Delayed changes

It was good news for players in the FMCH market that the recession resulting from the restrictive economic measures introduced last autumn had been delayed. However, it is bad news that recession did finally arrive in July-August 2007. According to Péter Biczó, director of PricewaterhouseCoopers Kft., the expansion expected for next year will also be delayed. As he pointed out, many people believed that immediate recession was coming when the restrictive fiscal and economic policies were announced in 2006. Recession however, timed its arrival for this summer, when statistics first began to reflect a reduction in consumption. Though there is still uncertainty about the end of the year period, the expert from PwC believes that overall figures for 2007 will show recession. It is also clear that the reduction in purchasing power took quite a long time to reach the market, which also shows a lack of willingness by households to adapt to new circumstances. Recession is expected to continue in the first half of 2008 as well. When the restrictive measures were announced, plans had already been prepared by most international chains for 2007. These reflected positive expectations and the chains are still trying to execute these plans, because they are under big pressure from international HQ-s. – Profit expectations are enormous in the FMCG sector, but the market does not necessarily allow these to be met – says Péter Biczó. At the moment, all market players are focusing on this year, with all kinds of promotional activities being used. The conflict of interests between Hungarian FMCG manufacturers and retailers has also intensified, with retailers turning to major regional suppliers and private labels. Retailers are also trying to reduce their inventories, which means that production also needs to be reduced, or manufacturers’ stocks will grow, which would add to their financing problems. The increasing energy, transportation and raw material costs make it even more difficult to cope with the situation, which might lead to many smaller food processing business going bankrupt. There are also global trends, like a shortage of milk in the EU, which can amplify the effects of the local crisis. Though this year’s 6-7 per cent drop in real income is expected to be followed by a slight increase next year, any expansion of demand is also likely to be delayed. In the meantime, new retail chains are planing to enter the Hungarian market, including Aldi, which is regarded as a true threat, because they rely primarily on their own international supply network and intend to grab a large slice of the market in a single move. However, all this should be interpreted as a process of correction, rather than a crisis of the retail sector.