KamLibrary - Market Review - Emerging Retailers In Eastern Europe

The growth and development in the less-saturated retail markets of Central and Eastern Europe has created a whole new crop of regional retail majors. These companies have worked quickly to entrench themselves in these markets, even as major international players start to put their foot through the door.

Background

Roughly defined, the Central and Eastern Europe countries include – Albania, the Baltic countries (Estonia, Latvia, Lithuania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Romania, Poland, Serbia and Montenegro, Slovakia, Slovenia, and Ukraine (for the purposes of this article, Russia is not included in this definition).

The first markets in this region to come to the attention of major international players were the Central countries, which bordered established markets. Countries such as Romania, the Czech Republic, Poland, and Hungary were targeted by pan-European hypermarket and discount chains, who now dominate these markets. The retail environment in these countries has therefore matured quickly, and become an extension of the battles fought between the global players in their home markets.

The saturation in these countries has led to a focus on the smaller countries in Eastern Europe, which are benefiting from a mixture of booming economy, higher consumer demand, and a maturing retail environment. These factors are also why five of these countries were ranked among the Top 25 most attractive emerging markets, according to the AT Kearney 2008 Global Retail Development Index.

Market Status

The retail scene in many of the Eastern European countries is still dominated by small independent shops, but organised retailers are slowly growing in strength and developing a formidable presence. There is wide scope for store expansion in these countries, as most parts of the market have quite a way to go before they reach near-saturation levels.

Retail sales are growing strongly, as many of these countries benefit from their introduction into the wider EU. Figures from Eurostat reveal double-digit growth in food sales in many of these markets for the 12 months ending May 2008 – average sales up 21.6% in Lithuania, 21.3% in Bulgaria, 20.8% in Latvia, 16.5% in Estonia, and 13.9% in Slovakia.

Retail store growth continues to grow in double-digit percentage terms. While initial store formats were restricted to supermarkets and hypermarkets, smaller neighbourhood grocery stores and convenience store formats are now being rolled out at a rapid pace.

There are many small and medium-sized retailers in the region, but some have realised the potential of expanding across several countries. Most of these leading retailers are owned by local conglomerates, which have a diverse array of interests. These groups not only operate chains across various market sectors, but are also manufacturers, distributors, and into non-retail related activities. Many of them draw on their other interests to boost synergies for their retail activities. The grocery retail market in many of these countries is fragmented, with a few dominant retailers existing alongside a multitude of smaller chains.

Five To Watch Out For

Mercator
This is the largest retailer in Slovenia, and also operates a large store network in Croatia, Serbia, as well as Bosnia and Herzegovina. It held an estimated 37% share of Slovenia’s grocery retail market in 2007, as well as 8% of the market in Serbia, 6% in Croatia, and 2% in Bosnia and Herzegovina.

The group operates formats such as hypermarkets, supermarkets, small neighbourhood grocery stores, discount stores, and cash & carry outlets. Besides this, it also has a diverse non-food store network, and operates chains that sell sports equipment, cosmetics chain, apparel, and consumer electronics. The group operates under a raft of banners, including its own name, Intersport, Hura!, Presoflex, Omega, Beautique, Modiana, and Maximarket. It also has a major controlling stake in Serbian retailer M-Rodic.

Mercator currently has over 1,420 outlets (including 300 franchises), covering a net sales area of over 600,000 sq m. Over 1,000 of these stores are in its home market, with Croatia being its second-biggest market. In 2007, Mercator saw its group net profit rise 45% to €43.8m, while group net sales rose 18% to €2.45bn. Sales in Slovenia accounted for €1.75bn of total sales.

Mercator expects sales of €2.63bn this year, and is aiming for an annual revenue growth of 9.0% between 2008 and 2012. It plans to invest €220m-260m a year during this period on expansion.

Delta Holding
Serbia’s third-largest company and the largest private entity in country, Delta has interests in retail, food processing, agricultural production, FMCG distribution, real estate, and automotives. Its retail arm is Delta Maxi, which is part of the Delta M Group, the largest division of the entity.

Delta Maxi is the biggest retailer in Serbia, and operates various food retail store formats under the Maxi, Mini Maxi, Super Maxi, and Tempo banners. It also operates sports equipment franchises through its Delta Sport Group division. In 2007, it had a group turnover of €1.72bn.

In Bulgaria, Delta has a majority controlling stake in supermarket chain Piccadilly, which plans to invest €120m over the next four years to develop the Tempo brand. The group has recently stepped into the Ukrainian market, and is currently looking for suitable locations in the country. It also has plans to enter the markets of Albania, Macedonia, Bosnia and Herzegovina, and Ukraine. The group estimates its 2008 turnover to jump to €2.88bn.

Agrokor
The largest private company in Croatia, it operates the country’s biggest retail chain and is also a major manufacturer of food and beverages.

Agrokor runs the Konzum grocery chain, which operates under the Konzum, Konzum maxi, and Super Konzum banners. Through this division, it also runs the Velpro wholesale centres, as well as the Kozmo drugstore chain. The group is also in charge of the Tisak newsstand retail chain, the country’s leading kiosk store.

Agrokor has over Konzum 570 stores in Croatia, 14 Velpro centres, and over 1,200 Tisak sales points. It also has 62 Konzum stores in Bosnia, where it has a 12% market share. It also has operations in Serbia, and has announced plans to expand operations to Bosnia, Bulgaria, and Russia.

Maxima
The largest retail chain in the Baltic region, owned by private firm Vilniaus Prekyba, which also controls the Euroapotheca pharmacy chain and the Ermitazas DIY chain. It has around 36% market share of the grocery retail market in Lithuania, 21% in Latvia, and 10% in Estonia.

The group operates stores under the Maxima X, Maxima XX, Maxima XXX, T-Market and Ermitazas banners. The group currently operates 416 stores - 226 stores in Lithuania, 123 in Latvia, 46 in Estonia and 21 in Bulgaria. Maxima reported sales €2.37bn last year.

The group aims to consolidate sales of its non-food products and services, continue expanding its chain in its existing markets and enter new markets. It expects its grocery store numbers to grow rapidly, rising to 519 by the end of 2008 – 258 in Lithuania, 149 in Latvia, 69 in Estonia and 33 in Bulgaria. In 2008, Maxima expects group sales to rise to €3.14bn.

Rimi Baltic
This is the second-largest retailer in the Baltic countries, with operations in Latvia, Lithuania, and Estonia. Rimi Baltic is fully-owned by Sweden’s ICA Baltic, having originally been set up as a 50:50 joint venture between ICA and Finland’s Kesko. It has an estimated 16% of the grocery retail market in the three countries.

The group currently has 220 stores across the region – 66 in Estonia, 96 in Latvia, and 58 in Lithuania. It operates stores under the Rimi Supermarket, Rimi Hypermarket, Rimi Compact Hypermarket, Saastumarket, and Supernetto banners. In 2007, Rimi’s group sales rose 19% to €1.16bn, with sales in Estonia amounting to €363.9m, those in Latvia worth €544.5m, and Lithuanian sales coming to €248m. In the first six months of 2008, group sales have risen 15% to E636.7m, with sales rising by 9% in Estonia, 13% in Lithuania, and 20% in Latvia.

The group has declared its intention to grow aggressively over the next few years, in order to gain back lost market share and fend off smaller rivals. It plans to open 15 new stores in Latvia this year, and up to 35 new stores in Estonia in coming years.

Outlook:

The retail markets in Eastern Europe are expected to grow at a strong rate for several years, and are even expected to be much more resistant to the current global economic downturn. This is likely to interest big international players who are facing declining sales in many of their core markets. However, these retailers will face strong resistance from the current market leaders, and may resort to the acquisition process alongside organic growth, as a means to establish themselves quickly.

Date article published: 01/07/2008

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