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BBJ MARKET ANALYSIS : Tesco still tops retail chains list in Hungary, has profit

2010 was a troublesome year for the retail sector. So far, 2011 has not brought much optimism either. Yet, a number of changes in consumer behavior opened new opportunities for businesses.

2010 was a bad year for retail in Hungary. The volume of sales in the sector dropped by 2.1% from the previous year. July gave a glimpse of hope when sales went up, the first positive development in 41 months. However, what appeared to be a recovery did not last very long: Hungarians said “Bah, Humbug” to the spirit of Christmas spending and kept their wallets firmly closed.

The largest players in the market, hyper- and supermarkets, were worst affected by falling consumption: the top 13 chains in Hungary in our list suffered a decline twice as large as the average in the retail segment according to the Central Statistical Office (KSH) data.

Still, top players’ positions in the market are consolidated enough that there was no significant change in their ranking. Tesco, which remains the leader in the sector, was the only one of the top five food retail chains to increase its total assets.

 

Falling sales and profit

Meanwhile, everyone at the top of the list except Auchan suffered a decline in net sales of between 0.6% and 9.2%. The French chain managed to increase its net sales by 0.3% to HUF 227.4 billion.

The sector’s profitability also declined. SPAR Magyarország suffered the largest drop in its bottom line: it had a HUF 25 billion loss in 2010, HUF 11 billion more than in the previous year.

Ironically, Auchan, the only chain to see its revenue, was only able to do this at the price of a 6.1% larger loss than in 2009, leaving it HUF 8 billion in the red.

Of course, not all large players closed the year with a loss. Tesco, for example, still made a HUF 9.7 billion profit in 2010 even though it increased its assets by 6.9%. Penny Market also had a HUF 700 million profit, a huge – 67.4% – drop from the previous year. Meanwhile, its assets decreased by 49% to HUF 25.7 billion.

 

Waiting for recovery

The long-awaited recovery has yet to take place. The first four months of 2011 recorded a 0.5% decrease in the volume of retail trade turnover from the corresponding period last year. April witnessed the sharpest drop of 1.3% in annual terms.

Sales of food, drinks and tobacco, which constitute roughly 46% of overall sales in retail, stagnated in January–April compared to the same period of the previous year. Non-specialized stores suffered the most since they account for 90% of all food, drinks and tobacco sales. A set of changes in consumer behavior explains these negative market tendencies.

 

Changing behavior

First, the tax-reduction program operational from the beginning of the year, which was meant to boost consumption by increasing the level of disposable income, failed. Households chose to save the extra money.

Second, consumers’ expectations of income and their predictions regarding the economy overall were quite pessimistic at the beginning of the year according to the GfK Hungária market research institute.

Households expected their financial situation to worsen, and unemployment to rise. As a result, not only were they shopping less frequently, but they took planned shopping trips and were significantly less prone to impulsive purchases.

As Katalin Gillemot, external communications and sustainable development director of Auchan Magyarország Kft, told the Budapest Business Journal, “as a result of the economic crisis our consumers behavior has changed - in every product category the customers look for low-price products.”

Another challenge that the retail sector has to face is a constantly changing legal environment. This year alone brought developments such as the adoption of the “chips tax” on food high in sugar, salt, carbohydrates and caffeine along with Hungary-led EU food-labeling initiative and a proposed shopping mall ban.

Last year brought the crisis taxes, of which retail chains have to pay 2.5% of annual revenues, regardless of whether they make a profit or not.

 

Signs of hope

Although the retail sector was off to a rocky start this year, some data suggests that things might pick up in the coming months. GfK has recorded improvements in consumer confidence and expectation indices during Q2 as well as the likelihood of households to make major purchases in the near future. This is, in part, due to a 0.4% drop in unemployment in the March-May period.

Moreover, due to an increased tendency by consumers to make informed decisions, they pay closer attention to promotions,special discounts and leaflets. This opens a window of opportunity for stores to attract more customers.

In fact, Katalin Gillemot predicts further increases in price-awareness as well as more sophisticated consumer behavior. This means that, on one hand, stores will compete more vigorously for customers’ loyalty, but, on the other, consumers will have an even wider range of fairly priced quality products.

“The task for the chains now is to launch programs that are able to shout louder than the marketing noise around them and can continuously maintain customers’ interest and active participation in the program,” said Krisztina Kovács, sector manager of GfK Hungária’s consumer tracking in a press release.

Already now, most major store chains offer their customers a variety of promotional deals, from bonus cards to information packages on healthy dietary choices; to various contests and lotteries; to even issuing credit cards through major banks.

 

This article appeared in the BBJ's Retail Focus in the print edition on July 15, 2011 under the headline Long-awaited recovery still far away.