The calm before the storm

It was just a few months ago that “growth” was the word on the lips of everyone connected with the retail market. But such enthusiasm has faded and been replaced by fears of much leaner days to come

Mladen Petrov

On the high street the best indicator of the mood of consumers are those few weeks of Christmas shopping. Falling consumption in the run up to Christmas in America was evident in 2006, while 2008 witnessed a further dip. Here in Poland, retailers celebrated another successful Christmas, as the Polish man-in-the-street again made the statement that he is not going to be a festive-season party-pooper in terms of shopping. A TNS OBOP public opinion poll reveals that the average Pole planned a budget of around PLN 700 for presents and other holiday-related spending, resulting in more than PLN 20 bln actually being spent on Christmas shopping. Such volumes must weaken the case of those who claim that a new thrifty attitude has already set in.

Roman Skowroński, Simon Ivanhoe’s director for development in Poland – the company which owns the Arkadia and Warszawa Wileńska shopping centres in Warsaw – attests to this: “We had a good holiday period. The increase in purchases was, perhaps, not as fast and furious as it has been in previous years, but it was nevertheless an increase. There was no feeling that a crisis was looming.” His company also manages eleven other shopping centres in Poland. Kamila Jaroszyńska, Levi Strauss Polska’s expansion manager, agrees, adding that: “It is still too early to speak of how the crisis is influencing consumption. The sales period is coming to an end and only then shall we see how the new collections which have appeared in our outlets are selling.”

What’s there to worry about?

Klépierre, the French company with 242 shopping centres to its name in Europe and the manager of another 318 centres, is one of those that are clearly delighted with last year’s sales figures for the region, where 7.5 pct greater revenues were generated. Although Simon Ivanhoe prefers not to cite specific figures, Roman Skowroński also claims that his company has not noticed any ill effects from the current economic situation on the turnover of the malls in his company’s portfolio: “The turnover of our flagship Arkadia mall in Q4 2008 is similar to that of the same period in 2007.”

However, Footfall Index Polska, which monitors the number of visitors to selected Polish shopping centres, has noted a decrease since the beginning of the year of between -0.1 to -5.2 pct on the same period in 2008. Robert Stevens, the regional manager of Experian Footfall Central Europe, which researches data for the index, remarks that: “Before the holidays there were fewer customers, and since the beginning of the current year the number has been continuing its downward trend.” Agnieszka Michalczewska, director of King Sturge’s retail department, claims that: “Retailers are speaking of a 3-7 pct decrease. Although the Central Statistical Office (GUS) data points to declining sales, the global situation is not being directly reflected in the retail sector. However, there are clear onging attempts to forestall the inevitable slump.”

It’s going to be good É at some point

The experts, when asked whether the crisis is affecting consumption in the region, most frequently give the reply: “yes and no”. The crisis has not scuppered all growth plans. Marks & Spencer has started expanding in Estonia, another country in recession, where the GDP may fall this year by as much as 10 pct, as is the case in Latvia. Was this an ill-judged decision? We will just have to wait and see.

The Polish retail group LPP, whose brands include Reserved, House and Cropp, put its trust much earlier in the potential of the Baltic countries. Last year’s financial performance shows not even a hint of the crisis to come – LPP’s sales revenue in 2008 rose 21.8 pct to more than PLN 1.5 bln (not including the earnings from the House and Mohito brands in Q4). Sales grew in each quarter in both Poland and abroad. The company, which is present in most CEE countries, where it had 612 outlets in late 2008, has 38 stores in Estonia, Latvia and Lithuania. Dariusz Pachla, LPP’s deputy president, comments that: “Consumption is clearly falling throughout the region, but in varying degrees. The Baltic countries, however, have been the hardest hit, where profits collapsed by as much as 50 pct in 2008. But these outlets are still generating profits despite all the dramatic changes.” The company analyses in great detail every proposal to open a new outlet in the Baltic countries, and is now planning to open another store in Estonia this year. A total of 56 new outlets (21,000 sqm) will be opened in the region in the first six months of the year, which means that the initial plans to expand the chain have been cut by a half.

According to ‘European Retail Property’, the latest King Sturge report on European retail trends, some CEE countries, including Poland, the Czech Republic and even the troubled Baltic states, are still enjoying economic growth due to rising consumption. King Sturge is expecting consumption growth in Bulgaria to reach almost 100 pct, 73 pct in Romania and 62 pct in Slovakia. Poland and the Czech Republic should see 50 to 60 pct greater sales volumes, while Hungary will have the smallest – a mere 18 pct. Now all this might seem to be quite remarkable, but there is one small catch – these results have been projected for 10 years. The compilers of the report have admitted, when talking to ‘Eurobuild CEE’, that they are currently updating these forecasts.

Crisis negotiations

Smaller retailers leasing up to 200 sqm may find themselves in some difficulty this year. The big boys can press for smaller rents, but the second tier of retailers have no such leverage. Nevertheless, they are not going to give in without a fight, demanding additional concessions from shopping centre developers, such as rent free periods, cash contributions and enhanced specifications. Large retailers are doing much the same, but aided by a much greater negotiating power. Intersport Polska, a company with 25 stores, last year signed six contracts to open new clothing and sports goods stores, but due to the postponement of construction work on a number of shopping centres, will be opening only two outlets this year (around 1,000 sqm) – in Opole (in Irish Investment Group’s Solaris centre) and in Częstochowa (in a development by Globe Trade Centre). Artur Mikołajko, president of the board of Intersport Polska, admits that: “We have succeeded in coming to an agreement with the developer of Galeria Jurajska on finishing our store, which allows us to cut opening costs. All I can say is we got more for the same money. We are tackling similar issues with every developer we deal with, but we do not always reach an agreement.” The company increased sales last year by 27 pct and maintains this can be expected to rise to double that figure in the next two years. Furthermore, Artur Mikołajko adds that: “The owners of the product brands with which we cooperate also believe the potential exists for such growth.”

Tales of the unexpected

Romanian and Bulgarian tenants, however, have cause to be increasing worried. Although 2008 was a record-breaking year for Romania in terms of completed projects (667,000 sqm in 24 shopping centres), this must be seen in the context of falling consumption and rising unemployment. Colliers International Romania claims that falling demand is forcing tenants to focus exclusively on top-ranking locations and is pushing rents down.

Dariusz Pachla of LPP has this to say on this issue: “When we were reviewing whether to expand into the Romanian market, we were faced with choosing from the three shopping centres that were being opened at the time in cities with populations of 100,000. We were not sure, as a future tenant, which centre would prove to be the most successful. However, the problem became academic when the Romanian market collapsed, and the same thing happened in Russia and the Ukraine.” Delays caused by the lack of finance are also evident in Bulgaria. LPP has opened its first outlets in the country – Reserved and Cropp – in the Stara Zagora Park Mall, and will open two further stores in Plovdiv in the autumn. The company is refusing to discuss its plans for 2010.

Forget about small cities

As 2008 came to a close, Industry Watch revealed that the crisis was not yet having a visible effect on consumers’ behaviour; indeed, Bulgarian households have even been able to increase their savings due to the rising interest rates. In 2008, Bulgaria saw a 22 pct average growth in annual salaries. However, retail consumption fell by 8 pct in December – a month which traditionally enjoys a high turnover. In January, Bulgaria’s National Statistical Office revealed that the consumer confidence index – calculated for every quarter and taking into consideration consumers’ expectations concerning their financial health, the state of the economy, savings and the unemployment rate – fell by 6.7 points. Current research shows that Bulgarians are this year likely to be tightening their belts. Manol Goygadjiev of the MBL consultancy, is of the same opinion: “Everyone is complaining about reduced turnover, even in Sofia. However, large international companies, which had earlier announced that they would expand in Bulgaria and intend to implement their plans, will have to take another look at their priorities and not enter every city that they are interested in at the same time.” This could mean that only Sofia and the “big five” of Varna, Plovdiv, Burgas, Ruse and Stara Zagora wouldn’t be crossed off the list. In Mall Varna last year, in the country’s second largest city of Varna, tenants were still complaining about high rents and low turnover. Opinions can also frequently be heard that rents in Bulgarian malls are exorbitant. When you factor in the high profit margins demanded by tenants, shopping centres are simply becoming too expensive for potential customers.

Rents under fire

The current situation is forcing tenants to close ranks. The Bulgarian Retail Tenants Association was established in February and already has 90 members who are campaigning for rents to be based on turnover and not, as is the norm, on floor area. Manol Goygadjiev stresses that: “We still do not know whether low turnover is the outcome of a poorly managed and improperly designed shopping centre project or if, on the other hand, because of the low purchasing power of the population. However, whether in Sofia or elsewhere, tenants are making full use of the crisis as a negotiating tool to reduce rents.”

In Poland, the recent collapse of the złoty’s value has placed tenants in a most uncomfortable position since rents are paid in euros. The rate against the euro was PLN 3.6 in January 2008, whereas this January the rate was around PLN 4.3 and had risen slightly to PLN 4.77 by February 20th (National Bank of Poland data). Agnieszka Michalczewska of King Sturge is of the opinion that: “A period of correction has arrived. Attempts to renegotiate are under way, especially regarding less profitable locations.”

Kamila Jaroszyńska of Levi’s Polska is convinced that developers are still not taking the current situation into account: “We are now in the course of several discussions over new locations, but I still have not noticed any reduction in rents, about which so much is being said. We would like to maintain the same rate of growth, but rising rents are the greatest obstacle in the way of achieving this. Even if consumption remains at the same level, opening new outlets constitutes a great risk when rents stay unchanged.”

Shopping centre owners and managers are most unwilling to agree to switch from rents being paid in foreign currencies to rents in złoty. According to Roman Skowroński: “There was a time when tenants stuck firmly by the strong Polish currency. No complaints have been made by our tenants up to now, but perhaps this is just the quiet before the storm.” In his opinion, Poles are still keen on brands and are gaining a reputation for being loyal customers. And besides, new players are queuing up to enter the market.” Agnieszka Michalczewska of King Sturge summarizes the state of the market in these words: “The third quarter of this year may be something of a trial period. Until now, the industry has been carried along by the force of its own momentum. We are still not fully aware of where we really stand.” ν