2016: Rising consumption puts wind in the sails of retailers, car makers
drowing domestic demand amid historically low inflation and a pick-up in private investment and employment continued to drive economic growth in poutheast burope EpbbF in OMNSK bconomic tailwinds benefited most retailers and car makers – the two industries most sensitive to changes in disposable income and consumer sentimentK At the same time oil and gas majorsI which traditionally dominate the ranking of the biggest companies in the regionI continued to suffer lossesI impacting the aggregate revenue of the pbb qlm NMM entrantsK qhe combined net profit of the NMM biggest companiesI howeverI rose by a hefty P9B as compared to the profit of the prior-year entrantsI largely as a result of improved operational efficiencyI integration of various business-specific activities and economies of scaleK
EEconomic growth in SEE quickened to 3% in 2016 from 2.5% a year earlier on the back of rising private consumption. Corporate investment grew, underpinned by ample liquidity and favourable financing conditions. Falling unemployment also contributed to improved economic sentiment. In Romania, the frontrunner with 4.8% gross domestic product (GDP) growth, retail and services contributed strongly to economic expansion as improved income growth prospects following tax cuts and public sector wage hikes fuelled demand. Foreign direct investment (FDI) inflow to Romania, Croatia and Serbia rose and these countries are poised to continue to benefit from EU funds, which provided an additional boost to public investment in Bulgaria as well. As economic growth picked up, so did M&A activity - both in terms of the number of deals and value - with Romania and Bulgaria leading the way. Political volatility, however, remained a drag, particularly in Macedonia, denting investor confidence and delaying reforms. General elections were held in Romania, Serbia, Croatia, Macedonia and Montenegro, putting fiscal discipline into question. Progress on structural reforms remained slow in the Western Balkans. Corruption and weak rule of law continued to curb economic growth. Anti-monopoly policies in some countries were weak and infrastructure, despite large scale public investments in upgrades in recent years, remained underdeveloped. The small size of the markets in the region was another constraint on business, with the notable exception of Romania.
Romanian companies expand foothold, Dacia leads the pack
Unsurprisingly, companies from Romania - the region's biggest and fastest growing economy - again occupied over half of the seats – 59, up from 55 in 2015, and dominated all subrankings. The three most profitable companies in the ranking - Hidroelectrica, Romgaz and Continental Automotive Products – are Romanian, as is the leader, Automobile Dacia. The car maker leads in the ranking for a third year running. It raised its revenue by 8% to 4.619 billion euro and increased its net profit to 100.5 million euro from 99 million euro in 2015. Dacia brand sales rose by 10.6% to record 415,010 registrations in 2016. The company's robust performance came on the back of improved operations and efficient use of resources, according to Yves Caracatzanis, managing director of Groupe Renault Romania. “Groupe Renault Romania, employing 16,700 colleagues, is the only company in the country integrating all activities specific for a car manufacturer, something which has generated a steady economic performance and a wide range of job offers in different fields,” he commented. (Read the full interview with Caracatzanis on p. 12). Automobile Dacia’s performance reflects the growth of the automotive sector across the region, which has been making the most of its strategic advantages - skilled workers, low production costs and easy access to EU markets, while riding the wave of people's growing purchasing power. Car makers in Romania and Serbia also draw on extensive past experience in the industry. In Romania the sector also benefits from government support schemes. The total revenue of the automotive sector in SEE TOP 100 rose to 11.5 billion euro from 9.6 billion euro in 2015. It should be noted here that the most profitable industry according to the ranking is rubber and rubber products, which is represented by two Romanian tyre makers - Continental Automotive Products Romania and Michelin Romania - with a
16.3% return on revenue.
Full pockets for retailers
Wholesalers and retailers are also reaping the benefits of rising private consumption. For the first time this sector has more representatives in the ranking, 24, than the oil and gas industry. The aggregate revenue of wholesalers and retailers in the ranking rose to 20.719 billion euro from 18.647 billion euro. The uptrend in the sector puts premium on retail chains that are better managed and in a position to develop their own logistics. Romania, being the largest market and the first expansion target of international majors, leads the way here again. Notably, five of the nine new entrants in this year's edition are wholesalers and two are automobile manufacturers.
oil and gas companies struggle
Oil and gas companies continued to suffer heavy losses from unfavourable global market conditions. Their combined revenue fell to 30.28 billion euro in 2016 from 34.1 billion euro a year earlier and their number declined to 21 from 24. Despite the continuing fall in individual revenues, however, the combined revenue of oil and gas companies remains almost a third of the entrants’ total and nearly 50% higher than that of wholesalers and retailers.
Profit grows, revenues flattish
The combined revenue of the entrants in the ranking for 2016 fell 1.8% year-on-year to 101.2 billion euro. Excluding the results of the oil and gas heavyweights, however, the entrants saw their combined revenue grow to 71 billion euro from 68 billion euro. At the same time, the aggregate profit of the top 100 companies leapt by 39%, suggesting that they have managed to make the best of the difficult environment in which their operate to streamline business processes, raise efficiency and improve bottom lines. The most profitable company among the SEE TOP 100 entrants was Romanian power producer Hidroelectrica with a return on revenue of 36.2%. After going insolvent twice, the state-controlled company went through a radical restructuring process, generating a cumulative profit of 1 billion euro for 2013-2016 and doubling its market value to 4 billion euro. In April 2017, Hidroelectrica exited insolvency, paving the way for an IPO seen as the biggest in Romania's history.
In a sign of tight competition the thresh-
old for entry into the ranking rose to 464.7 million euro from 440.1 million euro a year earlier. The ranking also welcomed less newcomers than in previous years in yet another sign that the corporate landscape in SEE is becoming increasingly competitive.
Ten years after
When SeeNews started compiling this ranking ten years ago the global economic crisis had still not reached SEE. The economies in the region were in a strong upward mode. Romania and Bulgaria were caught up in the optimism of their accession to the EU in 2007 and the countries of former Yugoslavia were still recovering from the recent wars. Bulgarian and Romanian stocks were yielding two-digit profits, their blue-chip indices soaring to all-time highs. Oil and gas companies had a much stronger hold over the ranking at the time, accounting for a quarter of all entrants and 35% of the total revenue of the top 100 companies. They were comfortably settled at the top, taking up the leading four places. The biggest company in the region in terms of total revenue was Romania's OMV Petrom, while Croatia's INA was no.1 in terms of net sales. (In thе first edition of SEE TOP 100 the companies were ranked by net sales for the fiscal year ended December 31, 2007. The following year we changed the methodology and started ranking them by total sales instead. The change reflected our assumption that total revenue is a more accurate gauge of the size of any business because apart from sales revenue it comprises financial and other income, which is often an essential part of the income generated.) Notably, six of the entrants in the top 10 in 2007 were the same ten years later. The global crisis reached SEE somewhat late and the local economies were spared its full impact thanks to their weaker integration with world markets at the time. Still, the SEE countries, most of which are net energy importers, were severely hit by the sharp rise in global prices of oil, gas and metals and the ensuing drop in consumption. Stock markets in the region saw most of their value evaporating as in 2008 their capitalisation collapsed some 70 80%. Banks in the region, mostly owned by Western European peers, tightened their lending policies, dampening the real estate market that used to be one of the engines behind the robust growth of the local economies. Private consumption too shrank. The crisis was in full swing in the region by 2009, when the top 100 companies' aggregate revenues hit a low of 77.99 billion euro as profits tumbled to 1.699 billion euro.
Recovery was sluggish in the following
years, the big companies weathering better the adverse factors. Oil and gas companies maintained their hegemony, yet they started steadily losing ground as automobile makers picked up speed. A new milestone in this direction was reached in 2013 when Dacia overtook OMV Petrom as the top company in the region. As businesses in SEE made unsteady strides forward during the years, they also had to overcome other hurdles such as obsolete infrastructure, cumbersome regulations and unpredictable legislative changes, widespread corruption and political turmoil.
Innovate, integrate, work across borders
In this complex environment, foreign ownership has emerged as a major factor for the success of local companies, helping them avoid many of the pitfalls of the local scene, while giving them access to big markets. Unsurprisingly, seven of the top ten companies in this year's ranking are foreign-owned. The winner, Automobile Dacia, exports 93% of its output. For domesticallyowned companies, capacity to work across borders is crucial to offset the limitations of the small size of the local markets. Integration of the full range of activities specific to a certain business is another key ingredient of success, and here again we do not need to look further than the top of the ranking for proof.
Capacity for innovation too has emerged as crucial for a company's success, and an area in which countries in SEE have a lot to catch up on. Focusing on these could help the local business harness the potential of a market that enjoys upbeat prospects and seems set for expanding consumption on the back of economic growth and rising disposable incomes. Retailers and wholesalers and automobile manufacturers have already taken the lead in this race and will most likely continue to pace the growth of the region's business. Other industries, however, such as IT, are still conspicuously missing from the list of the top performers despite being one of the most dynamic economy branches, international in essence and long present in the radar of foreign investors. Another industry, traditionally strong in SEE but weakly represented in the ranking is agriculture. Its whose progress, however, will depend very much on its ability to modernise. Looking at the M&A scene in Romania - the region's leading market that often serves as a testing ground for international majors planning to expand in the SEE and is thus very indicative of future developments – health services are one industry whose growth potential has not escaped the attention of foreign investors. Real estate too is expected to rise strongly as growing regional businesses seek more office and commercial space.
“te are covering four accordant and synergic business areas – oilI gasI energyI ecology xKKKz metrol droup understands the specifics of the market and also has good network of peopleI as well as a good network of local companiesK lur advantages on the market of poutheastern burope - familiar languageI similar cultural circle and historical backgroundI large network of friends - are actually a guarantee for our successK ”
janagement Board Chairman of metrol dKdK
2008 “lur challenges come from four directionsK cirstlyI the structural changes of the global gas and energy market which will impact all parts of our businessK pecondlyI the context in which we operate and f would mention here the volatility of the fiscal and regulatory environment in oomaniaK x…z qhirdlyI there is the depressed market for gasI electricity and fuels in oomaniaI our main marketK xKKKzK curthermoreI our portfolio is composed of mainly mature fields that exceeded their production lifeK”
Cbl metrom droup
2014 “fnnefficient public sectorI poor infrastructureI need for improved connectivity curb growth in pbbK”
Tomasz Telma, fcC regional director for burope and Central Asia
2016 lnly by looking beyond short-term political objectivesI confronting vested interests and seeking the longer-term good of the economy can this path to growthI jobs and prosperity be resumedK
Sir Suma Chakrabarti,