International DIY retailers cautious about 2010 prospects in CEE

2010-09-01

Since the mid-nineties and until the first half of 2008, Poland, the Czech Republic, Slovakia, Hungary and Romania were investor heavens for international DIY retail chains. Rapid GDP growth, along with substantial demand for new products, expanding construction markets, relatively inexpensive labour forces and low property prices made these five countries attractive destinations for large gardening and home improvement retailers.

Whereas the core markets of Western Europe grew by a mere 12% between 2002 and 2007, these emerging Central European DIY markets registered an average growth rate of 55.6%, far above the EU average of 15.7%. In addition, the comparatively low per capita expenditure on DIY items in CEE in 2007 was indicative of the considerable potential for growth on these markets.
However, in the second half of 2008, the effects of the financial crisis became noticeable on the DIY retail market in Central and Eastern Europe. Declining housing sales, accompanied by falling house prices, stricter credit policies and reduced mortgage availability, curbed demand for the major renovations which used to drive the sales of home improvement items. Meanwhile, high inflation and high energy prices further compromised disposable incomes and boosted demand for energy efficiency.
The response from DIY vendors was prompt. The majority adapted their sales and marketing strategies to a more value-oriented market, and, although such measures did not fully cushion them against the effects of the crisis, they ensured a continued presence on the market and safeguarded long term expansion plans against the temporary economic decline.

Area Overview
Although located in close proximity to one another, the five markets in question were affected in different ways by the economic crisis. The Polish economy was the only one to achieve an increase in GDP in 2009, albeit at a much lower rate than that of previous years, and to keep consumer spending growing. On the other hand, the depreciation of the zloty and the setbacks experienced by the construction industry (85% of all investments planned for 2009 were stalled, according to Praktiker's annual report for 2009) had a negative impact on DIY sales.
Because of its stable banking industry, the Czech economy was also one of those less severely affected by the economic crisis: it registered an estimated reduction in GDP of only 4% in 2009. Slovakia’s small economy was more significantly affected than that of the Czech Republic, as the reduction in sales of cars, Slovakia’s main export products, resulted in a 5% reduction in gross domestic product.
Hungary and Romania were the two most severely affected countries in the region. The rising unemployment rate in Hungary led to 30% of the population living in poverty at the end of 2008. The 5 p.p. increase in the VAT rate in 2009 resulted in a substantial reduction in purchasing power, which was reflected in DIY sales. In the autumn of 2008 the country had to borrow from the International Monetary Fund (the IMF) to save its economy. The subsequent fiscal measures put in place as part of the agreement with the IMF further impaired consumer spending
According to the National Statistics Office (the INS), Romania saw its economy reduced by 7.1% in 2009, whereas its currency, the Romanian Leu, fell in value in the spring of 2009, only to settle at a lower rate for the remainder of the year. The country also had to resort to the IMF in 2009, in order to be able to pay salaries and compensate for budget deficits.
Furthermore, the previously optimistic economic forecasts for 2010 are now being reconsidered, after the mixed results of the first quarter and the Greek crisis, which is threatening to spread to the rest of the euro countries. The monetary union plans of the Czech Republic, Poland, Romania and Hungary have been pushed back for a number of years, and Slovakia’s economy might suffer the effects of Greece’s economic failure

The DIY Market in CEE
The region has seen substantial investments from major Western European DIY retailers for the past decade, but a significant portion of that industry is still accounted for by informal, local markets or small businesses. However, DIY retailers are gaining an increasingly substantial market share in these countries. Groupe Adeo, the Western European DIY leader, with an €11.2bn sales revenues in 2009, is present in Poland with the Leroy Merlin and Bricoman chains. Kingfisher (sales revenues of €10.5bn in 2009) entered the Polish market with Castorama and Brico Depot. The German Tengelmann group is present, with Obi (a €5.9bn sales revenues in 2009) in Poland, Hungary, the Czech Republic and Romania. Praktiker (a €3bn sales revenues in 2009) has outlets in Poland and Romania, where it is also the market leader, and Hungary, where it is the runner-up. The Austrian group bauMax (2009 sales revenues: €1.4bn) is also an important player in Hungary, Romania and Slovakia, whereas Hornbach is the front-runner in Slovakia and is also present in the Czech Republic and Romania.

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With a population of over 38 million and estimated to be worth €11.6bn in 2008, Poland is the largest DIY market in the region. The Czech and Romanian markets, worth approximately €4bn each in 2008, are similar in size, according to Praktiker estimates. The French group Bresson is present, with 16 Bricostore outlets in Romania, a 4.8% market share. Other important domestic providers in Romania include Ambient (a 5.5% market share) and Dedeman (5%). In the Czech Republic, Globus CR is present, with 16 DIY outlets named Globus Baumarkt.
The smallest markets, Hungary and Slovakia, were worth €2.6bn and €1.8bn respectively in 2008. These markets are largely dominated by international retailers.

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Anti-Crisis Measures and Future Outlook
The economic crisis has affected consumption in Central and Eastern Europe: this was clearly visible in the DIY concerns’ financial results for 2009 and Q1 2010. Large retailers in the region have, however, remained confident and plan to continue with their expansion plans, although they have become more cautious when implementing them. One reason for this attitude is the relatively severe housing deficit in Central and Eastern Europe, which is expected to drive demand for DIY products in the long term. For example, in Poland alone, the housing deficit is currently estimated at to consist of 1.6 million units. For most retailers, the previous expansion targets remain unchanged, although the deadlines for their completion have been postponed by at least two years.
DIY retailers have been forced by the economic milieu to be creative in order to maintain increases in sales and profit, reduce costs and minimise losses. In the current situation, maintaining a profit while sales are on the wane is considered a high priority target. Strategies implemented across the board include redundancies, cost cutting, extensive discounts and store refurbishment programmes. Innovation is also important in attracting value-oriented customers. For example, Praktiker is installing self-service checkouts and launching new services, such as a currency converter, language selection and suggestions for items to complement those already scanned in, to increase customer satisfaction. The kinds of product offered are also changing. Retailers are now focusing on offering essential products at lower prices, pushing for private labels and reducing the offer of expensive electrical appliances, while expanding the low-end offer, cheaper alternatives or even “do-it-for-me” products which do not require such appliances.
Although most major retailers have made losses over the past 18 months, no one has yet abandoned the market, which is proof that confidence in the region remains robust. It is difficult to estimate the sales volumes in the short term, particularly because the first quarter of 2010 was affected by seasonal factors and might not be indicative of the rest of the year. Retailers remain cautious with regard to forecasts for 2010 but expect a revival in 2011.

Carmen Valache
PMR Correspondent