POLAND – RETAIL MARKETPLACE 1999-2000.
A year is long time in the life of an emerging economy. In Poland, soundly managed, robust economic growth under-written by growing productivity and an avalanche of direct foreign investment resulted in further qualitative leap of the retail scene. Polish consumer rose to the challenge acquiring more and more material possessions.
A. BASICS
Like in the previous years, the growth of the Polish retail sector outperformed the overall growth of the economy. In addition in 1998 the industry achieved higher gross profit margins by 0.5%. At the same time 'other costs' rose disproportionately resulting in overall drop in bottom line incomes for retailers. Given that bulk of retailers comprises small independents one should look at this 'lower income' phenomenon with a dose of skepticism. However, occupancy costs imposed by western mall developments are beginning to bite.
The amount of stalls which started Poland’s free market retailing continues to decline. At the last count there were just fewer than 400,000. In 1997 the official statistics have been discontinued due to low integrity of data. Overall number of shops in Poland grew to 450,000 in 1998 - a 5.8% growth on the previous year.
Table 1.Retail sales growth, year-on-year.
Country / Previous year = 100Ireland / 108
Poland / 107
Italy / 107
Portugal / 106
Great Britain / 105
Sweden / 104
Norway / 103
Holland / 102
Denmark / 102
Greece / 102
Most shops are smaller than 500 sq. ft. Shops of over 4,000 sq. ft grew the fastest again (by 8.4%) but they represent only 0.75% of all retail units. Most are foreign owned. In percentage terms hypermarkets grew the fastest. They reached 166 in 1998 - from 107 in 1997: a rise of 55%. Unofficial 1999 figures claim 192 units.
The sales figures show that 'large and medium-size' operators already account for over 50% of turnover. The generous definition of 'medium' skews the data but the trend is obvious.
This trend toward larger stores is further strengthened by runaway shopping mall construction, which offers western standard shells. Poles support this. Reported dwell times are now averaging two hours which is twice the rate for Norway (whose developers built the best malls in Poland so far).
Table 2. Store numbers.
Year / 1995 / 1996 / 1997 / 1998 / 1997/1996 / 1998/997General grocers / 160,415 / 165,283 / 169,454 / 177,321 / 102.5% / 104.6%
Clothing stores / 29,776 / 27,201 / 30,503 / 35,051 / 112.1% / 114.9%
Shoes and leather goods / 9,708 / 7,185 / 7,875 / 8,703 / 109.6% / 110.5%
Brown/white & household / 12,797 / 8,185 / 8,097 / 8,183 / 98.9% / 101.1%
Furniture/lighting / 9,339 / 5,670 / 6,092 / 6,717 / 60.7% / 107.4%
Overall- non food / 91,766 / 71,560 / 77,781 / 86,519 / 108.7% / 111.2%
Source: Ministry of Economy, Warsaw 1999
There were over 86,500 non-food stores in 1998 engaged in mainstream retailing (excluding department stores, general stores in villages and car showrooms) representing an impressive 11.2% rise on the year before. Overall, retailers now employ over 1,000,000 people.
Consumer spending patterns are changing toward those predominant in the West with growth of non-food purchases by households outpacing food buying (11.2%). Such rate of growth is unheard-of west of Oder.
B. SPECIFICS
1. Generic Retailing – market outline.
Local retailing, operating bulk of stores, has been dramatically improving, especially in the major cities. Despite this leap local retailers as a whole haven’t yet achieved quality of operation that would allow them to compete successfully with the incoming foreign retailers.
Three main reasons applicable before remain unchanged:
1. Polish retailing remains fragmented although large local forces are slowly rising.
With some exceptions within the grocery, DIY and electrical sectors there are still few sizeable chains of stores. The largest local non-food retailer is ECI – grouping Centrum Department Stores and few other stand-alone brands. They trade from 125 locations. Curry's look-alike 'EURO AGD/RTV' has 60 units. The largest children's clothing retailer had 20 stores and DIY retailer - 30. The latter is now owned by Kingfisher and can only be classified local by the application of the Rusedski principle.
2. Professional know-how is getting better but not yet at a pace enabling operators to close the gap on foreigners. Resources needed to acquire it are still not sufficiently allocated.
This bodes well for western arrivals, as most tend to excel in all the requisite retail skills, techniques and efficiency of application of resources.
3. Limited own funds of generic retailers and expensive bank credit are barriers to growth.
Although the situation is improving, the fault lies with the banks who until recently were spoiled by making too much money keeping their snouts in the government finance trough and did not have to depend on normal, commercial lending for their existence to the degree applicable in the West. Change crept in from mid-1999. Reluctantly banks have joined the ranks of fund providers, in turn spoiling the game for venture capital firms who until then were the only meaningful finance provider in the country.
Polish government in its annual state of the economy report agrees with the criticism:
In the situation of increased presence of large space retailers both international and national it is necessary for the smaller units to work together, especially by joint buying while 62% of them state that there is no need for it. In addition poor access to credit and high interest rates make investments difficult. Lastly, the lack of adoption of the state of the art systems, logistics and modern internal structures further diminishes their competitiveness.
It concludes: Competition in this sector is increasing and the bulk of retailers who are of small and medium size are unprepared for competitive battles in the marketplace.
1.1. Generic Retailing – operators.
E-commerce analogy of Old Economy versus New Economy bears true here. Local operators can be divided into ‘oldies’ – however rejuvenated - and the ‘new bloods’ arriving on the market without the baggage of the socialist ‘no-service’ economy.
Flag bearers for the oldies are manufacturer owned fascias, most with a large national presence. Cora, Telimena, Pabia, Moden, and Intermoda - all ladies wear specialists – trade in most locations and are a controlling force in smaller catchments. They have been joined by country's largest suit makers Bytom, quoted shirt makers Wolczanka, coat manufacturers Vistula and several others. While they have good visibility, their store environment is only now changing for the better. Vistula in particular has been adept at enhancing their USP. New, French–sounding brand name, enhanced store environment and complimentary product ranges put it in good stead to survive more competitive years to come.
The new bloods are becoming quite visible in major conurbations. A good example is the upper-to-mid-market clothing operation - Royal Collection - growing steadily in Warsaw and other major cities. Hexeline (mid-market ladies fashions) - a brainchild of young entrepreneurs from Lodz has grown steadily, supported by local design thought and operational procedures. Endo – designer children’s wear - is the first local retailer free of any major criticism – this could be the first international retailer to emerge from Poland. Other good operators within children’s sector include 5-10-15 and Chico Kids. Teenage fashion chains do well. Troll was the first and has now spread to most prime locations. Terranova - a new, Poland-only vehicle by Italian garment makers - followed and then overtook them as the first port of call for fashion conscious youth. Kameleon is by far the best shoe retailer with Gino Rossi following them more in numbers than quality.
Good operators are beginning to emerge in the electricals sector (locally known as RTV/AGD). Market leaders are EURO with about 60 stores followed by Elektroland who so far only concentrates on Warsaw. It tries to resemble Darty and is unsurprisingly a product of expatriate Frenchmen.
These developments confirm the market reaching the next competitive stage, where each sector hosts plurality of directly competing brands.
Smaller independents have now formed much-awaited buying groups.Siec (network) is one example, grouping over 500 food stores. Orbita unitesgrocers in the north-east. Another one operates in the drugstore sector with 200 members.
In the department stores sector only one local operator exists. DT Centrum started life in 1968 as the monopoly department store group with only Warsaw properties worthy the name. In 1998 it was sold by the state to Eastbridge – a Dutch based grouping - through its Polish subsidiary Empik Centrum Investments. Aside ECI (with 70% stake) shareholders include EBRD and a Polish bank. The deal also included a guarantee to buy further 200,000 sq ft of prime space in the centre of Warsaw on soft terms. They are now executing it (despite huge political fallout when this became known).
Following the acquisition, ECI launched a large-scale, refurbishment programme.
Premises improvements have been accompanied by total revamping of the product offer. British concessions: Wallis and River Island and other good operators such as ZARA, Timberland and Esprit have been brought in. All ‘oldie’ manufacturers’ concessions are retained, as are previously supported local designers (Barbara Hoff). ECI have been quite inventive in some product areas and not averse to taking a risk on a new, but potentially exciting formats. Sense Philosophy is one such operation, providing ‘lifestyle/health’ beauty products along the lines pioneered by Body Shop.
Refurbished Centrum format is branded GALERIA and is now operating in six cities: Warsaw, Kraków (small space), Szczecin, Gdañsk, Lublin, Wroclaw and £ódz.
1999 revenues were pln 350 million or £ 58m ($ 90m) to which Warsaw contributed £ 21m ($ 33m) from trading on 150,000 sq ft. The figure was lower than potential due to the rolling refurbishment. In 2000 they are now on target to hit £ 28m ($ 44m) in Warsaw and £ 61 ($ 98m) across the chain.
Refurbishment programme has so far swallowed £ 31m ($ 49m) – 50% in Warsaw - but the properties and the retail mix aren’t completed. For example there is no catering, which in the west proved to increase sales through effecting longer dwell times.
Galeria now stocks over 400 world brands. Brand awareness is quickly becoming an important factor for Polish consumers. Healy and Baker survey stated that 46% of Polish consumers feel brands are important and becoming more affordable whereas only 25% of Czechs or Hungarians shared that view.
The Warsaw site comprising three adjacent properties gets 30,000 visitors a day but the conversion rate is low. Overall Centrum/Galeria served 10 million customers in 1999.
Radical improvement of shopping environment and revolution in product provision hasn’t yet been matched by the quality of customer service in many (but not in all) departments. Customer complaints – widely reported in the press - confirm analysts’ view that store staff – many of whom are relics of communist era ‘service-by-intimidation’ - prefer to do almost anything but serve. Indeed it is shocking to see the look-alikes of Soviet era female shot-put champions trying to sell youth, vibrancy and waif fashions in some departments. Talking to each other and sending browsers dirty looks are the all-time favourites amongst older selling staff.
Customers also report that layouts are confusing and product displays jumbled, although this should be toned down by their unfamiliarity with self-service, free-flow concepts.
Complaints about frequent shortages of sizes and options in foreign concessions, such as Esprit are justified. Some analysts blame them on payment disputes. Comments on sales from concessions failing to fulfill expectations also abound.
Aside from Centrum department stores, ECI runs locations in Poland under diverse fascias: Smyk – children’s department store, Empik (a cross between Boots and WHSmith) and Kodak Express. Annual group turnover is pln 10 bn (£ 1.5 bn or $ 2.4 bn).
1.2. Generic Retailing – trading conditions.
The reported stock turn of Polish retailers got better and stands at 9.6 times, annualized.
Good local operators (of whom there aren’t many) are more costs conscious than incoming westerners. Unlike the latter, they are well versed in estimating sales potential of sites and many voice concerns that these are unsustainable.
Leading Polish mid-market children’s clothing retailer 5-10-15 recorded an annual turnover of pln 7 from 14 stores (£ 1.2 m - $ 1.7m).
Justyna Kurek, owner of BabyColleCtion, a four-store chain of children’s toys, equipment and clothing is appalled at rent levels extracted by developers. She said: ‘at current rents here (Warsaw’s Reduta, a hypermarket anchored mall) we need to achieve sales of pln 1000/m sq/month to make ends meet (£ 175/sq ft). At Polish sales densities it's in the realm of dreams. Landlords demand rents well in excess of $ 45 (per sq meter per month including service charges) and as result we do not make money. In some centres local retailers have not been paying rent aside from lodging the initial 3-month deposit, as the sales did not materialize to the level required’.
For political and marketing reasons landlords cannot contemplate evictions.
‘Can’t they (landlords) see such short-term greed does not lead anywhere productive?’ she adds.
Well they can’t as the foreigners, who are still the majority of tenants in all new schemes, pay up and seemingly do not count their pennies too much.
There are first signs of this being counter-productive as the first foreign retail chain bankruptcy has happened with Intersport (7 stores) ceasing trading in the first week of April and some quiet pullouts are on the way. Seemingly laws of economics do not exclude anyone yet.
2. Foreign operators - the dam has burst.
Foreign retailers have now reached numbers enabling high visibility in all major cities. Grocers, which brought the first hypermarkets to Poland, are still the leading force, followed by caterers (McDonald's now operates 165 stores from the standing start in 1992) and DIY merchants. Fashion and footwear operators joined later and are quickly becoming a fixture in all the major cities.
Over 50% of all capital investment in retailing is now made by foreign operators. What's more, the capital committed to Poland trebled in 1998 (on 1997, when it doubled on the year before) reaching US $ 1,545 million (£ 980m). According to planning authorities about twice that is committed for the next year. As these figures do not cover investments of less than $ 1 million the reality is much bigger.
Numbers of foreign operators grew by 12% in 1998. Despite all this only 0.4% of all stores is in foreign hands. At the end of 1998 there were 1,657 foreign stores, up from 1,295 a year before. They occupy 9 million sq. ft or 3.7% of available space.
Table 3. Foreign retailers.
Year / 1993 / 1994 / 1995 / 1996 / 1997Number of stores with foreign capital / 483 / 748 / 925 / 1,295 / 1,657
Foreign capital shops' % share in overall stores total / 0.12 / 0.18 / 0.23 / 0.31 / 0.4
Source: Ministry of Economy, Domestic Trade in 1998. Warsaw 1999
Top operators are Makro/Metro, followed by French formats: Carrefour, Casino/Geant, and Auchan. Tesco is rapidly making up for the lost time, as is Ahold.Of the smaller space grocers Rema 1000 and Globi are active in the centres of towns. Jeronimo Martins, a Portuguese operator, invested heavily in establishing generic brands such as Biedronka supermarkets (ladybird), Eurocash and Jumbo. Together with Metro/Makro they are responsible for over 20% of all foreign capital committed. Other Metrobrands are Real, Roller, Media Markt, New Yorker fashions, M1 trade centers. Dutch Rossman dominates the drugstore market with 60 stores.
Office Depot (eastern Europe master franchise) is present throughout Poland. Vision Express successfully overcame internal upheaval preceding and following its takeover by France’s Grand Optique, who sent their top property/expansion specialist to the country to spur the growth again (Pierre Combet). Fielmann, the largest optical retailer in the German speaking Europe has now arrived with a pilot operation in Poznan. They plan to open 4-5 stores this year.
In the clothing stakes Carli Gry still dominates (Danish casual clothing retailer). Later arrivals were Vero Moda, Mondi, Max Mara,KappAhl, Palmers (Austrian lingerie) and Petit Bateau (children’s fashions). Shoe retailers are well represented with K-Shoes, Salamander and Bata.
Generally those who moved most energetically were able to secure levels of visibility unobtainable in sophisticated retail markets. Tobeto, with sites in all the prime mallsis a good example. They are Turkish children’s clothing retailer and were quick to commit.
Marks and Spencer finally opened the first store in a temporary but reasonably prime location. A consortium comprising a property developer, local investor and M&S Czech franchisee owns the Polish franchise. Storehouse has opened (BhS and Mothercare). Others, such as Wallis and River Island chose to be represented by local concessions. Arcadia brands are now visible in the new mall in Wroclaw: Dorothy Perkins, Burtons and Principles. They are a master franchise taken by a Polish petrol distribution company.