PRINT THIS STORY:

CHANGE TEXT SIZE:

European retailers head Eastward

By Susan Thorne

U.S. food- service companies have a strong presence in Eastern Europe.

For expansion-minded Northern European retailers, the road to opportunity appears to lead eastward.

Southern Europe was a popular cross-border destination during the 1980s, when French grocery and hypermarket companies, among others, staked substantial claims in Spain, Portugal and Italy.

"But the new thing in recent years is Central Europe -- Hungary, Poland, Slovakia and the Czech Republic," noted Robert Clark, a retail specialist with Corporate Intelligence, London, a consultancy that tracks cross-border retail moves.

These adjoining markets are coming into their own after languishing for decades under Communist command economics, yet modern Western-style retailing is still in its infancy and the competition is often thin, he said.

From 1995 through 1997, 30% of all European cross-border activity was directed at those three countries, according to a report by the London-based international property consultancy Jones Lang Wootton. From 1990 to 1997, 66 new foreign retail banners were unfurled in the Czech Republic and more than 50 each in Hungary and Poland, the report said. Yet the rush to the East is by no means finished.

The Eastern Frontier appeals to many retailers facing saturated markets or restrictive regulations at home. For example, Leroy Merlin, the second-largest French retailer (70 stores) of do-it-yourself (DIY) and home-improvement products, has adopted an actively expansionist approach because of development obstacles at home.

Claude Mast, vice president, real estate and development, of Lille-based Leroy Merlin, explains that his company is held back by the 1996 amendment to the French Royer law -- named after former Minister of Trade Jean Royer -- which requires special government authorization for stores bigger than 300 square meters (3,000 square feet). Leroy Merlin's big-format stores average 8,000-10,000 square meters (80,000-10,000 square feet). With operations already established in Spain, Belgium and Italy (14, five and four stores respectively), Leroy Merlin opened its first Polish outlet in Warsaw in June 1996, where it found an untapped customer market.

"We chose Poland because it was a new market as well as a large one of 38 million inhabitants -- the largest in Eastern Europe after Russia and Ukraine," said Mr. Mast. Other favorable factors were the traditional Polish-French cultural connection, and the presence in Poland of Leroy Merlin's sister company, the Auchan group, which operates hypermarkets there.

At the time of the Warsaw store's opening, many home construction materials were difficult or impossible to find in Poland, Mr. Mast said, so Leroy Merlin had a very favorable consumer response.

"Polish people like our store a lot, and they need a lot of our products because they like doing their own construction projects," he said. Two additional units will be opened in Gdansk and Warsaw later this year.

When retailers such as Leroy Merlin step into Eastern markets, they import not only Western merchandise but also Western-style retail practices and formats. At the time of Leroy Merlin's entry into Poland, there were only small independent retailers in the DIY sector, according to Mr. Mast. His company's category-killer store, similar to a The Home Depot outlet, was a first for Poland.

Drugstores

The German retailer Drogeriemarkt created a new retail category in the Czech market with its 250-300 square meter (2,000-3,000 square foot) stores offering discount-priced health and beauty aids, pharmacy dispensing, home cleaning products and photo processing services.

"Before Drogeriemarkt, our type of store was unknown in the Czech Republic," said Gerhard Fischer, chairman for Czech and Slovak operations, Prague. "There were only very small drugstores of 100 square meters [1,000 square feet] or so. We brought a new category."

The kind of bargain pricing offered at his company's stores was also virtually unknown, he said, and has been well received. Indeed, Drogeriemarkt has gone from strength to strength in the East, with 45 stores in the Czech Republic and 22 in Slovakia, as well as units in Slovenia, Croatia and Hungary.

The arrival of foreign retailers has been supported by construction of the first regional-sized shopping malls in Eastern Europe (Warsaw's Kings Cross Centre, Prague's Myselbek Centre), even though these centers account for only a small share of total retailing.

In Hungary, the 1996 openings of the country's first two modern shopping centers (Toronto-based TrizecHahn Corp.'s Polus Centre and the Duna Plaza, owned by Israel's Ofer Brothers) mean that Western retailers with money and aggressive expansion policies can finally gain access to retail sites, pointed out Patrick Kirwan, a retail analyst with Jones Lang Wootton in Budapest, Hungary.

But it remains difficult for foreigners to get streetfront locations under the Hungarian property ownership/rental system, he said. Traditional Hungarian property law turns on something called Berleti jog -- the right to lease shop premises -- which is restricted and usually nontransferrable. Therefore, renting a high street store is difficult for new entrants, even if they find a vacant space.

But foreign retailers have persisted.

"This market has definitely moved on in the last year," said Mr. Kirwan. "If you look at international retailers, a lot of them are expanding and they have a lot of confidence in this market."

The new shopping centers have significantly boosted the complement of Western retailers in the city, he said, which now includes such banners as Levi Strauss; Reebok; Adidas; Nike; Virgin Megastore; Marks and Spencer; Mothercare; Clinique; and Julius Meinl.

Demand for space in shopping centers remains strong: Only two premises in the highly successful Duna Plaza have turned over in the past year, and more than 180 prospective tenants have applied for spots in the center's planned 2,000-square-meter (about 20,000 square foot) expansion.

Another retail novelty coming in on the coattails of modern malls is the entertainment retailer. Although shopping centers are new in the East, the merchandise mix can include the newest elements, said Brian Jenkins, vice president, development (Europe), of TrizecHahn.

"Entertainment is taking center stage as a component right off the bat here," he said.

The West End City Center, a TriGranit joint -venture mall project set to open in 2000 in Budapest, will have a strong entertainment focus, with a 14-multiplex cinema by South African company Ster-Kineker, a large Giacomoli Italian sports store and large family entertainment center, as well as a big-format bookstore and food court. The center will be zoned and themed very much like a U.S. mall, Mr. Jenkins said.

Germany, France, the United Kingdom and Austria have been leading countries of origin for retailers pushing eastward, observed Corporate Intelligence's Mr. Clark.

"Germany was initially not so important; the Germans were giving their attention to East Germany, and this allowed others such as the Austrians into the market," he said. "But Germany is beginning to catch up."

North American retailers are present in the East but are less numerous than European ones, Mr. Clark said. However, U.S. food-service companies such as Taco Bell, McDonald's and KFC are strong players.

Western retailers going eastward tend to cherry pick countries such as Hungary with strong customer markets while neglecting weaker ones like Romania, said Corporate Intelligence's Mr. Clark. In the early days of eastward expansion, Hungary was the first destination of Western retailers, he said, soon followed by the former Czechoslovakia. Now, he says, Poland is generating more interest as its economic troubles are resolved, and there is growing realization of this country's strengths -- namely a large population and a number of secondary cities outside the capital that make good regional markets.

Slovakia, with less than half the population of the Czech Republic and a lower standard of living, is less favored, he said. There is a tendency for new retail entrants to start with the big three capital cities of Warsaw, Budapest and Prague, and expand from those locations.

Besides the home building/DIY sector, Mr. Clark identified supermarkets and hypermarkets (the European combo of supermarket and discount store) as important retail exports from Western Europe. Luxury apparel retail shops with fashion designer names such as Versace or Gucci are another category with significant outsider participation.

Who will be next? Mr. Clark predicted that Humlebaeck, Denmark-based Ikea, may soon enter the region, and Western clothing retailers at middle and lower price points could follow. Computer/electronics retailers may soon have a stronger showing, too, he anticipates.

Room to grow

Yet retailers consider Eastern Europe's markets far from saturated. British grocery giant Tesco Stores, for example, has a strong presence there with 42 Hungarian stores under the Global banner, 32 Polish 'Savia' brand outlets and 13 Tesco stores in the Czech Republic and Slovakia. But the company doesn't plan to stop there.

"We saw an opportunity originally in Hungary, where there was an immature retail structure and good market potential," said Andrew Coker, corporate affairs director for Cheshunt-based Tesco. "It's a region similar to our own, with a population of around 67 million," he observed, "and it is our intention to become among the leaders in the region."

Although French hypermarket companies such as Carrefour and Cora preceded Tesco into Eastern Europe, the British grocer evidently feels there are enough shoppers to go around. Tesco is developing two major units of about 100,000 square feet each on the outskirts of Budapest plus an additional six stores across the Eastern European region.

Observers note that competitiveness could escalate as the European Union admits new members from Eastern Europe, which will lead to a lowering of tariff and trade barriers and increased prosperity in the region.

Meanwhile, there is a downside in current trends for old-style indigenous retailers. Mr. Kirwan said the Western retail influx will create significant fallout among Hungary's traditional retailers, most of whom occupy streetfront stores of around 50 square meters. "With the advent of one-stop shopping there will be losers among them, especially retailers in the secondary high streets," he said. "For sure you're going to see some boarded-up stores."