crisis into account, and Vladimir Vava believes the cash&carry chain can overcome this complicated period, be it a crisis or recession, with the goals achieved.

    Goals are obviously more complex than in the past years, when Vava was working on promoting and making the ‘cash&carry’ concept understood in Romania and on a differentiation from the other players in modern trade. In the past years, however, profit or sales growth were taken for granted, as the consumer goods market was growing by 20 to 30% year by year. Vladimir Vava would rather not talk about the growth pace: ”No one can tell whether we will see growth in line with what we had in the last few years or more moderate; for the time being we are doing everything we can in RON to eliminate the effect of the exchange rate.”

    The optimism of the chief operating officer of the cash&carry chain resides precisely in the specificity of Metro’s customers, as well as in a potential change of consumer behaviour. ”Sales of food are the most important thing for cash&carry. I do not believe we will see a very serious decline, because people continue to eat,” says Vladimir Vava, who believes resellers should take advantage of this situation, of the fact that more and more customers choose to go to convenience stores to save petrol, as well as money, since one usually spends more money in a large store. ”To us it is a very good sign, because our customer is that trader, the owner of the small store, and the growth of their sales generates growth for us, too.”

    Vladimir Vava says that Metro will adjust to the needs of the small shopkeepers as much as possible and will invest more in the private labels of the group this year: ”private brands play a very important role and I am sure private labels are an opportunity for our clients, as they make a difference in their stores.”

  • Airports of the future

    6 years ago, the British were testing the ”eye recognition” (retina recognition) system on the personnel at Heathrow Airport, saying it would speed up check-in and boarding procedures, and, after the spread of the SARS virus (which caused huge losses to the industry) airports in Asia acquired a piece of equipment which would perform a quick passenger scan and identify every trace of fever. Right now, the two technologies are just some of the systems which up until recently seemed to be exclusively the preserve of science fiction, and which are being used on a regular basis.

    After the 2001 terror attacks, airports worldwide invested billions of euros in developing new technologies used to scan, weigh, take the temperature of, memorise and identify every passenger that steps into the airport. In the context of the financial crisis and of the increasingly tight competition among airlines, airports have started to be used as weapons that can make the difference in the fight over market share. All the more since a new social category has developed over the last few years, that of the frequent traveller, which includes businesspeople and keen travellers, who spend a lot of time on the airport or on an aeroplane.

    Such is the case of Marius Ghenea, president of online retailer PC Fun, of Italian Coffee Concept (owner of Testa Rossa coffee shops) and of Orbital Solution, a distributor of thermal comfort equipment, who travels by aeroplane as often as twice a week. Having been on over 2,000 flights in the last 10 years, Ghenea has developed a whole ritual in preparation for the flight. ”I frequently use online check-in services provided by the major airlines because you can print your boarding pass from your home or from your office 24 hours prior to the scheduled time of the flight,” says Ghenea.

    In order to attract customers like Ghenea, airport operators have thought up new technologies every year. For instance, Air France has launched the SmartBoarding technology this year, designed to attract frequent travellers, for whom saving time is essential. The company promises passengers who join the programme that they will be able to board individually at any time they wish, using a gate specially created for this service.

  • The percentage of dark chocolate

    ”I would rather wake up in 2011, but, unfortunately, every morning I find it’s still 2009,” says Jihad Jabra, general manager of chocolate producer Supreme Chocolat. The decline in chocolate sales over the last few months has not been anticipated by chocolate producers, which did not think any segment of the food industry would be significantly affected by the current situation. Whilst in the first part of last year, chocolate producers were complaining about the high costs of raw materials and hoping things would improve, allowing them to invest more in production, the last few months of 2008 proved to them that things could be much worse.

    ”We don’t have all the figures yet, but we have felt a decline in orders from retailers,” says Jabra, for whom the clearest signal was the low demand for chocolate in November, otherwise a month boasting the highest sales. In 2008, however, people tended to put off their holiday chocolate shopping until December, and they didn’t even buy as much as in previous years. ”I think this change came about amid negative information which emerged in October,” says Erwin Vondenhoff, general manager of Heidi Chocolats Suisse. 2008 had started well for everybody, with satisfactory sales and economic growth, the only complaint voiced by producers being related to personnel shortage.

    ”However, starting in October, we felt a blockage, growth slowed down, with sales lower than the forceful start would have had us expect. It was apparent that consumers moved quickly from emotionally-driven to functionallydriven purchases,” says Jabra. Producers will not be able to offer cautious consumers more attractive prices, quite the contrary: They have accepted that, like most producers in the food industry, they will be forced to increase prices, amid an increase in the cost of raw materials and amid exchange rate fluctuation (which will mainly affect importers, generating a gap between Romanian-produced chocolate, one of whose advantages is that its labour costs are in RON, and imported chocolate).

  • It might be cheaper next door

    At the end of last year, Dragos Raducan, general secretary of the Federation of Romanian Tourism Business Owners (FPTR), told BUSINESS Magazin that the pressure on the prices charged by hotel operators would be heavier this year, so that unless they froze rates at at least 2008’s level, they would lose money. Reactions on the market at the time did not seem to back Raducan’s opinion, but January results made hotel operators change their minds.

    Take-up started to go down by 10-15% in the second half of last year and 2009 estimates point to a constant decline, as a result of a shrinking demand for accommodation and the rising number of hotels. Considering the projects already announced, but regarded with scepticism (because development of many of them has been halted), 12 to 15 hotels will open this year, most of which outside Bucharest. Competition and slow market have upset last year’s trend when the most expensive hotels on the market fared best. Now, hotel owners have started to fight a battle of special offers and lower prices, though lowered by quite small percentages.

    The 10-20% cuts started from the small hotels unaffiliated to international chains, which are the most exposed when it comes to the decline in business travel, because they are not part of international booking chains (the number of rooms affiliated to international chains is quite low, about 3% in Romania, anyway). ”They risk not being able to cover the expenses and then starting to make people redundant. There are big hotels in Prahova Valley that fired 30% of their employees,” Dragos Raducan says. On the other hand, contracts were signed at the same rates in RON last year for the seaside, and in mountain and spa areas rates in RON were kept or raised by 5-8% on average (in some rare occurrences, they were either kept unchanged or rose by 12%).