Baltic Bonanza
Elsevier Food International, Vol.7, No.2, May 2004 Pascal Kuipers
Since the Baltic countries returned to independence, their retail sectors have changed dramatically. The sectors have been privatised and entrepreneurial retail pioneers have set up businesses. In recent years, state-of-the-art retail structures were established, catering to a Baltic clientele with a rising disposable income. This attracts foreign investors, which again heats up the Baltic retail sector.
Ignas Staskeviius, general director of Lithuania-based retailer VP Market, has no background in retailing. In fact, he was educated as a paediatrician before he saw a business opportunity back in 1992. With eight other founders – all academics eager to make a fortune in business – he bought sugar companies from the young Lithuanian state which was privatising businesses and he founded Vilniaus Prekyba Group (‘Prekyba’ means food in Lithuanian). Also in the early 90s VP acquired food stores, but retailing did not become core business until 1998, when VP sold its four sugar companies to Danish company Danisco. The money gained was then invested in food retailing in Lithuania and currently VP Market – as VP Group’s retail branch is named – is the largest retailer in Lithuania and Latvia.
Michael Avrutin is an American citizen with Latvian roots, living in New York and engaged in real estate management. In 1991 he established the retail company Nelda, whose 2001 sales is estimated at US$33 million. Since 1997 Nelda split its business into real estate – owned by Avrutin’s American real estate company – and the operational business that is being run by Iluta Kalina, a young businesswoman who is Nelda’s CEO.
George, Oliver and Nicolas Ortiz are three Belgian brothers who arrived in the autumn of 1991 in Lithuania to set up a business in the wake of the fall of the Iron Curtain. They noticed the lacking food distribution infrastructure and opened their first store in 1992. The company is named IKI, which means ‘till next time’ in Lithuanian. Being one of the first private companies in post-Soviet Lithuania, IKI had to deal with the red tape habits of the then local authorities. “Power abuse by minor officials hindered business development; various unsuccessful attempts were made to close IKI stores,” the retailer’s website reads.
Retailer for sale
After a decade of developing a modern retail structure, the three Baltic countries are increasingly eyed by international retailers who show a keen interest in these North European markets are to join the European Union as of 1 May 2004. Schwarz Group (Lidl) has already bought land and opened offices in the three Baltic states, and in the grapevine, the names of Carrefour and Metro Group are mentioned.
Established (local) retailers are therefore speeding up their activities and some of them may well be tempted to seize the opportunity and cash in. Especially when managed by entrepreneurs with no roots in retailing. Leading retailer VP Market for instance, dominates its home base Lithuania where it holds a 50 per cent market share with hypermarkets (Hyper Maxima and Maxima Baze), superstores (Maxima), supermarkets (Baze, Media, T-Market) and neighbourhood stores (Minima). With a 20 per cent share, VP Market is also market leader in Latvia where it has hypermarkets (Hyper Maxima), superstores (Maxima) and supermarkets (Mini Maxima and T-Market). In Estonia however, VP Market’s position is modest with only one store (a T-Market supermarket) which still accounts for a 1.6 per cent share of the market.
Last January, VP Market said that it “aims to pursue fast track expansion in al three Baltic countries this year”. In April 2002, M+M PlanetRetail quoted VP Market’s general director Staskeviius saying that “The Estonian market is saturated. Maybe it will pay us more to enter the Ukrainian and Russian markets.” Last December however, the same source said that VP Market revealed fast-track expansion plans for Estonia for the years 2004 and 2005.
In December last year, VP Market said it planned expansion into markets like Poland, Ukraine or Russia. This is a result from failed negotiations earlier in 2003 with possible acquirers of the Lithuanian retailer. “We haven’t found anyone who can afford the price at which we value ourselves,” said Staskeviius to M+M PlanetRetail in May 2003. One year earlier the Lithuanian press reported that VP Market was preparing the entry of a strategic investor by taking direct control of real estate to ensure financial transparency. This would enhance the retailer’s attractiveness to foreign investors. “A strategic investor will take over VP Market sooner or later,” M+M PlanetRetail quoted Staskeviius in July 2002.
January 2004 VP Market announced that it would receive a €35 million loan from the European Bank for Reconstruction and Development (EBRD). “This agreement is important for us not only financially, but also as recognition of our standing in the market place,” commented Staskeviius, thereby diplomatically putting VP Market up for sale: “The loan from a bank like the EBRD shows the transparency, stability and reliability of our company’s activities.”
The consolidation scenario
Foreign retailers already represented in the Baltics are retailers from Scandinavia – most notably ICA AB from Sweden (for 50 per cent owned by Ahold) and Kesko from Finland. In 1997, Norwegian retailer Hakon Gruppen was the first foreign retailer to enter the Baltics by setting up shop in Latvia with its RIMI supermarket chain. After Hakon was acquired by ICA in 1998, this Baltic operation became part of the Ahold-ICA Holding, which was established in 1999. RIMI is the supermarket banner that ICA AB operates in all three Baltic states. In Latvia, ICA also has four hypermarkets under the Maxi RIMI banner and ICA’s two hypermarkets in Lithuania have a different name: Hyper RIMI.
“Consolidation in retail will happen with the replacement of the early investors by long term players with confirmed retail competences that are looking for growth markets,” says Antonio Soares, CEO of ICA Baltic. “That would be the case even without any new entrance from Metro Group or Lidl, but can be faster with them. Small local players will suffer unless they organise central buying capabilities.”
The Hungarian trade alliance CBA intends to drop a lifeline to interested small local retailers in the Baltics. CBA is a buying and marketing organisation for some 40 member companies in its home base Hungary, which expands its operations abroad. Now CBA is active in Poland, Slovenia, Slovakia, Croatia, Romania, Bulgaria and since last year also in the Baltics. In October 2003, CBA recruited Lithuanian retailer Aibe and its Latvian subsidiary, reported M+M PlanetRetail, quoting Aibe’s director Egidijus Aleinikovas: “The CBA arrangement will enable us to withstand new competitive pressures from multinational retailers as we join the European Union.”
Finnish retailer Kesko first set foot on Baltic ground in 1999 in Estonia and expanded its operations to Latvia (in 2001) and Lithuania (in 2002). Anticipating the market entry of German discounter Lidl, Kesko is dramatically speeding up the pace of opening discount stores in Estonia and Latvia under its Säästumarket banner, whose logo shows a remarkable resemblance to the logo of Lidl (see the photo in Elsevier Food International, February 2004, page 68).
ICA and Kesko announced in December last year their intention to establish a 50/50 joint venture for their Baltic operations. The joint venture targets a 25 per cent market share in the Baltics within three years. In 2003 the intended joint venture partners in the Baltics had combined sales of some €550 million which – according to ICA AB – accounts for a 15 per cent market share.
ICA says it is strongest in Latvia where it has a 17 per cent market share, whereas Kesko is strong in Estonia with a 23 per cent share of the market. In Lithuania, ICA ranks third after IKI and VP Market who hold much larger shares in their home market. Lithuania may well be the first target market for international retailers, keen to setting up shop in the Baltics. “Many of the large foreign retailers already operate retail infrastructures in the neighbouring Polish market,” said Seppo Hämäläinen – vice director Kesko Foods in the Baltics and deputy CEO of the intended joint venture – in a recent interview with the Swedish business publication Utblick. “From Poland they can easily expand to the north, to Lithuania. The natural process of consolidation that has already happened in Scandinavia, will also happen in the Baltics and in five to ten years each of the Baltic countries will be dominated by two or three large chains.”
Baltic perspective
Historically the Baltics’ prospects look good as well. In the 1930s the standard of living in the three Baltic countries was higher than living standards in Finland. The rise of communism crushed this Baltic perspective, but now Estonia, Latvia and Lithuania are quickly recovering and will in the future at least be at par with their fellow EU-member state Finland.
“EU membership will increase the development of Western retail formats with the release from import duties,” Soares says. “Sourcing of private label products in Poland and Germany might trigger a faster entrance from the German discounters. Easier flow of products between the Baltic countries may also help the consolidation of producers and retailers and allow for single delivery points in the region. Foreign investment in infrastructures, industry and services will generate better income levels and modernised consumption levels like eating out.”
In this respect the access to the Baltic market of Colliers International – a global real estate developer – clearly indicates that change is at hand. “The Baltic real estate market has been steadily growing in importance and this trend will become even more pronounced after the Baltic countries’ accession to the EU,” said Thor Bjordal, boardmember of Colliers International Europe to the Latvian newsletter News2biz.
Last March Colliers opened its office in the Latvian capital Riga. Mihail Morozovs, general director Baltic states at Colliers International, expects increasing demand for retail real estate in 2004/2005. “There will be aggressive competition in all three countries,” he says, referring to VP Market’s ambitious expansion plans and the intended Baltic joint venture between ICA and Kesko. “Kesko and ICA will share distribution and marketing costs, which will allow them to invest more money in new projects,” Morozovs says. “And next year Lidl will come on the market. Lidl already started to buy land for construction of retail sites and it’s opening offices in all three Baltic countries. In general, due to the fact that mainly custom taxes are already cancelled for products coming from the EU, and internal borders will disappear within the EU, the Baltic states will be attractive markets for investment projects in retail sites.”
| Estonia | Latvia | Lithuania | |
| GDP (US$mn) | 8,983 | 10,867 | 19,274 |
| Consumer spending (US$mn) | 5,111 | 6,818 | 11,868 |
| Retail sales (US$mn) | 2,196 | 4,184 | 6,541 |
| Food retail sales (US$mn) | 1,047 | 1,616 | 3,446 |
| Foodservice sales (US$mn) | 164 | 241 | 531 |
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