Since the expansion of the EU last year, retail chains from Western Europe have expanded rapidly in the new accession countries, bringing new products and a more convenient way of shopping to customers, and new opportunities and new problems for producers. Mark Rowe reports on the retail picture in Eastern Europe.
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Consumer groups and farmers in Western Europe have grown accustomed to giving supermarkets a hard time in recent months. Increasingly, criticism has focused on the prices paid to producers and the impact that large stores can have on local shops, jobs and communities. The supermarkets have of course fought their own corner vociferously, but in Eastern Europe the picture is rather different.
For consumers in the new European Union (EU) accession countries, such as Poland, Hungary and the Czech Republic, the supermarket can do little wrong. Foreign chains are expanding rapidly and shelves are filled with produce that appears to send a message to consumers that the times of shortages under communism – still only 15 years ago – are well and truly over. The economic legacy of those times has also played a crucial role in the success of supermarkets. Under the communist regime, consumers in central and Eastern Europe bought most of their food in state-run retail shops and cooperatives, businesses that were run as nationalised, inefficient behemoths. During the transition period in the 1990s, the retail sector was privatised, and some domestic-capital supermarket chains gradually emerged. “Because communism nationalised all the shops you don’t have the history of much-loved local shops that you get elsewhere,” said John Band, an analyst with Datamonitor. “So there isn’t the issue of ‘evil’ supermarkets closing down the local business.”
Dynamic growth market
Poland saw its first supermarket open in 1995. Now the country has more than 500 hypermarkets and supermarkets. Most major international chains are represented: Tesco, Carrefour, IGA, Royal Ahold, and Metro. Hypermarkets are also the big winners in the two most developed retail markets, the Czech Republic and Hungary, where they account for 35% and 29% of shoppers respectively. Tesco plans to build a further 30 stores in eastern Europe this year – the company already has around 200 stores in Poland, Hungary, Slovakia and the Czech Republic – and will open a new fresh food distribution centre in Slovakia this summer, to join others in Poland in Hungary. Metro has 230 stores across 11 Eastern European countries, employing 45,000 people. A spokesman described Eastern Europe as “among the most dynamic growth markets in the world”.
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By GlobalDataThis was stressed by Band: “Supermarkets may be a bane for producers in the West because they drive down prices but they are fantastic in the east. They are an enormously helpful way to get branded goods onto shelves. They have long shelves that are really begging to be filled with western branded goods. It’s also usually the case that the supermarket will transport the goods so it saves you hassle on your distribution network.”
A recent report from market analysts GfK & INCOMA Research showed that 23 million people in the Czech Republic, Hungary, Poland, Romania, Serbia and Montenegro, Slovakia, Moscow, St. Petersburg and Kiev prefer the supermarket format above all others. In the Czech Republic, the number of hypermarkets surged from two to 105 between 1996 and 2001, driving many small retailers out of business.
Producers feel the squeeze
According to a report by Rapeepun Jaissard of the World Bank, there are several key factors that must be in place for supermarkets to succeed in Eastern Europe. He identifies these as: “political stability & cross-border logistical ability; growing per capita purchasing power; viable banking sector to finance transactions of the company and domestic and international suppliers; a presence of local supermarket acquisition targets. If these pre-requisites are in place the entry of large international supermarket chains can be very rapid,” he adds.
But the view from the local producers is dramatically different. In both Hungary and the Czech Republic, politicians are considering passing new laws to prevent producers from selling below cost price to the supermarkets and to stop the retailers from selling below cost price to the public. Supermarkets have been quick to apply the hard-nosed business practices that bought them success in Western Europe and which is difficult for local competitors to match. While Tesco says that around 90% of its products sold in eastern Europe are sourced form the region this has not stopped it playing hard ball with suppliers in a way familiar to western producers: in Poland, Tesco negotiated a 25% better price on carp from local suppliers after local suppliers matched the lower price offered by suppliers from Ukraine. Contract volume and delivery terms were enforced and any suppliers who failed to meet the exact terms were dropped.
“We face a real mess,” said Jaroslav Camplik, president of the Czech Food and Drink Association. “Supermarkets are pressing too much on prices. A lot of industries are still not reconstructed and we have perhaps 20 major retailers – that’s too many. Everybody wants to supply the supermarkets so they lower their prices. It’s destroying some producers already and the quality is lower.”
Supermarket dependent
According to Camplik, EU accession has exacerbated matters. “When we joined the EU the price of milk and sugar production went up but the retailers refused to pay the higher price and have started to import from abroad.”
A similar picture was presented in Hungary by Csaba Csontos, vice-president of the Hungarian Food and Drink Producers’ Association. “We look at Tesco and the other companies with ambiguity,” he said. “They are popular with consumers but they lobby very strongly at government level and do not always deal with the producers. We are seeing companies that go under because they have to sell their goods at below the cost price.”
However, Band believes the negative impact of supermarkets can be overplayed. “The structural adjustments of joining the EU have made life harder for food and drink producers in Eastern Europe,” he said. “But we don’t need to grieve too much for the producers. We are likely to see some kind of compromise between retailers and producers. Everyone is aware that there is a certain point below which you cannot work. While producers are angry they are not about to stop selling to supermarkets. The potential for producers is huge and they’re not going to cut off their own nose to spit their face.”
“Many Eastern European countries are among the most supermarket-dependent in the world but that isn’t necessarily a problem – as long as governments in these countries enforce EU competition rules and ensure that no retailer gets a monopoly or that a handful of retailers operate as a cartel then that should be sufficient to ensure a fair price for everybody,” he said.
