Firms happy to see back of bleak 2010

The telecom & IT industry has had a lively year in spite of general reduced consumption woes. But the healthcare sector struggled. Starved of funds from the GDP, the system was plagued by malpractice scandals, lack of predictability and the migration of medics abroad or to the private sector. Retail fared little better. In the first half of 2010 the local retail market was estimated to have dropped by about 10 to 12 percent. Less consumption by cost-conscious shoppers translated into lower sales and forced retailers to scale back their expansion plans. On the car market, Dacia and Ford were saved by exports, while oil producers Petrom and Rompetrol have seen their results go into freefall. All this against a backdrop of fiscal volatility and unpredictability that mired players in all sectors in a pit of uncertainty. But does 2011 promise to be a happier new year?

Dana Verdes, Otilia Haraga, Simona Bazavan

As far as the local fiscal scene goes, 2010 was ruled by the sign of change and a subsequent state of uncertainty. The government found itself caught between the devil and the deep blue sea, having to comply with a strict set of austerity measures required by the International Monetary Fund (IMF) on one hand, and the need to reboot the economy on the other.

Romania and the IMF signed a EUR 13 billion loan agreement last year, as part of a larger package (EUR 20 billion) that includes funds from the EU, the World Bank and other foreign lenders. So far, the country has received around EUR 11.27 billion from the IMF and another EUR 3.65 billion from the EU. Romania should get its seventh disbursement from the IMF, worth almost EUR 900 million, in January, a month later than previously agreed. Discussions over a potential new loan agreement will also begin this January, said Prime Minister Emil Boc last week, on a TV talk show.

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In an attempt to increase budget revenues and stick to the 6.8 percent budget deficit agreed upon with the IMF for 2010, the government hiked some existing taxes, introduced new ones and expanded the tax base.

Taking tax levels alone, with the exception of VAT and social contributions, Romania still remains an attractive fiscal environment. But it is more than the taxes themselves that counts, investors argue. Predictability and stability, two of the main requirements of running a business and investing in a country, were ignored by the authorities, undermining Romania’s credibility as an investor-friendly economy.

VAT was hiked almost overnight in July from 19 percent to the current 24 percent. Three months later, VAT could have dropped to 5 percent for food staples after the Romanian Chamber of Deputies unanimously passed a bill on this matter and exempting pensions lower than RON 2,000 from income tax. The two bills lacked government support, with MPs from the ruling Democratic Liberal Party (PDL) saying at that time that they had voted in favor by accident. Had the bills been passed by President Basescu it would have cost the Romanian state an estimated EUR 1 billion per year.

 Other changes related to the business environment that were adopted this year included new rules on the treatment of income from professional activities, registration in the Registry of Intra-Community Operators, plus changes to the norms of the fiscal code covering individual and corporate tax, VAT and excises, and the procedure for issuing a certificate for the deferment of VAT payment on the import of goods. Also, in October the minimum tax was removed, and as the change came at mid-year the 2010 fiscal year will be divided into two different fiscal periods.

The government’s fiscal bumbling sent more and more local companies south to neighboring Bulgaria, which, tax specialists say, promises lower taxes and less red tape.

According to media reports, about 300 Romanian companies are believed to be registering each month in the Bulgarian town of Russe alone.

Tax hikes and subsequently higher compliance costs should have been the options of last resort while the modernization of the fiscal legislation and administration remains only wishful thinking, companies argue. Many taxpaying firms complain that they are paying the bill for the authorities’ inability to efficiently collect money and fight tax evasion.

This view is shared by local NGOs that promote the interests of the local business community and foreign investors active in Romania.

Business relocation is an option for any company nowadays and this is why Romania should consider reforming its labor and fiscal systems, said Sorin Mindrutescu, president of the American Chamber of Commerce in Romania (AmCham Romania), recently. Local business organizations have also called for more transparency and the need for a real dialog between the authorities and the business community.

Show me the retail

The dynamic growth of the Romanian retail sector ended with the crisis. The sector boomed during 2007 and 2008, when sales grew at an annual rate of more than 20 percent. But in the first half of 2010 the local retail market is estimated to have dropped by about 10 to 12 percent. Lower consumption translated into lower sales, especially for FMCG products, and forced retailers to scale back expansion plans. So far, the recipe for success seems to have been promotions and sales, a focus on proximity outlets and the addition of new formats as well as launching private labels. The only segment that remained untouched by the crisis was fashion. Retail sales in clothing never stopped growing, according to a Candole report, and new names are expected to join the fray next year.

In the first nine months of 2010 international retailers present locally opened 76 new outlets while five existing ones were shut down, according to data from a PwC Romania study on the local retail market, put together by Radu Stoicoviciu, partner in transactions, and Mihaela Danilov, manager in transactions. About 12 new hypermarkets were opened, 3 cash & carry outlets, 31 supermarkets and 30 discount units. The closures included three Carrefour Express outlets and two units belonging to Interex.

Since the beginning of the crisis, the segment of small proximity stores has been hit the hardest, according to retail auditor MEMRB. About 3,300 small shops and 900 kiosks are estimated to have closed between 2008 and October 2010, according to the same source.

While up until now opening large hypermarkets was the thing, last year saw a U-turn. Little is the new big, as local retailers pin their hopes on this change. The trend was set by Mercadia Hollander BV, owned by local businessman Dinu Patriciu, and its Mic.ro concept.

The traditional store network is tipped to reach 1,000 fixed shops and 2,000 mobile outlets on wheels by the middle of next year. According to Patriciu, the break-even point is estimated for April 2011, 12 months after the business was opened.

Mega Image, the company that runs supermarkets with the same name and others called Red Market, is employing a similar strategy and launched its own version of the proximity store, the Shop & Go concept, at the beginning of December. The first outlet of this kind was opened this month in Bucharest. With a total area of 170 sqm, it offers about 2,000 products, most of which are food items. Run by Belgian group Delhaize, Mega Image is estimated to end 2010 with a total network of 72 outlets.

After being acquired by Private Equity Enterprise Investors, the Profi chain announced that it would change from its current discount format to the proximity store model.

Other players have also taken steps towards scaling down their formats. Carrefour focused this year on developing its supermarket chain branded as Carrefour Market.

The retailer operates 23 hypermarkets in Romania and its 31st supermarket was opened last week in Cluj. This November, Cora opened a hypermarket in Baia Mare with a surface of only 4,500 sqm, less than half the size of its previous ones.

German retailer Metro Group is also betting on smaller units. Metro Cash & Carry Romania opened its fourth Metro Punct outlet last week in Targoviste. The retailer established its first such store this May in Satu Mare as a new concept on the local market, exclusively targeting resellers. Proximity and ease of shopping are the benefits of the new concept, the firm says.

Confident in the local economy, retailers have developed their local business in the past few years both through organic growth and through mergers and acquisitions. M&A activity is expected to decline as Romanian retail is dominated by large international players who will continue developing through organic growth and a series of local retailers have entered insolvency, read the PwC report. The most important transactions this year were the takeover of miniMax Discount by Mercadia Holland BV and the acquisition of the local low-cost chain Plus by German discount supermarket chain Lidl.

The last quarter of the year was busy with new openings in fashion. German retailer New Yorker opened two new stores in November, bringing its local network to 16 units. Swedish fashion retailer H&M announced it would set up six shops in Romania next year.

Iditex Group, which owns brands such as Zara and Pull & Bear, opened its 13th Zara store on the local market in Pitesti in early December following an aggressive expansion campaign this year. Six out of the 13 are located in Bucharest. In September the fourth Bershka shop was opened in the capital in Unirea Shopping Center.

Iditex operates over 50 stores in Romania under the following brands: Zara (13 stores), Pull & Bear (10), Stradivarius (9), Oysho (4), Zara Home (3), Massimo Dutti (2) and Bershka (10). Inditex posted a turnover of EUR 75 million in Romania last year, from a network of 36 shops.

Public healthcare sector ails while private centers thrive

The public health system was poorly last year, plagued by malpractice scandals, lack of predictability and staff desertion. The sum allotted from the GDP to the health sector was not sufficient to alleviate the serious problems facing the sector. The most notorious scandal that shook this sector was the tragic fire in Giulesti hospital which left five new born babies dead and several others severely injured. Meanwhile, medics are leaving the country or opting to work in the private sector in search of better paid jobs. 

The IMF prompted the government to approve in August the payment of EUR 454 million in arrears for the health system. Legal measures that affected the system included the increase of VAT from 19 to 24 percent for products, except prescription medication, where the rate stays at 9 percent. The methodology for calculating the prices of medicines introduced on April 1 remains unchanged: the price in RON of imported medicines is calculated at an exchange rate of RON 4.25 per EUR, RON 3.06 per USD and RON 2.80 per CHF.

Also, a therapeutic reference price was introduced in July 2010 for prescription medicines for acute afflictions (lists A and B). The therapeutic reference price for medicines for chronic diseases (the C1 list) came into force in October.

Implementation norms of the claw-back mechanism were approved this year. These stipulate that the license owner who sells subsidized medicines must pay the state a percentage of the turnover generated by all the prescription drugs it sells. This should be applied retroactively starting from January 2010.

A very important measure being brought in is co-payment, which could be applied for all medical services starting next year. This is currently still in project stage.

The value of the pharmaceuticals delivered in Romania in the first nine months of the year reached RON 7.3 billion by distribution price, up 24.2 percent y-o-y, according to findings from the Pharma & Hospital Report released by Cegedim Romania. The growth rhythm has slowed since the middle of the year, following steps to reduce public support for subsidized medicines.

On the other hand, the market of private medical centers is in robust health.

MedLife supplemented its investment program to EUR 45 million, to be invested by 2013. The operator is in negotiations for making three acquisitions outside Bucharest, one of which may be concluded before the end of the year. MedLife currently has spaces for medical units with a total surface of 25,000 sqm. Newly announced projects include a hospital in the Telegraf building in Bucharest (10,000 sqm), a pediatrics hospital in Baneasa (5,200 sqm) and the Obor and Titan clinics (3,800 sqm). MedLife took over an 80 percent stake in Policlinica de Diagnostic Rapid in Brasov in June, for which it paid in excess of EUR 3 million. Also, it started construction works at a hospital (of 6,000 sqm) and clinic in Brasov.

This March, investment fund Advent International acquired 80 percent of Centrul Medical Unirea (CMU), which has an investment plan in excess of EUR 20 million for the next two years. CMU took over the Euroclinic Hospital and Euroclinic Medical Centers in Romania from insurer Eureko. It also opened a new medical unit in Bucharest, CMU Dorobanti, following an investment of approximately EUR 1 million. And CMU opened the Center for Medical Investigation Bacau, following an investment of EUR 1 million. The medical chain announced its intentions to open a location in Sun Offices in Bucharest (1,200 sqm) in the first trimester of next year.

Meanwhile, at the beginning of the year, A&D Pharma announced plans to tap into the private medical services market with a new dedicated division, Anima Specialty Medical Services, having so far opened four clinics in Bucharest and a central laboratory.

Innovative areas of medicine were not neglected. This year Biogenis opened a new stem cell storage bank. Until then, the firm had stored stem cells in its bank in Poland.

A new entry on the market was that of Turkish private medical care provider Medicana Hospital, one of the largest private chains in Turkey, which announced that it intended to build a hospital with a surface of 10,000 sqm on a land plot it owned in Bucharest. The investment was announced at USD 30 million. 

Similarly, West Eye Hospital Group also established a presence in Romania after opening the first ophthalmology hospital in Bucharest, West Eye Hospital. The hospital took two years to build and covers 1,400 sqm.

After opening a central laboratory, Medicover announced plans to start a hospital unit project next year, to be opened in mid-2011, after which new clinics will follow. 

Telecom & IT: new entries, new openings, new appointments at the top

This year was the year when the telecom market started to put a brake on its decline. Revenues on this market will still be affected by the recession this year but to a lesser extent than in 2009. Last year, the market reached EUR 3.9 billion, a 15 percent decrease compared to 2008, according to data from the National Authority for Management and Regulation in Communications (ANCOM). Operators saw a decline in the number of subscribers for mobile and fixed telephony. However, the broadband internet segment was on the up.

Employees in the IT sector escaped having to pay a tax on their earnings, after the authorities initially announced their intention to axe the tax exemption for IT programmers, as part of the austerity measures.

The Romanian state announced its intention to sell the stake it has in Romtelecom, for which it hopes to get EUR 1 billion. The Romtelecom shareholders are the Greek group OTE which has a stake of 54.01 percent, and the Ministry of Communications, with a stake of 45.99 percent. German operator Deutsche Telekom has a participation of 30 percent in OTE. The state asked OTE officials to come up with a price offer for the shares that the state owns in Romtelecom by the end of the year.

This year Google established an official presence in Romania by opening an office with a local team headed by Dan Bulucea, formerly business and marketing director of Microsoft Romania. The company also launched the Google Maps Street View service, covering 6,000 kilometers in Romania, which will be available in eight cities, the main ski resorts on Valea Prahovei and the Black Sea Coast.

Software company Intel also opened a Software Development Center following an investment of several million EUR. The center will initially employ around 25 specialists in software R&D, but the number will increase three or even fourfold, as the projects diversify.

Changes at the top took place in several large companies, such as Vodafone, UPC, Microsoft and Xerox. While Vodafone and Microsoft brought expats into their management line-ups, UPC and Xerox named Romanians at their helms.

Inaki Berroeta became the new CEO of Vodafone Romania, having formerly been CEO of Vodafone Malta, since July 2007. Liliana Solomon, who was CEO of Vodafone Romania for five years, was promoted to manager of operations for the Europe region. Pole Ronald Binkofski replaced Calin Tatomir as general manager of Microsoft Romania and will continue to implement cloud computing as one of the main priorities Microsoft has announced it will pursue during the 2011 fiscal year (July 2010-June 2011). UPC Romania appointed Severina Pascu, formerly CFO of the company, as CEO starting with January next year. She will be replacing Jack Mikaloff, who will retire at the end of the year.

Elsewhere, Gabriel Pantelimon was appointed country general manager of Xerox Romania and the Moldova Republic. Formerly sales and marketing director at Xerox Central Eastern Europe, Israel and Turkey, Pantelimon replaced Petr Sichrovsky.

There were also strategic changes. Telecom operators switched their approach regarding their outlets this year. Some of them enlarged their network, while others revamped their stores to improve the customer experience when showcasing their latest technology.

UPC launched the first store under its new design in January on Mihai Bravu Street, injecting approximately EUR 200,000 into the new concept at the 130-sqm location. Three more were then opened in Bucharest, and one each in Ploiesti, Bacau, Galati and Cluj. The shops were opened mainly in street locations on surfaces of 100 sqm. Over the next year, the concept will be rolled out to other big cities, Timisoara being on the list.

Similarly, Romtelecom chose to apply a new concept to some of its stores, based on Deutsche Telekom standards, to reposition itself. Romtelecom now has four such stores trading, two in Bucharest, one in Constanta and the other in Braila. On average, an outlet is around 80 sqm. Each required an investment of several tens of thousands of EUR. The operator has also opened three kiosks in AFI Cotroceni and Baneasa Shopping City in Bucharest and in Polus Mall in Cluj.

GSM retailer Cosmos Mobile also opened two concept stores this year in the capital. The firm’s average estimated investment in opening a concept store is around EUR 50,000. Depending on the location, the retail area of a Cosmos Mobile concept store is on average 40 sqm.

Fonomat became a Vodafone exclusive partner following a deal. This added 166 stores to the Vodafone network. With a total retail surface of over 7,000 sqm, Fonomat shops can now be found in 96 cities in Romania. Previously, Fonomat was a dealer for Orange Romania but the three-year contract between the two companies reached maturity. 

Orange finished this year a  EUR 4 million franchise program. A total of 171 shops were opened in 82 locations under the Orange Store umbrella. At the moment, Orange Romania has a distribution network of 99 own stores, 171 shops opened in franchise, 117 points of sale based on a partnership with retail chain Euro GSM and 77 with Say network.

Last but not least, Panasonic established two concept stores this year. The first was opened in Unirea Shopping Center, following an investment of EUR 100,000. Panasonic officials expect the store to generate sales of approximately EUR 1 million. The second Panasonic store was opened in Focsani, costing EUR 50,000. The shop is expected to generate sales of approximately EUR 500,000 over the next year. Panasonic is also looking into opening a new concept store in Cluj-Napoca.

Telecom operator RCS & RDS launched Zece TV, a generalist TV station, this month. The new station’s project manager will be Radu Morar, former anchorman and TV producer at B1 TV.The company announced it would put EUR 10 million into the TV channel which is meant to attract more subscribers to its services, in a battle with competitors Romtelecom and UPC Romania.

Local carmakers’ sales driven by exports

The automotive sector has been to hell and back this year. At the beginning of 2010 local carmaker Dacia was debating the best business solutions to survive on a market that seemed to have run out of gas. “In 2010, it would be a great achievement if we got to some 90 percent of last year’s production, which was 130,000 units,” said Constantin Stroe, Dacia’s VP, recently.

The carmaker responded with the new Duster model and exports.  And this proved to be Dacia’s winning ticket: the new SUV model, the Duster, was launched in March this year and cleaned up on foreign markets.

“For Dacia, 2010 is the year of the Duster. The new model, launched in March at the Geneva auto show, became a true best-seller in Europe, recording more than 90,000 orders by the end of last month. The Duster was among the 4×4 segment leaders in highly competitive markets, such as Germany and French,” Silviu Sepciu, media relations service chief at Dacia, told Business Review.

He added: “In terms of commercial results, about 90 percent of Dacia’s production this year was exported. In Romania, on a market strongly impacted by the crisis, Dacia has managed to consolidate its market share.”

Officials cite “fluctuations in salaries, which at Dacia have increased three fold in the past five years, and exchange rate instability eroding the value of investments in Romania” among the difficulties encountered in day-to-day operations. The carmaker’s officials also bemoaned the economic instability. “Compared with 2009 the economic environment has deteriorated: lending reductions, public sector salary cuts of 25 percent and the increase in VAT have destabilized the economic environment,” said Jerome Olive, COO of Dacia and Renault Group Romania. Meanwhile, Ford’s operations in Romania this year can be summed up as “more investments, less return”. By the end of this year, the firm will have completed a total investment of EUR 200 million in its Craiova plant, about one third of the EUR 675 million promised in the privatization contract, initially by 2012, and now, thanks to the crisis, by 2013, when the company must reach a production of 300,000 units per year.

In the Craiova plant nearly 7,500 Ford Transit Connect vans were produced in the first ten months of this year, according to statistics from the Automotive Manufacturers and Importers Association (APIA), with over 99 percent being exported.

The company has bold plans for the future. The small class model Ford B-Max will enter production at the Craiova plant by the end of next year and its commercial launch will take place in 2012, announced Ford Romania officials recently. The company has already established a list of nearly 20 suppliers who will produce components for both the B-Max and the Transit Connect, a next generation light commercial model.

For 2011, the Romanian authorities have in their car market survival kit measures such as a higher car tax, a tax for EURO 5 vehicles and a repeat of the local version of the ”cash for clunkers” program. But is it enough?

Oil companies saw financial results burning this year

In the oil production sector the two major companies, Petrom and Rompetrol, have had their share of burning problems this year. OMV Petrom posted EUR 27.6 million in losses in the third quarter of the year. The financial results reported by the company in Q3 2010 were burdened by a one-off charge in Kazakhstan.

“Our bottom line was adversely affected in Q3 by the impairment of Kazakh assets and FX losses due to USD loans given to our Kazakh subsidiaries. In the past months, in line with our strategic directions, we made progress on the power project at Brazi and entered partnerships with internationally reputed companies in order to maximize production on selected mature fields, with a cumulative production enhancement of 50 percent expected from the respective fields in the next five years,” said Mariana Gheorghe, CEO of OMV Petrom.

The company’s reported EBIT of RON 336 million was 62 percent lower than in the same period of 2009, driven by the impairment of Kazakh assets based on the outcome of the technical assessment of the fields and the reestablishment of export customs duty in Kazakhstan, and also by higher depreciation, following significant investments made in the last 12 months.

According to company information, exploration and production (E&P) will continue to focus on larger, high-impact prospects located in deeper areas. A 3D seismic survey in the Moreni area is ongoing. The 3D seismic data acquired in the Neptun deepwater offshore area, explored in a joint venture with ExxonMobil, is currently being evaluated to identify prospects.

The focus is on a close-out of the gas de-bottlenecking project in Hurezani, and the further progress of seven ongoing integrated field re-development projects. 

As a result of a recent technical assessment of its Kazakh activities, Petrom announced that the production forecast for Komsomolskoe was being revised downwards to reflect the actual performance of the reservoir as well as its facilities.

Construction of the Brazi power plant, which is scheduled to start operations towards the end of 2011, continued. Moreover, Petrom is focusing on the construction of the wind power generation plant it acquired in Dobrogea, estimated to be finished in mid-2011. Through this project, the firm intends to capitalize on the flexibility of the Brazi gasfired power plant, benefiting from the strengths of both technologies.

Meanwhile, the Romanian Office for State Participations and Industry Privatization (OPSPI) initiated procedures to sell a 9.8 percent stake in Petrom on the stock exchange.

In a first step, the state institution made public its announcement that it would take on legal consultancy services through which to manage the selection of financial consultancy services for a second IPO for OMV Petrom.

According to state authority sources quoted by media reports, the share package listing is estimated to be finished by March next year.

Elsewhere, Rompetrol Rafinare (RRC), part of the Rompetrol Group, reported USD 139.6 million of losses for the first nine months of the year, a hike of 29.1 percent from the same period of last year. The company’s consolidated businesses grew 18 percent, to USD 2.1 billion.

Rompetrol Rafinare and Rompetrol Petrochemicals interrupted their activity on September 20, in order to carry out works related to the general scheduled overhaul.

Rompetrol Rafinare also has serious issues with the Finance Ministry. The company paid EUR 54 million in August for the bonds issued by the company under an agreement concluded between Rompetrol Rafinare and the Ministry of Finance in December 2003 on RRC’s EUR 570 million historical debt.

In line with the legal requirements bonds unredeemed by the due date (September 30, 2010) were converted into shares.

Following this operation, the amount by which the share capital was increased was directly awarded to the Romanian state, specifically the Ministry of Finance, which became a shareholder in the firm, with a 44.7 percent stake of its total share capital.

The Romanian authorities contested the resolution and have initiated more than 20 law suits against Rompetrol. Yet, recently, during a visit to Kazakhstan, President Traian Basescu talked of extending the payment deadline by two-three years. 

New kids on the block

Despite the testing economic times, 2010 saw new brands and new players launching local operations. Others have announced plans to weigh in next year.

McDonalds Romania opened the first local McCafe in Bucharest following a EUR 200,000 investment. The McCafe is located in the existing McDonald’s outlet in Unirea Shopping Center.

The outlet will serve 17 types of coffee, costing from RON 5 to RON 11. It has 44 seats. The first McDonald’s restaurant opened in Romania in 1995. The company currently has 63 restaurants in 21 cities across Romania, and a daily flow of 140,000 customers.

Google established a local presence in Romania this November by opening an office in Bucharest. The firm’s local team is headed by Dan Bulucea, formerly business and marketing director of Microsoft Romania.

The Bucharest office will be responsible for developing Google’s presence and strategy in Romania, establishing business relationships with Romanian partners, educating local companies about the benefits of going online and direct advertising sales.

Austrian crystal manufacturer Swarovski is considering investing in a production unit in Romania, according to media reports. The company is allegedly negotiating the opening of a crystal factory that could require an investment of about EUR 10 million with local authorities in Cluj.

Swedish fashion retailer H&M will open six stores at the same time in Romania next year. Two of the outlets will be located in Bucharest in Baneasa Shopping City and AFI Cotroceni. Three more stores will be opened in Iasi, Timisoara and Cluj-Napoca in the Palas commercial center and the Iulius Malls. Another outlet will be established in Constanta in the Maritimo Shopping Center, the former Polus Center Constanta.

The first Gucci mono brand store will open in Bucharest by mid December this year, according to CPP Luxury Industry Management Consultants Ltd. The store will cover a surface of 280 sqm and will be located on the ground floor of the Athenee Palace Hilton.

“Gucci will have the best location in Bucharest, not only being positioned in the very heart of the city, on the leading shopping high street of Calea Victoriei, but also being on the right section of Calea Victoriei, with steps from secure parking facilities, and with large windows assuring excellent visibility,” said Oliver Petcu, managing director of CPP Luxury Industry Management Consultants Ltd.