Romania Food and Drink Report Q2 2008

International mass grocery retail (MGR) operators continue to demonstrate their commitment to the Romanian market with a series of aggressive expansions, as discussed in BMI's recently published Romania Food & Drink Report for Q208. This is all the more impressive given the troubled macroeconomic climate in the country, and the growing concerns over the economy's stability. Romania's vast and widening current account deficit is its largest macroeconomic imbalance and the country is likely to be one of the first and the heaviest hit by any further downturn in global investor sentiment. Growth in the Romanian economy, which has averaged over 6% in the last five years, has been built on debt-driven consumer spending, mostly on imported goods. Although fast-developing economies often out-spend their incomes, Romania's external deficit is vast even by regional standards. Moreover, this consumer spending is fuelled by heavy loans: growth of domestic credit was still an astonishing 43% year-on-year (y-o-y) at the end of September 2007, and has been at or near 50% for some years. If all of these factors were to catch up with Romania and the economy was to take a sudden downturn, this would have an immediate impact on MGR sales.

However, given the extent that international operators have already invested in the country, many major players have decided to move ahead with expansion plans, despite the risks involved. In February, French retailer Carrefour reiterated its commitment to the Romanian market, in spite of the mentioned concerns.

The company has said that it is still very optimistic about the local retail scene and plans on investing at least EUR100-200mn (US$145-291.1mn) in the country in 2008, saying it will continue to act rapidly in its expansion policy. Apart from expanding its store network, Carrefour has also been investing heavily in its logistics infrastructure and distribution network, as it lays the groundwork for future store openings.

In early 2008, Germany's Tengelmann, which is already present in the country with its Plus discount chain, also announced a major expansion strategy with plans of opening 25 new stores through 2008, with an investment of EUR75mn (US$104.1mn). In order to support its expanded store network, Tengelmann has started construction on its second logistics centre in the country, located near Cluj Napoca.

Meanwhile, in the same month, Delhaize-owned Mega-Image announced that it will expand its current network, adding six new stores through the year, most likely in the capital city of Bucharest. Such major expansion waves are actually nothing new and have been going on for some time. This has led to concerns about the Romanian MGR market being overheated, with the market weaknesses now exposed by the current global financial crisis. Only time will tell how detrimental an impact the current economic outlook will have on MGR sales, but that industry majors such as Carrefour, Tengelmann and Delhaize are still willing to move forward with their planned expansions is surely a good sign.