September 24, 2010

Should German retailers still dare go east?

Billa store opening in Moscow (photo: Rewe Group)
Making good money: A Billa store opening in Moscow (photo: Rewe Group)
Rewe Group's eastern European supermarket business under the "Billa" banner is continuing to go through a rough patch.  

The 2009 crisis in Central & Eastern Europe (CEE) has blunted the former dynamism of the company in the region. Revenues in 2009 increased a mere 1 per cent to €2.5bn, while sales and earnings have continued to disappoint so far this year.  

This was the tenor of statements made by Rewe International at a management conference in Prague recently. Rewe is obviously feeling the pinch in the Czech Republic, Slovakia, Hungary and particularly in Rumania and Bulgaria. Is this bad luck, bad management, or something symptomatic of a much broader trend?

Despite having divorced its former local joint-venture partner, Marta, trade insiders confirm, however, that Billa is making "good money" in Russia. Currently, the retailer runs around 70 supermarkets in the greater Moscow area where it intends to double its store base.

Past euphoria  

Rewe's eastern troubles are not company-specific. Many other retailers are currently singing the blues there. How long ago the early 90's now seem when CEE was the hottest thing on the global block!  

At the time, former eastern German authorities often virtually rubber-stamped store planning authorizations with little thought for tomorrow; the then Czechoslovak Republic was dubbed "our Asian tiger on the doorstep"; and Dr. Helmut Wagner, the eloquent and dangerously fascinating former CEO of what was once Asko (later to be devoured by the Metro Group), held feisty lectures with titles like "Young Man Go East!"  

In retrospect, the demise of communism certainly did provide western German retailers, who had been stagnating on an already virtually saturated market, a few years of unexpected and unprecedented growth.  

From a strategic point of view, expansion into CEE was also both a logical step and an historic opportunity. Germany shares borders with Poland and the Czech Republic, and initial moves into the western parts of both these countries were supported logistically from home distribution centres.  

Austria enjoyed similar geopolitical advantages to Germany with the added advantage that the old Austro-Hungarian empire provided historical and cultural links with Hungary, Slovenia, the Ukraine and today's Czech and Slovak Republics, although these were clearly overrated by the Austrians themselves.

A level playing field?  

In addition, while western retailers have always been keen to demand a level playing field for themselves in their home countries, they were more than happy to use the nascent free markets in the east to give full play to their bigger elbows.  

Often, it was an unfair fight. Local retailers knew their customers better, but these co-operatives and independents frequently had to compete with multi-billion, international retail groups who had been able to hone their formats over decades in numerous foreign markets and who could raise billions of new investment capital either via the stock market or through their house banks.  

Significantly, and sadly, eastern European retailers couldn't even obtain credit from their local banks, so that, with the notable exception of Russia, their markets were soon overrun by a plethora of foreign groups who dominate retailing in the CEE to this day.  

Since those heady days of almost unbridled expansion in the east, the former Eldorado has lost a lot of its shine.  

Inevitably, the rubber-stamping of store planning authorizations in eastern Germany lead to whole regions being overstored. In the Czech Republic, a country scarcely larger than Bavaria, no less than a dozen big western retail groups fight for every square inch of shelf space. Delhaize Group was only one victim of this ruthless cannibalization process — doubtless others will follow soon.

Post-communist mafia  

Further east in Poland etc. one major retailer told Lebensmittel Zeitung only a few years ago in disgust that it had delayed entering the country due to the "post-Communist mafia" control exercised over planning authorizations by local councils.  

Even today, the cost of sites, for instance, in Russia has increased astronomically and exhorbitantly.  

As corruption and extortion increased during the "Wild West" days of the Yeltsin era in post-Soviet Russia, banks began to lend more cautiously due to increased country risk. Metro Cash & Carry, for instance, only entered Russia after the government had provided it with a double-figure million guarantee to idemnify risk -- a wise and necessary move, but obviously a sign of the times.  

Over the last years, there have been numerous recessions and financial crises in CEE leading to sharp reductions in consumer spending power. The decline in local currencies against the euro and dollar has also darkened the picture.

Rise of S.E. Asia & Latin America  

Parallel to these disillusioning factors, other, demographically younger and often far larger markets have opened up in Turkey, China, Vietnam, the Philippines and, slowly, but surely, India. This represents perhaps the most dangerous legacy of German retailers' initially euphoric expansion in eastern Europe.   

The thrust into CEE has delayed their investment in other exciting global regions such as south-eastern Asia and Latin America, where there are still no German grocery multiples. US, UK and particularly French retailers have clearly stolen a march on them there; will they be able to catch up?

Lebensmittel Zeitung with its online sisters (photo: LZ)
Lebensmittel Zeitung with its online sisters
Read in German: 'Billa leidet in Osteuropa' by retail news editor Annette C. Müller on page 8 of 
Lebensmittel Zeitung, no. 38, 24.09.2010

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