Studies Eastern European Markets
Eastern European Markets
February, 2006

Tauno Tiusanen
Northern Dimension Research Centre
Publication 27.

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In 1989, centrally planned economic system collapsed in the former Eastern bloc. Systemic change in the former Soviet Union took place with a delay, in 1991. In the early period of transition, all post-communist economies suffered a severe slump. At the same time, foreign trade regime was essentially liberalized. Western consumer goods started flowing in, but people in the TE-region had rather low purchasing power to buy Western goods they had been waiting for decades. Bent-up demand was obvious: severalWestern firms started to create a foothold in the TE-region because of the new potential offered by post-communist consumers.

FDIs started to flow rather rapidly toward the TE-region in the early 1990s. In manufacturing low wages for experienced workers was an obvious attraction for potential investors. Relatively soon Western investors in the service sector became interested in restructuring TEs. Banking sector in TEs badly needed modernization. Thus, it is no wonder that financial mediation has attracted big movement of FDI-money from the West to the East. Telecom branch was in the TE-region badly outdated. Large-scale investment has been done by Western telecom operators with interest in the TE-region. In retail trade, Western giants started to regard post-communist societies as virgin land full of long-term prospects.

Invasion in this branch started to take shape already in the first half of the 1990s.

Opinion polls were hardly made in communist societies. After the systemic change, Western social scientists entered the TE-region. Also market research companies got interested in new opportunities in post-communist area. Numerous studies made in the early 1990s showed that almost all citizens in the TE-region had the dream to get a car of Western quality. Therefore, it is not an accident that car manufacturers discovered new opportunities in formerly communist countries. Volkswagen, Europe’s largest car-maker, became a pioneer in investing in the TE-region.

• VW acquired Skoda (in the former Czechoslovakia) with a relatively modest price. It is assumed that VW’s investment plan was the most decisive factor in the Skoda deal. Skoda brand has been maintained, even though the German company is the sole owner of Skoda. There is anecdotal evidence that VW agreed to keep the Czech name of her daughter company in the Czech Republic. In Skoda’s marketing efforts, it is not mentioned that the brand is part of VW Group. It can be assumed that the majority of Skoda’s potential customers know that Skoda is actually Volkswagen which can be acquired to a relatively low price. In the early period of transition, VW entered also Slovakia via acquisition. In Slovakia VW produces Volkswagens (no local brand is involved). VW’s Slovakian operation has expanded rapidly. In both cases (in the Czech Republic and Slovakia), VW’s FDIs are mainly supplyoriented: export of cars is the main business. VW’s Skoda in the Czech Republic is the most important company in the national economy. The relative importance of VW in Slovakia is even much higher for the local economy.

• In car manufacturing, labour cost differences between the East and the West are continuously striking. In Slovakia, workers earn less than their colleagues in Skoda plant. VW is partially owned by the public sector (the German State of Lower Saxony has a 20% stake). Therefore, the company must pay special attention to German labour market: all operations cannot be moved to the TE-region. VW is the main investor in car branch in the TE-region, but not the only one. The branch has shown extreme dynamism in the TE-region lately.

• Poland has not been too lucky in her efforts to restructure automotive industry. Fiat’s operation in Poland seems to bee on a healthy basis, but the mother company is struggling in the tough global car market. The other investor on Polish car market went bust (Daewoo). On the long run a new strong strategic investor is in need. GM has entered the Polish market in slow motion. The company seems to restructure her European operations, while production in Poland gives a clear sign to GM’s plants in Western Europe: costs must be cut, or the Polish operation will be expanded. Peugeot and Toyota established a JV in the Czech Republic. The aim is to get cost advantages in the main mini-car market. Toyota invested in Slovakia as well. For this strong Japanese company it is essential to be cost-effective within EU-market. Hyundai (and other Korean companies) have not been too successful in the European car market. For the company, which is competing in the price-sensitive segment, it is essential to minimize labour costs. Thus, Hyundai invested in Slovakia, which is now the most important hub of car-making in the TE-region. Renault has shown impressive results in the last ten years. The company was not in a hurry to acquire her former licensee, but got it obviously advantageously after a trial and error game by Romanian state.

A dramatic change of the retailing sector is under way in the TE-region. In the communist era, the sector was badly neglected. Therefore, in the early period of transition, a multitude of small private shops started to emerge in all TEs in the early 1990s. Very soon big western retailers, who suffer from saturated traditional markets, started to invade the TE-region with their deep pockets and very competitive business schemes.

Therefore, a real retailing revolution has taken place in the TE-region in a very short period of time. In the rapidly growing economies of Central Eastern Europe, purchasing power is still limited in Western comparison. Price is an extremely important tool in retail competition. In order to be competitive, the winners must have economies of scale, and an efficient storing and distributor system. Therefore, the sector started to consolidate already in the 1990s in the richest TEs.

• Tesco is the biggest retailer in her home base, Great Britain, with an extremely sophisticated market. In 1990 Wal-Mart, the biggest retailer in the world, acquired Asda, a big British retailer. This single deal aggravated competition in the mature British market. Therefore, Tesco has been forced to seek opportunities overseas.

• Tesco entered the TE-region in the relatively early period of transition. In this context, the British company decided to invade several TEs simultaneously (the Czech Republic, Slovakia, Hungary, and Poland). This strategy obviously brings economies of scale. In the TE-region, Tesco has used both acquisitions and Greenfield investment. The ultimate aim of Tesco’s TE-operations is to advance its
own concept and image.Central Eastern Europe is not the only target of Tesco’s internationalization strategy: the company has presence also in some Asian locations.

• In 2005, it was announced that Carrefour, the French retailer, gave up its operations in the Czech Republic and Slovakia via an asset swap with Tesco. The latter received in this deal Carrefour’s 11 outlets in the Czech Republic and 4 stores in Slovakia valued at ¤ 190 million. In exchange, Carrefour received Tesco’s 6 stores and 2 sites in Taiwan, worth ¤ 132 million. This deal makes Tesco the leading retailer on the Slovak market and the fourth largest in the Czech Republic. After this extremely interesting asset swap between the biggest European retailer (Carrefour) and the fourth one, Tesco essentially strengthened her position in the TE-region. However, in CEE-group of countries (Poland, Hungary, Slovakia, the Czech Republic), Tesco is still behind Metro, her German competitor (the second biggest European retailer after Carrefour).

• The Dutch retail giant Ahold (the third in Europe) bought in the summer 2005 no less than 56 supermarkets in the Czech Republic from the Austrian retailer Julius Meinl. However, Ahold has not as strong position in other CEE-countries as Tesco and Metro.

• In the second half of this decade, the retail market of CEE-region has a high level of consolidation. Metro, Tesco and Ahold dominate the scene after Carrefour’s withdrawal from the region. Obviously, these three European competitors are watching Wal-Mart’s intentions carefully. In 2005, Wal-Mart opened 15 outlets in China. It may, or may not, mean that the real giant of global retailing is about to enter the CEE-region.

• In the region under review, there are some strong contenders present, e.g., Rewe, Tengelmann, Schwarz Group (all from Germany), Auchen, Delhaize (France). Some TE-retailers, especially Hungarian ones, have grown rather large in TEs. Therefore, competition in the TE retailing market still continues. Potential newcomers will not have an easy start. Continuous competition is good news for local consumers. Retailers must watch their prices carefully. Not even the Big Three (Metro, Tesco, Ahold) have a monopoly position in the CEE-region allowing skimming in pricesetting.

Western car-making in the CEE-region has revolutionized one of the most important manufacturing branches. In this revolution, relatively low wage has been a crucial element. Development in retailing has transformed post communist countries in an extremely visible way.

FDI in manufacturing is appreciated by citizens of TEs, while retail FDI is facing mixed feelings. In the former case, foreign input has brought in clean and well-paid working places. In watching retail sector development, many locals in TEs have got the feeling that foreign invaders have brought in their know-how, but also the merchandise on offer from the West. Local retailers and producers are suffocated by international companies. However, prices offered by big super- and hypermarkets are appreciated. In actual fact, an increasing share of goods on offer on the shelves of the foreign retailers is produced locally.

However, local (TE) production of everyday products must be rational and often made in highly automated plants. Therefore, local unemployment in TEs is presently high or even very high. Thus, transformation in post-communist countries has positive and negative aspects.

This is a fact no investor in TEs can ignore.

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