INSIGHTS ON RETAILING IN EASTERN EUROPE
The retail sector in Eastern Europe is starting to resemble a modern retail environment similar to that of Western Europe. Still, many changes lie ahead, such as further hypermarkets development, massive consolidation, Western department stores and apparel chains entries into the market, and integration into Europe. Given these trends, Baltics is on the verge of revolutionary change, too. Having already gone through the stages of privatisation and commercialisation since early 1990s, retailers in the Baltics are likely to increasingly consolidate and rationalise their operations, differentiate from competitors and develop local and pan-regional chains. These chains are potential targets for acquisition by Western Europe's prominent retailers who are gradually increasing their importance in shaping Eastern Europe's retail landscape.
The Czech Republic has the highest GDP per capita in the region (US$ 5,300 at current exchange rates) and has experienced healthy economic growth for most of past several years. With population of 10.2 million, the Czech Republic is an attractive market for Western retailers. To leverage their purchasing and distribution power, they are not entering only the Czech market but usually several Eastern European countries.
The retail sector in the Czech Republic is dominated by Western retailers. The major player in food retailing is Ahold CR, a private joint stock company owned by Royal Ahold (the Netherlands), with total sales of US$ 390.6 million in 1998 (of which approximately 80% was food sales). Today almost 30 hypermarkets are operated there; the estimated turnover in the hypermarkets took about 30% of the Czech retail market in 1999.
The non-food retail segment accounts for approximately 55% of total retail sales in the Czech market. Overall, the sector is far less concentrated than food retailing.
Hungary's GDP per capita in 1998 (US$ 4,700 at current exchange rates), while low by Western standards, remains high for the region as a whole. Hungarian consumers (9.9 million) are the most sophisticated consumers in the region. Perhaps because of their historic links with the rest of Europe, Hungarian consumers, unlike their peers throughout the region, heavily favour well known Western brands.
The Hungarian retail sector is the most concentrated retail sector in Eastern Europe. More than half of total retail sales are controlled by the country's top twenty retail companies. One reason for this has been the country's success in enticing foreign retail companies. These include Germany based Metro and Tengelmann, Austria based Julius Meinl, France based Carrefour, and British based Tesco.
With a population of 38.6 million, Poland is the third largest market in Eastern Europe after Russia and the Ukraine. In 1998, Poland's GDP per capita stood at US$ 4,000 (at current exchange rates). Polish retail sales are slightly higher on a per capita basis than those in Hungary, but still well below those of the Czech Republic. While Polish retailing remains somewhat underdeveloped relative to that of its neighbours, the sheer size of the market, coupled with Poland's strong economic growth, renders it very attractive to Western retail chains. They have invested more than US$ 2 billion in Poland to date, and the investment flows continue to accelerate. For instance, Tesco is reported to be planning to invest more than US$ 700 million in developing a grocery network in Poland by the end of 2001.
With a population of 7.7 million, the three Baltic countries - Estonia, Latvia and Lithuania - constitute a relatively smaller market. In 1998, total retail sales in the Baltics were estimated at US$ 5.3 billion (excluding value-added tax); food accounted for 53% of total retail sales. With economic growth of 2% to 5% predicted in the coming five years, growth in retail sales should be visible in the region.
Despite successful privatisation of former state owned retail enterprises, much of retailing in the region remains traditional in nature. Privatisation has compounded the situation by creating considerable fragmentation within the retail sector. A significant portion of retail sales in the Baltics continues to be generated through small stores (50 square metres or less), though the level of fragmentation in the sector is similar to that in other countries in Eastern Europe - approximately 5 stores per 1,000 population. This is set to change shortly as the trend of consolidation has started speeding up and major players intend to increase their retail turnover by new store openings and acquisitions. Key roles in food retailing in the Baltics are presently played by approximately 15 companies, the largest of which is Vilniaus prekyba, a private joint stock company with more than 40 stores in Lithuania. The company's retail sales in 1998 are estimated at US$ 175 million, roughly 8% of retail sales in Lithuania and 3% of those in the Baltics. It is expected that in the foreseeable future the Baltics' food retail sector will witness rapid development of hypermarkets. As hypermarkets are a major store format run by aggressively expanding pan-European chains such as Ahold, Metro, Carrefour and Tesco, it remains to be seen shortly when those chains enter the Baltics market and develop the hypermarket business there.
The non-food retail segment accounts for 47% of total retail sales in the three Baltic countries. In terms of turnover, non-specialised stores selling non-food items (mainly department stores) have been less popular compared to specialised stores; sales in non-specialised stores (mainly department stores) represented 32% of total 1998 turnover in this segment in Estonia and only 25% of that in Lithuania.
As retailers develop the Baltics retailing further, the main issues facing them will be market segmentation and focus on target customer groups, retail consolidation, operational performance improvements (particularly on the purchasing and distribution side) and Baltic-wide expansion.