BUDAPEST, Hungary, Sept. 20 (UPI) -- How cut-throat can Hungary's retailers get?
In one of Budapest's host of brand-new shopping malls, a tank of swimming sharks greets arriving customers. They may only be 2- or 3-foot-long mini-sharks at the Campona mall in the suburb of Budafok, but they are the real thing.
A simple day out shopping in one of Eastern Europe's grandest capital cities can be a litmus test of how far former communist countries have embraced Western capitalism. Budapest, capital of Hungary, has no shortage of smart-looking shops, packed with western styles, which back under the old regime were only privately available through friends. Most startling is its almost 4 million square feet of shopping-center space built since 1996, for a city of 1.8 million people.
The city's natural elegance helps first impressions. Yet Hungarian retailing is not as healthy as window displays suggest.
Hungary was relatively open to the West, practicing "goulash communism." From the 1970s Hungarian governments let small businesses modestly flourish, if they were discreet.
How has Hungary used that head start in capitalism?
One thing which puzzles visitors is how few pile-it-high-and-sell-it-cheap stores Budapest has.
Instead, cheaper goods can be found at the city's several open air markets -- known as "Chinese markets" -- which have traders of Chinese, Turkish, Romanian and Afghani origin, selling cut-price goods in the open or at stalls inside warehouses.
Everyone goes to Chinese markets to buy handbags, shoes, electronic goods, towels. A network of indoor markets sells fresh food.
Oddly this model has not transferred to stores on the street. The same items -- handbags, shoes, electronic goods, towels -- are attractively displayed in city-center stores at higher prices, so without the customers. One shoe shop in the late 90s near Blaha Lujza square really did pile it high and sell it cheap. Everything was a third to a half cheaper than anywhere else, and it was always crowded with customers. Four assistants and the Turkish owner were working the whole day to deal with sales.
Yet it closed. Every street is back to business as normal: meaning handsomely presented but overpriced goods, bored staff and empty storefronts.
The malls follow the same pattern: expensive to build (the West End City mall cost more than $180 million), sublet to glamorous, high-rent, deserted outlets filled with fashion goods priced the same as, or more than, elsewhere in Europe. One new mall in eastern Pest sometimes has fewer customers in its 100,000 square feet than the flea-market traders lining the approach tunnel from the subway station.
But Canadian-Hungarian entrepreneur Sandor Demjan, chairman of TriGranit, is among the optimists. TriGranit is partly owned by Toronto-based TrizecHahn, which has $6 billion of assets in North America. Having pioneered Budapest's 500,000-square-foot Polus Center, West End City's 900,000 square feet, still the largest, and a 600,000-square-foot mall which opened in Bratislava, capital of neighboring Slovakia, last November, Demjan has little time for naysayers. "Hungary will catch up with the West. Those people who build for the present social structure will fail."
A demand for cut-price value in the East seems obvious to others however. Wages in Hungary are not as low as official figures suggest, $300 a month -- but still low enough to suggest massive demand for bargain retail.
So why do new stores open every week in Budapest selling Western designer-label clothing for the same prices as Vienna, capital of Austria, a country with wages four or five times Hungary's? Stores which stay empty until they close down a couple of years later?
Partly inexperienced retailers, partly high rents in fashionable districts, and partly a Central-European idea of how shopping should be.
Just as in Germany, Austria, Switzerland, the elements of elegance and grandeur is what Hungarians feel shopping is about. High ceilings, ornamented facades, entire districts of 1900-era storefront lettering and decoration draw film-makers to the city for its period flavor.
Proud locals feel competing on price alone is vulgar. Budapest's old claim to be the "Paris of the East" is taken completely seriously in Hungary. This affects retailing. Staff ask customers to be patient, not the other way round, and shop assistants are quick to indicate customers are being irritating or over-demanding.
An assistant will often just walk away from a customer who is insufficiently humble. Yet an economy as dependent on tourists as Hungary's cannot afford to copy Germany's aloofness with customers.
Whether the optimists or the pessimists have the edge, Budapest's crowded upmarket segment will make fascinating watching. On the plus side, a joint report by Jones Lang LaSalle (at that time Jones Lang Wootton) and Oxford's Institute of Retail Management praises the tendency of Hungarians to do more impulse buying and more one-stop shopping than neighboring Poles or Czechs. Hungarians also switch brands and respond well to promotions, the report adds. On the minus side, Hungary is elderly and shrinking, with 25-to-39-year-olds falling from 22 percent to 19.5 percent of the population between 1990 and 1998. Consumption is only just returning to 1989 levels (it was 20 percent down as late as 1997), according to Hungary's Central Statistics Office.
One retailer who has seen demand in Hungary for good service and low prices is British supermarket chain Tesco, now part-owner of Safeway's online business. The largest Tesco store in Europe is just outside Budapest.
Soon after opening Tesco opened several years ago, one local on a train, prompted only by the sight of a supermarket bag, could not contain himself. He had to share his excitement about Tesco's price cutting.
In many cases, giant supermarkets like the Tesco outlets are at the heart of mall schemes, bringing in the lion's share of the shoppers, such as at Polus Center.
The International Council of Shopping Centers was predicting mall saturation for Budapest as long ago as spring 2000. Founder of the 210,000-square-foot Mammut mall Sandor Nagy has several times warned of over-capacity. The ICSC quotes developer DTZ as counting eight malls in Budapest with more than 200,000 square feet of space, plus six smaller malls, totaling more than 3.5 million square feet of shopping-center space for the city even then. With typical rents to retailers of $1 to $2 a month per square foot, and gross sales of $11 per square foot per week the figures look reasonable. Except that that turnover is spread unevenly between tenants.
The bulk of sales are in movies, food shopping and fast food, leaving far less for the empty clothing stores that occupy most of every Budapest mall. And even if the average pre-tax Budapest salary is reckoned at $400, not the national average of $300, the arithmetic seems hard to believe. For malls in the capital to sustain $10 a week per square foot long-term, this assumes every man, woman and child in Budapest continues spending $80 a month in malls, out of perhaps $280 to $300 a month of after-tax income.
And the minority of Budapest stores that visibly move goods in volume, focus on price. A handful call themselves "100-forint" shops, meaning that every item costs less than 40 cents or so, like the prewar Woolworth concept. As a result they sell mainly plastic key rings and bathplugs, but the idea certainly pulls in shoppers. The extent to which visiting business people are gouged has been scaled back if the Economist Intelligence Unit ranking of Budapest as the second best value for money among several international capitals for business travelers is a fair measure.
So why do so few stores copy Tesco or the 100-forint retailers, either in the malls or on the streets? And why do expensive, customer-hostile businesses refuse to go bankrupt? One reason is some retail outlets have low 1980s rents locked in.
Every shopping district has a deserted furniture shop with curiously high prices for ugly tables and cupboards crowding the dusty display area. Even more intriguing for historically minded American visitors are the factory shops. True hangovers from communism, these exist to display the products of one provincial factory. The window display is often only two shelves with 8- or 10-gear wheels, or 12 steel pipe components, laid out in glorious isolation, often without labels or lighting.
But low rents cannot explain the baffling survival of most of the shopping centers' tenants. How can there be enough spending in malls to soak up a quarter of each Budapest after-tax wage packet?
Some special East European factors do come into play. Most locals own their own apartment with a minimum of debt, thanks to communist city-council sell-off deals. Also a high ratio of elderly citizen and a high death rate by European standards means that a lot of officially low-income households have extra, undeclared, rental income from renting out a second property once owned by a grandmother or uncle.
So, compared to debt-laden Westerners, many apparently-poor East Europeans are able to spend a much higher share of their smaller incomes. Also, for several million Ukrainians and Romanians, Budapest is actually their closest large city, closer than Ukraine's own Kiev, Odessa or Lvov.
Cross-border-shopping is a major supporter for mall development, since malls are ideal for visitors with only one day to make purchases, and no time or interest in street-shopping.
Also, there are hidden benefits to the Hungarian way of shopping. Take one convenience lost elsewhere: you can still buy a single screw or a single envelope here. Remember those days?