Come on over
High growth, millions of hungry consumers, a relatively stable Government and EU membership in 14 months. So, asks ‘The Diplomat’, why are so many multinationals staying away?
Romania is not perfect.
Its roads are bad. The poverty is rampant. The middle class has not grown as fast as many neo-liberal commentators have forecast.
But in shopping, hotels, banking and cars, major successes have been registered by the few multinationals who took the risk of coming here.
Yet many brands, present in neighbouring markets, are conspi-cuous by their absence in Romania.
Tesco, Sheraton, Radisson, Mediamarkt, Spar, Ikea, H&M and Electroworld, for example, have yet to take that final step.
Therefore The Diplomat examines who is here, who is absent and reasons why they will be coming, or will not be.
Corruption does not seem to be a problem. While this is a domestic issue harming the day-to-day life of Romanians, it is unlikely to put off investors.
“I have not heard any potential British investor say that they will not come to Romania because they consider that corruption will prevent them from running their business successfully,” says Ray Breden, chairman of the British-Romanian Chamber of Commerce.
If a multinational company has to pay a big bribe to someone to enter the country, it can just leave and go to another. Romania may need it more than it needs Romania.
However, at the gateway to entering a country, heavy and convoluted bureaucracy could deter investors.
Bad press, contributing to a poor image abroad, has also made some multinationals decline the invitation to invest. Roberto Musneci, president of the American Chamber of Commerce Romania, says the media has not recognised the progress the country has made in the past few years and months.
“Bulgaria has overtaken Romania in its image development,” he adds.
Selling the country on the facts may help.
“The level of needs is high,” says Musneci. “The growth and wealth is increasing - among the highest growth in Europe. Monetary policy has been very stable.”
Romania is not the only developing country in the world. Nor is it the fastest. Although its growth rate compared to other European countries is pretty good.
Breden says that UK investors, while placing Romania on their list of potential markets, do not always put the country at the top.
Therefore something beyond Romania's control - other, better markets for multinationals to conquer - is an impediment.
Parts of China, India and the Middle East are growing at a rapid pace, and their rich minorities often follow the trend of assuming the tastes of the west in terms of automobiles, hotel accommodation, shopping and dining.
So international firms are diving into these countries and making Romania wait that little bit longer.
BANKS
WHO'S HERE
(with a branch presence)
Societe Generale, HVB, Unicredito,
ING, ABN Amro, Raiffeissen, Citibank, OTP
WHO'S YET TO COME:
Credit Agricole, HSBC, BNP Paribas, Royal Bank of Scotland, Barclays, Rabobank, KBC, Santander, Fortis, Dexia, Deutsche Bank
Romania has been prevented from becoming a fully liberalised banking market over the last five years owing to the fact that over 25 per cent is still in state hands.
The last chance for a bank to gain a major foothold will be the purchase of the two state banks, Banca Comerciala Romana (BCR) and national savings bank CEC, which has a vast network.
Only three of the top 20 global banks by capital have a significant presence in Romania: Citigroup, ABN Amro and ING, as ranked by magazine The Banker in 2004.
Notable absentees are any Swiss or British banks, as well as most of the French and all the Belgians.
Instead it is Austria, Greece, Turkey, Societe Generale and the Netherlands who have moved in pretty fast.
“A big international bank is missing from Romania,” Steven van Groningen, president and CEO of Raiffeisen Bank Romania tells The Diplomat. “Of course here is Citibank, but it seems it does not consider Romania an international market yet.”
BNP Paribas, with a presence in Bulgaria, Poland and Hungary, is one of the most obvious absentees. Although it has a representative office in Romania and its credit arm Cetelem recently bought Romanian consumer credit company Credisson, its only recent venture is becoming a bidder for BCR.
The Brits are also staying away.
Maybe the small and tricky east European markets are not big or easy enough for them to tap into. Only HSBC is present in the region and only in Poland.
Meanwhile a spokesman for Royal Bank of Scotland tells The Diplomat: “We have no interest in Romania nor do we have any plans to expand into the eastern European market.”
He added that Romania's joining up to the European Union would make “no difference” to this decision.
BIDDING WARS
A bidder for both BCR, and now CEC, is Austria's Erste Bank, which is present in Hungary and Serbia and has a strong focus on retail banking.
Andreas Treichl, the bank's chairman of the managing board, tells The Diplomat the bank can offer a “satisfying price” and can provide a “more profitable business plan” than the other suitors.
Romania is the biggest light pulsating on its radar screen at present. “We do follow what's going on in the whole central and eastern European region,” says Treichl, “including Ukraine, but there are currently no other concrete targets - we are fully focused on Romania.”
Banks are still attracted to this country's high growth, large market and trade opportunities. Corporate and consumer financing demands also still give a lot of scope for development.
Brussels-based banking and insurance provider KBC has a strong presence in central Europe and is smart to the demands of such a purchase. With Romania under its microscope, it has noted its steady economic progress and now sees the country as a front runner in the second wave of EU accession countries.
“KBC has identified [these nations] as the single most important driver for securing its leading position in its extended home market - central and eastern Europe,” Andre Bergen, CEO of KBC tells The Diplomat. Bergen, who is responsible for the bank's east European strategy, says Romania is a “top priority”.
Currently KBC is present in Slovenia, Slovakia, Czech Republic, Hungary and Poland and in order to enter the local market, the bank is keen to join forces with a “strong domestic bank” says the boss.
Joining the EU is likely to give these countries above average growth, so there is only 14 months to get in before the door closes.
“It is much more difficult to enter and achieve a significant market share in a mature market than in a fast growing market,” Bergen adds.
ACQUISITION:
NOT THE ONLY OPTION
KBC has decided to pull out of the race to buy BCR, but Bergen says setting up a greenfield operation in Romania could be on the cards.
The organic option means upfront investment is lower and the bank has greater corporate freedom to set up its own products and services. For KBC, the bank also says that moving into Romania is a natural extension of its existing presence in the region. “Hence, a greenfield operation is definitely a possibility,” says Bergen.
However he concedes that focusing on pure organic growth takes more time and energy, especially when trying to gain a significant market share.
Setting up a bank from ground zero may not be such an easy option anymore, says Raiffeisen's van Groningen. “I think it will be almost impossible to acquire a significant market share through a greenfield entry in Romania,” he says.
At the same time some of the smaller private banks on offer may be too tempting a purchase to miss out on. “Anyone coming through a greenfield investment with a long term interest will sooner or later start looking around for a possible acquisition,” van Groningen adds. “There are banks already active in Romania that deserve a try from this point of view.”
Specialist in local authority financing and with a universal bank presence in Belgium, Luxembourg and Slovakia, Dexia is currently bidding for both BCR and CEC.
Stephane Vermeire, head of Dexia's Business Development, tells The Diplomat that along with its size and growth rates, Romania fits into Dexia's business profile.
“Dexia considers Romania as a country with low banking penetration for retail banking and with important infrastructure needs,” he says.
BCR would give Dexia the chance to capture a significant market share in one fell swoop and create a “significant position” in central and eastern Europe, says Vermeire.
But with CEC, he says the business case is completely different.
“The main advantages of this bank are the name, its vast branch network and the value creation potential given the limited product offer today,” he adds.
With claims of being a world leader in financing local authorities, Dexia opened a marketing office in Romania (Dexia Kommunalkredit Romania) earlier this year and, if it fails to purchase either of the top banks, the bank says it will continue to develop its public finance activity in the region and “investigate other options.”
But on whether the bank would consider a greenfield investment, Vermeire says: “It is too early to talk about this. We still consider BCR and CEC as the most attractive options.”
CAFES, RESTAURANTS AND TAKE-AWAYS
WHO'S HERE:
McDonald's, KFC, Pizza Hut,
Gloria Jeans
WHO CAME AND LEFT:
Dunkin Donuts
WHO'S NOT HERE:
Burger King, Starbucks, Haagen
Dasz, Domino's, Coffeeheaven
Virtually risk-free, a guaranteed cash flow and knowledge that the brand is being stretched to the limit, without spending a cent.
Yes -
It's franchising. The tool many international cafes, restaurants and take-aways now use to muscle into developing markets.
In Romania, McDonald's is the exception to this rule and it took until last year for the company to post its first annual profit, after ten years of local operations.
Rival Burger King, which mostly runs through international franchisees in developing countries, has yet to come to Romania, although in eastern Europe it is present in Hungary.
“We are constantly looking at new opportunities where the Burger King brand can expand and this has included some research on Romania,” Brian Johnston, franchise contact for Africa, Europe and Russia at Burger King tells The Diplomat.
Johnston says franchising would be the “most likely” model for Romania and the candidates could come from either inside or outside the country.
Partners for Burger King are those who can 'build out' a particular market, such as a town or city, says Johnston. This means a development of many restaurants in a series of locations in one market place.
“As an example a franchisee will have a development target to 'build out' all the possible restaurants in, say, Arad in three years' time,” says Johnston.
As well as having a passion for the brand, customer service and leadership skills, a franchisee needs, according to Johnston, “a level of financial resources to be able to develop a number of restaurants in a short timeline.”
So that's anyone with cash up-front and an iron will.
CAFFEINE KICK-START
Romanians drink a lot of coffee. The cult of the sit-down coffee shop has become a favoured place to languish for the nouveau riche. And as for investors, well, once the unit is hired and the interiors designed, the profit margins are gorgeous.
But the trend of take-away coffees with a plastic lid has yet to rise.
Some entrepreneurs have tried, some have failed, yet no foreign chain has made a large step into the market.
Mother of the global coffee revolution, Starbuck's, is yet to capitalise on eastern Europeans' appetite for the bean, although it has opened outlets in Cyprus, Greece and Turkey.
A spokeswoman for the brand stated that the company is “aware of the potential of Romania.”
But, because they do not have franchise operations nor have any plans to franchise soon, “when we open a new market, we take time to make sure we have the right joint venture partner or licensee to help develop the brand,” she says.
This process of finding a partner can take a long time.
“We will open each market when the time is right, one store at a time,” she adds.
We asked Starbuck's for a picture of one of their stores, so that we could show Romanians what they were missing.
But the coffee chain refused to do this.
“In general, we would provide an image of a store that we have in the local market so that it is relevant to the readers, but since we do not have any Starbucks location in Romania that will not be possible,” the spokeswoman said.
However smaller but dynamic operators may seize the chance to enter a market where, in take-away coffee, there is zero brand recognition.
British-owned and east European based caffeine-stop Coffeeheaven is present in 39 sites in Poland, Czech Republic and Latvia and is looking to open in Bulgaria and Romania before March 2006.
“We cannot wait to open the first Coffeeheaven store in Bucharest,” says Richard Worthington, executive chairman Coffeeheaven international. “Hopefully that will be very soon now.”
But in Bucharest the store chain has yet to find a space. Worthington himself says his is searching for a “good site” between 80 and 150 sqm which is looking for a “strong and reliable” international tenant. “Or maybe,” he adds, “there is even a current coffee bar owner out there that wants to sell up?”
So, any offers?
SUPERMARKETS
WHO'S HERE:
Delhaize (Mega Image, Cora), Carrefour (Hyparlo),
Rewe (Billa, Penny Market and Selgros), Metro,
Tenglemann, Kaufland
WHO'S COMING:
Metro's Real
WHO ISN'T HERE YET:
Tesco, Auchan, Wal-Mart, Spar,
Groupe Casino (Leader Price)
Retailers require a massive investment to set up a supermarket in a new country, so no brand would dare take a chance on a new country without massive research and enormous risk.
International brands have therefore been scouting Romania, looking at oppor-tunities and raising rumours of an imminent entry.
Some of these, mainly from France and Belgium, have made a significant step into the Romanian hyper-market sector, while the Germans are slowly monopo-lising discount stores.
But other big names have yet to take on Romania.
Auchan has four hyper-markets in Poland and nine in Hungary, as well as a chain of supermarkets, while Tesco has also reported massive succes-ses in eastern European hyper-markets. The world's largest retailer Wal-Mart, however, is pretty much staying out of mainland Europe.
Richard Perks, senior retail analyst at UK research firm Mintel says that Tesco's entry to Romania “is likely” and Auchan could follow.
But Wal-Mart is probably not the case.
“I don't think the com-pany has the humility to succeed in different markets,” Perks says. “Its German venture has been loss making from the start and I suspect that its German experience may have put it off further expansion in continental Europe.”
Market rumours have pushed Tesco's expected arrival back and fourth between 2006 and the future in general. Experts say Tesco's entry would probably focus on the capital. “It has been highly successful in adapting its formats to local conditions and in developing and promoting local management, so I would expect it to succeed,” Perks adds.
Sir Digby Jones, director-general of the Confederation of British Industry would like to see British retailers in Romania. But he says one thing putting them off is the lack of a decent infrastructure, especially the bad roads. There is also the perception of corruption, which he says is not as bad as it seems.
Tesco, meanwhile, will not give away any details other than saying it could en-ter “if the market was right”.
In the discount sector the Germans have taken Romania by storm. From the absentees, Groupe Casino's Leader Price is present in Poland, but not Romania, while smaller, local retailer Spar has circled Romania, digging into markets in Hungary, Poland and Ukraine, but staying out of the southern Balkans.
GENERAL STORES
WHO'S HERE:
Praktiker, Bricostore,
Marks and Spencer
WHO'S COMING:
Baumax, Debenhams
WHO ISN'T HERE YET:
Ikea, H&M, B&Q,
Mediamarkt, FNAC, Toys R
Us, DSG International
(Electroworld), amazon.ro
Non-food retail is where the absence of big names is most noticeable.
Giant format stores have tended to bulldoze into Romania under their own steam. Meanwhile smaller format multinationals have chosen the current retail trend, franchises, to secure a brand presence in Romania, such as Brit retailers Debenhams, Mothercare and Marks and Spencer.
But acquisitions have not yet happened.
Multinational brands tend to buy into eastern European markets by purchasing an existing domestic retail chain from a bunch of investors. The buzz in electronic retail land surrounds whether chains, such as Altex, Flanco and Domo, could be sold off to the big boys, such as DSG International or Mediamarkt.
British-based DSG International has the chains Electroworld in Hungary and the Czech Republic and Kotsovolos in Greece. There is a rumour surrounding Mediamarkt's possible entry to Romania. The German giant is already present in Poland and Hungary. When asked, a spokesman for Mediamarkt told The Diplomat that members of the group “never communicate about our expansion plans.”
With stores in Slovakia, the Czech Republic and Hungary, Ikea has a production facility in the north of the country. Insiders at Ikea have told The Diplomat: “in maybe two to three years time” entry will be possible.
High street fashion retailer H&M is also another option. Many well-travelled young Romanians would like to see the clothing store open up ASAP in Bucharest. It manufactures a significant number of its items in Romania, many of which can be found in outlet retailers across the country. It has opened in Hungary, Poland and the Czech Republic, but not here.
"New markets are interesting, but due to competitve reasons we can not comment on our expansion plans," says a spokeswoman for H&M.
How about Amazon.com? Maybe it is looking for an east European base? “I'm afraid we can't speculate about what countries we would be looking at as potential sites,” says Patty Smith, director of corporate communications. “We can serve customers around the world, even if we don't have a dedicated web site in that particular country.”
HOTELS
WHO'S HERE:
Marriott, NH Hoteles, Accor (Ibis,
Sofitel and Novotel) Cendant
(Howard Johnson, Ramada) Hilton
Group (Hilton), InterContinental
Hotels Group (Crowne Plaza)
WHO'S YET TO COME:
Intercontinental Hotels Group
(Holiday Inn), Hyatt, Carlson
(Radisson, Park Inn, Regent
International), Marriott
(Courtyard), Starwood (Sheraton,
Westin), Choice (Comfort, Quality)
Take a look at plans for the major hotel chains in the world and the first thing one notices is - China.
Hundreds of posh lodgings are under construction in all the major cities across the orient. But eastern Europe has not been forgotten yet.
Notably absent in Romania is Sheraton, which has units in Sofia, Zagreb and Poland and the Radisson, which is open in Hungary, Bulgaria, Ukraine, Czech Republic, Slovakia and Croatia.
High class outlet Hyatt is also staying away for the moment, even though it has a presence in Poland, Russia and Serbia.
However Antoni Kuhnen, president of the tourism promotional club Skal Club in Romania, says Radisson SAS could have a deal signed to set up Hotel Bucuresti on Calea Victoriei. This giant 400-room Communist-era block has lain empty for many years in the prime retail space opposite the Hilton.
“Hyatt and Sheraton are also in the pipeline, but no decision has been taken yet by any of them on when or where they will step in,” Kuhnen tells The Diplomat.
Bucharest is seeing a building boom in two and three-star hotels, especially for business clients. Kuhnen feels this market is “not saturated yet” and will be the future of the hotel business in Romania, with international brands taking a major interest.
How about stepping out of Bucharest? Kurt Strohmayer, general manager of JW Marriott Bucharest Grand Hotel says the chain would consider this: “If opportunities arise and somebody puts the money on the table.” He added that one other brand for the Marriott chain, the four-star business hotel Courtyard, would be interested if the chance and the right investors are found.
For the mid-range, Franz Ratten-stetter, general manager of the Crowne Plaza hotel Bucharest, says his chain, the British InterContinental Hotels Group, has a development team constantly coming to Romania to explore development opportunities.
“There have been talks to open a Holiday Inn or an Express Holiday Inn in Bucharest or somewhere in the countryside, but no decision has been taken yet,” he tells The Diplomat.
Holiday Inn tackles the mid-scale customers, while the Express Holiday Inn is more of a budget hotel. “There is definitely place to grow in all segments, from two to five stars, especially in Bucharest, but opportunities are also in cities like Timisoara, Brasov, Sibiu and Constanta, where no international brands are seen, especially in the three to four-star hotel level,” Rattenstetter adds.
NOT SHY: CAR DEALERS
Judging by its tiny GDP per capita and the 200 Euro-a-month medium salaries, one would guess that no luxury car producer would dare wheel or deal in Romania.
But sales in luxury cars in Romania are some of the highest in central and eastern Europe. Reasons include Romanians' need to show off and the willingness the large number of overnight millionaires have to spend on luxury.
Mobile phone sales have also witnessed this phenomenon. Ultimate luxury car brand Rolls Royce will this year open its first showroom in Romania, through local importer Automobile Bavaria. With 15 potential Romanian clients expressing interest in buying a RR Phantom model, priced at almost half a million Euro, the market seems mature enough to have a permanent presence of this brand. Michael Schmidt, the GM of the local importer, estimates sales of between two and five units per year. In sports car, encouraged by the success of Maserati on the local market, Auto Italia is negotiating to bring Ferrari to Romania.
No specific time frame is in place, but negotiations are underway, according to company president Herbert Stein. Rumours of the Volkswagen group's Bentley have yet to be realised. With sales coordinated by a dealer in Austria, the brand already found a few clients in Romania. Aston Martin, dealt through Austria, also managed its first two sales at this year's Bucharest car fair, at a price tag of over 250,000 Euro.
After the revolution, poor standards of policing, public corruption and little protection for personal property, fed a demand for private security.
With competition forcing the industry to reform, a local company can develop itself up to a point, but go no further without international support. The largest international private security firm active in Romania, Group4Falck, was the first foreign name to a buy a local security company, Valahia, in 2002. The latest sale is Romanian-based Dragon Star, which two months ago was sold to Spanish company Prosegur.
Romania does not have the mafia of Russia, nor the problems with burglary of the UK or France. “Organised crime is more active in Bulgaria,” says Muresan. “Businessmen are killed on the street there. That's not happening in Romania.”
Laws do not allow PSCs to use handcuffs or flare guns. Guns with live ammunition can only be carried in certain situations (in banks, value transportation and places of strategic importance, such as nuclear power plants).