March 9, 2012

UEFA Euro 2012 opens up Ukraine retailing

UEFA Euro 2012 Ukraine (photo: LZ-Archiv)
Symbol of hope: Not just retailers stand to benefit from the Ukraine co-hosting UEFA Euro 2012
Kick it like freedom, Ukraine! For some Ukrainians football is more than just "the beautiful game". In a country which limits the right of its 45 million citizens to travel to the West, but allows its oligarchs an insolent and oppressive freedom, co-hosting UEFA Euro 2012 surely means something more than increased retail sales.

UEFA does not only lighten the daily load and the hearts of the common people; it is also the chance to open both markets and minds towards new possibilities of the human spirit.

Lebensmittel Zeitung asked three experts intimately connected with this facinating country to what extent this year's soccer could change the climate for retail investors. Foxtrot CEO Uwe Klenk, Rewe International Board Member Janusz Kulik, and management consultant Peter Györffy are western pioneers who remain committed to growing their businesses there.

It will come, Uncle Vanya
 
Like all investors in a nation that was supposed to have gained independence from Russia in 1991 they have had to exercise the virtue of patience. Over the last 20 years, this politically unstable country has swung regularly from boom to bust with intermittent bouts of delirious inflation and currency depreciation.
 
Today, GDP per capita ($3,013) is still the lowest in Eastern Europe and half that of neighbouring Russia. Kiosks and bazaars still dominate local retailing.

Home game

At least, however, this has kept retailing/wholesaling mostly in local hands. The only foreign player to have entered the Ukrainian Top 5 is Germany's Metro Group. The Dusseldorf-based company also intends to grow its current network of 31 C&C outlets via its relatively new, compact "Metro Baza" format.

However, retailing as a whole remains relatively unconcentrated. The Top 5 do not count for more than a quarter of the market. Supermarket operators Fozzy Group and Furshet as well as soft discounter ATB Market are among the very few superregional players.

A fatal cocktail of bureaucracy, corruption and low growth has already forced a number of international investors to throw in the towel (Serbia's Delta M or Russia's O'Key). Others, such as Auchan, Ikea, Netto (Dansk Supermarked), Real (Metro Group) and Russian market leader X5 have pruned expansion plans.

Brave pioneers

Meanwhile, a few intrepid retailers have decided to invest anti-cyclically in order to profit from the recent dampening of rampant price speculation in commercial real estate. Austrian-based Rewe International subsidiary "Billa" intends to almost triple its store network to around 60 supermarkets by 2015 (cf. interview below).

With GDP per capita rising by 4 to 5 per cent a year since 2009, the Ukraine is not without long-term potential. Parts of Kiev as well as an eastern strip of the country (including Dnepropetrovsk, Donezk and Odessa) enjoy a standard of living well above the national average.

To gain more insight, we talked to three managers who know the country intimately.


"The Oligarchs are Getting Richer and Richer"

Uwe Klenk,
CEO Global Management Consulting Retail & FMCG, and CEO of consumer electronics & home appliances company Foxtrot


Uwe Klenk (photo: Uwe Klenk)
Uwe Klenk
Herr Klenk, How would you describe the current general situation in the Ukraine?
The country is in rough waters both legally and politically. Originally, it tended towards the EU with Yulia Timoschenko, but now it is veering more towards Putin and Russia. Meanwhile, international heavyweight boxing champion Vitali Klitschko is trying to obtain influence in his home country, but hasn't succeeded in doing so to date.

Other countries such as Greece or Scotland are also debating their political loyalties. Why are they so particularly important for the Ukraine?
Of course, this is primarily about obtaining financial support from the International Monetary Fund. The political toing and froing also means that travel visas are still strictly regulated. In fact, most Ukrainians are only allowed to travel to around five or six countries such as Turkey, Israel or GUS countries.

Why talk about freedom of travel when most locals buy goods at home?
Where there is no freedom of the press, travel is of vital importance to opening up and democratising a country. The Ukraine must allow its young people to study abroad, for instance. And by this I do not mean just the children of a few oligarchs, but middle-class kids as well. Only then will the country start to develop.

Are the oligarchs really so powerful?
The problem in the Ukraine is that they determine how the country works. The oligarchs are getting richer and richer. As they pile up ever more money for themselves; meanwhile the people, of course, suffer accordingly.

There will be parliamentary elections this year and presidential elections in 2013. Could they bring about a change?
The way things look at the moment, current leadership is heading in a Russian direction. To an extent, this is understandable because Ukrainians are obliged to be on good terms with their neighbours, just think how dependent they are on Russian gas. At the end of the day, we shall have to wait and see how the elections go. If, however, the oligarchs impose a pro-Russian candidate, then, of course, any move towards the EU will be a long way off.

What is the general mood among the people at the moment?
The majority have given up hope. There is a lot of poverty, particularly in country regions; infrastructure is lacking; and Aids is a big worry. Logically, the few who are making big bucks out of the current situation view things differently. However, the many poor people in the country are becoming more aggressive, especially when it comes to the subject of Timoschenko; they are increasingly expressing their sense of frustration with the current state of things by strikes. Protests have even reached Boulevard Kreschatik, Kiev's luxury shopping street.

How do you view the Ukrainian market for international brand manufacturers in the present difficult situation?
People often can't buy the brand products they see on TV or in magazines. The Ukrainians particularly love German brands, regardless of whether they are AEG, Mercedes or Dr. Oetker.

What foreign trade investors have entered the country to date?
Metro Group is very successful in Cash & Carry, but stopped the expansion of its "Real" hypermarket division after opening just one store. This is surprising when one remembers that Auchan is practically the only competitor in the sector. Meanwhile Rewe Group supermarket subsidiary "Billa" is growing fast.

How about the hard discount segment?
There isn't a single foreign discounter in the Ukraine. I simply can't understand why Aldi, Lidl, Penny and others haven't entered the arena yet. After all, it is a huge market which is almost predestined to appreciate discount.

How about non-food specialists?
AS Watson dominates the drugstore segment. DIY is represented by Obi, Praktiker und the Auchan subsidiary Leroy Merlin. Marks & Spencer has just arrived with a department store.

Despite these foreign retail pioneers, street markets still dominate the retail landscape?
Absolutely, it's like in Russia a number of years ago. Once you leave the big cities, people are very, very poor and shop at kiosks and street bazars.

If the Ukraine is so far behind the curve, isn't it your duty as a management consultant to warn potential retail investors to keep away?
No, because the Ukraine is a highly interesting market and GDP is growing at an annual rate of 4 to 5 per cent. Billa and Metro etc. would not continue to expand in the country otherwise. In my consumer electronics segment alone it is estimated that total annual sales will increase from $5bn to $9bn by 2016. In fine: You can earn good money in the Ukraine, if you know how to do so.

Meaning local corruption?
It's a regrettable, but simple fact of life. Everyone has their hand out, whether customs officials or tax collectors. Government officials are often changed so that there is a constant stream of new people who expect something. Presumably the money ends up in the pockets of oligarchs or politicians.

Let's turn to more pleasant subjects. How is the country preparing to host UEFA Euro 2012?
You must realise that the country is still not fully prepared for the championship. There are many gaps in the infrastructure, including inadequate road and underground railway systems. Kiev international airport will probably be ready, but there are too few hotels. They are already fully booked due to UEFA and some have been demanding exorbitant prices.

You are not only a management consultant, but also the CEO of Foxtrot, the largest entertainment electronics retailer in the Ukraine. How is your company preparing for the event?
We are holding joint promotions with global suppliers such as Samsung, LG or Philips. We advertise both in-store and on TV, which is very cheap in the Ukraine. Billboard campaigns and sponsorship are obviously two other major topics. We shall be selling from lorries (trucks) in the car parks of our flagship stores and will be partying like a Love Day Parade in Berlin. We shall also put up huge screens so that customers can watch the games live because many won't have the money to buy a ticket.

Do you believe that the euphoria likely to be created by the football championship could also contribute to opening and democratising the Ukraine market?
I most certainly do, and Klitschko has also said this. The European Championship is a huge chance for the country to present itself in a positive way, and by this I mean, not just with beautiful women, but also culturally. The Ukrainians must seize this chance to open up their country. To be frank, I'd really be pleased for them because they are a very good-hearted people.


"Profits Are Significantly Higher in the Ukraine"

Janusz Kulik, Board Member of Rewe International (Billa)


Janusz Kulik, Rewe International CCE (photo: LZ-Archiv)
Janusz Kulik
Herr Kulik, to what extent are you hoping that UEFA Euro 2012 will push sales in the Ukraine?
Big sporting events like the European football championship certainly influence sales. We are working on the basis that an influx of tourism, particularly in major cities such as Kiev, Kharkiv and Dnepropetrovsk, will increase our revenues.

What marketing measures are you taking to boost Euro 2012 sales potential?
Of course, football will be the main theme. We shall also start attractive football-related promotional activities and adapt store ambiences accordingly.

Presumably you are stocking up with beer and lots of impulse items?
Beer is generally a very important category in food retailing, which is why it is so regularly advertised in stores. However, big sport occasions like the football championship will enable us to make attractive offers in all categories.

How would you describe the Ukraine market?
It is the second-largest country in Europe and it is still relatively unsaturated. Unlike countries such as the Czech Republic or the Slovak Republic, where high store densities and strong competition provide consumers with lots of local choice, there is still huge potential for development in the Ukraine.

Which Billa intends to capture?
Yes, we shall continue to pursue our expansion strategy in the Ukraine over the coming years. However, the country does present certain challenges in terms of political framework and too much bureaucracy.

Billa is in a total of seven central & eastern European countries, why bother to expand on such a difficult market as the Ukraine?
On the one hand, modern self-service retailing only represents around 30 per cent of the food market. On the other hand, profits are significantly higher in the Ukraine than in our other European markets. Furthermore, infrastructure is well-developed in the big cities and the medium-term prospects for business growth are good.

Billa once spoke so optimistically about its supermarkets in Poland, but that didn't stop you leaving the country in 2009...
Rewe International only had 25 outlets, and there didn't appear to be much chance of becoming one of the three leading supermarket operators on such a mature and competitive retail market. As we aim to be at least among the Top 3 in all our markets in central and eastern Europe, we took the strategic decision to concentrate our expansion elsewhere within the region.
 

"Food Retailing Still Earns Money"

Peter Györffy, owner & CEO of management consultancy CONplementation


Peter Györffy, Founder & CEO, CONplementation (photo: CONplementation)
Peter Györffy
Herr Györffy, who is going to profit most from UEFA Euro 2012 in the Ukraine?
Only specific branches of business will benefit from the competition. These will include electronics consumer goods retailers and manufacturers (TVs, cameras), food retailers (crisps, soft drinks, beer and other alcoholic beverages); sports goods retailers (footballs and football gloves) as well as those retailers who sell fan items.

Due to low consumer purchasing power and the high prices of licensed and genuine items, most expenditure is likely to go on (counterfeit) copies from Turkey and the Far East.
 
What marketing measures are retailers taking to harness increased sales during the championship?
Of course, they are using classic advertising methods as well as special TV spots and promotions. Some have already started putting up big billboard ads. Epi-center, Ukraine's largest DIY chain, and Intertop, the leading shoe retailer, are national sponsors.

Of course, during the hottest period of the championship, relevant products will be put on special displays etc.

How would you describe the general situation in the Ukraine?
The economy has generally worsened for the population over the last months. While a small section of the middle class is leading a partly better life, the majority of the people belong to the losers. This is particularly the case for those who are poorly educated or older people who live on a state pension.

This is the situation even before the implementation of austerity measures which the government is holding back until the parliamentary elections in October.

Therefore, 2013 is likely to be worse than 2012 because there won't be any big sporting occasions and government savings measures will begin to take a grip. Another depreciation of the currency (Griwna) is likely.

Furthermore, the Ukraine suffers from a lack of investment from the EU. The credit crunch, which has hit leading Ukraine banks hard, is impeding loans to local businesses, and consumers cannot obtain credit to finance larger items of expenditure (homes, cars etc.).

Given these problems, would you still advise western European retailers to invest in the Ukraine?
The Ukrainian market will not be very attractive for western retailers in the next three to five years due to the extremely difficult economic and political framework. At the moment, it is very hard to find new, modern retail outlets. Loans cannot be taken out to finance new shopping centres due to high interest rates.

This leaves the acquisition of local retailers with good sites as the only interesting way of entering the country. Food retailing in Ukraine is going fairly well and does earn money. Also, there are hardly any national chains, and there is no serious player in the convenience store arena.


Related article in German: Interviews by Mike Dawson in Lebensmittel Zeitung, no. 9, 09.03.2012


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