Monday, 27 December 2010

Greek retail pain...

One of the things that anybody walking down any high street in Athens will notice is that lots of stores are closing down. This is also one of the most common themes in Greek mainstream media.

But just how deep is the slump in retail sales? What part of it really is owed to a fall in disposable income and what part can be attributed to low morale? 

This year retailers face additional factors that are causing them pain. Consecutive hikes in VAT, the slashing of state salaries and the eventual follow up of private sector salaries, hikes in property taxes, the by now almost every-day protests in downtown Athens, rising unemployment, the all-enveloping uncertainty  etc. My view is that only retailers that deal in less price elastic markets will pass through these price increases to their customers and even these, only up to a certain point. 

In order to gauge retail activity I prefer using the volume index which is not affected by price fluctuations unlike the retail sales turnover index. Let’s tuck in then…


One of the sectors that I consider to be less price elastic is food, but even here the drop in volume is pretty steep. The household equipment sector is facing a really severe slump in sales. In essence this means that the market size is shrinking the consequences of which I think are pretty obvious. In the longer term this can be translated into greater pricing power for the remaining players.

A quick look at the charts is enough for one to realize that the drop in demand had started since 2008, something that I can only take as a sign that the constant brainstorming that consumers face about the crisis is certainly playing its part in affecting demand. In 2008 there was no direct effect for Greek consumers no massive lay-offs, no significant or widespread wage cuts, hence the drop in demand witnesses can be blamed on uncertainty and low morale.


One of the sectors where developments are causing great pain to Greek consumers right now is the fuel sector, always taking into account the Greek custom of driving everywhere. The drop in the volume sold is enormous and the sector hasn’t recorded an increase since late 2008. The rumors concerning gas stations closing down in numbers don’t seem wild if one considers the story told by the graph.

Maybe the most price-inelastic sector of them all, pharmaceuticals saw its sales volume skyrocket in the second half of 2009. I don’t know whether this can be blamed on the swine flu scare or in some other factor, but this year volume has plummeted. Is this due to government efforts to rein in medications oversubscriptions? Well, I can’t answer that either…

If you want to see an example of the divergence between the results when using the retail sales turnover index and the volume index take a look at the graph for the car fuel sector.

But this is not the only conclusion one can draw from this chart. This is a textbook case of a distorted market caused by a hike in indirect taxes. Demand is constantly falling but prices do not follow the same path, which would allow the market to stabilize, but due to the hike in taxes they are rising instead. Furthermore, it highlights a fact that is hurting Greek people enormously right now. According to the economy’s fundamentals, Greece should be living through deflation at the moment but is experiencing stagflation (inflation combined with negative GDP growth) instead due to the distorting policy of raising tax rates. 

The same can be said about large food stores, where prices are not falling as much as demand would suggest but somewhat less due to VAT hikes. In the beginning of 2010 there were some signs that prices would track volume exactly but VAT hikes (and maybe the fuel tax hike) interrupted this process.

If you want an example of a market where prices and volume move in tandem you can take a look at the graph for the electronics sector below.


These past two or three decades Greek retailers had it good. Deficit spending by Greek governments that helped public sector employment and pay balloon supported this. Especially this last decade, with the effects of the booming housing sector in Greece helping elevate disposable income retailers expanded pretty ambitiously. The strong Euro made imports cheaper and boosted demand making expansion plans by retailers seem sensible.

In the past I can recall that in order to buy certain things you had to go to downtown Athens, but suddenly this past decade you could find them even at your local high street. Maybe this was the last part of the Greek retail boom, the part where excesses can be observed.

According to the story told by the graphs above, is it any wonder that stores are closing down? The present state of the Greek retail sector cannot possibly be sustained. Maybe we will revert to the situation where there is no such abundance of goods, where retailers keep lower inventories to save on working capital and where imports of goods fall in value and in volume. All the aforementioned effects in work can result in higher prices for Greek consumers. Falling import volume can be translated into transportation costs being divided among less goods resulting in higher prices. A possible decrease in the number of retailers can result in reduced competition and higher prices as well. There are some other possible future outcomes that I can think of but are too fictional right now to mention. But let’s wait and see what time will bring and let’s hope that I got it all wrong…

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