Ten and counting: marking a decade of business on the Romanian market

Praktiker, Murfatlar, Oracle, Fox Com Serv Distribution, Max Bet, Romania Hypermarche, Elit, Baneasa Developments. What do all these companies have in common? A decade of presence in Romania this year, which specialists say is proof of good profitability, a comfortable market share and consolidation of the brand on the local market.

By Anda Sebesi

They are all celebrating ten years on the Romanian market this year and rank among the most significant brands that entered the local market in 2002. They are also among the Top 50 companies founded in 2002 ranked by their turnover in 2011, based on data provided by the National Trade Register Office (ONRC).

The cumulated net turnover posted by the top ten players in the 2011 ranking is RON 10.76 billion (EUR 2.53 billion) * while the companies making up the Top 50 had a total net turnover of RON 22.5 billion (EUR 5.32 billion)* in 2011.

Energy, finance, retail, cereals, automotive and FMCG are the industries with the most representatives in the Top 50, while transportation, real estate and fabrics have the fewest players on the list.

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About half of the names in the Top 50 have their registered office in Bucharest, with clusters in Timis and Constanta County. Arges, Buzau, Alba, Prahova, Brasov, Dolj, Cluj, Bihor, Tulcea, Harghita, Botosani and Iasi also host registered offices of Top 50 firms.

Ten years on an emerging market is quite an achievement considering all the challenges and difficulties these companies have had to face during this period. Many of the names in the Top 50 companies founded in 2002 are multinationals; others are local firms founded by young entrepreneurs. “The presence of a multinational company on an emerging market for ten years should bring an impressive level of profitability, a comfortable market share and confirmation of that brand on the market. Usually after ten years the company’s team of professionals is bonded and the management is mainly local. For Romania, the presence of foreign investors for ten years shows the significance of our market to the European Union,” says Dragos Cabat, managing partner at efin.ro.

Meanwhile, ten years for entrepreneurial businesses on the Romanian market means a lot of effort, achievement, courage, determination, strategic thinking and a need to set priorities on an ongoing basis. “I think that the local market is similar to other Eastern European ones. The difference in Romania is whether the state supports you or not. And that’s challenging,” says Madi Radulescu, managing partner at MMM Consulting, a training and consultancy company that will celebrate its first decade on the local market at the beginning of 2013.

Specialists say that the local business environment is much more competitive now than in 2000. The local economy has gone through a complete cycle. With EU accession it became mature and became more connected to other EU members. “A company like ours has grown around other large companies due to our services and the nature of our projects. There was competition at that time, but not like it is now. There was space for all players on the market and quality but the range of evaluation was wider,” says Radulescu.

Asked about foreign investors, Cabat says that they came to Romania when the economy was expected to grow, especially in the years before Romania’s EU accession and the first few years afterwards. “Domestic policies were not focused enough on supporting local and foreign investors and creating a competitive regional and global business environment. Now it is harder for the government to offer a competitive advantage to the companies that are active in Romania because it is limited by EU rules,” says Cabat.

He warns that the local business environment is becoming less friendly compared with others in Asia, Africa and even the European countries that are not part of the EU. “The advantages of salaries tend to be limited while the technological and infrastructural ones didn’t materialize,” he adds.

According to BNR data, Romania’s FDI fell to a nine-year low of EUR 1.917 billion in 2011 and continued to sink to EUR 490 million in the first four months of this year. Specialists say that Romania is losing potential investors because the local authorities don’t know how to negotiate while large investors haven’t heard about Romania at all. In addition, Radulescu thinks that the Romanian state doesn’t do much to stimulate either large investors or entrepreneurs. And this can be both a difficulty and a challenge for players on the market.

Then…

It is no secret that the 2000s were a very challenging period for the local economy and its players from many perspectives. According to the 2002 Regular Report on Romania’s Progress Towards Accession, issued by the Commission of the European Communities at that time, after a modest rebound in 2000, GDP expanded by 5.3 percent in 2001. Plus, in the first quarter of 2002, the unemployment rate rose sharply to 10 percent, possibly due to seasonal fluctuations and administrative factors linked to the introduction of a minimum wage. The same report found that inflation was still high but that it had declined steadily since mid-2000 on the back of a more coherent policy stance. The year-on-year rate also dropped sharply, decreasing to 23 percent by July 2002. Moreover, monitored enterprises’ arrears to the budget exceeded the agreed targets with the IMF at that time, increasing by 13 percent in the first four months of 2002 after a temporary fall in the second half of 2001. Regarding the local banking system, the same report says that in March 2002, only three state-owned banks remained, accounting for 35 percent of the credit stock. On top of that, the capital-adequacy ratio increased from 14.5 percent at the end of 1997 to 27.1 percent in June 2002. The share of non-performing loans fell from 71.7 percent at the end of 1998 to 2.8 percent in June 2002. The local authorities also launched significant initiatives aimed at improving market exit. In an attempt to streamline procedures, bankruptcy legislation for non-financial enterprises was amended several times, including in February 2002.

There was also some other good news for Romania at that time. The report noted that in April 2002 Romania launched its first ten-year bond on the international market, reaping the benefits of various upgrades conferred by rating agencies since 2000 and of its improving vulnerability indicators. Moreover, due to more supportive conditions, the monetary policy framework led to increased macroeconomic stability.

During the 2000s, public companies accounted for more than 40 percent of enterprise investment and 75 percent of all tangible assets. With the weight of private ownership expanding in all sectors, the continuing influence of public ownership largely rested upon its dominant role within the energy sector, which accounted for 30 percent of total industrial turnover. In the agricultural sector, nearly all land was privately owned but the development of an effective land market was still at an early stage.

The report of the Commission of the European Communities also found that SMEs accounted for more than half of total turnover, a quarter of all exports, and a fifth of all investment carried out by enterprises between 1997 and 2000. The share of employees working in SMEs also increased sharply, rising from 33 percent in 1997 to 47 percent in 2000.

Last but not least, foreign direct investments (FDI) were about EUR 1.21 billion in 2002, according to National Bank of Romania data cited by Ziarul Financiar. Meanwhile, according to National Trade Register Office data, over January-December 2002 some 84,780 new traders were registered, accounting for 8.5 percent of the total number of registration between December 1990 and December 2002.

…and now

Although the local political climate continues to be rather turbulent, there is some good news as the Romanian economy is still stable. Romania will be the sixth most attractive country for investments in Europe over the next three years, according to the European Attractiveness report compiled by Ernst & Young this year. Business leaders across the world find Romania more attractive than the Czech Republic, Switzerland, the Netherlands, Italy, Spain and Sweden. “Romania boasts confident GDP growth, compared to the European average, and valuable human capital. We are seeing more and more investors attracted by the renewable sector. Further privatizations are lined up, encouraging investors all over the world to look towards our country. It is crucial that we foster this positive trend through appropriate economic strategies,” says Bogdan Ion, country managing partner at Ernst&Young Romania.

The study also found that CEE economies led in the process industries. Romania, Serbia, Slovakia and the Czech Republic accounted for 53 percent of new automotive jobs. These countries have attracted big projects because they are cost-competitive and close to Germany, home to many key industrial customers.

According to the M&A Barometer study, also conducted by Ernst&Young, the value of the Romanian M&A market grew by 86 percent, to USD 901 million, while the medium value per transaction increased by 67 percent in the first half of 2012. Although the number of transactions closed fell slightly in the first half of the year, compared with the same period in 2011, the local M&A market increased significantly in value: 86 percent in terms of extrapolated market value and 74 percent based on disclosed deal values in the period.

“This year started with a long awaited revival of transactions. The market saw significant moves in many industry sectors, especially real estate, FMCG, manufacturing, and telecom and media,” says Florin Vasilica, partner and leader of the transaction advisory services at Ernst&Young Romania.

Despite this, there is a lot of room for improvement on the local economy. Representatives of the Foreign Investors Council (CIS) say that an improvement in the performance of public institutions will be vital to secure investment. They proposed several measures, including the creation of an agency with the aim of prioritizing public investments. “In a global market with many attractive investment opportunities, the stability and predictability of the business and legal environment is a key element for investors’ trust. Improving the performance of public institutions can play a crucial role in any decision to invest in Romania and attract additional foreign investments,” said Mihai Bogza, board member of the FIC, recently.

* sums are calculated at an annual average exchange rate of EUR 1 per RON 4.24, source: BNR.

anda.sebesi@business-review.ro