Poland's retail shakedown
Poland's fiercely competitive food retail market can only turn bloody as foreign retailers continue their aggressive push amid slower economic growth and tighter regulations. The next two years will be crucial as the retail boom in the mid-1990s turns into a fight where the weakest gets the most fatal bruises.
Elsevier Food International, Vol. 6, Number 3, November 2003
Joel H.Vega
If Poland's current food retail scene has to find a parallel in sports it would be a highly awaited heavyweight match in the crucial mid-rounds where the fittest finds just enough air and bravado to browbeat his opponent to the ropes. Indeed, and if market analysts are on track with their predictions, the next few years could prove to be a real shakedown to all-from the cash-laden foreign retailer down to the struggling local player.
Poland earned international plaudits when it led the transition to capitalism and democracy following the fall of communism in Eastern Europe in 1989. The country's sweeping economic restructuring in the early 1990s triggered growth in the second half of the decade with the influx of strong foreign investments. Economic growth averaged five per cent annually from 1996 through 2000 and was matched by a substantial rise in consumption. The privatisation of small and medium-sized state-owned companies and the passage of liberal legislation on establishing new firms also created a private sector that now fuels much of the country's current economic activity.
In the short-term, however, the outlook is clouded with growth falling sharply since 2000. Growth slid to 1.1 per cent in 2001 and to a similar level in 2002, well below Poland's growth potential of four to five per cent. Investment also declined in real terms, down by ten per cent in 2001. The slowdown in economic growth is also reflected in the rise in unemployment, which peaked to nearly 18 per cent in mid-2002. The malaise is also more evident in the construction industry, with output down by seven per cent in 2001 after average growth of six per cent from 1993 to 2000. Reforms are also overdue for the agricultural sector, which employs a fourth of the labour force but is handicapped by structural problems and the lack of investment. Nevertheless, foreign business communities believe that the longer-term prospects for the Polish economy remain promising and that the process of European Union (EU) accession, despite a rise in social tensions, is still on track. Although wages are low by Western European standards, with an average gross monthly income of around US$500, labour productivity is on the rise. With a population of nearly 39 million and a purchasing power second only to that in Slovenia among the Central European EU applicants, Poland is seen as a key market in the region.
The retail sector
Compared to its Western European neighbours, Poland's retail sector is fragmented with small companies dominating the retail market in terms of store numbers. Around 98 per cent of retailers own no more than two outlets. The same trend applies to the wholesale market, with only about ten foreign wholesale companies generating 70 per cent of total wholesale sales. In thel980s, there were hardly any modern food stores other than those found in department stores. However, with the entry of modern retailers in the early 1990s, a rapid development in food retail followed, with local players gradually losing bits of their turf in the retail battle.
In the last five years, three main trends have dominated Poland's food retail scene, namely, the diminishing importance of traditional retailers (shops or groceries with a shopping area below 300 square metres), the stabilisation of the fast moving consumer goods (FMCG) market, and the strong competition that engulf the food sector, particularly the modern retail formats.
Although Western European retailers started investing in the Polish market in the mid-1990s, modern retailers with sales areas from 400 square metres and above have a share (in terms of the number of store ownerships) of only about two per cent of the market. In contrast, around 98 per cent of the estimated 118,000 food retailers have sales areas of 300 square metres and below, with around 40 per cent of these stores located in rural areas.
In 1999 and 2000, the FMCG market (food, detergents, cosmetics, tobacco and alcohol) generated roughly the same value of about US$17 billion annually, which rose to US$20 billion in 2001. CAL Desk Research data showed that in the following year (2002) the estimated 118,000 food outlets generated a turnover of around US$21 billion, of which modern retail formats account for around 32 per cent to 33 per cent and traditional retailers (groceries and specialist stores) the remaining 67 per cent (see table).
In 2000, market studies showed that on average around 40 customers shop in a traditional retail outlet (small grocery) and spend less than PLN 100 (US$25). In contrast, the growing popularity of modern formats showed higher spends, particularly in hypermarkets located in big cities. The average purchase amount of a customer shopping in a hypermarket is estimated at PLN 172 (US$41), with higher spends in major cities such as Warsaw (PLN 203) and Gdansk (PLN 260). On the other hand, average value of transactions in traditional stores has declined by about ten to IS per cent, particularly in shops located in small towns with populations of less than 10,000 people. The growing popularity of modern retail formats is made more evident in the hypermarket sector, which accounted for about 18 per cent of sales in 2002. Other modern retail formats such as supermarkets and discounters generated eight and seven per cent, respectively, in 2002.
Growth of hypermarkets
The hyper-market concept was introduced in Poland only some ten years ago, but their impact on shopping behaviour was so striking that Polish shoppers now prefer to do their so-called "one-stop" shopping in these modern complexes. Recent years have seen the dynamic development of this sector with 27 hyper markets opening in the 1993-1996 period and 30 new hypermarkets from 1997 to 1998. Today, there are 170 hypermarkets, 154 of which are foreign-owned. Last year alone, two high-profile buy-outs took place when Ahold bought the Jumbo hypermarkets from Jerónimo Martins and Tesco scored a literal hit when it clinched a deal with Dohle for 13 HIT hypermarkets. The HIT deal made Tesco the largest retail chain in Poland. Tesco now owns 46 hyper markets and supermarkets with a total area of 250,000 square metres. In April this year, Tesco was reported as eyeing Ahold's network of stores. "Tesco would be able to achieve the critical mass required for the whole of Central Europe if it expanded its activities in Poland," said market researcher Robert Clark in a Lebensmittel Zeitung report.
Despite the confidence of foreign retailers on the growth of hypermarkets in Poland, analysts expect a gradual standstill in hypermarket development in the near future as foreign retailers begin to feel the sting of new regulations, market saturation and local opposition who are drawing attention to chronic unemployment issues. Magdalena Gniazdowska, senior negotiator at Cushman & Wakefield Healey & Baker in Warsaw pointed out that foreign retailers are increasingly running into obstacles in their bid to accelerate their hold via the hypermarket route.
"New laws oblige potential developers to first undertake a market study and show the impact of a new hypermarket on the local economy and labour market. With the rising unemployment, the issue of new jobs is a sensitive one. There are unofficial figures that claim that every job generated by the entry of a new hypermarket is created at the cost of four jobs at the local (retail) market," said Gniazdowska.
A retail law enforced in 2000 makes it difficult to open stores larger than 2,000 square metres. Securing approvals to operate hypermarket involves a tedious process with operators required to present their impact studies on the local economy to the gmina (municipalities). "That means the investment/development process becomes longer than it used to be," added Gniazdowska.
Aside from rigorous local rules that stifle the rapid growth of hypermarket development, Gniazdowska believes that hypermarket saturation already exists in Poland's major cities. She said that operators are now setting their sights on the smaller and middle-sized cities with populations of around 150,000 people.
"A very strong trend now in the food retail sector is supermarket development. Supermarkets have around 1,500 to 2,000 square metres of sales space. Since the new laws don't apply to supermarkets below the 2,000 square metre limit, we are seeing very aggressive growth in this sector," according to Gniazdowska.
The big five
Even though analysts expect that Poland's food retail will continue to be dominated by modern retailers, the five largest chains, namely, Metro, Jerónimo Martins, Auchan, Casino and Tesco, corner only about 13 per cent of the total market (See Table). By comparison, in France the Top five commands a 79 per cent share, in Portugal 65 per cent, in the Czech Republic 33 per cent and in Italy the five largest retail companies hold about 30 per cent of the food market.
In 2001, the number of foreign supermarket chains exceeded 100 outlets and one million square metres of selling space. In the same year, eight foreign retailers opened 26 shops, namely Auchan, Ahold and Tesco. Also in 2001 the total selling space of around 123 foreign hypermarkets reached 1.056 million square metres, which is 210,000 square metres more than in 2000. In comparison, the selling space in 1999 went up by 250,000 square metres. However, and as mentioned earlier, the growth rate of hypermarkets has slowed since 2000 as foreign retailers come to grips with the increasing market saturation and the challenge of finding a strategic location that is not close to a major competitor.
In a strategic move, German retailer Metro Group, one of the foreign retail pioneers in Poland when it entered the country in 1994 with its Makro cash and carry stores, has been building shopping malls called M1. Ml houses Metro's various distribution lines such as Real, Media-Markt and Practiker DIY stores, side by side with other lessees from other sectors. Metro's strategy is to locate these retail centres in medium-size towns or in the outskirts of big cities like Warsaw or Lodz. The move into less populated suburban areas is timely after Tesco outraced Metro in the hypermarket sector when the British retailer acquired the 13 Hit hypermarkets to add to its 46 outlets. Meanwhile, Jerónimo Martins (JM) is flexing its muscle in the discount/supermarket sector via the Beidronka chain, Poland's largest supermarket group with around 680 stores. The troubled Portuguese retailer is in the midst of a restructuring scheme as it attempts to reduce its massive debt by selling diverse non-core businesses. After selling five underperforming Jumbo hypermarkets to Ahold in 2002, JM agreed in February this year to sell its stake in Polish cash & carry network Eurocash for around 030 million in a management buyout. The retailer has clearly put its bet on the supermarket format as it indicated that it would float Biedronka on the Warsaw Stock Exchange if market conditions improve. JM plans to invest 0200 million (US$212.1 million) by 2005 to expand Beidronka by adding 50 stores next year. French hypermarket operator Auchan, on the other hand, pursues both the hypermarket and supermarket routes. Last year, it acquired the Billa/Atac supermarket chain and renamed it Elea. In September, Auchan also opened its branch in Wola Park, Poland's biggest shopping and leisure centre. Auchan's Wola Park outlet is by far its biggest branch with a gross area of 30,000 square metres and around 17,500 square metres of sales area over two levels. The French group also disclosed plans to invest PLN2.5 billion in its Polish operations by 2008, with a target to open between 15 and 20 new stores. Auchan currently operates 15 hypermarkets, 11 Elea supermarkets and two other hypermarkets in a 50:50 joint venture with Schiever.
Carrefour is also tracking the supermarket route with recent reports indicating that the French retailer plans to invest over PLN500 million (US$128 million) annually if it secures regulatory approval to open both hyper and supermarkets. Carrefour plans to open from ten to 12 supermarkets this year and three to six hypermarkets in 2004. In response, Carrefour's British rival, Tesco Polska, disclosed plans to open six hypermarkets and boost its investments in a bid to preserve its turf in the hypermarket race.
Wal-Mart in the wings
In sharp contrast to the fervent efforts of its European rivals, Wal-Mart bids its time and waits in the wings with regard to Poland. The Polish media has frequently reported on the ambitions of the world's biggest retailer in Central Europe. Last year, reports were rife about Wal-Mart's interest in Casino's Geant chain, which the French retailer promptly dismissed as pure speculation. In May, the Polish market was again buzzing with reports of another Wal-Mart takeover suggesting that Wal-Mart is after the 43-store Rema 1000 network owned by Norwegian retailer Reitan. The Rema chain has been struggling to keep afloat in recent years with trade reports saying that it has been up for sale for about six months.
Chronic talks on big takeovers provide fuel to the observation from market analysts who say that the fate of hypermarkets tracking a downhill path will end in bitter takeovers if operators fall behind in their strategies. Gniazdowska said the death knell for underperforming hypermarkets is to insist on sticking to poor locations and weak concepts (See Boxed Story).
"Old hypermarkets will go down and consistently suffer eroding market shares. The reality is that weak chains will be taken over as the market consolidates. The success of the French hypermarket operators is anchored on a combination of location and innovation, not to mention their focus on price and quality," said Gniazdowska.
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The (retail) heat is on Food retailers elbowing for space in Poland's retail scene should heed the Polish proverb "Gdzie kucharck sze_, tam nie ma co je_" (Where there are six cooks, there is nothing to eat). As in the English equivalent that says 'too many cooks spoil the broth," this adage is a succinct reminder to retailers caught in the current stampede to up their stakes at whatever cost in Poland's increasingly crowded market. Consider the facts. German retailer Edeka unceremoniously packed its bags in March this year just after six years twiddling its thumbs, hoping for a sunny break in the grey skies of Polish retail. Edeka entered the Polish market in 1997 after it bought the Gdansk-based retailer, MDA. Three years later, Edeka sold a 45 per cent share of Edeka Polska to its local management. To its credit, Edeka never conveyed the impression that it intends to challenge the retail frontrunners, having merely indicated its ambition to be present in one of the most promising markets in Central Europe. Edekas expansion programme unrolled in fits and starts after it started with 25 stores and generated a turnover of €25 million (US$28 million) in 1997. It took Edeka five years to double that figure, a clear sign that if it intends to stay in the ring it might as well roll up some sleeves, do some limbering up and prepare for a sooty fight. Instead, Edeka threw in the towel and left with barely a squeak. Exit victim number two, Dohle, also a contender from Germany but with a more hands-on approach and attitude than its compatriot. Initially, Dohle issued flat denials in July 2001 to media reports that it was in a huddle with French retailer Auchan over the HIT chain in exchange for an estimated DM500 million. But obviously Dohle could not keep the sight of its clammy hands out of the press for a long time as it watched from ringside the tooth-and-nail fight among Western European retailers. Active in the Polish market since 1994, Dohle finally hit the ropes when it confirmed a year later that it clinched a deal with British retailer Tesco, The deal worth under .£420 million unloaded the 13 HIT hypermarkets from Dohle's Central European portfolio. Based on periodic earnings statements, there is a line of foreign retailers that are failing to hit the marks, with some reporting a continuing slide in turnovers in the last two years. Local retailers are also in for the bad news. At the end of 2001, the Polish Chamber of Commerce issued a report forecasting that between 200,000 and 300,000 small retailers could be forced out of business in the next four years. Intractable, survivors in Poland’s retail race, however, could find comfort behind the mad scramble in yet another Polish adage: “Kuba stzela, Pan Bóg kule nosi” (Jake shoots, God guides the bullets). Indeed, leave it to fate; continue whistling in the dart and strike while the iron is hot. |
EU integration
With regard to the planned EU accession of Poland, market observers are one in saying that Poland has sufficiently prepared itself for European integration. Poland's retail market has been open to foreign investors in the last decade with all major European market players already operating in the country, which ensures that EU integration for the retail sector will be positive. Food producers with links to foreign retailers will only stand to gain by having access to the expanded EU internal market.
Recurrent complaints from some foreign business communities regarding perceived inconsistency and unpredictability in regulatory decision-making will also be properly addressed as the EU presses Poland to undertake administrative reforms. Polish authorities are not only obliged to adjust Polish law to the requirements of EU rules but also to respect decisions taken by the European Justice Tribunal. Changes in Polish law would also redound to the benefit of foreign retailers as these amendments concern protection of confidential company information, elimination of 'rock-bottom' sales and the ban on promotional lotteries.
Sources: USDA/FSA-Gain Report, CAL Research & Consulting/GfK Polonia, Cushman & Wakefield Healey & Baker, M + M Planet Retail, Eurornonitor, Supermarket News
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