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ECONOMIC CRISIS

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Can Tourism Be the Ticket to Turkey’s Economic Recovery by EOS Intelligence
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Can Tourism Be the Ticket to Turkey’s Economic Recovery?

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Tourism is one of the most dynamic and fastest-growing sectors in Turkey. The country is highly reliant on tourism for foreign exchange earnings. However, the COVID-19 outbreak and the Russia-Ukraine war have affected the country’s tourism industry and resulted in a decline in tourist visits. While the spike in energy and commodity costs due to war has widened the current account deficit gap, it has also made tourism cheaper in the country due to a significant decline in currency value. This has resulted in an unprecedented influx of tourists once the pandemic subsided. Furthermore, various initiatives have been taken by the government to boost tourism in hopes of reducing the current account deficit, bringing down inflation rates, and supporting economic growth.

Turkey is known for its vast historical sites in the major cities of Istanbul and Antalya, as well as the Aegean and Mediterranean Sea coasts. The tourism sector employs about 2.6 million people in the country. The sector also contributes significantly to new tourism-related business sources and foreign exchange earnings and, thus, plays a crucial role in the economic development of the country, especially in the post-COVID era. In 2021, it is estimated that Turkey generated about US$25 billion in revenue from the tourism sector.

The country’s dependence on tourism has increased significantly over the past few years. Turkey’s travel and tourism sector contribution to GDP increased to 11% in 2019 as compared with 4.7% in 2014. As per the United Nations World Tourism Organization (UNWTO), Turkey was the sixth-most visited country in the world in 2019. While the country’s rank came down to 15th in 2020 due to the COVID-19 outbreak, it jumped to fourth in 2021 in the post-COVID-19 recovery phase.

In addition to this, as per the 2022 Economic Impact Report (EIR) by the World Travel and Tourism Council, Turkey’s Travel and Tourism GDP is expected to increase by about 5.5% on an annual basis over the next decade (2022-2032) and create over 716,000 new jobs in the country. The projected growth rate in the country’s travel and tourism sector is more than double the projected growth rate of the overall economy, which is expected to be 2.5% during the same time period.

Challenges faced by the tourism sector over the years

While the tourism sector remains one of the best-performing sectors in Turkey, it has faced its own set of challenges over the past several years. Inflation has been rapidly rising in the country since 2016 due to factors such as low-interest rates, the energy crisis, an increase in commodity prices, and declining currency value. This has significantly affected domestic travelers and business owners in the tourism sector. Several terrorist attacks, particularly in the southeast part of the country and Istanbul and Ankara by the Kurdistan Workers’ Party (PKK) and ISIS, also severely affected tourist visits and economic growth in 2016.

Owing to the 2020 COVID-19 outbreak, spending on tourism by international visitors in Turkey declined by about US$20 billion, a 70% decline in comparison with 2019. This led to a decline in demand and unemployment in related sub-sectors, including airlines, travel agencies, hotels, and car rental companies, among others.

Stringent measures and trade restrictions resulted in a significant decline in air traffic and affected the aviation industry. For instance, the National carrier, Turkish Airlines, reported a net loss of about US$761 million in 2020.

The hospitality industry was also hit due to a fall in tourism in the country. Most hotels faced significant revenue loss during lockdown months. According to the Turkish Hotel Association (TUROB), the hotel occupancy rate in the first nine months of 2020 was just 35.4%, a decline of 47.8% from the same time period in the previous year. Moreover, revenue per available room declined by 52.5% to US$24.7 during the same period.

Can Tourism Be the Ticket to Turkey’s Economic Recovery? by EOS Intelligence

The 2022 war between Ukraine and Russia further affected the tourism sector growth in Turkey. Tourist visits from Russia and Ukraine used to account for a significant share of the total number of tourists visiting the country for holidays from Europe. Over 4.7 million Russians and 2 million Ukrainians visited Turkey for vacation in 2021. While 2.2 million Russians visited Turkey during January-July 2022, it is expected that the total number of tourists from Russia in 2022 will fall short of the 2021 figures due to prolonged war and the imposition of western sanctions and flight suspension. The number of tourists from Ukraine declined to 374,000 in the first seven months of 2022, in comparison with 1.1 million during the same period in 2021. The war also spiked Turkey’s inflation rate, which touched about 80% in August 2022.

While the Turkish government is trying to attract tourists from Russia by collaborating with Turkish aircraft to transport foreign guests amid war, it is not likely to recover tourist visits to pre-war levels.

Depreciating currency value boosts tourism in the country

The increase in the current account deficit due to rising energy and commodity costs in the backdrop of war in Ukraine has led to a massive currency value plunge for the Turkish Lira in 2022. Turkey is a net importer of oil and gas, and a spike in energy costs amid the Ukraine-Russia war has widened the current account deficit gap. As per the Turkish Central Bank data, the current account deficit increased to about US$32.4 billion in the first half of 2022. As of September 2022, the Turkish Lira declined to about TRY18.3 per US$1 compared with an average of TRY 8.9 per US$1 in September 2021 and is likely to decline further in 2023 with rising inflation rates due to interest rate cut.

A significant plunge in the currency value has made Turkey a more affordable destination for holidays in comparison with other European tourist destinations. The cost of stay, food, and travel has become significantly lower for foreigners. Adding to this, there has been a decline in COVID-19 cases across the globe, which has also provided the tourism sector a strong boost.

The number of foreign tourists visiting Turkey increased by 94% in 2021 (compared with 2020), reaching 24.7 million. It further witnessed a y-o-y increase of about 128% for the period of January-July 2022 to reach 23.3 million tourists during the period. The country’s revenue from tourism also witnessed a y-o-y increase of 190% in Q2 2022 to reach US$8.72 billion. In 2022, Germany accounted for the largest share of visitors, reaching 2.9 million from January to August. The number of tourists from Middle Eastern and European countries has also increased significantly in 2022. This has also resulted in an increase in share prices of Turkish Airlines. For instance, the share value of Turk Hava Yollari AO, also known as Turkish Airways, increased by about 147% between January and May 2022.

Since Turkey is highly reliant on tourism for its foreign exchange earnings, the significant boost in tourism is likely to help lower the widening current account deficit in the country. A low current account deficit is likely to increase the value of the Lira and, thus, bring down the inflation rate and support economic growth. However, further decline in interest rates by the Central Bank is resulting in an increase in the inflation rate, which reached 80.2% in September 2022. Therefore, while tourism can help soften the blow on the economy by reeling in foreign currency and earnings, it is unlikely that it will single-handedly help the economy recover from the ongoing crisis. That being said, the government is undertaking several efforts to capitalize on the growth in the tourism sector and provide a much-needed cushion to the economy as a whole.

Initiatives aimed at boosting tourism in the country

The Turkish government realizes the role tourism can play in uplifting the economy and has been undertaking several initiatives to boost the sector. For instance, in 2021, the government adopted a new promotion strategy, ‘Go Turkey’, to boost tourism. The ‘Go Turkey’ website encompasses the use of advanced technologies such as artificial intelligence and communication models. It follows over 100 media and social media outlets which cover news about the country. Additionally, it also analyses positive or negative content on Turkey and determines promotion priority based on this analysis. The aim is to focus on advanced public relations by integrating all 81 provinces under the system and promoting tourism together as a single voice.

A few other initiatives taken up to boost tourism in the country include additional domestic flight routes, medical tourism support, transportation infrastructure development, and several hotel investments. In August 2022, Turkish Airlines signed a deal with the Services Exporters’ Association (HİB) to help increase medical tourism in Turkey to meet the medical tourism industry’s export service revenue target aimed at US$5 billion in 2023.

About US$172 billion has also been invested in communication and transportation infrastructure during 2003-2021, and the government is planning to invest an additional US$198 billion by the end of 2053. Some of the key ongoing projects include The MBB – Gari – Mezitli Metro, The IBB – Kazlicesme – Sogutlucesme Metro Line, and the IMM – Ucyol-Buca Koop Light Rail, among others, aimed at boosting the transportation network in the country. Additionally, according to the Hotel Association of Turkey (TÜROB), new investments were planned in about 30 provinces in the first half of 2022. The new investment incentive includes applications for 11 five-star hotels, 18 four-star hotels, and 26 three-star hotels.

As of March 2022, TUI Group, a leading German travel and tourism company, together with its partners in Turkey, planned on expanding its holiday program and developing a winter program across destinations to attract more tourists as compared with pre-pandemic levels.

Additionally, in July 2022, Cengiz Construction, a leading construction company, started the construction of villas and hotels in Bodrum’s Cennet Bay together with Bulgari, a luxury hospitality company, with a significant increase in international visitors in the country.

Furthermore, travel companies and agencies are focusing on the adoption of digital platforms to promote tourism in the country as people are becoming more technology savvy and prefer online booking. It also helps attract travelers from different countries across the globe. Hotel booking through digital platforms increased to 81% in 2019, up from 73% in 2014, and is expected to increase further with rising penetration of smartphones and easy internet access. Turkey’s Tourism Development Agency (TGA) is likely to spend about US$100 million to promote tourism in over 120 countries through internet platforms and media in 2022.

EOS Perspective

Tourism contributes a significant amount to the Turkish GDP and is likely to help limit the consequences of increasing commodity and energy prices by reducing the widening current account deficit gap and easing the pressure on the economy. That being said, it is unlikely to help the country recover completely from its economic woes. Although the depreciating Lira has made Turkey a very affordable destination for holidays, people operating in tourism businesses are significantly affected by the high inflation levels as well. Hotels and resorts are facing high costs of employee wages, food supplies, and car rents, among others, which hurt their profits. Interest rates cut by the Central Bank are further increasing the inflation rate. In addition to this, the key tourist season, which is the summer season for Turkey, lasts for just a few months, and the sector’s revenue and profitability fall in the winter season. This makes it evident that the Turkish economy must base its recovery on a balanced mix of support across several sectors.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence
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Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence

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Sri Lanka is currently facing its worst economic crisis since its independence and is the first country in the Asia-Pacific region to default on its external debt in over two decades. While the financial crisis is underpinned by political mismanagement, low tourism during COVID-19, and affected exports and payments due to the Ukraine-Russia war, growing Chinese debt in recent years is also considered to be a major factor in the country’s financial downfall. More so, with China withholding desired and critical support at this time, more questions are being raised over China’s relationship with Sri Lanka. This has provided India and to an extent, the West, with the perfect opportunity to strengthen its ties with the country and in turn limit China’s political and economic influence in the region.

In April 2022, the Sri Lankan economy witnessed an absolute collapse owing to skyrocketing inflation, shortage of essential goods such as fuel, food, and medicines, and foreign debt to the tune of US$50 billion with just US$2 billion in foreign reserves. The financial turmoil further spiraled into a political crisis with the president, Gotabaya Rajapaksa, fleeing the country amidst strong public outcry.

There is no one cause for the freefall of the economy. However, the situation is largely underpinned by unforeseen factors such as halt in tourism earnings due to the pandemic, the Ukraine-Russia war, which resulted in blocked payments from Russia for tea exports, along with deep-rooted issues such as political corruption, favoritism, and weak policies.

An example of weak governance could be the 2019 tax cuts and 2021 ban on imports of synthetic fertilizers and pesticides, which forced majority of farmers to go organic overnight. While the ban on pesticides import was aimed at saving US$400 million that were spent annually on import of fertilizers (in addition to reducing the adverse effect of pesticides on health and environment), the move backfired as the ban led to a substantial drop in crop production. As a result, Sri Lanka had to spend US$450 million on rice imports to cover up for the 20% drop in rice production levels. Moreover, it saw a decline in tea exports by 18% due to limited production. To offset this loss by farmers, the government had to spend several hundred million dollars as compensation and subsidies for farmers who lost their livelihoods. While the policy was removed after only five months for some sectors such as tea production, the damage was done causing a huge dent to the economy.

However, one of the key reasons for the country’s downfall is attributed to the government’s close alliance with China and to several economically unviable infrastructure projects that were green-lighted with China’s financial support and influence. Currently China is Sri Lanka’s biggest unilateral creditor.

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

Sri Lanka’s Economic Crisis May Just Turn into a Battle for Influence by EOS Intelligence

The Rajpaksa family, which has dominated Sri Lankan politics for the last two decades, has been a close ally of China, and has favored investments from the country at the cost of relations with India and other nations that have for long warned Sri Lanka (and other Asian and African countries) about China’s debt-trap diplomacy. Over the last 15 years or so, Sri Lanka’s government has authorized several Chinese infrastructure projects including some that were considered economically unviable.

One such example is the Sri Lankan Hambantota Port that was built by China Harbor Engineering Company on a loan of about US$1.26 billion taken by Sri Lanka from China. The project, which was also touted to be commercially unviable from the very start by several experts and was cleared primarily because of close ties between China and the Rajpaksa family, was a commercial failure. In 2017, the port was handed over to the Chinese government for a 99-year lease due to default in loan payment. Similarly, the Hambantota airport is considered to be one of the emptiest airports in the world and has not been attracting traffic as anticipated, while the Nelum Kuluna towers (touted to be the tallest building in South Asia), stand empty. This has resulted in huge debt to the Chinese government from projects that failed to generate revenue for Sri Lanka. Sri Lanka owes 10% of its total foreign debt to China alone.

Now in the midst of its worst financial crisis and ridden of the old political regime, Sri Lanka is realizing the burden of the foreign debt it has to China. Especially at the moment, when the support received from its once most valued partner has been lukewarm at best.

China has largely maintained silence on the current economic crisis faced by Sri Lanka as well as on the political turmoil and fall of the Rajapaksa clan. It has adopted a ‘wait and watch’ approach, which is being criticized globally. More so, China has only provided minimal relief support to the nation in crisis. To put it into perspective, China has provided only US$74 million of aid and has sent a large shipment of rice to Sri Lanka in response to the large-scale monetary assistance requested by the Rajapaksas, before their departure. Moreover, China has turned a deaf ear to Sri Lankan government’s plead for loan restructuring and is yet to consider the request for an additional financial aid of US$4 billion (which encompasses US$1 billion loan, US$1.5 billion credit line for Chinese imports and US$1.5 billion in bilateral currency swap). Furthermore, China has not cleared its stance on IMF’s relief package for Sri Lanka. While IMF is designing a relief package for Sri Lanka, it needs consent from all its creditors to write off some loans so that the relief sum is used for economic revival instead of just servicing foreign debt. While Sri Lanka is urging the IMF and China to work together, it is going to be a long round of negotiations.

On the other hand, India has been increasing its influence on its neighbor and has provided US$3.8 billion in monetary relief to Sri Lanka. In addition, it is willingly working with IMF to restructure loans to provide debt relief to the country in need. It is also collaborating with Japan to assist Sri Lanka during the crisis. Sri Lanka is of strategic importance to India as it connects several of its key trade routes to Africa and Europe. With China having close ties with Sri Lanka in the past, it had built a strong foothold in the Indian Ocean, which was threatening to India and led to a geopolitical rivalry between India and China.

This financial crisis comes as an opportunity to India to replace China as Sri Lanka’s preferred partner. In March 2022, the Indian government signed a deal with Sri Lanka to develop hybrid power projects in northern parts of the country after China suspended a similar project in December 2021, stating security reasons. Around the same time, India was awarded a US$12 million contract to build wind farms on three small islands in the Palk Strait (which lies between southern India and Sri Lanka) after the project was taken away from a Chinese firm. In March 2022, India’s National Thermal Power Corporation (NTPC) also signed an agreement with Ceylon Electricity Board (CEB) to jointly set up a solar power plant in Sampur, Sri Lanka.

Moreover, in July 2022, several investment proposals to strengthen the economic ties between India and Sri Lanka were discussed between officials from both countries. The key sectors that were identified for investments by India in Sri Lanka include renewable energy, hydrocarbon, ports and infrastructure, IT, and hospitality. The talks also encompassed the development of the Trincomalee Port on Sri Lanka’s northeastern coast and a proposal to use Indian Rupee for transactions in Sri Lanka. In August 2022, the Sri Lanka government also gave an approval to Lanka’s Indian Oil Corporation (LIOC, a subsidiary of India’s Indian Oil Corporation) to open 50 new fuel stations in the country. While LIOC already operates 216 fuel stations in Sri Lanka, it plans to invest US$5.5 million in the proposed expansion. In a separate deal in December 2021, LIOC gained control of 75 oil tanks in a strategically significant storage facility near Trincomalee.

For China, on the other hand, this crisis presents a precarious situation. While it holds 10% of Sri Lanka’s debt, the perception is that China is one of the key reasons for Sri Lanka’s downfall. With China’s other BRI partners, such as Pakistan, heading towards a similar fate, it is important for China to understand the grip it has in deciding the fate of countries over which it holds such significant power. At the same time, it will not like to lose the control it holds over this region to India that would gladly step in to displace China as the preferred partner.

EOS Perspective

The Sri Lankan crisis and its management is being closely observed by several global economies. While China has been Sri Lanka’s prominent partner over the last decade and a half, a new regime in Sri Lanka, China’s tepid response, and India’s support may lead to a shift in allegiances in the region. However, it is still early to offer any definite comments. China still holds significant influence in the region. This can be seen in the recent events, when in August 2022, China docked its ballistic missile and satellite tracking ship, Yuan Wang 5, (also termed ‘spy’ ship) at Sri Lanka’s Hambantota port for six days, despite significant resistance and raised security concerns by India. Therefore, while India is trying to get closer with Sri Lanka, it is very difficult to match China’s control over the region. That being said, there is definitely an opening to improve both political and business relations with Sri Lanka for India. While politically Sri Lanka is of strong geopolitical significance, the country can also prove to be a valuable economic partner with regards to growing trade as well as large scale power and infrastructure projects in the long run.

by EOS Intelligence EOS Intelligence No Comments

Venezuela – Economic Crisis Strikes Consumers and Companies

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Venezuela, a country considered as a role model economy for other Latin American countries a few decades ago, has now fallen into deep economic, social, and political crisis that seems to never end. Venezuela’s economy, highly dependent on oil exports, witnessed a steep decline when global oil prices dropped dramatically during 2014-2017, followed by the government ill-treating national funds, and a massive reduction in import of goods. Under this scenario, several multinational companies, such as PepsiCo, Palmolive, and Coca Cola, chose to reduce or temporarily cease production in the country, which has led to increased unemployment. As a result, many Venezuelans started to flee the country in search for a better life quality, while those who chose to stay face low salaries, hyperinflation, empty supermarket shelves, and increasing violence as political turmoil is deepening amid opposition and criticism of the current government of Nicolas Maduro.

The root of the problem

Venezuela’s deep social and economic crisis is driven mainly by mismanagement of national funds and lack of investment in industries of national importance. For several years, the Venezuela’s government-established projects involved providing social aid for households with low income, and these programs were supported by revenue generated through oil exports. Therefore, as gas and oil sector revenue accounts for 25% of the country’s GPD, a steep plunge in global oil prices from US$85 in 2014 to US$36 in 2016 deeply affected Venezuela’s social projects turning them unsustainable.

Venezuela’s deep social and economic crisis is driven mainly by mismanagement of national funds and lack of investment in industries of national importance.

In addition, Venezuela did not invest in its oil industry, one of the main pillars of the country’s economy. Petróleos de Venezuela S.A. (PVDSA) the Venezuelan state-owned oil and natural gas company has witnessed limited investment, causing Venezuela’s crude oil production to decline from 2.7 million barrels per day in 2014 to two million in 2017, expected to further crumble to 1.4 million barrels per day in 2018. This also translated into a decrease in oil exports revenue by 64% during 2010-2015, deepening scarcity of funds and progressing economic instability in the country.

Venezuela - Economic Crisis Strikes Consumers and Companies

Plummeting imports in import-dependent economy

Venezuela has been highly dependent on imported goods and raw materials such as food staples and medicines, among other goods. After the fall in oil prices and decrease of crude oil production, Venezuela redirected a large percentage of the remaining revenue from oil export to repay foreign debt, drastically reducing import volume of goods. As a result, imports severely dropped from US$58.7 billion in 2012 to US$18 billion in 2016, leaving the country with shortage of wide range of goods, including pharmaceuticals, sugar, corn, wheat, etc.

Soaring inflation and unemployment

In addition, Venezuela established strict price control regulations as a way to counterbalance hyperinflation, which directly hindered production of goods by multinational companies. Consequently, several key market players reduced or partially stopped operations in the country as a way to avoid losing profits. In February 2018, Colgate Palmolive, a US-based consumer goods company, stopped production for a week after the government demanded that the company reduces the price of its products, which resulted in a large loss in profit for the company. Subsequently, the reduction of multinationals’ operations in Venezuela greatly increased the unemployment rate to 30% as of 2018, causing Venezuelans to opt for unreported employment or to flee the country looking for job opportunities. It is estimated that between one to two million Venezuelans will have migrated by the end of 2018.

EOS Perspective

Throughout 2017, the ministry of urban farming encouraged people to grow food, e.g. tomatoes and lettuce, at their homes and to start eating rabbits as a way to prevent starvation as a result of massive shortage of basic goods. Meanwhile, as a way to ease the situation, Venezuelan authorities sell a monthly bag containing corn flour, beans, rice, pasta, dried milk, and some canned foods at VE$25,000 – this is less than a dollar. These bags with food are distributed only among people registered in the communal councils and those who possess a Carnet de la Patria, a home registry system in order to receive the food. Additionally, president Maduro decided to open 3,000 popular meal centers as part of a nutritional recovery scheme seeking to feed hungry Venezuelans. However, none of these measures have clearly had enough impact to aid in the difficult situation amid the deepening crisis in Venezuela.

Migration to neighboring countries in Latin America has been the way many Venezuelans have found to escape the crisis. Argentina, Chile, and Colombia, among other Latin America countries, have received over 629,000 Venezuelans in 2017 alone, which is 544,000 more Venezuelans than in 2015. The mere number of fleeing people indicates the scale of the issue, yet the socialist administration of Nicolas Maduro refused to accept any help, aggravating the already strained political relationships with his Latin American counterparts. Further, Venezuela also refused to accept any aid from international institutions such as the WHO, which would help as a short-term solution or at least a relief for starving Venezuelans.

Moreover, Venezuela seems to be continuing to drown, as South American trade bloc Mercosur – one of the most important commercial blocs in the region, suspended Venezuela’s membership indefinitely in 2017. Such a measure translates into further reduction of imports into Venezuela from the bloc and, potentially, Venezuelans banned from legally migrating to any of the countries from the Mercosur bloc. So far, South American countries have welcomed waves of Venezuelans, but the dormant prohibition could negatively affect a considerable volume of the population seeking to flee from the crisis.

Venezuela seems to be continuing to drown, as Mercosur suspended Venezuela’s membership indefinitely in 2017. Such a measure translates into further reduction of imports by Venezuela from the bloc.

In addition, the USA issued an executive order banning any American financial institution from investing in Venezuela, that same year, which restricted the inflow of capital and increased the financial isolation of Venezuela from the North American markets.

This dramatic situation, both in Venezuela’s domestic as well as international arena, calls for president Maduro to reevaluate and encourage reforms that should empower small domestic producers, e.g. coffee makers, agricultural producers, among others, in order to reactivate internal consumption and counterbalance shortage of food and other supplies. Further, it is high time that the country’s leadership opens their borders to external help, however this seems unlikely to happen, considering that this would mean an acknowledgment that the socialist political management of the country has failed, and this in turn would play into Maduro’s opposition’s hands to easily overturn his government.

by EOS Intelligence EOS Intelligence No Comments

It’s Good the Crisis Happened – How Private Labels Benefit from Global Economic Turmoil

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Stagnating or declining consumption, falling sales, lower financial stability – the economic crisis is in full swing in many geographies. But it is not a bad thing for everyone. Across markets, private labels have witnessed strong growth over the past five years, the upward trend coinciding with the onset of the economic turmoil in 2008. Cash-strapped consumers, worried about their financial security, turn to cheaper options during their everyday shopping, providing the retailers’ own labels with unprecedented opportunity to win consumers’ hearts.

Since the very beginning of the private labels story, retailer-owned products have been typically associated with low quality (to some extent quite rightly as the first private label products were clearly inferior). These concerns over quality made it difficult for the private label market to take off, making it cater predominantly to the least demanding or poor group of consumers. Several retailers started to realize that while many consumers are indeed price-driven, what most of them actually look for is value for money – so value matters to most of them. While changing the private-labelled product quality was relatively easy to do, changing the consumer bias and conviction of these products’ low quality was a more difficult task.

Quality improved, but it was the onset of the economic crisis in 2008 that made many consumers develop a ‘crisis mindset’ that led them to actually try out private labels for the first time. It appears that the crisis gave private labels a unique chance to enter homes of a group of consumers who were very unlikely to try them out before, mainly due to the consumers’ loyalty to branded products, strong unverified perception of poor quality of private labels and lack of financial pressure to even consider cheaper options. With search for cost savings and brand loyalty in decline, many consumers have found private label products quality to be on a par with market leading brands across segments, but at considerably lower price (even up to 40% cheaper than branded equivalents, depending on product category).

Private Label Market Share in Europe - 2012Private labels market has been growing across several countries (most of Asia still has a relatively low penetration of modern retail formats thus presence of own labels is largely limited there), but the increased acceptance of private labels is particularly visible in Europe. According to a AC Nielsen report “The Power of Private Label in Europe”, already in 2010, a considerable group of consumers associated private labels with good value – between 82% and 87% of consumers across Spain, France, Belgium, Ireland, the Netherlands, UK and Germany believed that supermarket own brands offer extremely good value for money. This is a significant change of mindset, considering the long period of inferior quality associations. Such opinions have played an integral role in boosting the growth of the European private label segment, and in 2012, the average value share of private label across European markets was estimated at 30%.

Clearly, private labels will continue to benefit from the overall deterioration of the economic climate, not only now (even though private labels are gaining higher share of retailer sales, the overall consumption expenditures are all in all lower), but also after the crisis, when consumption will start to grow again. This will be possible provided that retailers use the current situation to build some sort of loyalty amongst customers. This is the time for retailers to prove to their customers that private label products are not half as bad as generally regarded, and to convince the consumers to stick to private label products even after the crisis.
It is not all nice and easy for private labels yet, as they are faced with a range of challenges, which might question their ability to win customers’ loyalty that would last even in the post-crisis era. Obviously, producers of branded products have also reacted to the deteriorated financial capabilities of their customers, and introduced a range of offers or launched product lines in cheaper segments.

Additionally, we have already seen an increase in private-labelled product prices, resulting in lower cost benefit over reduced-price branded products. Growth in the private label segment is linked to improved product quality and the retailers’ attempts to offset the decline in overall sales as consumption stagnates. This increase might eventually lead the consumers to realizing that they can get an old, beloved brand, that reminds them of pre-crisis security, at just marginally higher cost, especially with branded products now available at discounted rates and in promotional offers.

So, the question really is, whether the private label growth story is just a temporary affair, and most consumers will hop back to the branded cart the minute crisis is over?

by EOS Intelligence EOS Intelligence No Comments

Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?

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Since 2008, the economic crisis has been the subject of countless news headlines across the world with numerous economies sliding towards the verge of painful recession. Europe has been severely hit as well, with only one state, Poland, performing considerably better than those once believed to be more stable and better prepared for potential turmoil, resulting in the Polish economy being dubbed the ‘green island’ among weaker, crisis-ridden EU states.

As the economic crisis wave spread across the globe in 2008, it hit virtually all economies. The slowdown was visible in form of declining economic growth rates, which soon changed into negative growth in economies of Europe, USA and Japan. Interestingly, Poland was the only economy in the EU to register a positive growth during 2009, and, despite visible slowdown due to recession hitting its trading partners, Poland has managed to storm though the crisis reasonably well.

Real GDP Growth Rate 2009

Real GDP Growth Rate - 2000-2014F

Since the onset of the crisis, Poland’s good economic performance has surprised many analysts. Obviously, the country did not remain unaffected, and a look at a trend line of the country’s growth rates over the past decade clearly shows how its performance has mirrored EU’s economic struggles. Nevertheless, the Polish economy managed to grow throughout the crisis, and this year, again, as the EU economy is expected to shrink by 0.3%, Polish economy is expected to expand (though modestly). Poland’s position in terms of GDP per capita increased considerably by 11 percentage points, to 65% of EU’s average in 2011. The economic growth and persistence in defying the crisis is believed to be largely underpinned by strong internal consumption, as Poles took long to believe that the crisis could have an actual impact on them, thus did not cut down on their expenditure (e.g. in 2011, the Polish retail sector enjoyed one of the highest y-o-y growth rates in retail sales during the December holiday season in Europe, second only to Russia). This strong internal consumption, paired with attractiveness for foreign investors in production-oriented sectors, along with postponed entry to the Euro zone (a fact that has helped shield Poland from Euro quakes) and limited household and corporate debt, allowing for greater stability of banking assets – these factors are typically cited as reasons for Poland’s good performance amid the crisis.

However, there seems to be an air of negativity and the country might get its share of the crisis after all. Just in November 2012, the IMF and Morgan Stanley slashed Polish GDP 2013 growth forecasts by almost half, down to 1.75% and 1.5%, respectively, as rather modest export gains are expected to fail to offset weaker consumer spending. Indeed, private consumption boom is likely to significantly cool down, as for an average Polish citizen the situation does not appear bright. The mood amongst Poles seem to no longer reflect the earlier enthusiasm, with opinions that good performance of Polish economy is now more of a government propaganda, since what they see on a daily basis contradicts the positive overtone of analysts’ words. The change in moods has been already captured – in November 2012, the Indicator of Consumer Trust (BWUK) was down by 5.3 percentage points over November 2011.

In reality, Poland’s position in EU’s GDP per capita statistics improved more as a result of a decline of the EU average, rather than actual improvement in Poles’ incomes and standard of living. The accumulated negative impact of adverse situation in the country’s Euro zone-based trading partners, leads to increased cautiousness of firms, who are introducing cost control measures, including layoffs. Rising unemployment (registered unemployment reaching close to 13% overall and as high as 28% amongst graduates in November 2012), together with growing fear of losing jobs, as well as limited credit activity, seem to have put brakes on consumer spending and thus internal consumption, an element once considered as one of the fundamental forces allowing Poland to withstand the pressures of the crisis. The mood is increasingly pessimistic, and the Poles have now started to change their shopping habits – they buy less, think twice, postpone high-value purchases, downgrade to cheaper equivalents and demand higher value for money. Poles are finally increasingly aware of the economic storm going through neighbouring economies, and realize that they do not live on a safe ‘green island’ any more. This fear is escalated by recurring news and discussions filled with warnings of 2013 brining the crisis full-on to Poland. And what is definitely not helping is the opposition leaders’ lack of political will to constructively work with the government in averting the impending crisis.

Many economists urge Poles to remain calm and claim that there is no reason to panic (at least, not yet). Though the slowdown in economic growth is a fact, consumers’ calm approach is definitely recommended, as fear of the future might multiply the slowdown, resembling a self-fulfilling prophecy. But, one has to keep in mind that consumption levels, strongly correlated with consumer sentiments, has no capacity to remain the single force driving economic growth. Several cushions that previously protected the Polish economy slowly cease to exist – continuous, high value public spending, favourable VAT, weak currency that supported Polish exporters and high inflow of EU funds to sponsor infrastructure investments are becoming a story of the past. In this negative scenario, consumers’ wishful thinking, positive attitude and frequent shopping trips might turn out far too weak to lift Poland’s economy as Europe and the Euro zone continue to sink.

It seems that the story of the ‘green island’ may not remain true for long.

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