Central Europe’s retail boom comes crashing to an end

Central Europe’s retail boom comes crashing to an end
Empty shelves in one Sofia supermarket as worried residents rush to stockpile. The coronavirus pandemic has caused sales of grocery and cleaning products to spike temporarily, but non-essential retailers are already feeling the pain.
By Clare Nuttall in Glasgow April 6, 2020

The lockdowns introduced to slow the spread of the coronavirus (COVID-19) pandemic have resulted in tens of millions of people being confined to their homes across most of Europe, only being allowed out to buy essentials, visit their doctors and — in some countries but not others — take exercise. These restrictions and the closure of non-essential stories to enforce social distancing are already having a devastating impact on parts of the retail industry. 

However, unlike tourism, which has been universally hammered by the crisis, the picture for retail is a more complex one. The official figures for March are not out yet, but reports from several countries in the region indicate a sharp hike in shopping for groceries and hygiene products as people frantically stockpile for fear of shortages, while vendors of clothes and other non-essentials warn they may not survive the crisis. 

The end of consumption-fuelled growth 

The Central Europe region is expected to be especially badly affected by a collapse in retail, after relying on consumption-powered growth that — until recently — had proved remarkably resilient.

Economies in Central Europe were increasingly shifting away from the export-oriented growth model based on relatively low cost manufacturing to supply Western Europe. As labour markets tightened in the region, wages rose steadily, and this in turn fuelled consumer spending on everything from fashion to real estate. This meant that until shortly before the current crisis, consumption was growing strongly in the region, providing a new source of growth that allowed it to decouple from the growing slowdown in eurozone economies such as Germany.

The exposure of economies to the retail sector varies widely across the Central and Eastern Europe and Eurasia region. New research from the European Bank for Reconstruction and Development (EBRD) shows that states in Central and Southeast Europe are less resilient to a slowdown in the retail sector than their peers further east.

In Lithuania and Poland, resistance to retail sector shocks is rated as low by EBRD economists, while there is only moderate resilience in a range of countries in the region: Bosnia & Herzegovina, Bulgaria, Croatia, Estonia, Latvia, Russia, Serbia and Slovenia. 

For the most part, the less developed economies in the region, together with the hydrocarbon and mineral-rich economies of Central Asia and the South Caucasus, are much less exposed to retail sector shocks, and their resilience is rated as high. 

Across the wider region, the importance of retail as a share of the economy is highest in Lithuania at 31%, followed by Montenegro (30%), Poland (26%) and Latvia (25%). 

When it comes to domestic shocks to the economy — specifically those related to the lockdowns aimed at preventing spread of the coronavirus — the EBRD writes that "demand-side economic effects are likely to be larger in countries where retail services account for a greater share of GDP, as in Lithuania, Poland, Cyprus, Montenegro and Turkey. Effects are also likely to be larger where temporary restrictions on work result in significant income losses: for instance in Central Asia, the Caucasus and the southern and eastern Mediterranean.”

A shopping frenzy 

Initially, the spread of the pandemic across the CEE and Eurasia regions was accompanied not by a slump in retail sales but by a shopping frenzy as people frantically stockpiled food, cleaning products and other essentials. 

A report from ING said that in Hungary this panic buying started as early as February; ING analysts attributed to the double-digit increase in retail turnover in February — a 17-year record — to stockpiling. “Although the number of Covid-19 cases began to increase significantly in March, the news in February was more than enough to fuel panic buying among consumers,” they wrote April 3. In addition to food, the February numbers show consumers buying computers and other electrical items as they prepared to work at home, as well as medicines and cleaning products. 

“We see the temporary surge in retail sales continuing in March as the hoarding persisted amid an increase in the number of Covid-19 cases. The growth of retail turnover could be even higher than in February, after which we expect a sharp drop in sales numbers in the second quarter. We therefore continue to expect that the first quarter will bring relatively strong economic activity but see a downturn in the second quarter, with a V-shaped rebound,” the ING report said.

In Croatia, the first country in the region to confirm a coronavirus case, people spent HRK300mn (€40mn) more than usual on items such as food, drinks and personal hygiene products between February 24 (when the first case was reported) and March 15, according to data from GfK quoted by state news agency Hina. Specifically, Croatians stocked up on salt, frozen ready-to-eat meals, tinned meat and fish, wine and spirits, flour and yeast, toilet paper and soap.

Serbia saw purchases of food, drink, personal care and household cleaning items rise by a more modest but still substantial RSD2bn (€17mn) during the same period, daily Danas reported also quoting GfK data.

Food retailers are also thriving in Romania, where supermarket chain Profi is pursuing a rapid expansion plan, and Turkey, where retailer Migros has already added 2,200 people to its workforce to meet extra online business and bricks and mortar store demand largely prompted by the coronavirus outbreak, and intends to take on another 1,000.

However, as people fill up their storage spaces and start to feel they have food to see them through, this stockpiling effect is expected to diminish. 

Russian retail collapses 

Russia is something of a special case, as Russians have to contend with not only the growing coronavirus epidemic in their country and a strict lockdown in Moscow, but also the collapse of oil prices (by contrast, most Central European countries are net oil importers). 

Previously, 2020 had got off to a good start in Russia, even as malls lost out to online retail. However, the Watcom shopping index, which measures foot traffic in Moscow’s largest malls in real time, collapsed at the start of April, falling by 70.9% year on year in a week after Moscow mayor Sergey Sobyanin put the Russian capital on strict lockdown.

The problems started on March 6, when Russia withdrew from the OPEC+ oil production cut deal that sent the price of oil crashing, dragging the value of the ruble down with it from RUB62 to the dollar in February to a low of RUB80 in the last few weeks. But things changed dramatically on March 30 when Sobyanin put the entire capital on a stringent lockdown, banning residents from leaving their apartments for any reason except for going to work, shopping at a local store or visiting a doctor.

As reported by bne IntelliNews, in the face of a crisis Russian consumers typically cut back on spending and begin to save, depressing retail turnover. The pandemic is anticipated to hurt Russian retail sales badly this year, and many retail outlets, aside from those classed as essential, have simply closed down for the duration of the lockdown. 

Online only a partial panacea

Retailers that can are moving more of their business online. To date, fewer residents of the Central and Southeast European EU members engage in online shopping, even in tech-savvy countries like Estonia, though countries from the region have seen strong increases in the share of online shoppers over the last give years, Eurostat data shows. 

Among those that have sought to shift online are pan-Baltic food retailer Rimi, which said last month it plans to bring forward the opening of its Estonian online store.

In the Czech Republic, which has seen the Central Europe region’s worst outbreak of the virus with 4,472 people infected as of April 5, the amounts being spent online in March were reportedly approaching the spend during Black Friday. In addition to buying food, Czechs were preparing for a potentially protracted period of lockdown by ordering sports equipment, bread machines and sewing machines. But almost no one wanted to buy clothes or shoes. 

Fashion, home decor and DIY retailers in Romania are also encouraging their customers to buy online. However,  the non-food retailers that do not have online outlets are likely to see a sharp plunge in sales, as bne IntelliNews’ correspondent in Bucharest reports.

In some West European countries such as the UK even some fashion retailers have seen robust sales, as locked-down citizens seek to alleviate their boredom by buying things. But shopping as a hobby is less common in Central and Eastern Europe where incomes are lower, and if the crisis deepens with no end in sight, people’s worries about their economic situation will grow and deter unnecessary spending. 

One of the retailers that has already acknowledged being badly hit by the crisis is Polish fashion retailer LPP, which has emerged as a locally grown rival to international fast fashion groups H&M and Inditex. LPP is among the retailers that set up a lobby group to defend the industry as non-essential shops were ordered to close by the government. The group has warned that many retailers may not survive a prolonged lockdown. 

“This is not even a crisis, it is difficult to name it. It is unlike anything that has happened before… This is a war and we want to survive. I do not care what the financial results will be,” Marek Piechocki, LPP’s CEO, told daily Rzeczpospolita.

In Turkey, department stores Boyner and YKM, jeans maker Mavi and Yargici, Vakko, Ipekyol, Beymen, Mudo, LC Waikiki, GAP, Marks & Spencer and Kigili closed their doors in March. LC Waikiki and Mavi Jeans have since followed up by announcing suspensions of their online sales. 

But one online retailer has come up with an innovative response to keep its sales going during the crisis. Czech e-shop Zoot has taken online delivery service to another level by delivering clothing — including the loungewear that is most in demand at the moment — to its customers by courier and waiting while they try them on. The e-retailer hopes to use its Zoot Taxi service to buck the general trend of a sharp fall in purchases of clothing and accessories.

Lockdowns extended

The extent of the damage to retail sectors will clearly depend on how long the lockdowns continue, and this is still an open question. 

In Bulgaria, for example, where the number of new infections has tapered off recently, the government has extended the state of emergency until mid-May. Slovenia’s government plans to extend the country’s lockdown for “two to four more weeks”, a government spokesperson said on April 4. The government in Hungary has not put a time limit on the emergency measures that allow the government to rule by decree. 

While there are signs that the number of new infections is peaking or has already peaked in some countries, there is little expectation of an imminent lifting of restrictions, as there are fears this could immediately lead to a fresh wave of infections. For retailers, the uncertainty continues.