Transnational retail corporations and the modernization of the Romanian retail sector

Istvan Egresi, Department of Geography, Fatih University, Istanbul, Turkey, iegresi@fatih.edu.tr

Abstract: The Romanian economy has changed dramatically since the fall of Communism more than 20 years ago. Perhaps the most visible of these changes is the transformation of the retail sector. Initial change in the early 1990s was slow because of the great fragmentation of this industry and the lack of capital for investments. The development of the retail sector started to pick up towards the end of the 1990s when the first transnational retail corporations entered the Romanian market and especially after Romania’s accession to the European Union in 2007. Traditional retail formats still dominate in most of the country but this situation is about to change as foreign investors are opening more stores every year and diversify their retail formats. This study discusses the evolution of the Romanian retailing sector emphasizing the contribution of FDI to the modernization of the retail sector as well as the importance of EU membership in attracting retail TNCs to Romania. The study also examines the impact of retail FDI on the traditional stores and on the Romanian-owned modern stores. 1. Introduction International retail operations are fundamentally changing the methods by which consumer goods are distributed and marketed globally. Retail operations have been traditionally perceived as localized operations, with limited market power and limited managerial skills and sophistication (Alexander, 1997). The increased size of retail operations has stimulated and supported international expansion. Revenue earned within the domestic market has been invested in operations in new markets in an attempt to sustain financial growth targets. Large organizations, faced with limited opportunities domestically have sought expansion in non-domestic markets (ibidem). Alexander (1997) has identified five main reasons for retail organization focusing on expanding their international operations. For each of these factors, both push and pull effects are at work: 1) politics: the push factor is an unstable political structure within an organization’s domestic markets coupled with a restrictive regulatory environment, and also perhaps restrictions on consumer credit; the pull factor may be represented by stable political factors in the target countries; 2) economic: the push factor would be poor economic and trading conditions within a domestic market (along with maturity or perceived saturation), on the other hand, countries that have good economic growth prospects, low operating costs and growing markets, will be targeted as development opportunities for retailers. In a European context, countries such as Poland, the Czech Republic, Slovakia and Slovenia all fall within this category (Birkin et al, 2002). It is clear that hypermarket growth has slowed down significantly since the late 1980s across Europe. Much more stringent legislation in 1996 (Loi Raffarin) has finally it

informal. m. 2. Guy (1998b) also notes the recent trend of reducing the upper size limit of new stores especially in Belgium. In this stage. when it was mostly in private hands. through the post-war nationalization and finally to the re-privatization of the retailing sector following the fall of communism in Eastern Europe. “globalization period” that started in some CEE countries in the second half of the 1990s and is on strong today. and small-scale. supermarkets emerged or rose rapidly relative to their modest development before the stage. The same is true in Portugal and Belgium (which insists that an impact study must be carried out by the applicant. specialized/dedicated wholesalers. combined in some countries with a significant parallel retail sector that was private. Three stages in the path of change in the retail sector in the region: 1. European laws are now beginning to harmonize and agree that unrestricted retail development is harmful to existing retail infrastructure. pretransition period. There are several explanations for this and in order to understand them. France. including hypermarkets. the revised Planning and Policy guideline (PPG) 6 legislation has also tightened up on out-of-town developments. where in most of the countries the state played an important role in the retail sector. First the objectives and legacy of the centrally planned economy are examined. 3. Second the principles of transition to a market economy are assessed in the context of privatization of the retail sector including a closer examination of the role of FDI in this process. shifts from traditional brokers to use of new. but that the countries have varied significantly in how fast they have gone from one stage to the next (ibidem). In the UK. (Birkin et al. All CEE countries have gone through the same stages. with a proliferation of formats (the emergence of a variety of large format stores. and perhaps to predict future directions for development. For . often via privatization (ownership change) without fundamental change in the distribution (concentration of ownership or location pattern) and format (small versus large) of the retail stores. and generally the decline of traditional wholesale systems (Dries et al. Finally. This means that sites with existing planning permission are especially attractive and expensive. 2004). Portugal and Spain. Similarly. as well as small format chain convenience stores in addition to deep changes in the procurement systems of supermarkets (such as the establishment of centralized buying and distribution centers. new out-oftown developments have been banned. The French. for example have recently set an upper limit of only 300 sq. 2002). 2002).seems stopped major new store developments. The theoretical discussion provides a background against which changing consumer demand and responses of both foreign and domestic investors are reviewed. this paper will attempt to review the evolution of the retailing sector from the inter-war period. to use of private standards. discount stores. the purpose of this paper is to assess the intensity of retail FDI and its role in creating a new retail environment. Even in countries such as the former East Germany (which allowed a period of laissez-faire activity after reunification. cash and carry. The last section of the paper attempts to summarize the major processes involved in the transformation of the polish retail sector from a centrally planned to market economy. the Ley de Ordenacion del Comercio in 1995 in Spain (Birkin et al. The objective of the paper is to review some of the major trends in Romanian retailing from the perspective of both foreign investment and domestic competition. roughly pre1990. Retail is one of the fastest changing sectors in Romania. early transition period where the prior system was changed.

The fragmentation of the retailing sector continued in the 1930s and by 1936 there were 147. so that most of the shopping was done downtown. private retailing virtually disappeared. The early times Between the two world wars the Romanian retail was characterized by high fragmentation. In Romania. Bulgaria and Croatia and 2002 in Russia and Ukraine (Dries et al. . Poland and Czech Republic. Transformation of the retail sector in Romania 2. therefore. and Sobaru 1962: 15).probably the owner himself or herself. had few incentives. Making a very good living on the backs of the peasants and industrial workers transformed these retailers into “social parasites” and “enemies of the people” (Michalak 2001). like in Poland and Czechoslovakia all decision regarding the retail sector were taken by the Central Planning Commission and store managers and employees had little to say (Sobaru. vol.000 stores in Romania. In this regard. Most of these stores were small and very small (39. globalization phase started in 1996 in countries like Hungary.6 percent had 2-5 employees. Only 0. During Socialism After the war. although production in food sector decreased twenty percent (Sobaru 1962: 15. In contrast. iv. The store managers and employees. 2. Practically. 1962). or with insufficient retail space. “merchant”. 2. 407). they had no ways of exercising their “ownership” or controlling their “business”. Sobaru (1962) calls them “speculators” who make huge profits by buying cheap from the farmers and selling for high prices to the city dwellers. while the number of both private stores and stores owned by co-operatives was reduced to a minimum (Earle et al 1994).4 percent of all stores had twenty employees or more).2.1.example.and 55. The statistical yearbook of Romania for 1930 showed 75. while the rest formed co-operatives in which the retailers (again. Theoretically only 64 percent of the stores were owned by the state (84 percent in urban areas). 2004). however. the situation in Romania resembled very much that in Czechoslovakia where the retail sector was clearly in the state’s hands. communists kept investments in retailing at a minimum. p. Romania fell under the Soviet influence and words like “retailer”. Other problems with the retailing sector: • Many communist style housing quarters were build without shopping centers. With the nationalization of the 1948. in Poland twenty percent of all retail stores stayed in private hands (Michalak 2001 and Taylor 2001).7 percent had only one employee. but also in Michalak 2001 and Earle et al 1994).000 retail outlets for a population of 18 million (75 percent of which selling food and 25 percent non-food products) (Anuarul Statistic al Romaniei 1939-1940. In Eastern Europe. Romanian Encyclopedia. in late 1990s in Romania. theoretically) retained their ownership rights (Sobaru 1962: 71). The effects were visible in the state in the state of neglect the retailing sector was in. if any to make any improvements to the store. or “capitalist” became derogatory (Sobaru 1962. as this sector was considered unproductive and seen only as “an outlet for the distribution of consumer goods produced by manufacturing industries and agriculture” (Earle et al 1994: 4).

1994:23). Retail outlets were strictly to distribute goods at prices determined by the five year plan (Werwicki 1992). Small entrepreneurs focused mostly on trade rather than . the last year under communism there were less than 59. This did not seem to be a problem before 1990.2002. Poland in 1989 reached a nadir of communist inefficiency and neglect of consumer needs. there was very little retail FDI inflows during this period (Dries et al. everyone was continually engaged in a search for the discovery of a “double coincidence of wants” or a possibility to arrange a triangular trade among a number of different consumers. barter. sometimes the chains were quite long. there was an initial retail privatization. 1994). 1990-1995. 2004). they were also unappealing. 1994). 2. The period between 1990 and 1995 In the early stages of transition. Since 1990. the process of privatization encouraged a vast number of small and medium sized retail operations. 3. 1996. there was no rent. with the majority being single outlets.000 retail outlets in Romania (Euromonitor 1994). endless standing in lines. Transition and Internationalization Periods The time after the fall of communism (December 1989) could be divided into four distinct periods: 1. This was associated with the breakdown of the highly concentrated state system into separate units that soon started to merge and form many small private retail chains. in particular retired people and children often received this assignment (Earle et al. as there was no competition • Families were forced to adjust to the unavailability of goods by organizing their members to wait in queues. 2. The stores were not only empty. profit or supply to worry about. lacking in modern equipment and staffed by people who treated customers as a particular noxious species of intruders (Earle et al. 2008-2012 1. Because so many transactions were conducted on a barter basis. if unstated duty of many junior workers was to procure shortage goods (especially perishables) for her or his superior. bribery and ultimately very little to show for the effort. • Enterprises also adjusted allowing their workers time-off during the day to search for ingredients for the evening meal.2008 4. A simple task of buying necessary groceries consumed several hours each day in the life of every Pole. • Most of the shops were rather unattractive and the employees rude and uninformed. turnover. Part of the customary. • None of the stores operated in market conditions. no understanding of trade under socialism would be complete without an acknowledgement of the unusually active role played by consumers in organizing allocation (Earle et al. no price flexibility.3. with frustrating searches. In 1989.The number of stores in Romania decreased every year. 2003.

5 2. Although illegal this type of trade was very widespread in Romania in the first years after 1990.2 1.6 . or family association) and a very 1989 58. and the distinction between retail and wholesale was blurred (Euromonitor 2004). population lacked capital and there was a reluctance to sell to foreigners.3 1992 94. Small kiosks were built and placed on. including the real estate and land instead of leasing them to the successful bidders. while new companies specialized in consumer goods and usually started by importing. Most of Romanians who wanted to start a business did so in retailing because of the low level of capital and limited knowledge required. the number of retail outlets almost doubled between 1989 and 1992. and consequently much needed consolidation is slow (Michalak. The new shopkeepers bought only assets such as store equipment. most of the retail outlets were privatized individually under the small privatization program. Other stores were opened in first-floor apartments and in other spaces that previously had other utilization. Sometimes entire families were engaged in this type of activities. Clearly such privatization leaves much to be desired since the new retail management is reluctant to invest in store premises that do not belong to them. Poland. retailing quickly became one of the fastest changing and growing economic activities.4 1991 80. and were given a free hand in running the store. “Small privatization” limited the tender to the former employees of the state retained the ownership of fixed assets. With that money they would buy merchandise that was hard to find or expensive in Romania. Therefore. As in many other Eastern European countries. They would take any item they could buy for cheap in Romania or obtain for free and sell across the border in countries like Hungary. distant investment horizon or sophisticated technologies. like electronics or blue jeans and sell to family or friends or directly in the market. A rapid expansion of the retail network followed in 1991 and 1992 as a result of mushrooming new private enterprise on the one hand and the gradual privatization (and the resulting fragmentation) of the old state and cooperative system on the other (Euromonitor 1994). As table 1 shows.production.6 1990 59.6 3. The so-called small privatization was devised and implemented between 1990 and 1991 in the retail sector (Earle et al 1994). goods and stock. Yugoslavia or Turkey. Larger stores that could not be sold to employees were divided into smaller stores and then sold individually. The typical privately owned company had few partners (usually one or two.000 population Table 1 Romania: Total number of retail outlets 1989-1992 (Euromonitor 1994) Private firms were mainly active in services and trade. rules were not very strictly enforced. or around major pedestrian arteries or in areas lacking other retail outlets. 2001). expansion and takeovers are difficult. In a market starved for consumer goods and choice. Retail outlets (‘000) Outlets per 2. The main advantages of retail investment is that it does not require vast capital investment. Many Romanians were also engaged in trans-boundary small trade. Moreover.5 4.

0 1993 % 38.3 10. Demand-side capacity variables include: (1) per capita income growth increasing the demand for processed foods which is the usual entry point for supermarkets.4 1992 ‘000 37. In other Central and Eastern European countries.5 1992 % 39.5 10.4 100.0 59.0 8. The number of food outlets accounted for 30 percent of outlets in 1992 up by 1 percent since 1989 (Euromonitor 1994). 2004). Euromonitor 1994).4 Mixed 10. Delvita (Be) by buying the Sama chain of small supermarkets and Tesco (UK) bought the former Prior department stores in Czechia and Slovakia (Dries et al.low level of capitalization.4 1991 % 40.8 1990 ‘000 24.0 Nonfood Food 17. 2004).0 80.9 18.4 16. and (2) reduction of effective food prices for consumers because of supermarket chain’s mass procurement and efficient merchandising. gradually eroded by both the food and the mixed goods sectors.0 21.6 28.0 32.0 22.8 6.0 1993 ‘000 38. Their success has been accelerated by the interest from private entrepreneurs. This structure resulted in a great number of outlets.0 100.0 10.3 100. Mixed outlets included both large department stores and small mixed shops in rural areas (table 2.9 1991 ‘000 32.8 23. with the concomitant increase in the opportunity cost of women’s time. The firms had limited access to business financing and most made only slight attempts to modernize their equipment. Mixed outlets represented the most dynamic category and managed to increase their share of the total number of outlets from 18 percent in 1989 to over 21 percent in 1992. Hence retailers have an “anchor” strategy where they implant first and deepest in the best prospect first-wave country and then set up their procurement systems for the region and move into other countries (Dries et al.0 22.0 8. Ahold (Netherlands) entered by buying the Mana chain.0 17. for ex.7 29. most of them only simple kiosks or street traders.3 1990 % 40. Foreign retailers tended to find a relative “saturation point” that provided and impulse to spread regionally while at the same time in a more competitive environment started to acquire domestic firms and push out weaker foreign competitors. What drove this “supermarket revolution” and why has it occurred at different rates in the different sets of countries of the CEE region? Demand-side incentives include: (1) urbanization.0 8. The non-food retailing sector represented the largest one by the number of retail outlets in 1992 with an estimated 40 percent share.0 100.8 18.1 20.8 29.9 100. In 1991 in the Czech retail sector. however. 1989 ‘000 24.9 8.6 30.0 29. and (2) growing access . which did not have the power or ability to survive.5 1989 % 41. the few foreign retail chains that did enter the market did so by buying existing newly privatized retail chains.0 94.0 32.5 8.6 Table 2 Romania: Retail Trade Outlets by Type 1989-1993 Source: national statistics/trade estimates/Euromonitor 1994 In Romania no major foreign retail companies entered the market during this period. Its importance was.6 100. The number of outlets registered in 1996 and 1997 represented in fact artificial amounts of retail businesses (Euromonitor 2004).3 Kiosk 6.0 20.4 10.4 Total 58.

b. The salaries were very low and the number of cars limited. cars. Property rights were not clear and there still many disputes in court. Demographic trends are somewhat unfavorable throughout the region.4 in 2002). The remaining consumers do buy in larger amounts. c. The 1996 – 2002 period During this period the number of modern retail units continued to expand. • The Romanian trend in retailing is to buy small quantities in small amounts. while international companies were initially not interested in investing in Romania. In 1996 Metro opened its first cash and carry unit followed soon by Carrefour. Shortage of domestic capital.4% in 2001 and 2. followed soon by four Mega Image also in the capital. in one of the large and modern retail outlets. Development of modern retail outlets remained very slow in the first half of the 1990s because: a. in the 1990s and 2000s (Dries et al. This segment is more likely to buy from supermarkets and hypermarkets than the others. Most Romanians preferred to shop daily small amounts of food. and bus transport. but only due to their greater salaries (around $180) per month. The market was dominated by traditional formats. daily from the nearest grocer. 2004). 3. Population had very low incomes and preferred to buy in small amounts. population is . 2. The reasons are clear: better quality and lower prices (PwhC. The first Romanian supermarkets opened during this period. albeit very slowly. although they are slowly shifting towards the big retailers (Euromonitor 2004). which still prefer general stores and markets for their shopping. more than 70 percent of Romanian people are concerned only in strictly fulfilling their most urgent needs (Euromonitor 2004). In particular. The first international retail chains also started to arrive. • 76 percent of the urban population adopt the aforementioned buying tactics where food is concerned. Nowadays it has become a common practice for Romanians to go shopping at the end of the week with the family. There were very few supermarkets or other modern retail format and those that opened during this early transition period were mainly in the capital. The first “La Fourmi” supermarket started in 1992 in Bucharest.to refrigerators. therefore. rather than in small shops and kiosks. Retail sales also increased very slowly (1. The 2003 – 2008 period Purchasing habits change as Romanians’ lifestyles shift. Before 1996 foreign capital only participated in upgrading existing facilities and in joint venture with Romanian companies. the customer base is aging and the birth rate is low. and 76 percent of the same segment of population for non-food goods. 2004: 14). The supply-side of supermarket diffusion in developing countries was driven very substantially by an avalanche of European and US retail investment driven by FDI liberalization plus the factors above.

The retail sector is also fragmented. and rarely organized in the sort of large chains that have driven innovations in the west (Arnold v). The Period after 2008 Consumption has decreased by approximately 25% since 2008. In 2011 the focus shifted to supermarkets and convenience stores. Conclusion The retail landscape has changed several times in Romania during the last one hundred years due to political changes. Trident. Firstly. In spite of this the number of modern retail store has continued to increase. A considerable number of people continue to shop in traditional stores so there is still room from expansion of the modern formats in spite of a drastic reduction of consumption which accompanies the economic crisis. New discounters are entering the market. A single concept will not translate easily across borders without careful customization (Anonymous page 2). Profi has recently repositioned itself as a supermarket. The most recent shift can be attributable to the contribution of FDI to the modernization of the retail sector as well as the importance of EU membership in attracting retail TNCs to Romania.). Consumer purchasing power is much lower than in the west and retail prices are not dramatically lower (Arnold v). 3. . Lidl has bought all the Plus stores in Romania and Bulgaria from Tengelmann in 2009 and since started to expand aggressively. The purpose is to open smaller and smaller stores situated closer and closer to the customers. The growth is however mainly in the number of stores owned by foreign corporations as many of the few Romanian-owned companies that were involved in modern tourism filed for bankruptcy during this period (for example PIC with 5 hypermarkets. Eastern Europe has far more shops per consumer than the west. 4. SPAR. Also challenging to retailers are the many cultural and language differences across the region. the regulatory environment. Another trend worth mentioning is that retail companies are branching out into new formats which is a sign of the Romanian retail market becoming more mature. Two factors may hinder development of modern retail formats. One example is Metro who has created a convenience store franchise (“La Doi Paşi”) that already includes 200 stores. albeit slowly. Stores are smaller and more specialized. land large enough to build hypermarkets and supermarkets is already more difficult to come by especially in the larger cities. Romania has lost close to four million people since 1990 (close to 17%) due negative population growth and outmigration and this phenomenon is likely to continue because of low fertility and ageing of the population.expected to decrease….ro convenience store project many other companies have recognized the potential of this market and started to invest in it. While a new Romanian retail company created by the Mogul Dinu Patriciu failed lamentably with its Mic. The first two years are characterized by an unprecedented expansion of the discounters favored by the economic crisis. A third chain. Secondly. import duties and the difficulty of finding real estate for larger format store. UniversAll. Another discount chain is Penny Market owned by Rewe. etc.

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