When the Sky & More mall opened in Riga in 2007, retailers hoped its expensive boutiques and upscale supermarket would draw well-off Latvians on their way home to the pine-forested neighborhoods on the capital’s north side.
Today, the mall’s foot traffic has dwindled, and its shop-lined upper floor is as quiet as a library — a token of the breathtaking collapse in retail spending that is hammering stores in Eastern Europe.
The region’s severe recession sent retail sales down an outsized 29 percent in Latvia in June compared to a year ago, 20 percent in Lithuania, 17.8 percent in Romania, and 10.5 percent in Bulgaria.
For the entire 27-member EU, retail was up 0.1 percent, a figure that underlines the disproportionate impact the recession is having on the European Union’s newer, eastern members.
Some analysts think retail statistics look so much worse than in the West in part because some hard-pressed retailers are moving sales off the books to avoid taxes — meaning those sales don’t show up in the totals.
Still, there’s no question demand has plunged.
On the upper floor of Sky & More, darkness seems to spill out of the vacant shops. Mara Drozda, who runs a boutique of high-end Italian clothes, looks around apprehensively at the eerie solitude.
“I’m afraid we’re not going to make it,” she said. “I see the sales figures, and they’re not good.”
Along the Calea Victoriei, Bucharest’s Victory Avenue, even the bright summer sun fails to penetrate the gloom. Stores are shuttered, and many windows are plastered with political posters and signs offering fire-sale discounts of up to 90 percent.
Florina Manta, whose shop sells British and French porcelain and Venetian glassware, said business is getting “worse and worse.”
“Everyone is affected by the crisis, and anyone who tells you they aren’t is lying,” said Manta.
Eastern Europe is getting a cold shower after years of heady growth fueled by cheap bank loans and the euphoria of EU membership in 2004. Romania, Bulgaria, and Hungary and the Baltics are struggling, while Poland and the Czech Republic are faring relatively better.
Latvia, a country of 2.3 million, remains a basket case. Its economy is expected to shrink 18 percent this year, and the government was forced to borrow euro7.5 billion ($10.5 billion) from the International Monetary Fund and other lenders in December last year to stave off collapse. Joblessness is rising by the week, and at 17.2 percent is the second-highest in the EU after Spain, according to Eurostat.
Demand is falling as the government slashes expenditures, imposing painful wage cuts on public employees.
“The Baltics are undergoing are very deep period of fiscal restraint,” said David Oaxley, an analyst at Capital Economics in London. “There is anecdotal evidence of wage cuts of up to 50 percent, so a collapse of the retail sector isn’t surprising.”
BMS Megapolis, a chain of electronics stores in the Baltics, recently called it quits after having saddled itself with debt. All outlets, including 18 stores in Lithuania, closed their doors.
“Our rapid expansion model, which was based on an optimistic forecast of market development, became an unbearable burden,” said CEO Arturas Afanasenka.
In Estonia, the Enter computer network filed for bankruptcy and shut its eight stores. Finnish retailer Stockmann announced it was closing Hobby Hall, a mail-order retailer, in the three Baltic states, and was postponing the opening of its brand-name department store in Vilnius, Lithuania’s capital.
In the words of Hobby Hall director Raija-Leena Soderholm, the Baltics are “a small market…with economies that have experienced years of overheating. With a situation like this, the future of the Baltics doesn’t look too good at this point.”
Kesko, a major regional retailer based in Finland, reported that sales at its K-Rauta building supply stores in Latvia and Lithuania fell 36 percent and 39 percent respectively in the first half of the year.
“We’ve gone through a sharp boom, and now we’re going through a sharp bust,” says Peteris Stupans, chairman of the K-Rauta chain in Latvia. “Basically the sales volumes today are correcting themselves down to the level of 2004-2005.”
To survive the crisis, retailers are cutting back on inventory, holding sales, slashing wages and firing staff. K-Rauta in Latvia has laid off 25 percent of its employees.
Many retailers, however, are apparently hoping to survive by not reporting transactions — a practice referred to as the gray, or shadow, economy. An unrecorded sale means a merchant does not have to pay the hefty value-added tax charged at point of sale — one of the primary sources of state revenue in Europe. Normally VAT comprises about one-fifth the sale price.
“The situation today is that it is more profitable to work in the shadow sector,” says Henriks Danusevics, head of the Latvia Traders Association. “When taxes are going up and income coming down, the pressure to move to the shadow economy is growing.”
Romanian Prime Minister Emil Boc recently called on the state’s revenue service to crack down on tax evasion, which he described as the country’s new fashionable sport. Romanian officials said 4,600 tax dodgers were caught in the first half of the year, with lost revenues for state coffers amounting to 850 million lei (euro200 million).
“These numbers are getting to the point where you really have to question what exactly is being recorded,” Oaxley said of Latvia’s nearly 30 percent fall in June retail sales. “There’s a floor where retail sales can fall no further considering the necessities people need to buy.”