,s\n Bu a
IABSRJ |
\ ' /
geacollege
Faculty of Entrepreneurship
HOUSEHOLD CONSUMPTION AND CHANGES IN RETAIL TRADE DURING THE ECONOMIC CRISIS IN
CROATIA
Blazenka Knezevic
University of Zagreb, Faculty of Economics and Business, Croatia bknezevic@efzg.hr
Abstract
Data on household consumption across Europe show growing trend of economic deprivation of persons and households. In addition, data on the structure of personal consumption are also showing that, in times of crisis, majority of population is oriented merely to satisfaction of basic needs. Moreover, due to the reduced consumption in households, indicators of business activity in retail industry show a negative effect not only through the reduction of generated income, but also through changed way of behaviour of the majority of consumers, which consequently leads to changes in the retail structure. In this paper we will analyse official statistics and other available secondary data for Croatia in order to confirm the thesis that retail formats with the lowest margins occupy an increasing share of the market.
Key Words
Consumption; crisis; poverty indicator; retail; Croatia.
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
INTRODUCTION
The global economic crisis reached its highest intensity on a global level in period 2008-2013 and had affected all aspects of economic activities. Many scientists dealt with the problems of the economic crisis, measurements and effects of global economic crisis. However, there is a scarcity of papers dealing with the impact of the economic crisis on individual industries, and, especially, in the markets of the newer members of the European Union.
During the economic crisis, reduced consumption has a direct detrimental impact on retail trade. Therefore, this paper will focus on the retail trade in the newest EU member state - Croatia. In the paper we will describe how the reduction and restructuring of household consumption during the economic crisis is affecting the retail trade in Croatia.
The paper is divided into two main sections. The first section of the paper is based on publicly available official statistics and explains the movement of household consumption and the structure of household in Croatia. The second section of the paper is based on secondary data retrieved from official statistics, but also from research papers treating various topics related to retail industry in Croatia. The second section of the paper explains the changes caused by the economic crisis, in two directions: (1) changes in consumer behaviour, and (2) changes in the structure of retail trade.
THE CHANGING STRUCTURE OF HOUSEHOLD CONSUMPTION IN CROATIA AS AN INDICATOR OF THE ECONOMIC CRISIS
According to data gathered in The Household Budget Survey conducted by Croatian Bureau of Statistics, the average annual consumption expenditures per one household are decreasing due to deep economic crisis taking place since 2008 and an average household in Croatia spends less than 10000 euros per year for final consumption (see Figure 1). And this decrease can be explained by logarithmic regression with R square indicator of 0.9602.
Moreover, the official statistics relentlessly shows an extremely unfavourable structure of personal consumption in Croatia where from 2008 to today an increase in the share of food and non-alcoholic beverages in total consumption is observed. This share is now around 32%. Thus, one third of the average household budget in Croatia serves merely to meet the most basic needs of life i.e. foodstuff and non-alcoholic beverages. Second in importance are housing expenditures and energy (with a note that the index does not include the rent) which also in the same period increased share in the average household budget and today is around 15% of the average household budget. Shares of individual product groups in total consumption of households in Croatia are shown in Figure 2.
If we sum up the two mentioned indicators, we can conclude that in Croatia almost a half of the average household budget is spent on food and housing expenditures and in majority of households there is a little room left to meet some secondary or tertiary needs. All this tells us that the average household in Croatia focused on mere survival, with fewer acquisitions of
2
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
goods such as, for example: household appliances, consumer electronics, branded apparel and footwear, furniture and services in the field of hospitality and education.
In Table 1 the share of the most basic life necessities in Croatia and in some selected EU countries is shown. Based on Table 1, we can conclude that the Croatian household, compared to the newer EU member states is, in fact, in a very difficult situation. While in the average Austrian, Slovenian and Hungarian household, after obtaining food and paying housing costs (excluding rents and loans) remains between 60 and 70% of the household budget, for the average Croatian household it remains little more than half (52,30%) and out of that the household has to purchase the clothes and shoes, to pay transportation costs, to pay medical services, and to pay costs for their children's education.
Furthermore, according to CBS (2012a) data, to households in Croatia almost no space remains for long-term investment. Official data shows that for this purpose is allocated up to 7% of total expenditures in the household. While, for instance, in Slovenia the long-term investments are 9.72% of the total household expenditures, in Austria 10.31%, and the Czech Republic 8.36% (according to OECD.Stat data). We have to point out that there are some doubts regarding the methodology of CBS, but in this paper we will not get into debate on CBS methodology, but we will use available CBS data as is.
Table 1: The share of the basic necessities in total household consumption in 2011
Country	1 Food and non-alcoholic beverages	2 Housing, water, electricity, gas and other fuels	Sum 1+2
Croatia	31,70%	15,70%	47,40%
Poland	18,51%	22,51%	41,02%
Czech Republic	14,64%	27,08%	41,72%
Hungary	17,19%	21,93%	39,12%
Greece	16,24%	22,19%	38,43%
Italy	14,27%	22,70%	36,97%
Slovenia	15,12%	19,66%	34,78%
Austria	9,82%	21,36%	31,18%
Source: For Croatia - CBS (2012a); for other countries - OECD.Stat (2015); own compilation
According to all the displayed data, we can argue that the personal consumption reached a bottom and there is no space for its further decrease in Croatian households because majority of Croatian households focuses on the satisfaction of basic needs.
In addition, the analysis of poverty indicators is telling us that Croatia, compared to other selected countries, is in a very unenviable position
3
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
because it has high rate of poverty risk, which further reinforces the negative trends in personal consumption of households (see Figure 3). Unfortunately, due to the economic crisis taking place across EU, the risk of poverty is getting deeper and deeper, not only in Croatia, but across EU as well (see Figure 4).
Moreover, data of the Independent Trade Union surveys in Croatia are not encouraging because they claim that the average wage in Croatia can cover only 80% of monthly living expenses, and the pensions can cover only around 60% (CITU, 2013). And if this situation continues, a significant number of households will be brought to a situation that basic needs cannot be satisfied.
EFFECTS OF CRISIS AND REDUCED CONSUMPTION ON RETAIL TRADE IN CROATIA
A change in final consumption and ongoing and long-term economic crisis together with the problem of deepening poverty in given geographic market puts many challenges in front of retail companies. In advance we will describe some of challenges for retailers in Croatia. We will explain two levels of changes: (1) microlevel focusing on changes in consumers' behaviour and (2) macrolevel focusing on consequential changes in retail structure in Croatia.
Changes in Customers' Behaviour and Vicious Circle of Retailing in Economic Crisis
A large proportion of citizens in Croatia are negatively influenced by ongoing economic crisis. Basic economic indicators (CBS, 2009 and 2014b) show that unemployment rate grew from 13.2% in 2008 to 20.2% in 2013. At the same period average wages remained almost the same (in 2008 average net wage was 5178 kunas or 681 EUR, while in 2013 average net wage was 5178 kunas or 726 EUR; which means that annual growth was only 1.3%). At the same period consumer prices grew continuously (see Figure 5 where all chain indices year after year are above 100). Taking all of this into account, relatively, customers are getting poorer and poorer.
When the Maslow pyramid is discussed in retail management and retail marketing literature, then it is always in relation with mark-up possibilities. Counting on a high number of customers trying to satisfy their basic needs i.e. economy of scales, and due to high number of retailers serving similar purposed i.e. increased competition, retailers will apply lower mark-ups in product categories serving to customers' basic needs. While to product categories which are promoted to serve higher level of customers' needs (according to Maslow's pyramid, see Figure 6), the focus will not be on price competition but on qualitative values, and therefore, in those product categories retailers will usually apply higher retail mark-up rates. The higher retail mark-up rates combined with a large number of consumers that are
4
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
actually purchasing products, the higher profitability of retailer is generated as a consequence.
In the time of recession when customers are focused on low level of needs and where are a decreasing number of customers that can afford satisfaction of higher levels of needs, not only profitability of retailers is directly affected, but also their revenues are brought to a question. And a large number of retailers are brought into a vicious cycle of lowering business activities. There are several relationships in retailing system which can contribute to the depth of the crisis at a certain marketplace and understanding of them can be of a great importance when retailers are searching for a way to survive.
In Figure 7 the simplified model is given showing that layoffs and wage decrease at a certain market will, inevitably, lead to the pressure on retail prices and retailer will have to make corrections of mark-up rates. As markup rates in retail serve to cover operating costs, retailer will be forced to think how to lower this costs which in most cases means that he will decrease wages to his workers and/or layoff some of his workers and in that way in local market crisis is increasing and a contribution to pressure on retail prices is made.
Moreover, lower mark-up prices and reduced number of financially stable customers brings us to situation of lower revenues and lower profitability. Low profitability is a new pressure to cut operating costs and retailers is brought to a new situation of deciding on wages and/or layoffs. On the other hand, when retailer is facing a low profitability, he is forced to rationalize his supply chain, and, unfortunately, rationalization of supply chain often means a mere pressure on suppliers to cut input prices. This after some time, on suppliers' side, will lead to new layoffs and/or wage decrease. And the consequence will be a new pressure on retail prices.
But, the tragedy of the vicious spiral effect is that low profitability means a low possibility to invest into activities that can bring structural changes. Therefore, a deep recession is deepening more and more if some external impact isn't made at some point. That external impact can be: a government intervention into labour market; innovation impulse to change procedures, services, products; availability of financial support from financial institutions or investor for structural changes etc. But in this paper external impacts are not in our focus.
There are various actions taken by retailers in order to survive in the market and in order to keep profitability above zero values. Some of them are searching and applying new channels to communicate with customers so they are applying multichannel principles throughout implementation of channels with low transaction costs, others are applying innovative techniques in supply chains and intensively are searching for logistics effectiveness in strategic cooperation with suppliers, and some of them are intensively promoting private labels in order to gain overall control on all aspects of merchandize. And some research results (for instance: Petljak et al., 2011) show that in time of recession there is a respective growth of private labels in the average consumer basket. This brings us back to the
5
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
fact that customers are searching for products with the price as low as possible.
This fact is empirically supported by Anic (2010). His research results on consumers in Croatia show that the high proportion of price-sensitive consumers are those with lower incomes and lower levels of education. Moreover, when concerned for their own financial situation, consumers become even more price-sensitive. When they make decision in which store (of the foreign retailer) to purchase in, they tend to prefer the price-oriented retailers, while this is not the case when they are deciding on locally owned retailers. In addition, price-sensitive consumers show a great loyalty to a couple of preferred retailers, but they are spending less money per one purchase in stores of their preferred retailer.
We have to point to other facts regarding contemporary customers that influence and change retail strategies all over the world. Ridderstrale and Nordstorm (2007) claim that contemporary customer is "a mother of all dictators!" because he/she wants to satisfy his/her individual need with personalized products or services and he/she is completely aware that it is possible in terms of a real time. This is the consequence of a growing competition in all markets all over the world. Customers have a huge possibility to instantly get substitutes of products, services, retail outlets, and retail channels and so on. Moreover, he/she is not afraid to intensively use information technology in all phases of purchasing. Prior purchasing, he/she is collecting information, comparing prices, then he/she is deciding how to purchase within the traditional or online store or even combining those two. At the end, after purchasing, he/she share information on products, services, retail outlets, retail experiences throughout social media, but also he/she is searching for additional support regarding the usage of purchased products or services. So, actually retailers are facing very well informed, involved and disloyal customers and they have to predict it in their retailing strategies.
Another thing to take into consideration in a future development in retail is an increased awareness of consumers of sustainability concepts in retailing. As some studies shows, in Croatia consumers react positively on corporate social innovations applied in retail outlets and, consequently, retailers in Croatia apply a wide spectrum of initiatives in the field of corporate social responsibility (see Renko et al., 2010 and Sutic et al., 2012). For instance, they make various donations to local communities, they provide products to socially endangered population during the Christmas and Easter season, they introduce environment-friendly shopping bags, they organize events in order to promote healthier lifestyle, etc.
Changes in the Retail Structure as an Outcome of Economic Crisis
Due to all previously described changes on micro level, on macro level we can observe that the retail structure is changed as well. In Figure 8 the structure of retail market is shown. It is obvious that winners in the time of recession are hard discounters because their market share doubled from 2008 till 2013. In the same period, the share of hypermarkets grew as well but only for 7% in given five years.
6
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
In such environment, small shops and supermarkets are two retail formats which in the crisis suffered the most. In given period small shops lost 9% of market share, while supermarkets lost 6% of market share. All in all, we can conclude that consumers are turning to shopping formats which offer a larger variety of products combined with lower mark-ups and, thus, lower prices.
Moreover, Knego and Knezevic (2012) explain problems that small retailers are facing in Croatia due to economic crisis, those are: (1) significantly lower labour productivity measured by gross turnover per employee compared to medium-sized and large retailers, (2) lower inventory turnover ratio, which increase the cost of financing inventories and increase operational costs, (3) unfavourable conditions due to inability of obtaining the benefits of economies of scale,(4) low gross margin and low mark-ups which shrinks their possibility of investment in technological modernization of their retail outlets, and (5) as a result of all previously mentioned problems, they have to offer higher prices comparing to larger retailers. All those problems are deepening in the situation of market concentration and increased internationalization of retail market so we can expect even harder situation for small retailers in the near future. So, in the future they will have to make significant changes in their overall business strategies trying to differentiate not by prices but by quality of service, personalization of assortment to narrow niches, by redesigning layout of shops, choosing more favourable locations, finding strategic partners at supply side and so on. For instance, Knego et al. (2014) give some suggestions regarding location and layout that can be applied by small retailers in order to survive at the market.
We have to point out that, according to data in Figure 8, there was a significant growth in "other formats" of retail. This category includes: traditional marketplaces of local community, door to door retail, vending machines, TV sales and e-commerce. Unfortunately, at the moment we do not have a detailed insight into the structure of the other category and in future research this category should be scrutinize more in order to see which format Croatian consumers are converting to: are they turning back to their local marketplaces or do they prefer e-commerce as a new retail channel?
In addition to mentioned changes, there is one new format that is situated between traditional retailing or traditional food supply chains and final users of food within a socially endangered population, and that is a social supermarket. The first social supermarket in Croatia was opened in Split in 2009.
Social supermarkets have the main purpose to serve those groups of customers which have low income or which are unemployed. Holweg and Lienbacher (2011) define social supermarkets as food oriented retailers selling food to a restricted group of people living in or at risk of poverty. Maric (2013) claims that social supermarkets are social innovation which comprises social responsibility of associated individuals with an aim to show social solidarity towards socially vulnerable persons or families towards collection and distribution of goods that are collected from individual donors, large retail chains and/or other companies. Therefore, we can say that in the very essence, they are non-profit organizations which base their activity on volunteerism and charity and if they generate any profits they use them to
7
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
promote charitable activities. At the moment, there are more than 15 social supermarkets operating in Croatia and on monthly level there are new initiatives taking place in this field of operation.
Holweg and Lienbacher (2010) explain that social supermarkets can be positioned as a linkage within reverse logistic systems trying to reduce food waste and to redistribute food surpluses which occurs in the traditional food supply chains.
Maric and Knezevic (2014) explain that social supermarkets, as a retail format, are of similar size as conventional supermarkets or as convenience stores and that they are serving a local community in narrow geographic area, offering food as a key part of merchandize. But their assortment is much narrow and shallow comparing to mentioned retail formats because it heavily depends on collected donations within a certain period. If they are not organized in order to distribute goods for free, then their pricing policy is comparable to hard discounters, because they offer significantly lower prices comparing to other retail stores (what is an analogy to the policy of EDLP -Every Day Low Prices). Therefore, at some markets there is observed collision between hard discounters and social supermarkets because, to some point, they are targeting similar group of customers or users. So in the near future this is the topic to pay attention to in further retail research.
CONCLUSIONS
The ongoing economic crisis had a detrimental impact on household consumption in Croatia. In period 2008-2013 average net wages remained almost at the same level. While, at the same period consumer prices grew continuously.
The household consumption in absolute values was reduced and it structure had changed. At the moment, almost a half of the household budget in Croatia is serving to satisfy the most basic needs.
This brings many challenges in front of retailers operating in the market because their profitability is directly affected and often they are caught in a vicious cycle of lowering business activities as it was explained in the paper.
On the other hand, consumers are becoming more and more price sensitive and conscious regarding purchasing, which can lead retailer to implementation of policies oriented towards cutting prices and cutting operational costs, and that means speeding up in the vicious circle.
In the paper we explained that retail formats which are oriented towards a larger product variety at lower prices are gaining the market share in situation of economic crisis. Available data shows that both, the hypermarkets and hard discounters grew in market share in Croatia since 2008, while supermarkets and small shops suffered the most.
Another thing that we brought attention to, are social innovations that in the future could have an impact on retail revenues if the crisis continues, and those are social supermarkets as a form of food distribution to socially endangered citizens.
8
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
Nonetheless, this paper is based on secondary data gives a conceptual insight into retail market changes in times of crisis. Thus, it can be used as a basis for future primary research of changes in consumer behaviour and trends in retailing in similar markets. Especially, one topic have to be more investigated and explained, and it is a growth in "other retailing formats" because it would be very useful to explore is e-commerce as a new retail channel growing in times of crisis in Croatia and elsewhere.
ACKNOWLEDGEM ENT
This work has been fully supported by Croatian Science Foundation under the project UIP-2014-09-4057.
REFERENCES
Anic, I. D. (2010). Ponašanje cjenovno osjetljivih potrošača u vrijeme krize u Hrvatskoj / The Behavior of price sensitive consumers during the crisis in Croatia. In Renko, S., Knezevic, B., & Vouk, R. (Eds.), Izazovi trgovine u recesiji / Challenges for Trade in Recession (in Croatian), Zagreb, Croatia: University of Zagreb, Faculty of Economics and Business, 145159.
CBS (2009), Statistical Information 2009, Zagreb, Croatia: Croatian Bureau of Statistics.
CBS (2010), First Release 14.1.2., POVERTY INDICATORS, 2009 - Final Results, 12th October 2010, Zagreb, Croatia: Croatian Bureau of Statistics.
CBS (2012a), First Release 14.1.1., The Household Budget Survey - Basic Characteristics of Household Consumption, 2011, 22nd October 2012, Zagreb, Croatia: Croatian Bureau of Statistics.
CBS (2012b), Statistical Information 2012, Zagreb, Croatia: Croatian Bureau of Statistics.
CBS (2014a), First Release 14.1.2., POVERTY INDICATORS, 2013 - Final Results, 18th December 2014, Zagreb, Croatia: Croatian Bureau of Statistics.
CBS (2014b), Statistical Information 2014, Zagreb, Croatia: Croatian Bureau of Statistics.
CCE (2010), Distributive trade 2010, available at: www.hgk.hr/sektor_trgovina, (accessed on 20th July 2012).
CCE (2014), Distributive trade 2014, available at: www.hgk.hr/trg/distributivna_trgovina, (accessed on 18th May 2015).
CITU (2015), The consumer basket explanation and survey results, Croatian Independent Trade Union, available at: http://www.nhs.hr/gospodarstvo/kosarica/ (accessed on 23rd June 2015).
Holweg, C., & Lienbacher, E. (2010), Social Supermarkets - a New Challenge in Supply Chain Management and Sustainability, Supply Chain Forum, 11 (4), 50-58.
Holweg, C., & Lienbacher, E. (2011), Social Marketing Inovation: New Thinking in Retailing, Journal of Nonprofit & Public Sector Marketing, 23 (4), 307-326.
Knego, N., & Knezevic. B. (2012), The position of Small Retailers in Croatia on the Verge of Entering the EU. In Kandzija, V., Kumar, A. (Eds.), Economic integration, growth prospects and enlargement, Rijeka, Croatia: University of Rijeka, Faculty of Economics, 502-516.
Knego, N., Vouk, R., & Petljak, K. (2014), Location and Layout as Sources of Competitive Advantage of Small Retailers, Economy and Business, 8 (1), 267-281.
Maric, I. (2013), Socijalna trgovina kao društvena inovacija / Social Trade as a Social Innovation (in Croatian). In Knego, N., Renko, S., & Knezevic, B (Eds.), Trade Perspectives 2013: Relationships in Supply Chains, Zagreb, Croatia: Universtiy of Zagreb, Faculty of Economics and Business, 296-306.
Maslow, A. H. (1943), A Theory of Human Motivation, Psychological Review, 1943 (50), 370396.
9
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
Maric, I, & Knezevic, B. (2014), Social Supermarkets as a New Retail Format Inspired by Social Needs and Philantrophy - Case of Croatia. In at Kantarelis, D., (Ed.), Global Business & Economics Anthology, Danvers, MA, USA: Business & Economics Society International, 278-286.
OECD.Stats (2015), Database of the OECD, available at http://stats.oecd.org/index.aspx?DatasetCode=SNA_TABLE5 (accessed on 15th June 2015).
Petljak, K., Stulec. I., & Renko, S. (2011), Trgovacke marke u zemljama Jugoistocne Europe / Private labels in Southeastern European Countries (in Croatian). In: Knego. N., Renko, S., & Knezevic, B., (Eds.), Trgovina kao pokretac razvoja Srednje i Jugoistocne Europe / Distributive Trade as SEE and CEE Development Driver, Zagreb, Croatia: University of Zagreb, Faculty of Economics and Business, 214-231.
Sutic, I., Lazibat, T., & Bakovic, T. (2012), Corporate Social Responsibility - Analysis of the leading food retailers in Croatia. In: Knego, N., Renko, S., & Knezevic, B. (Eds.), Promjene u trgovini na malo u Hrvatskoj, Zagreb, Croatia: University of Zagreb, Faculty of Economics and Business, 109-124.
Renko, S., Rasic, S., & Knezevic, B. (2010), Environmental responsibility of the Croatian retailing, International Journal of Management Cases, 12 (2), 613-624.
Ridderstrale, J., & Nordstorm, K.A. (2007), Funky Business Forever: How to Enjoy Capitalism, Ontario, Canada: Pearson Education, Financial Times.
10
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
APPENDIX
Figure 1: Average annual consumption expenditures per one household in Croatia (in EUR)
Source: CBS (2012a)
Figure 2: The structure of the household expenditures in Croatia
Source: CBS (2012a)
11
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
Figure 3: Percentage of population at the risk of poverty in 2013
25
Hungary Austria Slovenia Czech Poland Italy Croatia Greece
Republic
Source: CBS (2014a)
Figure 4: The risk of poverty rate 2008 and 2013 (%)
Source: CBS (2010), CBS (2014a)
12
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
Figure 5: Chain indices of consumer prices in Croatia
Source CBS (2012b, 2014b)
Figure 6: Maslow's pyramid of needs
Source: Adapted according to Maslow (1943)
13
Advances in Business-Related Scientific Research Journal, Volume 7, No. 2, 2016
Figure 7: Impact of Recession on Retail - Vicious Circle(s) of Retail in Time of Economic Crisis
Source: Own work
Figure 8: Market share of retail formats in Croatia (in %)
Source: Own compilation on the basis of CCE (2010) and CCE (2014)
14