British retailer Tesco, which this week became the first UK supermarket to break the £2 billion profit barrier, plans to build on a strong performance across Eastern Europe by adding more than 30 stores in the region this year, increasing opportunities for manufacturers with local production, writes Chris Mercer.
Tesco, which unveiled profits up by a fifth to £2.03 billion and sales up by 12 per cent to £37 billion for the year ending February 2005, said it had been bolstered by strong performances in non-food and also overseas markets.
Promising results across Poland, Hungary, Slovakia and the company's less-developed Czech Republic market helped Tesco's Eastern Europe division to increase profits by nearly a fifth.
This was driven by a 13.4 per cent sales rise, despite the firm being forced to make unusually heavy price cuts due to rising competition in the region from discounter stores such as German chains Lidl and Aldi.
Now, Tesco said it planned to open a further 14 stores in Hungary, eight in the Czech Republic and five in Slovakia as well as increase its retail space in Poland by 14 per cent. The firm already has just under 200 stores across these four countries.
Tesco's expansion could bring new opportunities to suppliers operating inside the region, especially as the firm plans to open a new fresh food distribution centre in Slovakia this summer, set to compliment two others recently opened in Poland and one in Hungary.
"Around 90 per cent of our products are sourced from the region," said Greg Sage, Tesco spokesperson on international strategy, adding that this system worked well for Tesco because it could "provide products that local customers want".
Sage also spoke positively about the quality of Eastern European products and said that Tesco was "working to improve product quality all the time".
However, a main issue for both current and prospective suppliers in the region is the terms they can agree with Tesco.
The retailer has followed a rigorous price-cutting strategy across the region over the last year, something that may squeeze suppliers' margins, particularly in the face of rising raw material costs at the other end.
Food retail suppliers in the Czech Republic recently complained to the government about the fees they were forced to pay retailers to get their products on the shelves.
Suppliers called for shorter payment periods and changes to the country's Commercial Code to prevent retailers selling products below production costs, according to local press reports. The government has held meetings with retailers on these issues.
Yet, Tesco maintains that it operates a fair supplier system in all its markets. I>"We recently conducted a confidential supplier survey to understand what is good and where we can improve. The results were very positive," said the firm in a statement.
And lucrative retailer contracts have become one of the best ways for suppliers to get their products sold across the widest area. John Band, analyst for market research group Datamonitor, told www.Cee-FoodIndustry.com that many Eastern European countries were among "the most supermarket-dependant in the world".
A deal with Tesco may therefore work both ways, though competition among suppliers is likely to increase as the firm changes its building strategy to include more compact hypermarkets, roughly around 30,000 sq ft in floor space.