CEE food retail flourishes

The report from Polish company PMR likens the changes seen in the retail trade in this region over the last decade to a 'fast forward' version of the development of the western European retailing sector since 1945.

While Russia is clearly "behind the curve" in terms of its position in the cycle, the reoprt suggests, the physical geography of the country, together with tremendous challenges at a legislative and administrative level, make it questionable whether the country will ever follow closely trends experienced in the other Central and Eastern European countries. The only major exception to this is likely to be the major metropolitan centres such as Moscow and St Petersburg.

The report also looks at the challenges likely to be faced by the retail trade in the region following next year's accession to EU of a large number of central and eastern European countries. In particular, PMR suggests, the 'two tier' approach will impact significantly on logistics, income growth, pricing strategies and parallel distribution possibilities.

Enlargement is also expected to have a huge impact on the way food and beverage companies are run in the affected countries, with larger scale manufacturing operations in turn feeding larger scale retail operations.

The last 10 years have witnessed a number of significant trends within the region's retail sector, the report said. One noteworthy trend was the rapid growth and then decline in the number of small retailers. This was originally bought about by improving economic conditions throughout the region, but as larger retailers have moved in, attracted by the growth prospects, smaller retailers have been squeezed out.

In the food sector, the emergence of larger hypermarket chains, on both a national and regional level, has eaten into the smaller retailers' market share. This has also provided big opportunities for many of the leading western European supermarket and hypermarket chains, with leading players such as Metro, Carrefour and Tesco increasing their footprint within the region.

The rise in the number of supermarket and hypermarket chains has also led to an increase in own brand food items, both in the budget and premium priced sectors. This trend is further contributing to the pressure on smaller food and beverage manufacturers, as well as on smaller retailers.

However, it should also be noted that in parallel to these changes in the more dynamic countries and larger cities, other parts of the region's food retail sector have remained distinctly undeveloped. Indeed, in many rural areas, food markets still remain the chief source for family food purchases.

The report also highlights how relatively low income per capita levels have restricted the amount to which consumers fill up their trolleys on a weekly shop, as their counterparts might do in the west. Small and overcrowded apartments with reduced storage space restrict this kind of bulk shopping even for those who can afford it.

Many consumers also have limited freezer space, while low car ownership reduces the numbers who can buy products in volume.

The report also highlights price sensitivity a particularly significant issue within the region, with heavy discounting always proving a winner. Reflecting the more limited budgets for food purchases, consumers in the region are extremely price driven, the report said.

Pricing strategies have had to evolve very rapidly. In the first years after the introduction of the market economy, it was possible for retailersin some post-Communist economies to achieve a significant price premium compared to the rest of the world. Almost invariably, increasing competition from traditional rivals, together with local producers packaging and promoting their products in a similar way to their international peers without premium pricing, has produced an outcome where international brands are often cheaper in the region than elsewhere.

Retail rivalry is also starting to dog the region, with the large supermarket and hypermarket chains coming up against some stiff opposition. Small local retailers are lobbying their local politicians, just as their counterparts do in the west, to protest against the arrival of new hypermarkets with their low prices, economies of scale and aggressive purchasing practices. However, the report also points out that shopping malls are popular with consumers and, as is case in the more developed world, as long as retailers give consumers what they want, they will thrive.

International consumer goods suppliers whose goods line the shelves of retailers across the globe face specific regional challenges with their pricing strategies, which will intensify with many countries' accession to the European Union.

Those who produce locally, such as US-based meat processor Smithfields Foods which is aggressively investing in Central European production, are well placed to compete with increasingly well-organised local suppliers who have lower costs and aggressive pricing strategies.

However, this impacts on their ability to sustain pricing variations across the European Union. Retailers' global and European buying teams are increasingly questioning why money currently being made in grey parallel markets should be 'left on the table', PMR said.

Segmentation of the market, emergence or reinvention of local brands, the development of country-specific tastes, and the potential convergence of national and regional shopping patterns is continuing apace, the report shows, as markets narrow the gap with their counterparts in the west.

What is clear is that the fiercely competitive battle between retailers for access to customers' wallets will be fought just as bitterly in this region as in the west. But whether global retailers succeed or not compared to local retailers in long term profitability remains to be seen.

If analysts and industry observers predictions are correct, and the pattern of the rest of Europe is continued, the winners in the retail market in this region will be major global players. But this is by no means a given, as consumption patterns and consumer demographics are not the same as in western Europe.

Moreover, the global players have not had it all their own way in other markets - despite their strong footholds in Latin America and Asia - and there could still be opportunities for some local players to grow along side their western rivals, in particular in the smaller store segment.

This article contains is based on aPMR Ltd​ market report entitled Russia and CEE Retail 2003/2004. The Retail Trends for Emerging Europe.​