The need of change

The year 2009 has been a particularly difficult year for the Romanian economy, retail being one of the most affected. The economical crisis has generated on one hand the downfall of traffic in the commercial space as well as the loss in buying power, effects being the fall of transactions and average consumption. Under the current circumstances, Diverta retail stores have been strongly affected by the fall in the Romanian economy since last year. The retail chain closed 2009 with net sales of 30 milion Euro, 37% less that the preceding year (48 million Euro in 2008) and approx. 55%, if you take into account the organic decrease, as company officials state. This is the first year the company has closed at a loss. Last year, the top 10 highest turnover stores contributed 17.4 million Euro of the overall 30 million figure, which is more than 50%, which in turn means the rest of the stores are not so profitable. On the other hand, the most profitable 1- stores have had a profit of 2.77 million Euro, given the rest have had operational losses of 600.000 Euro1. Practically, these 10 stores were sustaining the rest of the network, the stores with the biggest turnover werent necessarily the most profitable. Current market circumstances, investor inflexibility and the reduction of the number of customers have made impossible the reduction of squandering resources. The lack of liquidities has had final word and so the Diverta network fell victim to the economical crisis. Economic decline since last year led to a decrease in both the number of clients and the value of the average shopping basket. This company adds to 10,000, some well-known already in various stages of insolvency, Flamingo, Leonardo and PIC is in a similar situation. Latest statistics show that at the end of March more than 5,600 companies were in the process of insolvency, and more than 4000 have not been able to avoid bankruptcy. Diverta asked to enter insolvency proceedings because of the debts of 10 million to suppliers. The application was approved on 28 May 2010, the firm's judicial administrator being Banca Transylvania. Establishment of insolvency is now the company's protection against creditors, Diverta intends to pay current debts, however, since these debts exceeding 10 million, Diverta chosen as a method to overcome the crisis judicial reorganization. The current conditions of the economy and the inflexibility of developers (i.e. the shopping centres where Diverta has stores opened) have given rise to the current cash flow problems. Currently, the stock is 7.5 million and trade creditors (suppliers of goods and services) are 10 million. Diverta has 8.5 million Euro of bank loans, half of it being for investments. Alpha Bank is the main creditor for both working capital and for investment. Its net value of Fixed Assets of the company is EUR 6 million.2 One of the main causes of the decline was that some stores had started to "eat" more than they yielded (gross margin), which led to debts to suppliers and developers and payment
1 2

Octavian Radus interview for Capital magazine, May 27, 2010 Press release, May 28, 2010

problems. Crisis and growing number of younger customers who have purchased products conflicted with the expenditure, which, despite the efforts society could not be reduced. At the same time, there was no action in 2008 to negotiate rents, which are the most important costs that the company supports them, i.e. 25% of total costs, while wages are 12%. Total area of shopping centers Diverta was at the end of 2009, 24,000 sqm. As surface, the largest space is rented Diverta in Plaza Romania, Bucuresti Mall and Magheru. The company pays rent to the largest fund Bluehouse Capital, owner of commercial space on Magheru, the Anchor Group and the network of shopping malls Iulius Mall. Looking into the past Diverta prosperity can be summarized in a few figures and significant actions (Table 1). In 2008, Diverta invested around 3.5 million euros in 12 new locations. Also that year the largest bookstore in the country, Diverta Magheru, was inaugurated after an investment of approximately two million euro. The contract value to the investment fund Bluehouse Capital, for a period of 20 years after nine months of negotiations to lease space occupied by former Eva shop on the Magheru Boulevard, was not disclosed. The location represented most expensive contract in the history of this group, according to CEO Diverta. Diverta registered in 2008 a turnover of 48 million. From total turnover, 27% represented book sales, an increase by 18% compared to 2007, 7% toy, 35% up relative to the previous year, 16% multimedia products, with a 10% increase over 2007, and 50% the rest, other ranges. In 2007 Diverta invested 2.5 million Euros in new locations. 3 In early 2008, Diverta was present in 70 locations in 41 cities, mainly in major commercial centers, the company forecast a turnover of over 56 million Euros. Table 1. Divertas evolution in the crisis period 2008: SUCCES PERIOD EUR 3.5 million investment Launching a new concept by opening Diverta Magheru. Turnover: 48 million EUR Units in the country and abroad: 70 Number of employees: 788 2009: DECLIN PERIOD Sales: 30 million, -37% compared to 2008 Operating result (EBITDA): -0.6 million euro Salary: -45% compared to 2008 Units: 64 Retail Employees : 579 (-25%) Investment: 1.5 million euro 2010: CURRENT TIME INSOLVENCY Debt: 10 millin euro Bank loans (made over time): 8.5 million euro The stock value: 7.5 million euro Net value of fixed assets: 6 milioane euro Employees: 441 (-40%) Units: 63

Financial data processed from Financiarul newspaper, May edition

45 40

900

840 750
3 7 .9

788
4 0 .8

800 700 600

35 30 25 20 15 10 5 0

579
2 7 .5

2 8 .2

500

T urnover E mplyeesnumber

411

400 300 200 100 0

Figure 1. Evolution of turnover and employees number