Private and accountable
In a risky business environment it comes as an advantage that Mercator understands the local culture in the Balkans. “Our early penetration into the markets of former Yugoslavia is certainly advantageous,” says Jankovic. “We were the first to offer customers from Bosnia and Herzegovina and Serbia and Montenegro a chance to shop in a state-of-the-art shopping centre. We did not need to invest large sums in promotions as these customers know and understand the brands and goods we have on offer. We all used to live in one common country so we at Mercator have a good knowledge of the culture and language in the Balkan region which makes our business operations even easier.”
Mercator’s roots date back to 1949 when Slovenia was still part of the socialist Yugoslav state, and the state-owned wholesale company ‘Živila Ljubljana’ was established. In 1953, the company was renamed as Mercator and in the following decades up to 1990 it added manufacturing, farming and services to its core wholesale and retail business. In 1990, the company named itself ‘Poslovni sistem Mercator d.d.’ (Mercator Business System). This happened on the verge of Slovenia’s independence (June 1991), and Mercator played its part in Slovenia’s economic transition from a centrally led and state dominated system to an independent market economy. In 1993, the privatisation process started and Mercator shares were publicly offered. In 1995, this was completed with Mercator Business System becoming Slovenia’s largest public company. Two state-owned funds still have some 29.6 per cent of shares and the rest is owned by employees, management and private investment funds.
Mercator sees 1997 as a landmark year in its history when a new management board was appointed under the leadership of Zoran Jankovic. Educated as an economist, Jankovic held commercial and management positions in several state-owned companies – including Mercator – in the 1980s and early 1990s. Returning to Mercator as CEO of this newly privatised company, Jankovic was left in near complete control as a strategic investor was lacking, wrote the Financial Times in June 2004. “The arrangement, as with many privatised companies in Slovenia, is not vastly different from the days of the so-called social ownership in the old Yugoslavia when companies were owned, in theory, by their employees and run by independent management with little accountability,” the FT reads.
In the 2003 annual report, however, Mercator’s supervisory board stresses its mandate, which it calls its “powers and responsibilities, conferred by law and the company’s Articles of Association.” Despite Slovenia’s recent economic and political transition and Mercator’s state-owned heritage, the executive board of the new and privatised Mercator is therefore officially just as accountable as in any other listed company.

Domestic consolidation
In practice it has not been necessary to test the retailer’s accountability safety measures, as the management board’s strategy has paid off. Mercator had suffered during the difficult transition years in the first half of the 1990s and the board led by Jankovic had to give the ailing retailer a new perspective. It unfolded an ambitious strategic development plan, based upon larger-sized stores (500 m² minimum) preferably integrated in a shopping centre. Since 1997, Mercator has developed into a true, domestic consolidator, acquiring retailers like Maksina and Klas in 1999 (total of 67 outlets), Emona Merkur in 2000 (the country’s fourth largest retailer with 70 stores and sales of US$79 million) and Živila Kranj in 2003 (Slovenia’s third retailer with sales of US$81 million). At the same time smaller retail units were either franchised or divested. Non-core assets were also divested, such as manufacturing facilities and a 20 per cent stake Mercator had in its main competitor Spar Slovenia.
All acquisitions were integrated within Mercator and business processes were standardised to control cost and optimise efficiency. “Mercator is characterised by uniform appearance on all the markets due to standardised procedures,” says Jankovic. “On all our markets we have been building shopping centres, recognisable as Mercator, as they have been constructed at equal level. Sales offer on the shelves is standardised and all employees have passed uniform educational programmes on the markets of our operation. In this way we succeeded to make all the employees on all the markets acquainted with Mercator’s corporate culture, mission, vision and strategic goals.”
Between 1998 and 2001, Mercator’s sales increased by 89 per cent to over €1.3 million and in the same period net profits more than doubled (+106 per cent) to €36 million. On its website Mercator says that in 2001 “(…) an exceptionally successful period ended: the first and turning phase in the development of the company, as well as, the Whole Group.” By then it had become clear that for sustainable future growth the retailer would have to set up shop abroad. Still, after 2001 Mercator continued to expand in its domestic market through takeovers (e.g. Živila Kranj) and organic growth by building new Mercator shopping centres. Last September, the first stores of its newly developed hard discount store banner Hura were opened. Discount stores were still lacking in Mercator’s format portfolio and the 60-store operation it aims to have opened by 2006, will further condense its already fine-meshed store network in Slovenia.

Foreign expansion
Mercator’s cross-border activities concentrate in the Balkan region. In November and December 2000, it first ventured abroad by setting up shop in other former Yugoslav markets, Croatia and Bosnia and Herzegovina, respectively. In December 2002, Mercator entered the Serbian market and the ambitious retailer is also interested in further expansion to Romania, Bulgaria and Macedonia.
“No one can escape globalisation and I think this regional approach is our only chance,” Jankovic said back in 2001. By 2006, Mercator wants to achieve 40 per cent of sales coming from foreign operations. “In the next two years, Mercator is planning its investments in the new markets, mostly in Croatia,” says Jankovic. “Our aim is to become the second largest retailer in Croatia, Bosnia and Herzegovina and in Serbia and Montenegro by 2008.”
With three hypermarkets and 70 supermarkets accounting for some €137 million of sales, Croatia is Mercator’s largest foreign operation and will get its fair share of investments. M+M PlanetRetail reports that Mercator wants to build shopping centres (in Osijek in the east and in Zadar in the south) and expand further by opening smaller food stores across the country.
Operations in Bosnia and Herzegovina are much smaller with two shopping centres (in Sarajevo and Tuzla) and, as M+M PlanetRetail says, two more to come in Banja Luka and a second one in Sarajevo.
Mercator’s presence in Serbia and Montenegro has been limited to a state-of-the art shopping centre that Mercator built in Belgrade, when it first set up shop in Serbia in December 2002. Mercator aims to become Serbia’s runner-up retailer with a share of some 15 to 20 per cent by 2007. If the bid to acquire a majority share in Serbia’s market leader C-Market gets the green light from the Serbian Securities Agency, and Mercator will succeed in acquiring the shares, Mercator will make a giant step forward in meeting this target. Small shareholders, most of them former and current employees, hold some 84 per cent of the shares. The Serbian government owns the remaining 16 per cent.
In a press release of 25 August, Mercator said that the takeover will be “difficult and long, due to the numerous hindrances that can take place, as this takeover has not been agreed with the management board of the company C-Market.” Furthermore it said that it could expect “(…) reactions of those interested parties inclined to closing the Serbian economy.”
The south-east European newswire SeeNews refers to the local media in Serbia who said that Croatian retailer Agrokor and Serbian retailer Delta Holding are also interested, with Delta trying to join forces with C-Market’s largest suppliers to form a consortium of some 15 companies to file a buyout bid for C-Market. This would leave Mercator empty handed but it does not deter the Slovenian retailer to pursue its plans in Serbia. “In spite of this takeover, Mercator will proceed with the planned strategy of building its own shopping centres on the market of Serbia and Montenegro, mostly of larger sales formats,” the retailer announced.

EU
Mercator’s domestic consolidation zeal prepared the retailer for market conditions after EU entry. Increasing its buying clout and efficiently integrating subsidiaries “(…) will have a significant impact on Mercator’s business after the entry of Slovenia to the EU,” Jankovic declares in Mercator’s 2003 annual report. “This will increase its competitiveness in those parts of Slovenia, which will become more exposed to the competitors from neighbouring countries due to the creation of larger regions and the removal of border crossings.” Mercator set up a project team to study the impact of EU accession and its conclusion was that the retailer is fully prepared.
In March 2004, Jankovic declared during a retail conference organised by the Ljubljana Faculty of Economics, that the Slovenian retail industry lags behind European competition in turnover per worker. The newswire Seeurop.net quoted him as saying that “(…) while the European average stands at around €200,000 per worker, at Mercator that figure is around €100,000. As regards the profit-to-revenue ratio, Slovenia is just above the average.”
Jadranka Dakic, member of Mercator’s management board, confirms this. “As the productivity of Mercator group is lower than the average of European retailers, Mercator is on the other hand comparable with European retailers in terms of profitability," she says. “Lower productivity is partly outweighed by lower costs of work and higher gross margins."
According to Dakic, smaller store sizes compared to other European retailers account for this lower productivity rate. She also refers to a different macroeconomic environment in Slovenia (less purchasing power and a lower level of average spend), to economies of scale (with some two million inhabitants, Slovenia has a small economy) and to the high level of social security for employees.
In other new EU member states - the Baltics - entrepreneurial local retailers seem to be keen on preparing their companies for a lucrative deal with large foreign retailers, eager to enter these northern European markets after their EU accession (see Elsevier Food International, May 2004, p. 51). In Europe’s south-east this is inconceivable, as far as Jankovic is concerned. “By all means Mercator has become an interesting acquisition target for retailers planning their expansion to this part of Europe,” he comments. “However, I strongly believe Mercator will remain the property of Slovenia also in the future, especially due to the awareness of its shareholders of Mercator's multiplier impact on the Slovene production.”
Mercator as a symbol of Slovenia's new identity within the EU. It is a remarkable statement of this chief executive who - being a renowned advocate of Slovenia’s EU accession - was quoted by The Guardian in April 2004 as saying that “The EU places the idea of economic interest above the political jurisdiction of a particular country, making it both pragmatic and visionary at the same time.”

Mercator Group
Sales breakdown by country (2003)

Mercator Group
Sales & profits (€ million)