Leveling off expected in tumultuous retail market

KLAIPEDA -  At the end of 2008, the economic situation in Lithuania worsened considerably because of the global financial crisis following the collapse of Lehman Brothers in October 2008. The crisis, quite manageable in Western European countries, has severely hit the Lithuanian economy, causing real estate prices to tumble, rising unemployment, a sharp fall in demand and, consequently, shrunken consumer spending.

In 2009, the retail trade wobble in Lithuania could be compared to a rollercoaster ride. Lithuania led the EU’s highs and lows on a month-to-month basis. In March, the largest retail trade decrease in the EU was observed in Lithuania, down 4.3 percent from the previous month.

However, in October, compared with September, Lithuania recorded the EU’s highest retail sales increase – 1.9 percent. An even more significant jump followed in December with food product turnover up 26.9 percent compared to November.
Despite the occasional hikes, the longer term produced quite miserable retail sales results. According to the Lithuanian Department of Statistics, in November 2009, retail sales were 27.8 percent lower than in November 2008. Turnover of enterprises trading in food products for January–November, against the same period  in 2008, decreased by 18.4 percent at constant prices. The turnover of food and beverage service enterprises in January–November 2009 totaled 828.5 million litas (236.7 million euros), excluding VAT, against the same period in 2008, down by 20.5 percent.

Such fluctuations don’t surprise Jonas Markelevicius, acting Director General of the Department of Statistics, who maintains that in the tumultuous economy, such ups and downs are nothing extraordinary. “A retail sales increase before Christmas and New Year is observed every year. It perfectly fits with the mood of the seasonal shopping spree. Our department is not in a position to comment on retail sales trends in 2010, but, certainly, they will be [affected by] the situation in our economy,” Markelevicius said to The Baltic Times.

Finance Minister Ingrida Simonyte had previously said that Lithuania would return to growth in 2010, reversing a previous forecast that the economy would continue to be haunted by the recession. In fresh forecasts, the Lithuanian Ministry of Finance said the economy would expand 1.6 percent in 2010, followed by growth of 3.2 percent in 2011.
The food and beverage retail segment, with several big players in the market, makes up a considerable portion of the entire retail trade in Lithuania. Some of the biggest and most important companies in this area are food chains including VP Market, Palink (IKI), Rimi, Norfos Mazmena, Aibe and Drogas, which had been expanding rapidly until 2009.

According to market analyst Planet Retail, the top five retailers in Lithuania account for around 60 percent of the overall market, principally due to the domestic dominance of Maxima, which itself controls an estimated 37 percent share of the sector. Key factors behind retail market expansion included rising disposable incomes and Lithuanians seeking a choice and low prices offered by different chains. As for expansion abroad, the search for new, uncharted markets prevailed.

EU membership in 2004 brought a substantial amount of foreign direct investment, allowing food retailers to make significant inroads in the local market and contributing to steady annual sales growth. Although the country’s GDP increased steadily over the last decade, yearly gains abruptly slowed to a halt in 2008 as Lithuania slipped into the recession.
Responding to the crisis, the retail trade companies put off their expansion plans and focused on concentration and mergers last year. Thus, the biggest player, VP Market, penetrated the Latvian market and now has the leading position there. VP Market also invested in Estonia and other Central and Eastern European countries, and runs 426 locations in total, with 229 stores in Lithuania.

The food chain giant experienced a 9 percent turnover setback last year, compared to 2008, and ran up total sales of 7.7 billion litas. The turnover of all the companies managed by Maxima Group was down in Lithuania by 11.6 percent. In 2009, the company offered discounts of more than 300 million litas.

“Last year was difficult for all business, not only due to the general economic situation, but also due to the political decisions, which had a direct effect on the company’s operations and results, especially in Lithuania. However, having started implementation at the right time on the company’s operations program to increase efficiency, and having evaluated the changed consumer needs, we were able to manage outlays and to maintain employment of the largest part of employees. We had to stimulate sales at our own expense, since price became the main criterion for consumers,” said Mindaugas Bagdonavicius, Director General of Maxima Group, JSC.

Maxima spokeswoman Renata Saulyte says purchases in 2009 returned to the levels of 2002 - 2003. Due to the considerable price cuts and special offers in 2009, there was an observed increase in sales of low costs staples such as grits (+7 percent), flour (+ 6 percent) and macaroni (+5 percent).

Sales of diary products, fruits, vegetables and meat products remained nearly the same as in 2008.
Due to increased taxes, cigarette sales went down by 44 percent, strong alcoholic beverages were down by 18 percent, wine down by 17 percent, beer off by 14 percent and fish products lower by 10 percent.

“The economic crisis has shown that people, despite tight budgets, are not refusing quality products. The most significant change has taken place in consumer thinking. Many consumers have realistically evaluated their financial abilities, switched their priorities and started behaving otherwise - borrowing less - and begin to save and plan their expenditures. The consumers’ portrait has changed. He or she deliberates purchases in advance, and is aware of their price [targets] and looks for the right price on quality goods. These kinds of changes in consumer behavior are substantial and they will have a crucial impact on future consumption. With the economy’s recovery, the consumer will keep saving - consciously and rationally,” Saulyte is convinced.

She says that the considerable sales decline through 2009 stabilized by year-end. “We do not yet have results from February sales, but if they are positive, it can be a sign of a much anticipated stabilization. However, we are expecting turnover in 2010 to be lower, by approximately 9 percent, in comparison with 2009,” she revealed.
Maxima opened two new stores in 2009, but will not open any this year.
Lithuania’s second largest retailer, Norfa, which currently has 124 stores and an estimated 10.5 percent domestic market share, had been expanding into Russia in 2007 - 2008, but this came to a halt in 2009. Norfa reported a 6.4 percent revenue slump in 2009.

Lithuanian retail chain IKI has also been expanding rather intensively over the last several years, as they, together with Casino Group, established the low-priced retail network Leader Price in the Baltic States. In 2009, IKI also acquired Latvian retail chain Nelda.

IKI CEO Marcel Haraszti says that the geography of Nelda corresponded perfectly to IKI’s development plans, and its similar format facilitated a fast merger. “A few new points of sale will inevitably consolidate IKI’s position in the Latvian market, where the leadership position is aspired to by the Group,” said the CEO.

By last July, all Nelda shops were renamed IKI and Centas in Latvia. The IKI retail chain entered Latvia with its first shop in Riga in 2005. At present, IKI has about 1,000 employees in Latvia. IKI, one of the ten largest food chains in the Baltics with almost 7,500 employees and managing three retail chains - IKI, IKIUKAS, and Leader Price -  reached a turnover of 2.2 billion litas in 2008, but last year this fell by 6.8 percent.

“Last year was very complicated for the entire Lithuanian economy. Unemployment was on the rise, salaries and pensions were cut and taxes were increased. The meltdown has hit consumption volumes and capacities hard, therefore, aiming to promote consumption we have been actively cutting prices. We do not expect any major breakthrough or change when it comes to consumer behavior in 2010. Even with the economy recuperating, there is no doubt that consumers will remain more cautious than previously. Low prices, special offers and sell-outs are the economic levers that we are counting on in pursuit of better trade. Undoubtedly, we will have even more special proposals of this kind in 2010. Competing with Maxima, we recently lowered fruit and vegetable prices by 40 percent, assuring [that we] are the lowest in the industry. Having implemented the best price per item policy, we expect to end the year with a little bit better turnover than in 2009,” said PALINK spokesman Valdas Lopeta.

IKI, which operates 216 trading centers in Lithuania, opened 16 new stores in 2009, and is planning to add another 10 in 2010.
The affects of the downturn can clearly be seen in the results of the only foreign-owned operator in the sector - the Rimi Baltic chain - which is operated through its Swedish subsidiary, ICA. Rimi Baltic ended 2009 with a 19.3 percent sales decrease. The food retailer is managed by ICA and has Rimi shopping centers in Lithuania, Latvia and Estonia. Along with Kesko Food, which is part of Kesko, it has recently combined their activities in the Baltic States.

Of course, none of these grocery retailing groups compare in size and financial strength with their larger western European counterparts, but the gradual predicted recovery of the Lithuanian economy, could yet produce further development in the market in the years to come.