Romanian FMCG producers are doing it for themselves

Many local FMCG producers are taking matters into their own hands by announcing big investment plans for their own retail networks. From dairy producers to meat processors and winemakers, the phenomenon has grown in the past couple of years, fueled by the economic crisis, adding more complexity to the local retail scene.

Simona Bazavan

The largest wine producer in Romania, Murfatlar, plans to reach a network of 150 private retail stores by the end of this year. Although less ambitious, other Romanian FMCG players are turning to the same strategy and making similar plans.

Investing in producer-owned retail stores is a good way to increase brand awareness and consolidate position on the market while also generating
incremental revenues by capturing retail margin, says Bogdan Belciu, partner at PwC.
“One of the main advantages for producers with their own retail networks is improving the cash flow, with the shops providing a good share of the cash. In addition, these stores can sell a producer’s entire product portfolio and can undertake high-impact marketing activities to promote their own brand at reasonable costs,” Sorin Spiridon manager of Ensight Management Consulting, told BR.

But there are various other reasons behind this strategy. Some of the older manufacturers started off with such stores that they kept and later developed. Others have seen it as a vertical integration which reduces the problems generated by modern retail such as tough acquisition conditions and logistics costs, or by traditional retail where the issues are decreasing sales, non-performing debt or large delays in paying bills, Spiridon explained.
Just as retailers are pushing forward private labels, FMCG firms are investing in their own stores. Traditional roles for manufacturers and retailers are blurring, and their activities are becoming more intertwined.

There is a natural tendency for retailers to turn to private labels, especially in the case of relatively undifferentiated products under weak brands. Among the advantages of this strategy are lower prices and more flexibility in firms’ relations with local producers, Belciu told BR. It also ensures that retailers negotiate from a position of power on the medium and long run.

“In many cases, those producers who have decided to open their own stores sell products that are by their nature undifferentiated – such as meat products – and have less brand strength.These products are more vulnerable to large retailers’ private labels and therefore their distribution through private stores is a means of protecting overall profitability,” he added.
Belciu underlined that in some cases the shelf price of products that are sold through private stores is higher than the price of the same products in large retail networks.
“In most cases, those producers with their own stores don’t sell only their products. They often have a diversified merchandise mix which brings them close to the offer of a proximity retailer. This also generates additional margin,” he added.

Local retail is maturing and becoming more competitive with the aggressive plans announced by large players adding to its complexity. “This is why niche networks – either by purpose or size – have to become very efficient in order to survive given that proximity retail and discount retail will grow strongly, along with other forms of modern retail,” Belciu noted.

Regarding the existing relations between local producers and retailers, Spiridon says the situation is tense. Aggressive private label strategies are part of the problem as are retailers’ acquisition conditions, he believes. “But we don’t think that this has had a very strong hand in developing private retail networks because no local producer has the necessary resources to develop such a strong network that it would replace modern retail,” he added.

As for what to expect in the future, he posits that in the medium term, the tendency to invest in private stores will remain and even grow further, although many of the producers could face difficulties when the number of stores gets too high.
“Problems can be generated by the large investment, but mainly by not knowing the specific business model of large retailers well enough,” Spiridon commented.

The producers’ assault
Depending on the industry and their size, local FMCG manufacturers have different business approaches and expectations from developing private retail networks.
Grigore Horoi, president of Agricola Bacau, recently told BR in an interview that the further development of the group’s private store network is an important objective for the meat producer. “This year we are planning to open 30 stores with a total investment of EUR 500,000. Presently, 12 percent of the company’s total poultry production is sold through Agricola Bacau stores, a share that we constantly look to grow,” he said.

Among the advantages of operating private outlets, Agricola Bacau’s president names the direct merchandise flow, coming closer to the final consumer and getting direct feedback, as well as the fact that the stores are a source of cash. “Of course, modern retail remains our main channel with a 46 percent share of total production at the moment, but there is an obvious tendency, even among large retail players, towards smaller scale formats,” Horoi added.
For 2011, the Agricola Bacau group of companies targets a turnover of up to RON 440 million (approximately EUR 105 million), which is 7 percent higher than the one registered in 2010.

This year, local dairy producer Albalact is trialing several private stores in Cluj and Bucharest. “As this a pilot project it is too early to speak of results and long term plans,” company representatives told BR.The stores are owned by the firm and run under the De Albalact brand (By Albalact) selling only its own products. For 2010, Albalact reported a RON 261.25 million (approximately EUR 62 million) turnover, 15.6 percent up on the previous year, and saw another 32.6 percent growth in the first semester.

While some players are investing in private stores, other local producers are putting money into developing private restaurants. Canned food producer Scandia Food has opened two quick service restaurants (QSR) under the Scandia Sibiu brand, serving traditional Romanian cuisine.
The move is part of the company’s development strategy and is based on the growing awareness of its brands, Adrian Gaspar, president of Scandia Food, told BR. The two existing restaurants are located in Baneasa Shopping City and Vitan Mall.

“By yearend 2011 we plan to develop the network only in Bucharest, where we seek to build a significance presence. For further expansion we are considering other cities that have commercial centers with potential such as Cluj, Timisoara and obviously Sibiu. Our objective is to become the largest QSR company in Romania with the largest network,” added Gaspar.
By the end of the first quarter of 2012 Scandia Food plans to have up to seven such restaurants with a total investment estimated at EUR 1 million.

Murfatlar, the largest wine producer in Romania, has big plans for its wine store network. The firm currently operates 85 wine shops country wide under the Murfatlar Wine Cellar brand (Crama Murfatlar) but hopes to see the number grow to 150 by yearend. The total investment goes beyond EUR 2 million, says the company.
“Our objectives are mainly related to increasing wine consumption and consolidating our market leader position. The expansion strategy is strictly related to these objectives and on the long run, national coverage is a priority. We will end 2011 with 150 wine shops and a good national coverage means over 300-350 such shops,” Daniel Negrescu, brand manager Murfatlar, told BR.

He adds that following the crisis, Romanians’ acquisition behavior has changed, and the shops enable Murfatlar to come closer to its consumers.
The stores are run under a franchise scheme in partnership with local entrepreneurs. The initial investment in such a unit is around EUR 7,000 and can be recovered in up to six months, says Negrescu.

Last year Murfatlar reported a RON 140 million turnover (approximately EUR 33 million) and in 2011 it estimates constant figures for bottled wine. “For the wine shops, we have budgeted sales of about RON 45 million (e.n. approximately EUR 10 million) but it will probably be about 10 percent higher. The shops’ share in the total turnover will be about 30 percent,” he added.

Another local winemaker, Halewood Romania, also plans to extend its network of Winery Outlets from the existing nine units to about 30 over the coming years.
“We look at these stores as a means to promote ourselves and not necessarily a way to boost sales. It is easiest to sell when one is in direct contact with the final buyer who also has the option to choose from our entire product portfolio. And we can also sell the wines at attractive prices.

We have our online store where we have had orders from countries like New Zealand and Brazil, but again, the purpose is not to alter the balance sheet. Our focus and core activity has always been winemaking. All the connected activities like the stores and the pension at Azuga have been centered on getting people to taste the wine,” Dan Muntean, managing
director of Halewood Romania, previously told BR. The company posted a turnover of about EUR 10 million last year and estimates 5 percent growth for 2011.

simona.bazavan@business-review.ro

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