BUSINESS BUSINESS COMPANIES ECONOMY EDITORIAL OP-ED OPINION POINTS OF VIEW

Mazars Romania: The Retail Industry – a journey of survival with frugal innovation, Blue Ocean Strategy, supply chain differentiation, and fiscal amendments

Before Romania was hit by the pandemic in 2020, food retailers had constant profits and clients. As for non-food retailers, they enjoyed exponential increases in profits, especially malls, which were full of hundreds of people every day.

Wholesale turnover increased by 12.6% in the first two months of 2020, compared to the same period in 2019. KeysFin specialists estimate that the threshold of 112 billion lei has been exceeded in 2019, so that in 2020, the growth rate will reach ~125 billion lei, considering the panic of buyers in the recent weeks, which they feared the disappearance of certain products and left empty the shelves of many stores.

However, the increased demand for products initially led to higher prices. According to an analysis conducted by the Competition Council, based on data from the Price Monitor, food became more expensive in March this year.

The closure of commercial centers and malls due to the COVID-19 pandemic has had a very strong negative impact on the Romanian retail, as losses reached about 600 million euro, according to CBRE estimates. Therefore, the retailers adapting the fastest to an ever-changing environment will have the best results.

 

Non-food retailers’ chain shifting to online experience as their survival kit

 

The Romanian retailers lost hundreds of millions of euro due to the Military Ordinance no. 2 from 21st March 2020, which ordered the closure of the malls. This has also affected the expansion plans of shopping center developers as the health crisis turned into an economic one, given that in 2020 an economic downturn of 6% is already expected in Romania, compared to an increase of 3.5% as estimated in January.

According to the Advisory & Transaction Department of CBRE, between 18th March and 15th May, ~8,800 stores were closed, ~50,000 of their staff became technically unemployed and the losses are estimated around ~600 million euro.

COVID-19 will accelerate the challenges in the retail sector, including their need to offer a simple, satisfactory online journey as well as focusing on ‘direct-to-consumer’ interactions, instead of working inside large department stores. The trend that has grown over the last decade of people choosing to shop near their living place rather than venture to out-of-town retail parks and hypermarkets is now a forced decision that protects themselves. Retail habits have been shifting in recent years, and now they look set to stay: from social distancing to online shopping excellence, the frugal innovation capacity has done wonders for this industry.”, mentioned Ella Chilea, Partner, Audit & Assurance, Mazars Romania.

 

Food retailers’ chain: from digital payments to home deliveries in the e-commerce journey

 

While non-food retailers are facing store closures and massive revenue losses, at the other end of the sector, hypermarkets and supermarkets have benefited from panic shopping to stabilizing operations, maintaining supply chains, and developing new ones. If the non-food retailers benefited a bit from the online experience, for many supermarket chains, e-commerce is just in the beginning phase, and this crisis has accelerated its digitalization plans. Some of the evolutions we see today will become permanent, and some will definitely change the face of food retail, such as e-commerce, home deliveries, the transition to digital payment methods, products’ sanitization, and supplier networks’ expansion.

Since the first week of March, the Romanian e-commerce registered a 30% increase in sales. The higher the number of people in quarantine at home, combined with the schools’ closure and the parents’ obligation to stay at home with young children, the higher the online sales.

According to RAOS (Romanian Association of Online Stores) estimates, e-commerce exceeded the threshold of 4.3 billion euro at the end of 2019, with 20-22% more than in 2018. Initial estimates for 2020 showed that the value of online purchases will exceed 5 billion euro, but in the current situation, this value may be even higher. If we are already accustomed to electronic and household appliances being purchased online, we will see increases in other niches, such as consumer goods and even food. The fact that a customer can buy several kilograms of sugar, flour, and other eatables and have them delivered at home gives extra points to e-commerce once again. According to Eurostat, only 23% of Romania’s population shopped online in 2019, which places us on the penultimate place in the European Union. These new online shoppers will significantly impact the volume of online sales.

 

Blue Ocean Strategy and Supply Chain Diversity as solutions for the future

 

For companies with stocks in their warehouse or even stores, it is recommended not to enter into aggressive promotions or liquidation campaigns. This year, we may have fewer Black Friday campaigns and some companies will want to keep their stocks. Those who sell in marketplaces must be very careful, because the stocks should be updated in real-time, otherwise they risk being penalized for not being able to deliver.

Another survival possibility is to look for suppliers in regions, such as India, Pakistan, Vietnam, or perhaps even better, to identify local producers. This is a very good way to boost and sustain the national economy in crisis. These suppliers may have higher production costs, but the risk of failing to serve loyal customers is greater than the risk of decreasing profitability in the short term. Therefore, a good way to overcome this period with minimal losses is to diversify the number of suppliers and their geographical areas. The concept of Blue Ocean Strategy in terms of differentiation and low cost can create new demand for retailers.”, mentioned Ella Chilea, Partner, Audit & Assurance, Mazars Romania.

The recommendation for online stores is to make the purchase process as easy as possible and to inform the customer about the delivery time and possible delays. According to StartupCafe.ro, the local marketing budgets dedicated to social media increased with 22.2%. The websites are now becoming responsive to adapt to the higher usage of mobile devices or they are being transformed into a mobile app, keeping in mind that the brand promise shouldn’t change and what the company is communicating still has to be authentic and true to its values and positioning.

 

 Fiscal measures helping the retailers in fighting the crisis  

 

If we take a look at the fiscal area, we notice that the evolution of the pandemic has determined governments around the world to take quick measures to support the business environment. The European Commission considers the COVID-19 pandemic to be „an unusual event that is out of the government control”. In turn, OECD (the Organisation for Economic Co-operation and Development) has proposed to governments and tax administrations packages of measures to mitigate the negative impact of the virus: deadlines postponement for filing tax returns and obligations, suspension of penalties/ default interest, suspension of tax controls or enforcement measures, accelerating VAT refunds.

The measures taken by the Romanian authorities are similar to those implemented by other states affected by COVID-19 and when we look at the retail industry, there are ones from which the non-food retailers may benefit. We can mention here the technical unemployment indemnity, the possibility of postponing the payment of fiscal obligations, considering the closure of the non-food retailers’ shops. Small and medium companies within the non-food sector may also benefit from the postponement of the rental fees, together with the related utilities by obtaining an emergency certificate”, mentioned Bianca Vlad, Partner, Tax Advisory, Mazars Romania.

Another measure from which all the retails may benefit is the bonus granted for the payment of profit tax for the first three quarters of 2020, as well as the cancelation of the interest and penalties related to the outstanding liabilities as of 31st March 2020, but keeping in mind the fact that certain procedures and steps are monitored.

Companies must also consider the extent to which they can benefit from the current provisions of the law, such as the tax exemption of the reinvested profit, accelerated depreciation etc. This is the time when companies should analyze their activities to identify potential cost optimization, such as analyzing the inventory losses. It is worth to mention that a new piece of legislation regarding the food trading has recently entered into force according to which a new agreement should be concluded between the producers and the traders within the next 6 months. Such new agreements should reflect the new provisions regarding the limited number of services that the traders are allowed to perform or the new payment deadlines etc.” mentioned Bianca Vlad, Partner, Tax Advisory, Mazars Romania.

Going forward, it is expected that a new VAT Directive will enter into force at the level of EU regulating the VAT regime of the online traders. Such a Directive has been drafted further to a study performed at the level of EU during 2015, where the level of the VAT fraud within EU reaches 1.5 billion euro, out of which 1 billion is coming from B2C (business to consumer) transactions.

 

 Looking ahead: new business models and customer-centric experiences 

 

Whilst governments globally are offering solutions to support the business community and the wider economy during this period, domestic tax legislation and OECD principles continue to apply.

In times of disruption, retailers may find the inspiration to start a new commercial journey that sets them up for long-term success, such as restructuring or new business models. COVID-19 is creating difficult circumstances for retailers, but it should not throw their existing plans completely off track. E-commerce, sustainable products, fair pricing, and customer experience are all at the core of their business, whether it’s during a lockdown or not. Leveraging the brand to stay in touch with customers and letting them know they will be there when shopping returns to normal could highly increase loyalty and sales in the near future.

 

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