Management, Vol. 9, 2004, 2, pp. 75-96
D. Dunković: Rivalry of domestic and foreign retailers in Croatia
RIVALRY OF DOMESTIC AND FOREIGN RETAILERS
IN CROATIA
Dario Dunković[*]
Received: 6. 7. 2004. Preliminary communication
Accepted:14. 09. 2004. UDC: 339.37 (497.5)
Foreign retailers are gaining progressively more of the Croatian retail market share. This paper is an analysis of the retail structure in the Republic of Croatia (sector G – 52), with respect to the origin of trading companies (domestic and foreign retailers), to their size (small, medium and large companies) and to sub-sectors within a sector G – 52. The aim of this paper is to contribute to the understanding of causes underlying the foreign retailers’ expansion regarding their business success.The paper includes an analysis of the structure of household consumption in the Republic of Croatia as an important condition for the development of the retail structure. The analysis involves the indicators of domestic and foreign retailers’ business success: the turnover per one trading company and the turnover per one employee of the trading company. The comparison of these indicators for domestic and foreign retailers lead to certain differences (foreign retailers are slightly more productive than the domestic retailers) and to the evaluation of the differences caused by the size of the company. Since a correlation of the size of the structure of domestic and foreign trading companies in certain sub-sectors within sector G –52 must not exist, the conclusion suggests itself in the form of a need to investigate other features of the retail structure. The research is related to the year 2001. Nevertheless, the research presented in the paper points at an inadequate adaptability of domestic retailers to the structure of demand in the Republic of Croatia as the cause of the insufficient trading success.
1. INTRODUCTION
In the Croatian retail market, the increasing number of foreign retailers that glut the domestic market in the form of retail chains is evident. Hence, domestic retailers are faced with a reduced market share. Trading activities are important for the Croatian economy[1], therefore, the research into its structure could present a significant contribution to domestic development. Hereby, the research is directed towards one of the trading sectors – the retail sector.
In the paper, there is a comparison of available structural and financial data of domestic and foreign retailers in the domestic market. The aim is to find reasons why foreign retailers are slightly more successful than the domestic retailers in their home market. Moreover, the paper is based on the assumption that foreign retailers have a better market performance. This was also implied by their different inclusion structure into sub-sectors G - 52.1-6[2] and turnover per employee. The appeal of a retail structure depends on its harmonization with the structure of consumer needs. Therefore, the structure of personal household consumption is investigated first, i.e. the demand trends in the retail sector in Croatia.
The research includes all companies active in the retail sector in Croatia, i.e. group G - 52.1-6, which submitted their annual financial report by December 31, 2001 to the Financial Service Agency (FINA). The retail sector involves economic activities G - 52.1-6[3], which can be performed only by business entities (trading companies or tradesmen) registered at a commercial court. There is a distinction in Croatian retail terminology between bodies which are primarily registered to perform trade activities according to NACE G – 52, and bodies (retailers) which, regardless of their economic activity registration, can perform retailing activities. In both cases, the ultimate goal is to sell products or services to final consumers.The data are grouped into two statistical sets; one of which includes the data obtained from domestic trading companies registered for activities in the retail sector, the other includes data from foreign trading companies in Croatia. The division emerged from the need to compare some elements of their retail structure. The comparative analysis includes data from sector G – 52, such as the number of trading companies, trading branch activities, number of employees, and total and average turnover. The data are collected from several official sources and categorized in crossed tables. The methodology is also related to the use of the graphic presentation methods.Economic trading activities differ with respect to the type of merchandise and selling location, and it can be said that they are different, among other things, with respect to the trading branches[4].
Table 1. Classification of economic activities in retail sector
NACE Code / Description / Economic activities / Sub sectorsG - 52 / Retail sector
G - 52.1 / Non-specialized stores with food, beverages or tobacco predominating; and other stores
G - 52.2 / Specialized stores with food, beverages and tobacco
G - 52.3 / Pharmaceutical, cosmetic, toiletry and similar articles
G - 52.4 / Specialized stores with textiles, clothing, footwear, household articles, appliances, hardware, and other specialized stores
G - 52.5 / Sale of used goods in specialized stores
G - 52.6 / Retail sale not in stores
Source: Statistical Yearbook of Croatia 2002.
Anić [2002] showed that the retailing sector is marked by dynamic changes in the retail structure. He used the statistical method of correlation in order to correlate some variables of the economic environment important for retail examination. The result pointed at a strong correlation between GDP, income, personal consumption and retail turnover[5]. The statistical correlation method in retail research can be used to examine the relationship between the two sets of static variables across sectors or other different structures [Dinlersoz, 1999][6]. This approach is used for the analysis of retail structure elements.
2. STRUCTURE OF PERSONAL CONSUMPTION IN CROATIAAND EU
Personal consumption per household in Croatia relies mostly on consumption in retail, which is caused by a lower standard when Croatia is compared with EU states and also with some countries in transition. The actual turnover of the retail sector in Croatia, in the period between 1998 and 2003, is marked by oscillations[7]. However, the actual turnover in 2003 was 18.9% higher than in 2000.
Table 2. Personal consumption per household in Croatia 1998–2002
Category / Year / Consumption in household (in HRK) / Structure of consumption1998 / 1999 / 2000 / 2001 / 2002 / 1998
(%) / 1999
(%) / 2000
(%) / 2001
(%) / 2002
(%)
Personal consumption / 53.677 / 52.382 / 58.613 / 61.141 / 64.736 / 100 / 100 / 100 / 100 / 100
Food and non-alcoholic beverages / 20.485 / 19.826 / 18.845 / 20.585 / 20.816 / 39.1 / 37.8 / 32.2 / 33.7 / 32.2
Alcoholic beverages and tobacco / 2.473 / 2.391 / 2.273 / 2.486 / 2.575 / 4.7 / 4.6 / 3.9 / 4.1 / 4.0
Clothing, cosmetics, jewelry, footwear / 3.367 / 3.911 / 5.907 / 5.585 / 5.735 / 6.4 / 7.5 / 10.1 / 9.1 / 8.9
Furnishing, household equipment / 3.387 / 3.081 / 2.880 / 3.450 / 3.573 / 6.5 / 5.9 / 4.9 / 5.6 / 5.5
Total retail sector / 29.712 / 29.245 / 29.905 / 32.106 / 32.699 / 56.7 / 55.8 / 51.1 / 52.4 / 50.6
Housing and energy consumption / 5.800 / 6.958 / 7.811 / 8.187 / 8.875 / 11.1 / 13.3 / 13.3 / 13.4 / 13.7
Health services / 898 / 957 / 1.228 / 1.232 / 1.442 / 1.7 / 1.8 / 2.1 / 2.0 / 2.2
Transport / 7.204 / 5.752 / 7.156 / 7.028 / 7.167 / 13.8 / 11.0 / 12.2 / 11.5 / 11.1
Communication / 1.008 / 1.113 / 1.619 / 2.127 / 3.115 / 1.9 / 2.1 / 2.8 / 3.5 / 4.8
Recreation and culture / 2.758 / 2.994 / 3.931 / 3.576 / 4.155 / 5.3 / 5.7 / 6.7 / 5.8 / 6.4
Education / 330 / 368 / 431 / 505 / 439 / 0.6 / 0.7 / 0.7 / 0.8 / 0.7
Hotel and restaurant services / 1.635 / 1.429 / 2.155 / 1.821 / 2.049 / 3.1 / 2.7 / 3.7 / 3.0 / 3.2
Misc. goods and services / 4.332 / 3.602 / 4.377 / 4.559 / 4.795 / 8.3 / 6.9 / 7.5 / 7.5 / 7.4
Index 1999=100 / 102 / 100 / 112 / 117 / 123
Chain index / - / 97 / 111 / 104 / 105
Source: Author's calculation of data given in Table 10.4 of the Statistical Yearbook of
Croatia 1999; 2003.
Changes in the structure of personal consumption per household, i.e. the consumption of income available, are of vital importance for turnover and retail development. According to Anić [2002], the personal consumption structure determines the structure of retail turnover according to trading branches. A relative increase in personal consumption in a certain category informs retailers about the growing market potential of a certain branch. Household consumption is a retail demand; therefore, in order for a certain retail structure to be appealing to consumers, it must reflect a specific structure of household market demand. If the retail structure in Croatia was to be viewed as the retail structure of domestic and of foreign retailers, the more successful of the two would be the one more appealing to the final consumers.
The structure and changes in personal consumption per household in Croatia (according to categories) are shown in Table 2. It can be seen that the most significant is the decrease in the share of food and non-alcoholic beverage consumption, whereas the most significant increase is achieved in the communication category. Only the consumption of clothing and footwear from the retail categories shows a relative increase, whereas a reduction is noted only in the categories of other types of consumption, i.e. in household consumption for transport and miscellaneous goods and services.
Figure 1 shows that households in Croatia primarily spend their income on satisfying their existential needs, and, once this is achieved, only then are other needs satisfied.
Figure 1. Structure of personal consumption per household in Croatia 1998–2002 and projection for 2003[8]
Source: CBS Newsletters 13.2.1., 9.1.1. and 13.1.2. in 2003.
Figure 2. Comparison of structures of personal consumption per household in some European countries in 2002
Source: Author's calculation of personal consumption per household from the Statistical Yearbooks of: Ireland 2003; Austria 2003; Czech Republic 2003; Slovenia 2003 and Croatia 2003.
In EU countries in 2001, the ratio from Figure 1 was, on average, 36%/64% in favor of other types of consumption[9]. The structure of personal consumption, with regard to the consumption share in retail, differs between EU states as well as between transition countries (Figure 2). The structure in Croatia in 2002 was still disproportional to the structure of EU states, but also to some applicant countries in 2004.
The CzechRepublic has a lower total value of personal consumption per household and a significantly lower relative value of personal consumption in retailing when compared to Croatia. Among EU-15 member states, the structure in Austria shows the sharpest deviation in these shares, whereas the circumstances in Ireland and Slovenia are representative of the average in the EU[10].
If disposable income, as an independent variable, and personal consumption in the retail sector, as a dependent variable, are put into correlation, the result will show the impact of a disposable income fluctuation on the fluctuations in personal consumption in the retail sector. Pearsoncorrelation coefficient – r can be used in order to compare the interdependence of the two sets of variables:
where X is the independent and Y the dependant variable, with n representing the number of frequencies[11].
Table 3. Relation of disposable income and personal consumption in the retail sector in Croatia from 1998-2002
Function / Variables / X / Y / n / r (Pear. coef.)Pearson correlation coefficient / Disposable income per household / Personal consumption - Total retail sector / 5 / 0.87
Source: Table 2; Disposable income per household named in Table 10-2 of the Statistical Yearbook of Croatia 1999; 2002; 2003.
The value of coefficient r ≈ 0.87 shows that these sets are strongly, but not entirely, correlated. It can be concluded that an increase in the dispensable income per household in Croatia significantly affects the level of household consumption in the retail sector.
Figure 3. Absolute change of disposable income and personal consumption per household in Croatia from 1999-2003[12]
Source: Table 2; the Statistical Yearbook of Croatia 1999; 2002; 2003; Table 10.2; CBS Newsletters 13.2.1, 9.1.1 and 13.1.2 in 2003.
An increase in disposable income in households will be better registered by retailers of services and goods outside the retail sector. This is the consequence of the absolute growth of disposable income compared to the absolute growth of household consumption in the retail sector, which is also shown by the steeper curve incline in Figure 3. The changes also occur in the structure of personal consumption in retail, which is an important factor for the shaping of the domestic retail structure.
3. RETAIL SECTOR STRUCTURE AND COMPARISON OF
FINANCIAL RESULTS IN THE CROATIAN RETAIL TRADE
The research into the elements of the retail structure could also contribute to determining the causes of a better success of foreign retailers in domestic markets. Mason/Mayer [1999] state that the type of ownership over business entities, according to descriptive categorization, is one of the elements of the retail structure. Also, they find the turnover to be an element to be taken into consideration. Furthermore, the elements can be the size of a business entity, involvement in NACE sub-sectors, etc. The confrontation of structural features includes data from 2001: (1) the number of trading companies in the retail sector; (2) the inclusion of those into the sub-sectors of G – 52 and (3) the number of employees in a company.
The data are categorized according to the ownership origin (domestic and foreign)[13] and the size of a business entity. Business entities in Croatia are, by law[14], categorized according to their size (small[15], medium[16] and large[17]); therefore, this division is relevant for future research. The purpose of dividing retailers into two statistical sets accounts for a separate observation of the sets' features and a correlation among variables.
The analysis of the financial results includes the analysis of the turnover of trading companies in G – 52 in 2001. The goal of the comparison of results between domestic and foreign retailers in Croatia is to determine the total and average turnover of trading companies, as well as the employee turnover achieved.
The research of some structural features and financial results includes data on domestic and foreign trading companies in Croatia, mainly registered for economic activities in the retail sector. The statistical set includes all 6,262 trading companies that submitted their annual financial report by December 31, 2001 to the Financial Service Agency[18]. That is the actual number of trading companies that, in 2001, regularly performed economic activities and paid taxes.
4. STRUCTURE OF ENTERPRISES IN THE RETAIL SECTOR
The structure of the retail sector presented in Table 4 shows that foreign retail companies in 2001 made 4.8% of the total number of active trading companies in the sector. In spite of a relatively small share, they accounted for 13.9% of the turnover of trading companies in G – 52, i.e. for 10% of the retail turnover in the domestic market. One of the causes of this relative disproportion is the ever-stronger presence of multinational retail chains in the form of shops taking up large areas (supermarkets and hypermarkets), which characteristically achieve a relatively high turnover.
Table 4. Structure of active enterprises in the retail sector in Croatia on 31/12/2001
NACE Code / Number of foreign retailers' enterprises / Share (%) / Number of domestic retailers' enterprises / ShareSmall / Medium / Large / Total / Small / Medium / Large / Total
1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10 / 11
G - 52 / 260 / 30 / 9 / 299 / 100 / 5.766 / 138 / 59 / 5.963 / 100
G52.1 / 88 / 4 / 4 / 96 / 32,1 / 3.599 / 91 / 42 / 3.732 / 62,6
G52.2 / 4 / 0 / 0 / 4 / 1,3 / 227 / 1 / 3 / 231 / 3,9
G52.3 / 77 / 19 / 4 / 100 / 33,4 / 77 / 0 / 1 / 78 / 1,3
G52.4 / 75 / 6 / 1 / 82 / 27,5 / 1.738 / 44 / 12 / 1.794 / 30,1
G52.5 / 0 / 0 / 0 / 0 / 0,0 / 9 / 0 / 0 / 9 / 0,2
G52.6 / 16 / 1 / 0 / 17 / 5,7 / 116 / 2 / 1 / 119 / 2,0
Share (%) / 87,0 / 10,0 / 3,0 / 100 / 96,7 / 2,3 / 1,0 / 100
Source: Author's calculation of official data aggregated by FINA - enterprises that provided final accounting sheets on 12/31/2001.
The biggest share of domestic retailers is in G –52.1, whereas foreign retailers are mostly involved in G – 52.3, than in G - 52.1. Both are equally involved in G - 52.4. The majority of foreign retailers in sub-sector G - 52.3, and their better financial results, according to Table 9, show that the domestic retailers are not nearly as successful in this sector. Anić [2002] noticed a lack of inclusion of domestic retailers in certain market segments where they are required to meet the needs of consumers by sheer resourcefulness.
From Figure 4, it is obvious that small-sized enterprises take the biggest share of retailing in Croatia, around 97%, whereas medium- and large-sized enterprises take 2% and 1% respectively. This distribution of business entities, with regard to their size, is representative of the retail market in general[19].
Figure 4. Structure of foreign and domestic retailers in Croatia regarding the size of enterprises
Source: Data in Table 4.
Trading companies founded by foreign retailers in the domestic market are actually subsidiaries of multinational companies. Within one or rarely more subsidiaries, there are satellite stores connected to retail chains[20]. A subsidiary is a registered daughter company with its central base in Croatia, whereas the headquarters of a multinational company, and by that, of its chief management, is outside the country (in Croatia, those companies have their headquarters in EU states and Slovenia). The chief management of all subsidiaries (which can consist of a considerate number of personnel) is centralized and, as a rule, located in the headquarters of the multinational company. Consequently, the number of employees in foreign retailers’ subsidiaries excludes at least the chief management personnel, i.e. it does not include the total organizational structure. This is to be considered when discussing the comparisons between the number of workers of domestic and foreign retailers, as well as the indicators of employee productivity.
The structure of trading companies compared to trading branches is actually the structure of offer for final consumers. In a free market, this offer is adjusted to the final consumer demand in order to satisfy their needs. As such, this structure is reason enough for it to be inserted into the elements of the retail structure and, thereby, to become the topic of our research. A structure that results in a higher turnover per entity obviously better reflects the demand, i.e. it is more appealing to consumers.
Porter [2002] concludes that whether an industry is new or old, its structural attractiveness is determined by five underlying forces of competition, one being the intensity of rivalry between the existing competitors. By placing Porter’s conclusion into the context of the topic of research, it can be seen that the appeal of the retail structure influences the competitiveness, i.e. the intensity of rivalry in the sector.
Domestic and foreign retailers are examined as separate statistical sets, and their structure, according to the data from Table 4 (col.6 and col.11), greatly differs. The deviations between these two sets of structures can be determined by a statistical method. In this case, the Pearson correlation coefficient is used.
Table 5. Correlation between some structures of foreign and domestic retailers in Croatia
Function / Variables / X (Foreign) / Y (Domestic) / n / r (Pear. coef.)1. Correlation of size structure of
enterprises / Share Row / Share Row / 3 / 0.95
2. Correlation of size structure of
enterprises throughout sub sectors / col. 5 / col. 10 / 6 / 0.60
2.1. Correlation of small enterprises / col. 2 / col. 7 / 6 / 0.70
2.2. Correlation of medium enterprises / col. 3 / col. 8 / 6 / -0.04
2.3. Correlation of large enterprises / col. 4 / col. 9 / 6 / 0.59
Source: Author's calculation of data in Table 4.
The value (1.) of the coefficient from Table 5 is r ≈ 0.95, which means that, in the home market, foreign and domestic retailers are included with nearly the same structure of entities regarding their size. Still, by analyzing the result (2.) of the coefficient r ≈ 0.60, a significant correlation of the inclusion structure of domestic and foreign retailers in sub-sectors of G –52 can be found.