Hungary retailers’ strategy: Sell it smaller!

The prospect of doing business in retail in Hungary hasn’t lessened a bit, but it requires a new approach that active companies are in the process of implementing.

Without any realistic chance of building further huge block retail outlets or hypermarkets thanks to prohibitive legislation, the chains have found a far more favorable tactic is to have more outlets, each of which are necessarily smaller in size, but are closer to the customers and more convenient.

“Everywhere in the region, including Hungary, it is clearly visible that the appeal of the hypermarket channel is diminishing and a growing group of customers is orienting towards discount retail or specialized smaller units,” Tesco-Global’s press department said.

The shift in strategy was apparent in the case of Tesco, which first established itself on the Hungarian market with its hypermarkets, but then started building a network of smaller units in central locations under the Tesco Express brand.

Hungarian competitor CBA has been aggressively expanding over the past years, through takeovers as well as new openings, giving it wide coverage in many areas. For example, there are five stores sporting the CBA logo within walking distance of the BBJ’s downtown editorial office in Budapest, and there is no indication that the process will stop.

“We are planning to continue on the started path and will be opening dozens of new stores in the near future,” CBA communications director Attila Fodor said.

Branching out through franchise
While CBA has been relying on involving franchise partners for the expansion of its national network for several years, Austrian competitor Spar is only now adopting this approach, having thus far relied on outlets it directly owns.

As the company’s communications director István Fehér explained, Spar commenced the introduction of its Hungarian franchise chain in 2012. In the future, a larger number of Spar outlets will be operated in the structure, which is already common in the firm’s Austrian home market, but conditions weren’t thought adequate in Hungary up until last year.

In one notable step, Spar has agreed with compatriot energy firm ÖMV to open franchised stores at five of its Hungarian fuel stations.

“The Spar supermarkets opening in the first year will operate as a test and future developments will commence pending customer responses,” Fehér said, declining to comment on reports that Spar plans to launch some 100 new outlets in the near future.

Banished block retail
When parliament ratified the so-called “plaza stop” bill at the end of 2011, which banned the construction of retail units larger than 300 square meters in size, the profession was disgruntled. Insiders argued that the ban was adverse to the economy in general since its takes business from the construction sector and consequently prevents job creation. It was also perceived as a tool specifically targeted to prohibit the growth of big foreign chains that relied on hypermarkets, and to benefit domestic competitors like CBA which had a different business model.

Seeing the change in overall customer habits in such a short period of time, retailers now probably aren’t particularly worried that they can’t build huge outlets anymore.

“While we don’t disclose our business plans, we can still say that due to the changing shopping habits, the plaza stop doesn’t in any way obstruct our investments,” Tesco said.

While retailers agreed on the general trend of a stronger orientation towards convenience and proximity over size, there is still some interest in building big.

As the Budapest Business Journal learned from the Economy Ministry, there are currently 11 requests for a waiver on the ban being processed. The ministry has jurisdiction over whether to green light such projects after examining them on a case-by-case basis. It says that, since the law took effect, it has approved exemption for 89 projects and rejected 69.

“Requests for exemption were approved in all cases where the investment’s planned profile, location and size didn’t mean an excess load on the environment and if the project included the refurbishment of dilapidated spaces and roads, if they reduced the noise load and if they also included additional infrastructural developments,” the ministry said.

Economy Minister Mihály Varga said in June that the government has no intention of revising the plaza ban anytime in the future, citing the continued need to support domestic vendors and retailers from strong multinational competitors.