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 In recent years, many international retailers have entered Central and Eastern Europe (CEE), which has been a key growth driver for them and suppliers. But could the current global economic turmoil significantly impact their expansion plans in the region… or could it be presenting different opportunities?
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| Central Eastern Europe is a key growth driver for many retailers and suppliers. | |
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Growth, interrupted
The era of unabated optimism is nearing a close in most CEE markets. While the rate of growth is slowing, it is likely to remain faster than that of Western Europe, and there is still a lot of untapped potential.
But the region comes with its mix of challenges. For instance, salary inflation is a real conundrum for businesses. Today, top executives in the region often secure remuneration comparable to Western European standards. Profits, however, still lag behind Western standards.
Future growth will come through cost cutting and genuine, effective innovation.
Driving profitability – IGD’s survey of grocery executives
At IGD, we carried out an extensive survey of top executives in the grocery industry in June 2007, and our survey showed that market consolidation, supply chain and a lack of consumer insight were the biggest challenges at the time. This still holds true today.
Indeed, with fuel costs skyrocketing in 2008, and pressure to be more environmentally friendly in the future, there is no doubt supply chain excellence will play a crucial role going forward.
As core Western markets are more challenging than ever, international retailers and grocery suppliers now expect their operations in CEE to deliver better yields. We do not foresee a major drive to improve return on investment (ROI).
Tesco is a good case-study in the region as it has been intently focused on improving its international ROI over the last 3 years. In Central Europe, the development of a more efficient ‘UK-style’ model, based around a network of distribution centres is paying dividends. Today, high tech, part-automated distribution centres are in operation across the region. This has enabled simpler operations and better in-store processes.
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| Tesco warehouse located in Letnany, Czech Republic (Source: IGD Retail Analysis) | |
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| Tesco 1k format: Simplicity & low-cost store fixtures (Source: IGD Retail Analysis) | |
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Will retailers put their expansion plans on hold?
Difficulties in securing finance, coupled with poor performance in core markets is forcing international businesses to review, reduce or put on hold future expansion plans.
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Growth for retailers and suppliers in CEE will depend on: |
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the right type of product innovation
focused investments
more targeted promotional campaigns
a step change in supply chain efficiencies |
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This process could therefore affect the shape of expansion in the region. We do not foresee a change in terms of strategic direction but we expect retailers and suppliers to delay or lower future investments until 2010.
For instance, Tesco in Central Europe is responding to the economic slowdown by delaying some of its intended store openings, particularly in the Czech Republic and Slovakia, and reining in its investment in new space. It will be opening 53,000sqm less than originally planned for this financial year. There will also be a greater focus on smaller, less capital hungry stores.
This could be a common trend among retailers which are likely to open fewer stores than planned in 2008 and 2009 in order to reduce their capital expenditure and debt ratios.
Good times for discounters?
The future looks bright for one format at least. Discounters are flourishing in many economies where consumers have seen their purchasing power eroded in recent months.
Central European customers are burdened by high petrol costs and food prices. They are leaving their cars at home and shopping less often at hypermarkets. Instead, they opt for discount stores.
Central and Eastern Europe continues to offer unparalleled growth opportunities for this format. In fact, our research shows that Russia is set to emerge as the second biggest discount market in Europe by 2012, just behind Germany.
Discounters are steadily gaining market share and the table below showcases the leading discounters in the region in 2008.
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Top discounters in Central and South-Eastern Europe, 2008e
| Fascia |
Sales €m |
Stores |
Countries of Operations |
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| Biedronka* |
3,438 |
1,345 |
Poland |
| Lidl |
2,895 |
1,040 |
Croatia, Czech Republic, Hungary, Poland, Slovakia, Romania |
| Penny* |
1,949 |
578 |
Bulgaria, Czech Republic, Hungary, Romania |
| Netto |
510 |
180 |
Poland |
| Aldi |
240 |
90 |
Croatia, Hungary, Poland, Slovenia |
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| *Including former Plus stores |
Source: IGD research | |
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Lower commercial property prices and potential acquisition bargains
Ironically, there might be a positive side to the global credit crunch for retailers seeking to expand into the CEE region.
Lower levels of FDI could deflate somewhat the real estate bubble, helping retail firms buy commercial property at prices which would have been unthinkable 18 months ago. There will also be opportunities for cash-rich businesses to make interesting acquisitions. So, the landscape of the grocery industry in the CEE region will remain a dynamic one in the years to come.
In any case, the sharp adjustments which will take place in the months to come will provide the preconditions for resurging growth, probably in 2010.
More information:
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Unlocking Eastern Europe’s Potential
An in-depth guide to retailing in Central & Eastern Europe, this report highlights consumer & retail developments in CEE, regional retailer-supplier relationships and advice on future expansion approaches. |
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