Back from the brink
By Heike Dieckmann
In economic terms, Russia appears to be over the worst, but optimism remains muted as the market regains a sense of normality. The same can be said for other countries in the region, although some – Poland, the Czech Republic and Slovakia among them – are faring better than others. What they all have in common – in OP terms – is the dawn of a new reality with regards to pricing, product choice and range and, above all, financial risk-taking
In 2009, the bottom fell out of Russia’s economy, with GDP shrinking nearly 8 percent. Compared to its Central and Eastern European neighbours, it was among the highest rates of decline in the region. Only the three Baltic countries fared worse, with shrinkages in the mid- to high teens (see chart on page 34), plus the politically and economically volatile Ukraine, with a GDP decline of 14 percent.
And while the economy in Russia has seen somewhat of a bumpy recovery over the past few months – aided by a recent surge in energy prices, various stimulus programmes and low interest rates – it hasn’t been the recovery expected by many.
While it’s a widely held assumption that growth in the country has been primarily driven by petrodollars, many experts argue that it’s in fact been thriving consumer demand that’s stimulated growth over the past decade and leading up to the crisis. And that consumer demand collapsed spectacularly in 2009, particularly in businesses.
For office products companies in the country, the going has been tough indeed as demand slowed and financial resources were limited. Says Olga Dormidoshko, Marketing Manager at Russian wholesaler Bureaucrat: "The OP and IT market fell dramatically in 2009 – the decrease was anywhere between 20 percent and 55 percent depending on the product category.
"The PC and hardcopy market, for example, dropped 40-50 percent, the consumables sector 30-40 percent, the stationery market 30-35 percent, and office paper 20 percent."
It is widely believed that the B2B channel was most affected by the crisis, although there’s no doubt that the retail market has suffered too. The fact that many of the mass market retailers are reigning in rather than expanding their non-food ranges, doesn’t help. (See also ‘The changing face of Russian retail", page 32).
Altogether, many companies have gone out of business – OP companies themselves or indeed their customers, including financial institutions, state offices and other corporations.
As for Bureaucrat itself, the company has done spectacularly well in an intensely difficult trading environment. The importance of a wholesale channel can hardly be overstated in the most vast country on the planet, and there’s a proliferation of distributors and wholesalers dotted across the regions.
Bureaucrat is one of the few that considers itself to be a national operator. And despite the perception that a high percentage of business is generated in the capital Moscow or certainly west of the Ural mountains, the country is speckled with cities (about 13 with a population of more than one million) that have thriving business districts fueled by the country’s two main natural resources – oil and gas.
While Bureaucrat’s revenues dropped 20 percent in 2009, it managed to maintain its operating profit and even increase its market share from 19 to 24 percent by expanding geographically into more Russian regions. So what did the company do?
Says Dormidoshko: "We analysed our assortment and placed more emphasis on providing our clients with middle-range and entry-level of products (as opposed to premium products).
"We also segmented our client base and divided customers into groups depending on their specific circumstances and potential. Criteria included factors like resources, regional market share, ability to develop and so on. We then offered different packages of support to these individual customer groups. Specifically, we’ve been giving some special marketing funds to key clients that have developed an alliance with Bureaucrat; we provide these clients with free catalogues and free logistics services.
"We also increased our marketing support for a group of dealers with the emphasis on channel activity – specific channel marketing programmes, merchandising, promo activities in retail shops, etc.
"Overall, we’ve cut our operating expenses substantially through downsizing. We reduced our warehousing facilities from 50,000 square metres to 31,000 square metres, for example."
Tightening its belt and adapting to different circumstances has paid off for Bureaucrat. In the first half of 2010, revenues grew 30 percent compared to the same period in 2009.
Two other dominant players in the country are contract stationer Pragmatic and multi-channel operator Komus, arguably the largest OP player in the country with a retail, B2B, wholesale and manufacturing presence as well. Both companies – the former has also had a partnership with Lyreco since 2005 – remain tight-lipped about their performance over the past 18 months or so, but had been growing in the high double and even triple-digit figures up until the economy fell off a cliff in the summer/autumn of 2008.
OP manufacturers have also been feeling the downturn acutely. For Germany-based Durable, for example, Russia has historically been the strongest market in the region, with customers from all sectors being highly brand and quality-conscious. But while the company’s VP of Marketing Horst Bubenzer admits that brand awareness and also company loyalty were down in the crisis, they are gradually improving again. He says: "Durable offers many niche products of premium quality which cannot be replaced easily. But a lot of purchases have been postponed, that’s for certain. Oil and gas prices have risen again from the peak of the crisis last year and there’s now also roughly a 15 percent exchange rate advantage of the ruble."
Esselte, meanwhile, has been doing relatively well in the country, but President of Esselte Europe, Cezary Monko, admits that most of its business is currently in the capital – which was never as badly affected as the regions and has also recovered quicker. "We’re doing ok in Russia, but we put our plans for the regions – the big cities outside of Moscow and St Petersburg – on hold for the time being because our business partners weren’t ready. We have significant plans to expand in Russia, but we’re going to do it at a slower pace than initially expected. We will expand our factory in Moscow and widen our salesforce into the regions, but we’ll take it slowly."
While the Russian market is largely devoid of international OP resellers – with the exception of Lyreco through its agreement with Pragmatic and the emergence and then retreat of Office 1’s franchise operation (the company had five stores in Moscow but pulled out in 2008 due to a lack of sales, high rents, etc) – the same cannot be said for the rest of the region where particularly Lyreco and Office Depot have become real forces.
Out of the countries in Central and Eastern Europe, it is perhaps Hungary and Romania that, from an OP perspective at least, are still reeling from the recession.
Hungary, once one of the best performing economies of post-socialist Eastern Europe, has slowed its growth, even in the run-up to the recession and GDP dipped 6.7 percent last year. The country has a large contingent of multi-national companies, partly the result of manufacturing-intensive FDI in the 1990s.
As such, in OP terms, all the large players are there, except for Staples which pulled out of the country with its small contract business last year. Rob Vale, President of Staples Europe, says: "Our decision to close our Hungary business was based on our desire to focus on those markets where we have, or expect to have, a significant position within an acceptable timeframe. In Hungary, we lacked scale or critical mass."
This of course has benefited fierce rival Office Depot. Says Bart Sasse, Office Depot’s Regional Vice President for the area: "Several companies have pulled out of Hungary last year or went out of business. This has resulted in additional customers turning to us. At the same time, however, the Hungarian economy is still weak and in a cost-cutting mode, with bankruptcies and the postponement of investments being very common. We have taken a number of measures to dampen the negative effect of the business decline last year and these allowed us to avoid a decline of our financial results in Hungary."
Hungarian wholesaler Corwell has also managed to keep its balance sheet on track. In fact, says Commercial Director Mark Hortobagyi, financially the company is looking better than ever, a positive side effect of rather challenging times: "Last year, Corwell suffered a 9 percent decline in revenues. Most of this decline was precipitated by our own strict financial policies which we had to implement, like monitoring customers’ payment disciplines. As a result, we lost some accounts – some very large customers went bankrupt – that were not financially stable. Thanks to our strict cost-cutting policy and stock level optimisation we could reach an even better level of EBIT than we had in 2008."
While some of the global operators are highly visible in several Central and Eastern European markets – with Lyreco strongest in Poland and Office Depot dominant in Hungary, Slovakia, Poland and the Czech Republic – it’s the local players that combine to be the biggest force in office products. They are also the largest customer base for manufacturers, in the delivery as well as retail space.
Romania remains one of the lesser developed OP markets in the area, but one with great potential due to its large size and population. Here, the retail sector has been particularly hard hit. Diverta, the 62-store bookstore chain that is part of RTC Holding, entered insolvency proceedings in May. Sister company RTC Proffice has been doing rather better. Amidst plenty of cost-cutting, the l34.5 million multi-channel reseller has chosen to invest in new projects in difficult times (such as an ecological lighting range, a revamped catalogue plus numerous promotions) and is hoping to reap the benefits with an expected 17 percent increase in revenues in 2010.
It is companies like this that Radostin Kirilov singles out as winners in the aftermath of the global recession. As Office 1’s Director of European Operations, Kirilov has become somewhat of an expert on the region, particularly since the global-become-local franchisor has been exploring Central and Eastern Europe longer than any other international operator. It now has over 400 stores in nine CEE countries which by and large follow the Office 1 pattern of 75 percent B2B and 25 percent retail.
Kirilov says: "Companies such as Plaisio in Greece, Office 1 in Bulgaria, Slovakia and Turkey, RTC in Romania – these companies are so entrenched regionally that they provide very strong barriers to entry for the power players. Strong local players with links outside their own markets – they will be the winners."
"The future," he adds, "belongs to those who know their markets, are innovative, fully adapt to local business conditions, and build impeccable logistics and service networks. Logistics, in fact, is perhaps the weakest point in the region right now and the best area for investment."
Scope indeed for a company like Spicers. That said, the wise would probably hold on to their investment cash at this particular time until the markets have calmed a little more – in Central and Eastern Europe and beyond.
The changing face of Russian retail
Frustratingly opaque but potentially highly lucrative, Russia’s retail market is tantalising at the very least. Brand-conscious and spending happy, consumer confidence has been high for years, supported by the trickle-down oil wealth that helped lead a consumer boom in the aftermath of the Soviet era.
Says Vadim Khetsuriani, Retail Analyst at Management Ventures Inc (MVI): "The average growth rate of the retail market from 2005 up until 2008 was in the 25-28 percent range. But the top grocery retailers during that period were growing at around 40 percent."
Then came the economic meltdown. The market still grew at the height of the crisis in 2009, adds Khetsuriani, though overall only by 4 percent. Factoring in the 30+ percent devaluation of the Russian currency, however, and these growth rates were rendered null and void.
The top ten operators, including Russian hypermarket chain Lenta, retail discounter Pyaterochka, as well as France-based Auchan and Germany’s Metro have fared better, with growth of about 20 percent last year (in rubles, however, so overall still negative growth). The consumer electronics sector, on the other hand, has suffered substantial losses, plenty of disruption to businesses and many store closures.
The concept of hypermarkets, discounters and superstores – many with sizeable non-food segments that include office products – has for a long time sat well with a Russian population of over 140 million.
Why then have the two largest retailers in the world – Wal-Mart and Carrefour – failed to make a splash, despite every intention to conquor the country?
In the space of just four months, Russia has gone from a "strategic priority" to an afterthought at Carrefour. Just over a year ago, in June 2009, the giant French chain was cutting the ribbon on its first Russian hypermarket, covering 8,000 square metres at the Filion shopping mall in Moscow. A second store followed soon after and more were planned before the end of the year.
Then, in October 2009, came the quiet announcement that Carrefour was abandoning the Russian market, citing an "absence of sufficient organic growth prospects and acquisition opportunities in the short and medium term that would have allowed [it] to attain a position of leadership".
To Khetsuriani, the reason for the company’s failure was evident: "Carrefour realised very quickly that there were no bargains in the market. There still aren’t. The company was hoping to acquire a retailer at a bargain price during the economic crisis. It didn’t find one. And if you don’t acquire, opening stores organically takes a very long time to get you to the top. That wasn’t really an option for Carrefour."
Florence Baranes-Cohen, a spokeswoman for Carrefour, indeed described the U-turn as a "pragmatic" decision, explaining that the company’s strategy was to enter countries only where it could be a market leader and that Russia no longer looked so promising.
Wal-Mart, meanwhile, is still looking for that elusive partner in the country, one that would give it a fast-track dominant presence. Aforementioned retail chain Lenta has been one of the names mentioned in negotiations.
For Wal-Mart Stores too, price seems the issue, as international chief Doug McMillon pointed out in June. "One of the things that has been a hindrance in Russia is an agreement on price. If you wanted to have some scale to start out, you have to have a willing seller and therefore you have to come together on valuation."
The retailer already has an office in the capital, employing a team of people who are exploring any opportunities and finding differentiating factors in the market. McMillon refuses to provide a timeline for Wal-Mart’s further plans in Russia but says: "We think, long term, Russia is a big enough market that it’s certainly worthy of attention. But we don’t have to be there this year."
Whatever happens with Wal-Mart, it seems inevitable that the Russian retail market is looking to cut costs and become more operationally efficient. Consolidation also is just a matter of time.
Says Khetsuriani: "Before the economic crisis, borrowing money was very inexpensive and retailers could afford to grow inefficiently. And as long as they kept opening new stores, it worked. That has changed. Now they have to think about how they can operate efficiently, how they can take costs out of the stores, etc."
Auchan, for example, is pioneering self-checkout in Russia as a means to becoming more cost-efficient. Self-checkout is standard procedure in many western countries, but in Russia where labour costs have been traditionally low, it’s a completely new concept.
Other approaches are a complete rethink of business models, to smaller-sized stores as well as severe reductions in non-food ranges. The latter would be bad news indeed for OP manufacturers as they face a decline in the all-important mass market sales channel.
Light at the end of the Greek tunnel?
EU entry: 1981
Population: 11.2 million
GDP 2008: 2 percent
GDP 2009: -2 percent
Unemployment: 9.8 percent
Public Debt: $405.7 billion (113 percent of GDP)
Strictly – and geographically – speaking, Greece doesn’t really fall under the remit of this article, focusing, as it does, on the Russian and some of the more mature OP markets in Central and Eastern Europe.
Teetering on the verge of bankruptcy prior to the $141 billion bailout in May by the European Union (EU) and the International Monetary Fund (IMF), Greece is now embroiled in all manner of strike action and protests as a result of the government’s new austerity programme that was a condition of the bailout.
So how are OP companies faring in among all the public discontent and the perceived freeze on spending?
George Soubasis is General Manager of the Office 1 franchise operation in the country. He says: "Both the B2B and the B2C channels are affected by the crisis and it is estimated that sales have dropped around 30 percent. It’s not a regional crisis either, but one that is felt all over the country. Customers in general are reluctant to buy in their efforts to cut down expenses. The fact that a lot of companies are having financial problems – and many have closed down – has created particular turbulence in the B2B channel. OP companies are not just recording sales drops, but are also getting into bad debt themselves."
Despite the bailout package that should help the country get back on its feet, Soubasis is not confident about recovery any time soon. "We feel that the road ahead is still long and difficult. Unfortunately, the problems of the Greek economy are deep and we expect at least two more difficult years."
Aside from a couple of big companies, including Greece’s largest OP player, Plaisio Computers, the industry is highly fragmented with thousands of small operators in the various distribution channels. And the country remains devoid of the usual cornucopia of international OP resellers that have ventured into most other parts of Europe.
Office 1 is the exception, but its franchising concept works rather differently, of course. There are currently nine Office 1-franchised stores in the country. And while the stores are experiencing similar problems to the rest of the country, with sales down approximately 30 percent, Soubasis is pleased to say that there have been no store closures and all stores remain profitable.
But this has come at a price, he adds: "We’ve had to implement serious cost-cutting measures and those have included some staff redundancies. Our strategy now is to concentrate on our private label products. These allow us to lower prices and deliver better value to our customers. We also realised, when the crisis first hit us, that we were completely overstocked. Our main effort now is to sell all our excess stock from our warehouse and to keep it low. Another goal is to closely monitor our customer database in order to avoid, or at least minimise, bad debt."
Survival tactics aside, Soubasis is acutely aware of the need to grow its B2B business in the country – with more franchises as well as its forthcoming electronic store launch in the pipeline.
And there’s no time like the present, as the international competition is unlikely to want to lose any sleep over a country as unpredictable as Greece at this particular moment.