Just after H&M entered the apparel market in Romania, its strategy of wanting to become the biggest dog in the fight became blatantly apparent. The Swedish retailer entered Romania in 2011, ending its first year as the fifth largest brand, only to become the largest apparel brand in value terms two years later. As of 2015, H&M generated over 50% more sales than the second-placed brand Zara (from Inditex SA) to reach nearly RON 800 million in value sales. Furthermore, in spite of the low purchasing power of Romanian consumers, being only ahead of Bulgaria within the EU, in 2015, the Romanian H&M subsidiary recorded the highest sales per store in the entire Central Eastern European (CEE) region. This success is the result of a favourable mix of rising purchasing power, increasing consumer preference for modern retailers, pricing, and, most importantly, an aggressive expansion and marketing strategy.
Value Sales of Selected Apparel Brands in Romania: 2011-2015
Everybody gets a piece of the pie, except the host
Romania, one of the largest CEE countries, has proven to be an attractive market, particularly for market-seeking Western European retailers. Due to weak domestic competition, the first decade of Romanian EU membership has been marked by an invasion of modern retailers capturing market share at a high pace in most fmcg categories. The apparel category is no exception, and growth is only limited by low, yet rising, domestic purchasing power. While the level of fragmentation in the apparel category is still high, there is a clear tendency towards a concentration of market shares in modern retailing as Romanian wages rise. H&M boldly and optimistically entered the market in 2011, a low point in the most recent Romanian economic history, betting big on stable recovery. The bet paid off, with H&M becoming top dog in terms of value sales within four years.
Selected Apparel Brands in Romania
The Romanian population has experienced a constant rise in purchasing power since 2009, reaching a new high in 2015. Consequently, Romanians are generally spending more money, and mushrooming shopping centre openings offer increasing opportunities to spend that money. However, in spite of rising disposable income, the budget of the average Romanian consumer is still under pressure, as over 50% of disposable income goes towards essentials, such as nutrition and housing. Interestingly, this configuration is an excellent economic environment for H&M. Due to the fact that most Romanians orient themselves towards Western lifestyles, H&M is able to supply this particular demand at a competitive price. Consequently, the brand is perceived more positively in Romania than in Western Europe, where it is mostly considered an “acceptable” economy brand. Regarding lower price bands, C&A is not able to profit as strongly from this configuration since it is positioned more as an economy brand and thus faces strong competition from low-cost retailers such as PPT, Takko, KiK, private label and open-air markets.
But, once in a while, dogs bite their own tail instead of the opponents. H&M has not been shy about implementing its offensive strategy and embarked on an endeavour of aggressive expansion, opening 6.2 stores per year on average in the last five years to reach 42 by the end of 2015. In comparison, Zara only opened 1.2 stores on average (totalling 22) over the same period, while C&A recorded 2.2 openings (totalling 28). Besides having inaugurated the largest H&M store in the region, at 4,300 sq m in the centre of Bucharest in 2015, H&M is also targeting smaller localities than Zara. The company has thus not lost its initial optimism and hopes for continuing rising domestic consumer purchasing power and that growth will soak through to households in smaller localities, such as Tîrgu Mure?, Satu Mare and/or Tîrgu Jiu.
But, once in a while, tanks get stuck in mud too. H&M might be winning the expansion battle, but, in terms of profit, Zara is currently winning the war. By tapping into higher income consumers with a small retail network, Zara recorded a profit of RON63 million in 2014, while H&M had to content itself with RON23 million, due to higher expenditure per store and thus lower profit margins. Moreover, parent company Inditex SA, owning five more brands beside Zara, is still leading company ranks, with sales of about RON1.0 billion. In order to beat the competition on all fronts H&M has thus another RON200 million to go.