Poland’s economic boom is helping retailers discover new markets outside the major cities for the first time, and the prospect of further EU integration is likely to boost the country’s status as the leading investment market in Europe. 
Elsevier Food International, Vol. 11, Number 1, February 2008
Chris Jones

Poland is likely to remain the most interesting retail market in central and eastern Europe for many years to come as companies capitalise on the growing economic and political confidence there.

Introverted. Conservative. Economically backwards. A country ill-at-ease with itself. This was the impression of Poland given by the majority of the newspaper headlines in 2007 as the government led by Jaroslaw Kaczynski moved from one disaster to another, falling out with Germany over the Second World War, the rest of its EU partners over the new constitution, and its own coalition partners over corruption. Yet even before the general election in November swept a new, pro-European, pro-business government to power under the leadership of Donald Tusk, and in stark contrast to the image painted by the headlines, the country’s economic boom was very much alive and kicking. Gross domestic product (GDP) growth in the third quarter of 2007 – the last under the Kaczynski government – was 6.4 per cent, well ahead of most estimates and in line with the steady improvements in the country’s economic performance since it joined the EU in May 2004.

"Poland has done very, very well economically since joining the EU," said Cecile Riverain, senior business analyst at IGD, a UK-based retail market specialist. "Membership has had in particular a big impact on the labour market. In 2006, unemployment was around 18 per cent; in the third quarter of 2007, it was down to nine per cent. Wages have also risen considerably, and that is obviously positive for retailers. Consumer optimism is at a record high, there is strong price competition between the major retail groups and that means lower prices, which has always been the key element in most Polish food purchases."

All of which is definitely fuelling growth in the retail sector, according to Riverain. "Poland is no longer seen as an emerging market," she said. "In fact, it is one of the key markets where food retail executives expect to see substantial growth over the next five years." A recent survey of industry leaders by IGD put Poland sixth in the list of markets to watch between now and 2012 – behind China, India, Russia, Brazil and Turkey and ahead of the US – and Riverain said that the election of the Tusk government was likely to give a further boost to retail confidence. "Poland has already done phenomenally well despite the political turmoil of recent years, and we expect to see no slowdown in FDI, despite some concerns about the impact of food price inflation and growing fuel costs." The new ‘business-friendly’ government should also help new store development. "It generally takes longer in Poland to get things done compared to comparable regional markets," said Riverain. "So the hope is that the new government will do more to cut red tape." Nonetheless, there are still plenty of barriers to rapid retail growth thrown up by the government in Warsaw: retailers seeking to open a store with a sales area larger than 400 square metres must receive approval by local authorities, while stores with a sales area larger than 2,000 square metres require approval by the provincial authorities.

Tusk is also seen as being far more positive about the euro than his predecessor, suggesting that the new government will work hard to meet the Maastricht criteria – the economic tests required for euro entry – as soon as possible, with a deadline for the switchover to the single currency set provisionally at 2013. This should bring greater economic stability for retailers in Poland and, with the rest of the new EU counties – except perhaps Hungary – likely to have joined the euro before Poland, finally bring some element of price transparency and allowing retailers to generate potential savings by selling products throughout the extended Eurozone.

Store types
Supermarkets remain the key format for local players such as Spolem, a cooperative retailer operating a network of over 4,000 independent stores, often serving smaller communities. Several of the major foreign groups have also started to move into this sector, in part due to the success of Spolem: in 2006 Carrefour acquired the Albert supermarket operations of Dutch group Ahold, while Tesco bought 187 Leader Price discount stores from Casino, which it continues to run as a soft discount supermarket chain. Intermarché, Rewe and Billa are also starting to increase their operations in the supermarket sector, which according to estimates from PMR Publications actually overtook hypermarkets as the most popular store format, increasing its share to 13.2 per cent in 2007 from 9.1 per cent in 2006 (compared to a static 12.2 per cent for hypermarkets).

Spolem, meanwhile, has reacted to the incursion of the foreign groups by announcing plans to begin centralised purchasing and supply chain functions for its stores – a move that would allow it to be more competitive on price – but these plans have yet to be finalised. And it is not the only local company to react to the threat from foreign groups in the supermarket sector. Emperia Holding, a leading wholesaler, has started to move into the supermarket retail sector by integrating independent stores into a fledgling franchise chain and is reported to be talking to ZKiP Lewiatan, the largest franchise chain in Poland, about further rapid growth. Other chains expected to add considerable store numbers are Eurocash and Rabat Pomorze, according to PMR. Another development within the supermarket sector is the creation of a handful of so-called deli-supermarkets, offering upmarket food and drink products in a delicatessen format. Three chains – Piotr i Pawel, Alma and Bomi – dominate the sector with around 80 stores between them in 2007, while a fourth, Stokrotka Premium, entered the market in 2007 and is likely to have around ten stores by the end of this year.

Neighbourhood stores – small, often family-run outlets – are still the food store of choice for many shoppers in the more remote rural or semi-urban areas and Riverain said that these outlets could benefit from the growing trend towards greater convenience – a trend already widely seen in the western European market. Carrefour is already looking at developing a network of franchised convenience outlets – at a rate of up to 40 a year – along the lines of the traditional neighbourhood store as a means of expanding its footprint without any significant investment needed. According to PMR, this sector currently accounts for only 2.5 per cent of the market but is expected to rise rapidly as both Carrefour and Tesco step up their interest in convenience.

The hard discount sector has been the focus for the group that Riverain suggests is the undisputed star of the Polish retail sector, Biedronka, owned by Portuguese group Jerónimo Martins. "Where other foreign groups entered the Polish market at the hypermarket level, Biedronka took the deliberate decision to target mid-sized towns with the discount format and created a strong market position long before any competition came along," she said. Such is the company’s stranglehold on this particular segment of the market that Biedronka is the country’s biggest retailer according to IGD, with sales of €2.2 billion in 2007 and a 9.8 per cent market share, fending off competition from both Tesco and Carrefour whose positions were bolstered by their acquisitions. Discount stores account for around 6.5 per cent of the market, with Biedronka in turn accounting for the lion’s share of this. The chain is also by far the biggest user of private labels – nearly 75 per cent of its products are sold under its own label – with the companies operating primarily in the supermarket or hypermarket sectors still focusing mainly on branded goods. Discounters will continue to flourish in the coming years, with price still remaining a key factor despite the rise in incomes, and the pace is likely to quick significantly following the arrival of German discounter par excellence ALDI in 2007, which Riverain said had "pushed other retailers to accelerate their discount format expansion".

Online grocery sales are still in their infancy in Poland, perhaps not surprisingly given the relatively slow penetration of home computers and high-speed Internet access that allow online retailing to flourish. PMR estimates that Internet grocery sales were little more than €10.5 billion in 2006 but that this is likely to advance rapidly in years to come as greater disposable incomes lead to more home computers and European infrastructure subsidies help the development of better communication networks. As a result, sales in 2007 could be as high as €18.4 billion, nearly twice the previous year’s level.

Trouble ahead?
And while Poland’s economic development will inevitably slow down in the medium term, other factors should come into play that will keep the retail market developing dynamically. Improvements to the country’s administrative structure – vital if it is to make sure that it benefits from the billions of euros it is due in EU subsidies over the next five years – should help reduce the red tape, while the EU money itself will be spent on key infrastructure projects such as the country’s notoriously poor road network, in turn bringing significant supply chain improvements.

The fragmented nature of the Polish retail market is also likely to help stimulate growth as the big players seek to develop more rapidly through acquisition. Tesco and Carrefour have already made their ambitions known and Spolem attempts to fight off the threat from these and other major groups such as Auchan and Metro. Discounter Tengelmann is already looking for buyers for its stores across eastern Europe, having sold its German business to Edeka. Moreover, its 1.6 per cent share of the Polish market would allow the likes of Tesco or Carrefour to narrow the gap with Biedronka, although the discounter will be keen to add Tengelmann’s Plus discount outlets to its own extended network.

Poland’s positive new image – pro-European, pro-business, pro-growth – will inevitably have a positive effect on the retail market. Higher incomes mean greater purchasing power and with plenty of the country still relatively untapped by major retail outlets, the prospects for the future have never looked rosier.

Can Poland’s retail boom continue unchecked? IGD’s Riverain has some small concerns about potential spanners in the works but remains extremely optimistic. "Food price inflation is likely to grow in 2007 and 2008, with prices rising by around 1.4 per cent on average and this could have some potential impact, as could the rising cost of fuel. But GDP growth is also likely to be around five per cent for the next two years and consumer spending on grocery products is likely to remain high, at around €40.5 billion." She added that it was always the possibility that higher wage costs, sparked by the improving economy, could lead to a slow down in FDI as foreign companies looked to cheaper markets to do business but stressed that this was unlikely to have a significant impact. Hypermarkets have been the store format of choice for foreign retailers since they began arriving in Poland in the 1990s, offering a quick and easy way to attract large numbers of shoppers from the major cities. But while hypermarkets will continue to be the dominant force in major cities such as Warsaw, Lodz, Krakow, Wroclaw or Poznan, Riverain said that different formats were being used by the major retailers as they moved to smaller cities and towns on the back of the economic boom. "The hypermarket sector is already saturated, so companies such as Tesco are moving to new locations with compact hypermarkets – around 3,000 square metres – with a more targeted range of products on sale for smaller client bases," she said.