EU enlargement - threat or opportunity?
will tomorrow join the European Union, the culmination of 15 years
of rapid economic and social development since the end of Soviet
rule. But with most of the leading food retailers in the region
already owned by western companies, will accession bring any real
change to supermarket sector in the east, asks Chris Jones.
The coming together of east and west has been taking place ever since the momentous events of the late 1980s which saw the fall of the Soviet Union, and nowhere has this been more evident than in the food retail sector, where French, Dutch, British and German companies have become the leading players in just a handful of years (see tables).
So does this mean that there will be little left to change in the food retail market after 1 May? Well, actually, no, at least according to Boris Planer, emerging market specialist at retail analysts M+M Planet Retail.
"After Communism fell, western retail companies moved rapidly into the markets in the east, the Czech Republic, Hungary and Poland in particular," Planer told FoodandDrinkEurope.com.
"Now large parts of central and eastern Europe are dominated by these cash-rich groups - with the exception of a small pocket of resistance in Hungary and a handful of modernising regional players in the larger nations such as Poland - and this obviously means that, on the surface, accession will have little real impact on the make-up of the retail market there in the short term."
But this is not to say that change will not come at all - only that it will take far longer and be much more profound. "The retail markets in central and eastern Europe may be dominated by western players, but most of them are still making substantial losses at their businesses there, and that is likely to continue for at least another five years, even with enlargement," said Planer.
"Take Poland, for example, which alone accounts for half the population of the new member states and as such has been the prime target for western companies. But several of the western groups which set up shop there have already pulled out, unable to cope with the substantial start up costs."
While property prices may not be as high as in the west, retailers have nonetheless been faced with substantial cash outlays as they expanded eastwards, and the low standard of living there means that it has taken companies much longer to recoup these losses than many had originally thought.
"Even now, 15 years after the fall of Communism, wages in Poland remain around a fifth of the level in neighbouring Germany, and while salaries will inevitably begin to rise after accession, it is likely to take several more decades, if not over half a century, for any sort of parity to be achieved," Planer said. But for those companies which can continue to swallow the losses, the opportunities in the long term are substantial.
"Already we are beginning to see substantial improvements in incomes in the major cities in most of the accession countries, and this is obviously where the main retail outlets are concentrated. Food prices in some eastern European cities are now not that much lower than in the west," Planer added, suggesting that the time taken to recoup losses will shorten noticeably after accession as incomes increase.
While large-size formats, such as cash & carries, hypermarkets and superstores, dominate in the east - mainly because of the retailers' focus on major urban centres - this is also likely to change after accession, not least as a result of an increasingly vociferous small store lobby. "In Poland, new laws have been passed which now make it much harder to open hypermarkets," said Planer.
"Stores of more than 2,000 square metres in cities with a population of over 20,000 people must get official authorisation from local planners, and this effectively means that permission is rarely granted."
So supermarkets are becoming increasingly popular, and along with discount stores are expected to play a much more important role in the retail market in accession countries over the coming years. "Poland is again likely to lead the way in this regard, not least because it has such a low population density. Just 6 per cent of the population live in the Greater Warsaw area, and so retailers are inevitably going to be obliged to look to smaller cities in more rural areas. Supermarkets and discounters are likely to be the preferred format of choice, if only to avoid major problems of planning approval in these regions. And this will be the beginning of a major meltdown in the traditional, independent food shop sector which continues to dominate Poland's rural areas to this day."
Whatever format the companies choose for their stores, the certainty is that the number of modern outlets will continue to grow because the retailers' true power is in their size - the bigger they are, the more influence they have over suppliers and the more they can dictate prices.
And they are already exerting considerable power over the supply chain in eastern Europe - so much so, in fact, that one of the main changes after enlargement is more likely to affect the west than the east.
"The retailers' success in the east will be built on their buying power, and the unique structure of the market in the new member states will have a knock-on effect on suppliers in the west," suggested Planer.
"Retailers are increasingly asking their main suppliers to manufacture their products in the east because of the substantially lower costs there - even though in many cases the products being made are western brands. But this does not mean an end to local products - far from it. There will also be greater opportunities for eastern European food brands to move onto supermarket shelves in the west, and in any case, retailers have to continue to source at least 90 per cent of their food in the local market, if only for political reasons."
While productivity levels in the east are still some way below those in the west - some estimates suggest that it is more than half as high as in some countries like Germany - and production techniques are not always the most modern (though this is changing too as more and more manufacturers set up plants there), it still remains cheaper to produce food and beverage products in eastern Europe (notwithstanding higher transport costs), in turn allowing retailers to keep prices low (and increase their margins at the same time).
"Products manufactured in eastern Europe are not necessarily poorer in quality than those made in the west, that is not why they cost less," said Planer. "It is rather that core elements such as labour costs, ingredients, packaging etc. are all far cheaper there, and are likely to remain so for several decades to come.
"The irony of this is that it will become so much cheaper to manufacture products in the east that companies could begin to shift even more of their production there, with potentially disastrous effects on manufacturing jobs in the west. And higher unemployment generally means lower consumer spending, in turn meaning lower retail sales - all potentially sparked off by the increasing demands of western retailers for lower production costs."
