Too big to fail in the Balkans: The case of Agrokor

September 26, 2017 – This post was written by Martin Belchev, Central Europe Intern


Earlier this year, Agrokor – a massive conglomerate of 143 companies operating throughout the whole of the Western Balkans – had to be taken over by the government. The ongoing crisis, caused by the company’s excessive indebtedness poses a threat to the Croatian economy and threatens to seriously undermine the economic progress made since the country’s ascension to the EU. Agrokor’s crisis has much wider implications for the whole of the region, however, as estimates point out that as many as 500,000 individuals could be affected by the company’s potential default through its numerous subsidiary companies, wide network of distributors and producers, and wide-ranging business activities that span across virtually every market in the Western Balkans.

Too Big to Fail

While Agrokor’s situation remains a looming danger to the Croatian economy, one cannot ignore the fact that at its current state it is just too big to fail. Its sheer size should not be overstated. Employing some 55,000 people in Croatia alone and with sales of over EUR 6.5 bln, the firm amounts to roughly 15% of Croatian GDP. Clearly, a possible default of the company would cause significant economic shocks across the region.

The financial woes of Agrokor started with the company’s acquisition of the troubled Slovenian retailer Metacor, with the deal being financed through borrowing and excessive overinvestment. Croatia’s EU membership also led to an increase in competition caused by new market entrants in the retail sector, which started to undermine the profitability of Agrokor’s retail arm in Croatia, Konzum. Soon it became clear that Agrokor’s debt far surpassed initial concerns, with latest estimates pointing to outstanding liabilities of EUR 6.7bln, well beyond its annual turnover. Earlier in April 2017, the government passed a law dubbed Lex Agrokor in response to the crisis, which put the administration of Agrokor under public management.

Economic and Political Risks

Given that the unemployment rate in Croatia stood at 10.9% in August, or 171 000 individuals, Agrokor’s potential demise would severely worsen the unemployment problem in the country. Furthermore, the fact that the liabilities of the company equate to six times its actual equity means that some of Agrokor’s debt will need to be written off. The high debt-to-EBITDA ratio also means Agrokor’s bonds can be considered to have a junk status, especially after S&P gave the company a “CC” (Extremely Speculative) rating in March. The effect of the downgrade was immediately felt by the Croatian stock market, which plunged by more than 6% in March, before experiencing a slight recovery in the beginning of April (Chart 1).

Source: Frontier Strategy Group

Many businesses have also expressed concerns that the restructuring process may have a negative impact on consumer confidence through a spillover effect via the supply chain through delayed payments to distributors and producers, and lack of liquidity, resulting in more cautious consumers. Finally, given the fragility of the current HDZ-MOST ruling coalition, a failure to properly deal with the administration of Agrokor would provide a catalyst for another political crisis in Croatia, resulting in a loss of credibility for HDZ’s moderate wing and prompting wave of populist sentiment among the public.

What to expect – Implications for MNCs

The government’s success in securing a EUR 480 million loan, aimed at ensuring the company’s continued operation, serves as an indication of the awareness of the severity of the situation and the resolve needed to tackle it. The company’s debt to distributors (such as the producer of confectionary and alcoholic beverage Zvecevo) has put many of them in danger of bankruptcy; however, Agrokor managed to start repaying smaller distributors as early as April, helping Croatia avoid a serious and prolonged contraction in industrial output. The same can be said about the trade of Croatian stocks (Chart 1). While the plight of Agrokor has indeed resulted in a significant degree of volatility in stock prices, the actual price in HRK has simply subsided to 2016 levels and in fact experienced appreciation after the government took over Agrokor’s management in April.

What is more encouraging is the fact that the growth in retail sales grew throughout Q2, averaging 4.7% YOY growth (Chart 2). Ironically, this can be attributed to the expansion in the retail sector prompted by Agrokor’s main competitors Lidl and Kaufland, which achieved sales growth of 7.4% and 5% YOY in H1 of 2017 respectively. This expansion serves to indicate that market fundamentals have remained strong and consumers have already begun to change their shopping habits. The same can be said about local distributors and manufacturers who have begun supplying Agrokor’s competitors in an attempt to diversify their own sources of income.

Source: Frontier Strategy Group

While the restructuring of Agrokor will lead to the sale of its food production and retail operation, this should not have a long-term negative effect on the Croatian economy or the Balkan region, and the impact on unemployment will be temporary, as the market readjusts to the new business reality of the retail sector. B2C MNCs operating on the Croatian market should be able to adapt fairly well to these developments by diversifying their own distributors and retail partnership. While Agrokor’s restructuring will undoubtedly negatively impact the economic growth of Croatia, the effects on consumer spending should be minimal and contained.


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