Microsoft Word - ea_2020_2_final.docx DOI: 10.28934/ea.20.53.2.pp39-50 ORIGINAL SCIENTIFIC PAPER Analysis of Profitability and Efficiency of Trade in Serbia Radojko Lukić1* | Hasan Hanić2 | Milica Bugarčić2 1 University of Belgrade, Faculty of Economics, Belgrade, Serbia 2 University Union Belgrade, Belgrade banking academy, Belgrade, Serbia ABSTRACT In this paper, the profitability and efficiency of trade in Serbia are analyzed in the period 2013 - 2019. Taking into account the complexity of the analyzed issues, the research methodology is predominantly based on the strategic profit model and programming based on the DEA approach. The results of the conducted research show that the profitability and overall efficiency of Serbian trade have recently improved. The better trade performance was positively influenced by both external and internal factors, including the application of new business models based on global retailers, multichannel sales - classic and electronic, and the digitalization of the entire business. Key words: return on sales, return on assets, return on equity, financial indebtedness, efficiency JEL Classification: L81, M31, M41, O32 INTRODUCTION Due to the importance it has for the functioning of national economies, trade is continuously researched, especially in terms of profitability and its efficiency. The subject of research in this paper is a complex analysis of the factors of profitability and efficiency of trade in Serbia. The goal and the purpose of this research is to create measures to improve the profitability and efficiency of trade in Serbia in the future, based on the current situation, by applying the strategic profit model and DEA approach. This, among other things, reflects the scientific and professional contribution of this paper. The obtained results provide a theoretical- methodological and empirical basis for further research on the treated issues, as well as for international comparative analysis. Due to the importance of this topic, numerous papers have been written that are dedicated to measuring the performance of trade and researching the factors that significantly determine such performance, and above all profitability and efficiency (Berman, Evans & Chatterjee, 2018). A particularly rich literature has been created to evaluate the efficiency and productivity of companies in the world, including trade companies, based on DEA analysis (Malmquist, 1953; Asmild et al., 2004; Andersen & Petersen, 1993; Donthu & Yoo, 1998; Tone, 2001; Tone, 2002; Tone & Tsutsui, 2009; Tone & Tsutsui, 2010; Fare et al., 1994; Fare, Grosskopf & Roos, 1995; Moreno, 2010; Vaz, Camanho & Guimarães 2010; Wang & Lan, 2011; Moreno & Maria, 2011; Vaz & Camnho, 2012; Lau, 2013; Lee, 2013; Gandhi & Shankar, 2014; Al-Refaae, 2015; Anand & Grover, 2015; Majumdar & Asgari, 2017; Barros & Alves, 2004; Barros, 2006; Bambe, 2017; Qiu & Meng, 2017; Sarmento, Renneboog & Matos, 2017; Ko et al., 2017; Hsu, 2018; Haidar, 2018; * Corresponding author, e-mail: radojko.lukic@ekof.bg.ac.rs 40 Economic Analysis (2020, Vol. 53, No. 2, 39-50) Camanho, Portela & Vaz, 2009 ; Caves, Christensen & Diewert, 1982; Jorge & Suárez, 2009; Melo & Sampaio, 2018; Yu & Ramanathan, 2009; Busu, Vargas & Gherasim, 2020; Cheng, Chu & Ohlson, 2020). However, the national literature in this area lags significantly behind (Lukic, 2018; Lazic & Domazet, 2019; Radović-Marković, Brnjas & Simović, 2019; Lukic & Hadrovic Zekic, 2019; Lukic, Hadrovic Zekic & Crnjac Milic, 2020). It can be claimed that according to our knowledge, there is no extensive study dedicated to the analysis of efficiency and productivity of trade companies in Serbia, which is predominantly based on the DEA approach. In that sense, this paper represents a special scientific-professional contribution. The basic research hypothesis is that continuous measurement of profitability and efficiency of trade provides a basis for international comparison and its improvement by imposing appropriate measures and adequate control of internal and external factors. This setting fully refers to trade in Serbia, which is empirically investigated here primarily from the point of view of profitability and efficiency. Empirical knowledge of the legality of trade and factors that determine its performance and adequate control of key factors can significantly contribute to improving the overall profitability and efficiency of trade in Serbia in the future. The methodology of research of the problem discussed in this paper, in accordance with the defined basic hypothesis, is based on the strategic profit model and DEA analysis. In order to transform the initial data into useful information and draw appropriate conclusions, certain statistical analysis techniques are also used here. For the purpose of researching the profitability and efficiency of trade in Serbia, the empirical data contained in the publications and financial reports of the Business Registers Agency of the Republic of Serbia were used. They are “produced” in accordance with the relevant international standards, so there are no restrictions in terms of international comparison of the obtained research results in this paper. RESEARCH METHODOLOGY The research of the issues stated in this paper is based on the application of the strategic profit model and DEA analysis. In addition to the basic methods of descriptive analysis, standard techniques of correlation analysis were used in the paper. Strategic profit model The strategic profit model indicates the key determinants of return on assets and return on equity. Their adequate control can significantly improve returns on assets and capital. Return on assets is determined by the formula: 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑎𝑠𝑠𝑒𝑠𝑡𝑠 𝑥 (1) The return on assets is, as can be seen from this formula, d function of the return on sales and the turnover ratio of the assets. Return on equity is determined by the following formula: 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑒𝑞𝑢𝑖𝑡𝑦 𝑥 𝑥 (2) Return on equity is therefore a function of return on sales, the ratio of turnover of assets and financial indebtedness, i.e. the return on assets and financial indebtedness. Radojko Lukić, Hasan Hanić, Milica Bugarčić 41 DEA models In the context of a brief theoretical analysis of the DEA model, the CCR model and the BCC model will be presented in briefly. The CCR model is based on a fixed or constant scale yield. This means that a proportional increase in all inputs results in the same proportional increase in all outputs. The dual of CCR efficiency is expressed as: 𝑀𝑖𝑛 𝜃 under restrictions ∑ 𝜆 𝑥 𝜃𝑥 𝑖 1 … . . 𝑚 ∑ 𝜆 𝑦 𝑦 𝑘 1 … . . 𝑠 𝜆 0 𝑗 1 … . . 𝑛 (3) where θ the technical efficiency of DMU units is 0, λ is a dual variable for identifying comparable inefficient units. If the value of θ * is equal to one, the observed unit of DMU is technically efficient. The concept of the CCR model was modified by the introduction of the BCC model (by Banker- Charnes-Cooper) by replacing the constant scale yield (CRS) with the variable scale yield (VRS). A DMU unit operates under a variable scale yield if the increase in input does not result in proportional changes in output. The BCC model is shown as: 𝑀𝑖𝑛 𝜃 under restrictions ∑ 𝜆 𝑥 𝜃𝑥 𝑖 1 … . . 𝑚 ∑ 𝜆 𝑦 𝑦 𝑘 1 … . . 𝑠 ∑ 𝜆 1 𝑗 1 … . . 𝑛 𝜆 0 𝑗 1 … . . 𝑛 (4) The BCC model divides the technical efficiency (TE) obtained by the CCR model into two parts: 1) pure technical efficiency (PTE), which ignores the influence of scale size by comparing a DMU unit with units of similar scale and measures how a DMU unit uses inputs under exogenous conditions; and 2) scale efficiency (SE), which shows how scale size affects efficiency, formulated as follows: 𝑆𝐸 𝑇𝐸 / 𝑃𝑇𝐸 (5) 42 Economic Analysis (2020, Vol. 53, No. 2, 39-50) PROFITABILITY OF TRADE IN SERBIA The original data used for the analysis of profitability and efficiency of trade in Serbia are shown in Table 1. Table 1. Initial data for measuring the profitability and efficiency of trade in Serbia, 2013 - 2019 DMU (I) Number of employees (I) Earnings per employee (in thousand RSD) (I) Assets (in thousand RSD) (I) Equity (in 000 din) (in thousand RSD) (O) Sale (in thousand RSD) (O) Net profit (in thousand RSD) 2013 193210 151978 2160474 746992 2891518 89730 2014 191621 154833 2157564 761305 2594602 86955 2015 159621 164718 2197931 805009 2731999 95265 2016 206092 180367 2324843 859749 3009651 105238 2017 208020 194924 2375290 920992 3172393 122727 2018 219373 218410 2524897 1007972 3361094 121816 2019 222049 238022 2682931 1073056 3608329 139409 CAGR 2.01% 6.62% 3.14% 5.31% 3.21% 6.5% Note: Authors’ calculation of annual growth rates using CAGR calculator (Compound Annual Growth Rate calculator). (I) – input elements. (O) – output elements. Source: Business Registers Agency of the Republic of Serbia Recently, the indicator of earnings per employee has been used more and more often to measure the profitability of companies, regardless of their activity, including trade companies. Among other influences, this measure expresses the influence of “hidden characteristics” (for example, skills) of employees on the profitability and efficiency of companies. Table 2 and Figure 1 show earnings per employee who works in trade in Serbia for the period 2013 - 2019. Table 2. Net profit per employee and earning per employee who work in trade in Serbia Year Net profit per employee (in thousand RSD) Earnings per employee/Sale (in percentage) 2013 0.464417 5.26 2014 0.453786 5.97 2015 0.596820 6.03 2016 0.510636 5.99 2017 0.589977 6.14 2018 0.555292 6.50 2019 0.627830 6.60 Source: Authors’ calculations Radojko Lukić, Hasan Hanić, Milica Bugarčić 43 Figure 1. Net profit per employee and earnings per employee who work in trade in Serbia Source: Authors’ calculations During the analyzed period, earnings per employee in Serbian trade increased steadily. This was, among other things, influenced by the improvement of the "quality" of human resources management in Serbian trade and the improvement of the culture of relations between employees and consumers. This was certainly contributed by the greater presence of foreign retail chains in Serbia, which invest significantly more in the training and education of employees. Table 3 shows the strategic profit model - return on assets of trade in Serbia. As the data in this table indicate, Table 3. Strategic profit model - Return on assets of trade in Serbia Year Return on assets Return on sale Asset turnover ratio 2013 4.15% 3.10% 0.041533 2014 4.03% 3.35% 0.040302 2015 4.33% 3.49% 0.043343 2016 4.53% 3.50% 0.045267 2017 5.17% 3.87% 0.051668 2018 4.82% 3.62% 0.048246 2019 5.20% 3.86% 0.051961 Source: Authors’ calculations Table 3 shows the strategic profit model - return on assets in trade in Serbia. As the data in this table indicate, in 2019 the return on assets in trade in Serbia increased significantly, which is a consequence of the increase in both the return on sales and the asset turnover ratio Table 4 shows a strategic profit model – return on equity in trade in Serbia In 2019, the return equity in trade in Serbia also increased significantly. This was influenced by an increase in return on sales and asset turnover ratio, on the one hand, and a decrease in financial indebtedness, on the other. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 2013 2014 2015 2016 2017 2018 2019 Net profit per employee (in thousand RSD) Earnings per employee/Sale (in percentage) 44 Economic Analysis (2020, Vol. 53, No. 2, 39-50) Table 4. Strategic profit model – Return on equity in trade in Serbia Year Return on equity Return on sales Asset turnover ratio Financial indebtedness 2013 4.15% 3.10% 0.041533 2.892232 2014 4.03% 3.35% 0.040302 2.834034 2015 4.33% 3.49% 0.043343 2.730319 2016 4.53% 3.50% 0.045267 2.704095 2017 5.17% 3.87% 0.051668 2.579056 2018 4.82% 3.62% 0.048246 2.504928 2019 5.20% 3.86% 0.051961 2.500271 Source: Authors’ calculations It can be concluded that all analyzed indicators reveal that there has been a significant increase in the profitability of trade in Serbia recently. Factors that influenced this are the following: improvement of general economic conditions, low inflation, stable exchange rate, low bank interest rate, significant inflow of foreign direct investments (increasing presence of foreign retail chains in the Serbian retail market), more efficient management of sales, costs, assets and profits, accelerated digitalization of the entire trade business and others. TRADE EFFICIENCY IN SERBIA The assessment of trade efficiency in Serbia was performed using DEA analysis with constant and variable yield. The following are used as input variables: number of employees, earnings per employee, assets and equity, and as output: sales and net profit. Table 5 shows the descriptive statistics on input / output data. Table 5. Statistics on input/output data Statistics on Input/Output Data Number of employees Earnings per employees (in thousand RSD) Assets (in thousand RSD) Equity (in thousand RSD) Sale (in thousand RSD) Net profit (in thousand RSD) Max 222049 238022 2682931 1073056 3608329 139409 Min 159621 151978 2157564 746992 2594602 86955 Average 199998 186179 2346276 882154 3052798 108734 SD 19674.8 30354.2 184656 115331 329218 18271.8 Source: Authors’ calculations by software DEA model = DEA‐Solver LV8.0/CCR(CCR‐I) In the observed period (2013 - 2019), almost all input / output data were from 2016 above the average for Serbian trade. This had a positive effect on her overall performance. Table 6 shows the correlation matrix of input / output data. Table 6. Correlation matrix on input/output data Correlation Number of employees Earnings per employee Assets Equity Sale Net profit Number of employees 1 0.75677 0.77928 0.74712 0.81175 0.74553 Earnings per employee 0.75677 1 0.99507 0.99931 0.9549 0.97268 Assets 0.77928 0.99507 1 0.99085 0.96466 0.96467 Equity 0.74712 0.99931 0.99085 1 0.94954 0.97371 Sale 0.81175 0.9549 0.96466 0.94954 1 0.95619 Source: Authors’ calculations by software DEA model = DEA‐Solver LV8.0/CCR(CCR‐I) Radojko Lukić, Hasan Hanić, Milica Bugarčić 45 Based on the numerical values of the correlation coefficients given in the last column of the extended correlation matrix, it can be concluded that there is a strong positive correlation between the input and output data. Table 7 and Figures 2 and 3 show the efficiency of Serbian trade measured using the DEA model: CCR (CCR-I; CCR-O). Table 7. Efficiency of trade in Serbia – CCR model No. DMU Model = CCR‐I Model = CCR‐O Score Rank Score Rank 1 2013 1 1 1 1 2 2014 0.929 7 0.929 7 3 2015 1 1 1 1 4 2016 0.9671 6 0.9671 6 5 2017 1 1 1 1 6 2018 0.9904 5 0.9904 5 7 2019 1 1 1 1 Average 0.9838 0.9838 Max 1 1 Min 0.929 0.929 St Dev 0.027 0.027 Source: Authors’ calculation by software DEA model = DEA‐Solver LV8.0/ CCR (CCR‐I; CCR‐O) According to the CCR model, with input and output orientation, trade in Serbia was efficient in 2013, 2015, 2017 and 2019, while in other observed years of the analyzed period (2014, 2016 and 2018) it was (slightly) less efficient. In order to improve the efficiency of trade in Serbia in these years, and in general, it was necessary to manage human capital, assets, equity, sales and profits more efficiently. Figure 2. Efficiency of trade in Serbia (CCR-I) Source: Authors’ calculations 46 Economic Analysis (2020, Vol. 53, No. 2, 39-50) Figure 3. Efficiency of trade in Serbia (CCR-O) Source: Authors’ calculations Table 6 and Figures 4 and 5 show the trade efficiency in Serbia measured using the BCC model with input and output orientation (BCC-I; BCC-O). Table 6. Efficiency of trade in Serbia – BCC model No. DMU Model = BCC‐I Model = BCC‐O Model = BCC‐I Model = BCC‐O Score Rank Score Rank RTS of Projected DMU RTS of Projected DMU 1 2013 1 1 1 1 Constant Constant 2 2014 1 1 0.9998 5 Increasing Increasing 3 2015 1 1 1 1 Constant Constant 4 2016 0.9727 7 0.9693 7 Constant Constant 5 2017 1 1 1 1 Constant Constant 6 2018 0.9912 6 0.991 6 Constant Constant 7 2019 1 1 1 1 Constant Constant Average 0.9948 0.9943 No. of Increasing RTS=1 No. of Increasing RTS=1 Max 1 1 No. of Constant RTS=6 No. of Constant RTS=6 Min 0.9727 0.9693 No. of Decreasing RTS=0 No. of Decreasing RTS=0 St Dev 0.0103 0.0115 Source: Authors’calculation by software DEA model = DEA‐Solver LV8.0/ BCC (BCC‐I; BCC‐O) According to the BCC model with input orientation (BCC-I), trade in Serbia was efficient in 2013, 2014, 2015, 2017 and 2019, and inefficient in 2016 and 2018. According to the BCC model with output orientation (BCC-I), trade in Serbia was efficient in 2013, 2015, 2017 and 2019, and inefficient in 2014, 2016 and 2018. Based on both DEA models (CCR and BCC) with input and output orientation, it can be concluded that trade in Serbia was efficient in 2019. This was favourably influenced by external and internal factors, with a special contribution given by two factors: bigger number of foreign retail chains on the Serbian market, as well as the accelerated digitalization of the entire trade business. Radojko Lukić, Hasan Hanić, Milica Bugarčić 47 Figure 4. Efficiency of trade in Serbia (BBC-I) Source: Authors’ calculations Figure 5. Efficiency of trade in Serbia (BBC-O) Source: Authors’ calculations CONCLUSION Based on the conducted research, it can be concluded that there has been a significant increase in the profitability of trade in Serbia recently. According to the CCR model, with input and output orientation, trade in Serbia was efficient in 2013, 2015, 2017 and 2019, and inefficient in 2014, 2016 and 2018. According to the BCC model, with input orientation (BCC-I), trade in Serbia was efficient in 2013, 2014, 2015, 2017 and 2019, and inefficient only for two years of the analysed period - in 2016 and 2018. According to the BCC model, with output orientation (BCC-O), trade in Serbia was efficient in 2013, 2015, 2017 and 2019, and inefficient in 2014, 2016 and 2018. 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Article history: Received: November 15, 2020 Accepted: November 27, 2020