While at the beginning of 2008 everybody trumpeted an increase of about 100 percent in 2009, now they foresee an increase of just 60-80 percent, Liviu Taloi, e-commerce consultant and site auditor, tells Business Review.
The main trends this year will be acquisitions and consolidation. “Practically, this year the big fish will swallow the little ones,” he says. There will also be many bankruptcies, or at least some businesses will freeze in the online sector represented by electronic commerce, says Taloi who sees the market as “a Schweitzer cheese, with holes in it.”
He predicts that a large percentage of the newer stores, founded a year or two ago, will go bankrupt, since they will not be able to bear the financial pressure to which all the players on the market are subjected via the relation external partner-importer-distributor-online store.
“Online stores often appear and vanish just as quickly from the market. There are several reasons for this, mainly the lack of a business plan and correct strategy, as well as the absence of a minimum marketing budget to ensure a good start,” says Carmen Sebe, CEO of Gecad ePayment. She cites “the wrong start” as the main cause for the exit of online businesses. And if this does not happen, there is always the cash shortfall menace, which can affect large stores but takes a heavier toll on smaller ones.
Aura Tatu, business developer at Chase Corp, which runs the Virtual Bucharest project, does not share this grim vision. She is convinced that small businesses will be the least affected since they can “recover quickly, re-orient their resources and run fewer risks.” She also believes online businesses are unlikely to go bankrupt, since they are versatile, but the competition between sites will sharpen “given that budgets for traditional online advertising (banners) will be somewhat reduced.”
She believes that for an M&A to be considered substantial it would have to weigh several million EUR but the chances of seeing that on the Romanian market in 2009 are slim. “Maybe in two years' time when significant online businesses develop and the wave of the crisis passes,” she says.
There has been a slight drop in the volume of transactions in the electronic home appliance and IT products sector in January 2009 compared to January 2008. But since other products in the electronic retail area grossed higher sales at the beginning of this year, on the medium term this could compensate for the downward trend in IT&C, electronic and home appliance e-retail.
However, due to the public's reluctance to spend during this period, online purchases could shortly become the preferred options, since they save both time and money, says Marius Ghenea, president of PCFun/Electrofun, controlled by FIT Distribution. He says the difference between prices in the online and offline environments is natural, and that online prices will be several percentage points lower, “which is a strong argument in favor of online purchases,” says Ghenea.
In 2008, FIT Distribution posted a turnover of approximately USD 23 million, calculated at the monthly average exchange, which means a 30 percent increase compared to 2008 and a rate of profit of 0.1 percent. “We were very close to fulfilling the target set at the beginning of the year, but negative influences in the last two months of 2008 cracked down on our sales,” says Ghenea.
But the first signs of crumbling e-businesses have already started to show as some mid-sized e-shops have ceased activity. Ghenea mentions www.24pc.ro, a domain taken over by FIT Distribution. He says over the last few weeks he has been receiving proposals to take over e-commerce sites that are going through financial turmoil or to co-invest together with entrepreneurs, which shows that “entrepreneurs in the online industry are doing their best to find financing solutions.”
Hot of the press is the merger between Grifon Group, which controlled MarketOnline.ro and MediaDot.ro, and Azerty Distribution, which controlled Azerty.ro, “which puts it in second place in the online retail hierarchy,” says Taloi.
Mugur Frunzetti, managing partner of Grifon Group, previously told the media the new company would have a 15 percent share of the IT&C online retail market and the move would increase the company's capital by over EUR 500,000, allowing it to have permanent stock and excellent liquidity in the crisis period 2009-2010. In the chapter of M&As waiting to happen, Taloi mentions the forthcoming acquisition of eMAG.
But what can an online entrepreneur do to weather the storm? “An M&A is a good solution for small businesses under the shadow of the bankruptcy. At the negotiation table, however, obstacles appear since the seller is always under the impression their business is worth more than the sum they are offered and the buyer refuses to raise the offer, at which point negotiations reach a standstill,” says Dan Calugareanu of magazinultau.ro, which posted a turnover of EUR 3 million. He says this is a good time for a niche start-up, with a minimum investment for launching an online functional store with real chances in times of crisis being EUR 50,000.
A significant barrier to M&As is that Romanians want either to have 100 percent of a company, or to give it up completely, so they are less open to mergers, says Ghenea. “This is indeed an important barrier, but when creditors are knocking on the door and there are no resources to pay them, I think any reasonable entrepreneur would consider an M&A with a much more open mind,” says Ghenea, adding that there is still potential on this market which is still much too fragmented to be mature and efficient.
The imbalance between supply and demand is bringing acquisition prices down. “No online business is worth too much at the moment since in most cases their net value is negative on account of the debts that are above the level of the capital,” says Ghenea.
So, even though the market is still not mature enough and many over-evaluate their businesses, the fact that they are desperate to sell, along with the limited number of buyers, “will take the price down, close to zero,” says Ghenea. “This is therefore a good time for acquiring sites provided that investors know what to do with them, have a clear strategy and financial resources to support this strategy at least for the middle term,” says Ghenea.
If the entrepreneurs decide to stand on their own, favorable solutions would be to attract an investor that would sponsor the company with cash, renegotiate terms of payment with suppliers, cut costs and make expenses more efficient. An online store must also pay attention to stocks that are blocking cash but which are necessary for the optimum flow of the activity, says Sebe.
By Otilia Haraga