Investment on hold as economic measures bite

It is one year since Portugal had to request financial assistance from its Eurozone partners and the country’s economy continues to be in dire straits.

Unemployment reached 12.4% in the fourth quarter of 2011 while manufacturing was down by 5.1% on the previous year, according to figures published by Statistics Portugal.

Retail turnover had fallen by an even larger amount (10.3%).

“The Portuguese economy has come to a standstill,” says Diederik Vervenne, regional sales manager for Alliance International. “We continue to see increased unemployment, higher taxes, cutbacks in expenditure, social unrest, fewer investments, difficulty financing through banks, long payment terms and a high risk of non-payment.”

He adds that the Portuguese government had supported small- to medium-sized businesses in developing innovative projects. However, as the economy has worsened, it has postponed or cancelled some investments.

Portugal joined the European Union in 1986 and was one of the first countries to adopt the Euro on 1 January 1999. The economy was characterised by a large gap between public and domestic investment and savings that translated into a need for external financing.

Denis Begasse is director of laundry products at Metso Fabrics Portugal. He says that the economy seemed to work at first but the international financial crisis upset the equilibrium and Portugal’s debt went out of control. The government has responded with structural adjustments in the public sector, with spending cuts in areas such as the health sector and with increased labour market flexibility.

Begasse says that the recession is forecast to continue through to 2013, although there is optimism that the government’s reforms should lead to sustainable growth in the long term. GDP is expected to drop by 3.1% in 2012 and grow by only 0.3% in 2013.

According to Clément Silvaggio, the Jensen Group’s regional business director for Western Europe and Mediterranean countries, this year will see a lower level of funding to finance the Portuguese economy. “The government’s priority over the next couple of years will be to reduce the public deficit drastically,” he says.

“For this reason and because the government has also increased taxes, both public and private investment is at its lowest level since 1990.

“There is a need for the laundry market to renew itself and prepare for automation but the banks and leasing companies are not providing finance.”

João Fial, Christeyns’ managing director – Iberia, says the Eurozone crisis accelerated the number of bankruptcies among companies that had already suffered over the past two or three years.

In response, the government increased both direct and indirect taxes on individual citizens (but not on private companies) to reduce the country’s dependency on external loans. To support private companies, it introduced more flexibility in labour legislation, employment incentives and a reduction in public costs. That banks have stopped funding new investment is a big concern for the laundry sector and where they do offer funding, interest rates may be prohibitive.

Eduard Colomer from Domus in Spain says that some laundries are not happy because they need to pay new taxes and it seems that the government is squeezing them instead of helping them. However, he is more optimistic than many, adding that: “Our results in 2011 were better than they were in 2010 and we are starting 2012 with the same level of sales.”

At Metso, Begasse says: “There is pressure on pricing and margins so laundries need to tighten their credit policies in order to avoid non-payment risks. This situation will certainly cause huge turbulence and the disappearance of customers and suppliers.”

However, he adds: “On the bright side, as energy consumption, quality service and productivity will be the keys to decision-making, they will also provide an opportunity for differentiation for those suppliers who are the best prepared.”

Energy costs have increased massively – electricity has risen by as much as 20% in the past year and diesel and water costs have also increased. Sales in the sector have significantly dropped in the last two years.

“Customers are looking for products that help reduce energy costs,” Vervenne says. “Our partner Alliance Laundry Systems has invested millions in product development over the past few years. For us, the move toward energy reduction fits nicely with our products and services.” He adds that the company has developed control systems that allow users to have a choice of water levels and that its tumblers shut off once the linen is dry, which prevents overdrying and avoids the cost of wasted gas or electricity.”

Vervenne warns: “The textile industry is moving to low-wage countries, which could soon begin to impact on our industry.”

Around 90% of linen is outsourced in the healthcare sector, although textile rental is still not common. The sector is dominated by one major group.

In the hotel sector, on the other hand, rental is well established and only hotels that have specific individual requirements own their own stock. This sector is dominated by three groups. There is also a large number of small laundries and these tend to be located near hotels and restaurants.

Fial at Christeyns says that OPLs are declining in number and only remain the norm in care homes.

Marco Niccolini from Renzacci says that the number of laundry shops that offer both OPL services and coin-op is growing. “Up to three or four years ago, they were doing either one or the other. Now they are doing both in the same premises. As a manufacturer of washer-extractors, we have seen that even in areas such as the Algarve or Lisbon hotel openings have come to a halt,” He adds that tenders have been delayed on some of the projects that the company had in progress.

Impact on tourism

A main part of the Portuguese economy is tourism, which contributes around 5% of the country’s GDP.

In 2010, the country attracted around 13million tourists. However, LCNi has heard informal reports that even here the economy is having an impact.

Some businesses decided to take advantage of reduced building costs to carry out improvements.

One hotel in the Algarve did a complete interior refurbishment. However, once the refurbishment was complete, it was faced with a dilemma. Should it raise room rates to cover the cost of the work or keep this year’s room rates at 2011 levels in a bid to increase occupancy rates? This was a difficult decision in these times.

In another scenario, a restaurant in Albufeira had been a favourite with locals since it opened more than

30 years before. It was largely unknown to tourists. However, in 2011 locals found they could no longer afford to dine out and were eating at the restaurant only once a month rather than once a week as they had in the past. Unfortunately, the revenue from holidaymakers was not enough to make up for the drop in income and staff layoffs are likely this year. It was a similar story for other restaurants in the same town.

Drycleaning shops

Drycleaning is facing a similar scenario. There are around 1,300 drycleaning shops in Portugal, most of which are small shops, however as the financial crisis progresses and customers bring fewer garments in to clean, the number of shops is declining, according to Daniel Ries from Kreussler.

About a third are part of drycleaning franchise chains, the largest being the French drycleaning group 5 à Sec with about 250 shops, but the majority are small, family-owned shops.

“From 2002 – 2008 many new businesses opened up,” says Renzacci’s Niccolini. “They received incentives from the state – funds from the EU. However, this came to an end in 2008 and more recently there have been no new openings, other than by businesses that have family capital. Even they are being very conservative.”

Pedro Martins, Portugal country manager for Electrolux, says there is great interest in self-service laundries and wetcleaning. “Environmental concerns in relation to drycleaning machines can be an area of growth for the replacement market, pending tougher legislation in the future.”

Martins adds that the main problem at the moment is the bureaucracy involved in getting licensing through local municipalities or in meeting energy requirements, especially in self-service laundries where the buildings are sized for domestic power use.”

Renzacci’s Niccolini says the growing professionalisation of drycleaning over the past decade has meant that a lot of traditional shops closed as the owner reached retirement. These were then replaced by shops that adopted a more professional approach both in terms of their image and in the way they sold services to the customer.

Drycleaning services in hotels are not common, although hotels will send guests’ work to a local drycleaner.

Households do not use drycleaners for washing their clothes. Even the use of “engomadorias” where the laundry has a contract with a family to wash a certain number of pieces per month, is likely to be affected by the increases in consumption and personal taxes.

The lack of capital means that drycleaners are not investing in equipment so perc remains the most common solvent. Renzacci reports a lot of interest in hydrocarbon machines and expects that once the market picks up again drycleaners will start to invest in such equipment. Niccolini says: “I have no doubt the market will recover once bank policy takes hold, so we are watching the market closely.”