IT retailers market wary of M&A and investments

Of course, nobody is in the mood for making investments while satisfactory profits are not guaranteed. And as long as you have to focus on keeping your head above water, who is willing to take on extra weight?

Retailers complain that even last year they were confronted with cash flow and liquidity problems. Some had to reduce costs drastically and even close some smaller stores which did not yield profit.

In other words, this is a moment when retailers are more prone to closing rather than making investments in new locations. As a consequence, the market will shrink in terms of the number of stores and sales will increase at each location that weathers the bad financial conditions.

“We will only relocate those stores where the owners are not understanding enough to decrease the rent to a level that will allow us to maintain a decent level of profit. We will not make investments unless we come across opportunities that cannot be turned down,” Adrian Furnica, general manager of Romsoft, tells Business Review.

Romsoft, which runs the Depozitul de Calculatoare retail network, has gained traffic thanks to its competitors closing stores. However, Furnica admits that even though sales were “pretty good” during the holiday season, they were below the level of this time last year.

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“We cannot know beforehand how the market will perform just as we do not know what the evolution of the exchange rate will be. We can only speculate in the hope that someone is influenced by it, but slim chance,” says Furnica.

Jiri Rizek, CEO of Flamingo International, shares this view, saying it is too early to make detailed forecasts about how this year will pan out due to these variables. However, he says the market will remain stable and similar in value to 2008.

“Despite all these, in the first half of the year there will be a fall. Later the market is expected to recover and even grow slightly in the second half of the year. At the moment, though, we cannot expect a substantial growth since retailers are focusing more on closing unprofitable stores and relocating current ones to areas with higher commercial traffic. At this point the emphasis lies on cost efficiency and profit,” says Rizek.

Currently, the market is unstable and the exchange rate changes from one day to the next, which leads to a decline in purchasing power. “Naturally, due to all these factors, consumers will not be as willing to spend, which will also affect the sales of retailers,” says Rizek.

If a company also owes the bank money, the volatility of the exchange rate spells higher interest rates. “It is also likely that new stocks of products will be more expensive, as we will have to raise prices as a result of the unfavorable evolution of the exchange rate,” says Rizek.

Furnica says some retailers' policy of slashing prices while everybody else is doing the exact opposite is a potentially dangerous idea which will harm their business. “Those who do not raise their prices will not make it. I have already noticed that some players on the market are desperate to lower prices, which is totally unjustified while on the international market all producers are increasing prices. This will cause them big losses since they will not be able to update their stocks,” he says.

“The volatility of the exchange rate is reflected in the price of the products and in deliveries made to the hypermarkets, since nobody is willing to wait so long for payment. I hope they come back down to earth and take a more appropriate attitude because if not they will

definitely not have merchandise to put on the shelves soon,” adds Furnica.

M&As only for those who have ready money

Pundits seem to agree that the M&A market will be lacking in spectacular transactions this year. “I don't think there will be mergers & acquisitions this year since everyone will try to direct their funds towards stabilizing the business and not to expansion. But here things will also depend on opportunities and on who has enough money to be able to afford to make investments,” says Furnica.

Smaller retailers of electronics, home appliances and IT equipment will probably be out of luck this year since their businesses will decline, predicts Rizek. Internal acquisitions are also unlikely since the three main players on the market will be much more bent on maintaining cash flow at an optimum level rather than making investments in expansion, he adds.

Flamingo has prepared a plan of action to minimize the effects of the crisis. This includes a strict program of financial controls to ensure cost efficiency and prevent unforeseen or counter-productive expenses as well as strict stock management. The company has also adjusted its acquisition policy to reduce operational costs.

The Flamingo International CEO says sales figures in December 2008 were 10 percent lower than in the same period of 2007. On the one hand, Rizek says he saw it coming since the last sales season in 2008 was strongly hit by the economic and financial instability, as well as the very strict credit conditions. This is why consumers preferred to wait and avoid major expenses.

On the other hand, the number of sold units did not fall as much as the sales figures, “which proves that people were more restrained and went for cheaper products,”he says.

Otilia Haraga