Decreasing purchasing power, cash-flow issues, difficult access to financing and stock related problems are among the factors that have plunged numerous consumer goods producers and retailers into insolvency over the past year. And the situation is not likely to improve in 2013, market pundits warned BR.
By Simona Bazavan
Last week, the owner of the local Spar supermarket franchise, Retail D&I 2011, entered administration for the second time in three years. This is only the most recent insolvency in the retail sector, which alongside wholesale saw the most insolvencies over the past year, followed by constructions, horeca, transportation services and the food industry, according to a Coface Romania report released earlier this year.
Overall, some 23,600 companies opted to enter or were forced into insolvency last year, up by 10 percent on the previous year and by 20 percent against 2010, according to the same source.
“What we have seen since the start of 2013 is that insolvency doesn’t discriminate against anyone. While before, most of the insolvencies came in the construction and metallurgical sectors, in 2012 and the beginning of 2013, a larger number of insolvencies have come in sectors such as meat processing and agro-food,” Constantin Coman, country manager, Coface Romania, told BR last week.
Furthermore, he thinks that the FMCG sector in particular will be affected in direct relation with the public’s spending power. “It’s clear the purchasing power of Romanians has decreased, which harms consumption,” he added.
“Goods production, trade and distribution, especially FMCG, seem to be the worst affected sectors, since most consumers have started to be more cautious with their spending. Considering that most consumer goods were financed by consumer loans in the years before the economic turmoil, once the banking system became more risk adverse in providing consumer loans, the resources available for this sector also became scarce,” Dorin Petcu, head of restructuring and insolvency services at TZA Insolventa, the insolvency entity of Tuca Zbarcea & Asociatii law firm, told BR.
Cash-flow difficulties, delayed payments, rising production costs, accumulated and slow-moving stocks, large distribution networks including overheads and logistics expenses are some of the industry-related issues that have forced consumer goods companies into insolvency.
The issue of stock is particularly important in an insolvent company’s process of restructuring, which Petcu stresses means much more than protection from creditors’ claims in the insolvency procedure, but rather “a detailed analysis of the entire structure and costs in order to understand which areas generate value, and which areas should be cut, outsourced or kept in order to maintain value”.
“From our experience we have learned that the most difficult part is dealing with the accumulated stock. Most entrepreneurs do not seem to understand that it is more expensive to hold onto such stock in the hope of an unforeseen better market, than to sell it at a high discount to specialized companies,” he said. The situation gets even more complicated when the stock is collateral for bank loans, as banks are typically interested in obtaining a higher price than the market can provide and using the full collection for loan repayment.
To the list of specific factors that can lead to insolvency in the consumer goods sector, Ana Maria Placintescu, partner at Musat & Asociatii, adds the aggressive expansion strategy many producers have adopted and which can no longer be supported given the economic context. As demand went down, business followed suit, affecting entire production and distribution chains, she told BR.
“The situation is in no way surprising considering that these are industries which depend directly on consumption, which has been greatly affected by the economic evolution. Against dropping sales but also limited access to financing, companies were not able to honor their payment obligations and creditors demanded the opening of insolvency procedures in order to recover the debt,” she said.
However, not everyone agrees, at least when it comes to FMCG producers.
“I don’t think we can talk about a greater number of insolvencies in the consumer goods sector compared to other fields. Even if the public’s financial resources have diminished over the past few years compared to the previous period, the FMCG sector has the advantage of meeting the public’s everyday needs, even in times of crisis. This should help – at least in theory. In reality, the difficulty comes mostly because of chain effects,” Bogdan C. Stoica, partner at Popovici Nitu & Asociatii, told BR.
What does 2013 have in store?
In a business environment that continues to struggle with a lack of capital resources while seeking to reverse cautious consumption patterns, medium- and long-term projections are for the number of insolvencies to go up, says Placintescu.
“Many creditors and companies had hoped business would recover but it hasn’t happened and patience has come to an end. In this context, one expects that more creditors will try to recover their debts from business partners by asking for their insolvency or for debtors themselves to start procedures in order to save their business,” she explained.
Representatives of Casa de Insolventa Transilvania believe that this year the market will see more insolvencies among private clinics, milling companies and bakeries and DIY stores. “Retail and real estate will remain on the first positions in the insolvencies’ top as has been the situation until now,” they told BR. As FMCG companies continue to be under pressure, the sector will continue to see new insolvencies in 2013.
Petcu, on the other hand, believes that when it comes to insolvencies, 2013 will be similar to last year, as “no good news is emerging from this sector”. “On one hand, consumers who still have cash for expenses are cautious enough not to invest or replace goods unless absolutely necessary. On the other hand, there are also consumers that are in need of such goods but they do not have the available cash, other than cash for their daily needs and to service debt. To have a new boom in consumer loans is not a particularly good solution, but if new money is not available soon, general consumption will not increase and the previous year’s pattern in insolvency will be replicated this year, too,” he warned.
But there is also room for optimism, according to Stoica. “I expect 2013 to mark a stabilization of the number of insolvencies at the level of 2012. There could be problems if some large retailers fall into difficulties, which will directly impact the entire business chains,” he said.
How the mighty have fallen
Last year, the Romanian retail and FMCG market saw major M&As, withdrawals from the local market, bankruptcies and numerous insolvencies.
In the FMCG domain, one of the most affected industries remains the bakery sector, which faces challenges such as rising production costs and tax evasion estimated at a whopping 70 percent. In February, Romanian bakery and milling company Dobrogea officially began insolvency procedures. According to the most recent available data, Dobrogea had 845 employees in 2011 and reported revenues of about EUR 55 million the same year. Debts, however, reached some EUR 22.5 million, according to local media reports.
The dairy sector has also had its share of insolvencies. Among the most significant at the top level was that of Prodlacta, which started voluntary insolvency proceedings at the end of 2011 following declining sales and rising losses. One year later, in December 2012, the dairy producer was taken over by JLC, the largest dairy player from the Republic of Moldova.
The Romanian subsidiary of Israeli dairy producer Tnuva was the second major player on the dairy segment to apply for insolvency after having previously tried to sell its local operations due to unsatisfactory results.
The Israeli firm is estimated to have invested about EUR 60 million locally since 2005 when it entered Romania with the goal of establishing an integrated business – from milk production to product distribution under the Tnuva and Yoplait labels.
While the company hoped to reach yearly sales of EUR 50 million by 2008, the figure did not surpass EUR 20 million.
One of the most eye-catching insolvencies by far last year was that of Murfatlar in March. Romanian’s largest winemaker was forced to take this step by cash-flow problems, said Cosmin Popescu, the company’s GM. “The main consequence of the slow money recovery rate – a general characteristic of the business environment at present – is that it makes it difficult to pay outstanding debts,” he explained.
Murfatlar said the insolvency procedure would not affect its objectives and development plans.
After reporting RON 140 million (approximately EUR 33 million) worth of sales in 2010, the winemaker saw its turnover hike to RON 180 million (approximately EUR 42.5 million). The growth came from expanding its network of wine stores to 125 outlets.