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David Chmelař for Portofolio Hungary: "It doesn't bother me if I die in a fair competition, but this is not fair."

19. 06. 2024

    Temu and Shein have completely disrupted European online trade. This is felt not only by regional players with significant market shares in Hungary but also by the market-leading price and product comparison site, Árukereső.hu, which is also Czech-owned. We talked to David Chmelař, the CEO of the parent company of Árukereső, Heureka Group, about the Hungarian online trade market, the Chinese contenders, Google's market dominance, and Árukereső.hu's domestic plans.

    When e-commerce boomed during the coronavirus pandemic – in Hungary as well – the general belief was that even if the volume of physical shopping decreases, online shopping will hold its ground since people have experienced its convenience. However, when Hungary was hit by record-high European inflation and people's real incomes decreased, the online segment also shrank along with the entire retail sector. What do you think about the maturity of the Hungarian market based on all this?

    We thought exactly the same, that the peak we saw in online commerce in 2021 was a new level from which we could only go up. We were wrong; people happily returned to offline stores, driven by the feeling that they could finally do so. If we look at the European and Hungarian forecasts made by Heureka Group, it is clear that the low point of e-commerce was in 2023. Growth must start in 2024, along with the general expansion of the economy.

    It may not be the traditional European players but the aggressive Chinese ones.

    If I have to find a factor that could explain the lower penetration of e-commerce, it could be the development of logistics. In the Czech Republic, 94% of deliveries are completed by the next day; Hungary is far from this. Another factor is the conversion rate (the ratio of buyers to visitors over a given period – ed.), which is 30-40% lower in Hungary than in the Czech Republic. It is good to compare the two markets because we are talking about roughly the same population size. Additionally, we must not forget that many still fear being scammed during a purchase. Although we have seen this fear ease in Europe in recent years, AI and phishing attacks have gained new momentum. It seems this is stronger in Hungary than in other countries. Despite all this, I believe that the growth rate of e-commerce will be faster in Hungary than in the Czech Republic due to the lower base.

    What does the appearance of Chinese players in the Hungarian market cause? How does it squeeze out regional but significant players like Emag or Alza in the Hungarian market?

    I lived in Asia for a long time, in Kuala Lumpur. I saw how these companies operate and acquire markets at very high costs, with expenses that other players can hardly compete with. Now Temu is doing the same, spending 5 billion euros just on marketing, which is a third of their revenue. This is unprecedented, and they still have plenty of capital to continue brand building. We all feel this marketing blitz, including us at Árukereső. We see ad prices on Google and other platforms going up.

    Starting from complete obscurity, Temu achieved a 13% market share among the 15 largest players in Hungary within half a year. It is not just about taking customers from others but also attracting new ones, especially from physical store visitors like Pepco. Their strategy is to sell products known in these chains at a fraction of the price.

    Will Temu be with us in ten years?

    Success is never guaranteed. There is no guarantee that the European Union or individual countries will not intervene and force equal competition conditions for all market players. It is proven that Temu violates some EU regulations. History shows that policies aimed at enforcing fair competition have worked but often arrived late, meaning we cannot rely on them in the short term. It is also not certain – although unlikely – that Temu will not run out of money.

    The third risk factor lies in Temu's business model. According to Wired magazine, Temu's goal in the American market is for each customer to order from them at least 30 times a year, with an average order value of $50. Currently, they are at $25, so they need to double this, not to mention they want to encourage people to make 2-3 purchases per month. To achieve this, they need to expand their product range to include phones and TVs.

    How can the company's product range be so cheap?

    Referring to Wired magazine again, they say the company loses $30 on every order. Obviously, this is not sustainable; the question is how temporary it is. If they can drive people to their app, they can later save a lot on Facebook and Google ads. They might start "playing" with the minimum order value or charge shipping costs.

    And since you asked about prices, we can entertain the thought that the company could eventually become a monopoly and, if they no longer have competitors, they could afford to raise prices, and they will certainly do so at some point.

    You mentioned the app as the platform where Temu wants to direct all buyers. Could this be a solution for Árukereső as well to become independent from Facebook or Google?

    When I moved to Asia in 2014 and started my online trading business, half of the people bought on a computer interface and half on mobile. In four years, the mobile share grew to 96%. I know up close that world where everyone shops exclusively on mobile.

    There is another important aspect that differentiates the European and Asian markets.

    In Europe, shopping is shopping and entertainment is entertainment. We do not mix the two; if we go on Facebook, we entertain ourselves, and if we browse a webshop, we want to shop. In Asia, shopping is entertainment, and this is precisely the mindset that Temu brought to Europe. If anyone observes Temu's web or mobile interface, it never ends; you can scroll infinitely and get new offers, just like scrolling through your Facebook page. In this respect, they showed something completely new to the European market.

    From a European perspective, this may seem strange, but in Asia, the young generation does not have a laptop; they handle everything on their mobile. An extreme example is that in Indonesia, low-income families share a mobile phone. In the morning, the child watches YouTube, the mother watches Instagram in the afternoon, and the father shops online in the evening. Of course, as we talk about better-off families, they own more devices, but these are mostly mobile devices. Temu is the first sign of this "mobilization," the test, if you will.

    What do you think about Temu reversing the value chain? So far, we have seen that there is a product and the manufacturer looks for a distributor. Now the distributor – in this case, Temu – tells manufacturers what to produce, what is needed in the market.

    We do not fully understand how Temu's value chain works, but it can be said that the company treats its suppliers very harshly. For example, the company has a central warehouse where goods are delivered, but they are not bought from the manufacturer/supplier, and they even charge a storage fee. They will pay for the product only when the end-user buys it. But I will go further: if something sells slowly, Temu can force the supplier to lower prices due to the storage fee since it has to be paid as long as the goods are there.

    It is important to know that with such small gadgets and often seemingly unnecessary trinkets as those in Temu's assortment, it is very difficult to achieve a monopoly. Therefore, the company will target European suppliers and, most importantly, will open the Chinese market to them as well. The planes that now return to China empty will be filled with European goods.**

    Is it true that logistics companies are happy with Temu's arrival even if they push down prices because it increases the address density so much that their efficiency jumps?

    It is certain that the appearance of the Chinese company means positive, predictable orders for local service providers. In the longer term, the question is whether Temu will create its own logistics provider, as we have seen with Emag.

    Let's move on to a completely different topic: Heureka Group has long been in dispute with the Google search giant, and it does not seem that they have made progress in recent years despite supporting the EU's stance against the technological company's dominance. What is this conflict about?

    Google is partly our ally, partly our competitor, and we have a dispute with them. This dispute is about the abuse of dominance. We do not dispute that Google has become an indispensable and dominant player in the search segment because they provide an excellent service. We also know that they have interests in more and more segments, such as accommodation search, flight booking, and of course, shopping. They embed all this into their own search engine, and we know that these appear at the top of the search results. This is something that the EU does not like and is trying to ensure that a dominant service does not provide additional advantages for other own services. In other words, it must offer this to other service providers as well, such as Árukereső. The EU distinguishes so-called gatekeeper services, and Google's search engine is one of them.

    All these changes were due to be made by Google by 6 March, but were not done properly. The EU is now investigating and should soon be calling on the company to comply.

    What exactly is the problem? If I type a particular brand of television into a search engine, it will show up in Google's search results, and I will be able to compare prices through it.

    Statistics show, for example, that Goods Finder is getting lower and lower in the search results. In organic searches, Goods Finder is often ranked on the third page of the mobile interface.

    And it's not just me saying it, the European Union says it.

    It's a long-standing battle, my predecessor fought it, other European online retailers are fighting the US search giant. And the EU is worried that there will be no local competitors to Google in Europe: everyone knows, a travel service provider employing thousands of highly skilled people. If Google comes up with a similar service that would bleed to death in two days in pure competition, but survives because of targeted searches, that's not OK. This could lead to the disappearance of digital jobs in Europe.

    It is good that you mentioned Booking, because there is a big difference there, I think. Booking has made it so that when I am looking for accommodation, I go directly to their site or their app. If I'm buying a TV, I'm very likely to start my search on Google.

    Yes, our goal is to get people to go directly to the Search for Goods. Google Shopping has been around for a couple of years and I am convinced that it was not a good service at all at the beginning, and it is not even a strong price comparison service now.

    What will happen if the EU cannot address this problem?

    We have been fighting this battle for 12 years, we can adapt and we are still in a dominant position in price comparison in Hungary.

    What are your plans for the Hungarian market?

    We want our services to go beyond where and what is cheapest, and even beyond what you can order at the lowest price including delivery. We'll also help you by letting you know if there's a parcel machine near your house and you can choose that instead of home delivery. These prices and options can completely change the order of where it's worth buying a product. It's also important to know what recommendations each provider has, because it's no use being the cheapest if you've never heard of it in Hungary. We would also like to be able to clearly distinguish between the supplier and the logistics provider, so that if there is a problem, the source can be identified.

    In other words, the aim of Árukereső is to improve its service step by step, bolt by bolt, so that in the end what we talked about before happens, that is, that customers are the first to start shopping on our platform.

    Do you have specific acquisition plans?

    We don't have a specific target, but we are constantly looking for partners whose services we can integrate into our ecosystem. That's why we recently acquired a Czech logistics data company, which allows us to provide customers with more accurate delivery times and prices.

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