FT.com / World Reports / Central & Eastern Europe 2004 - Polish retailing: Chains pile into the small towns Wednesday Sep 22 2004 . All times are London time. Roger Bove Edit Profile Take a Tour Log out HomeWorldBusinessMarketsMarkets & funds dataIndustriesLexComment & analysisTechnologyManagementYour moneyArts & WeekendSportJobs & classifiedsIn today's FT FT ReportsCreative BusinessFTfmFT-ITWorld reportsBusiness Reports Partner sites Chinese.FT.com FT Deutschland Les Echos Expansion The New York Times Recoletos CBS MarketWatch Vedomosti Investors Chronicle World Reports / Central & Eastern Europe 2004Print article | Email article Polish retailing: Chains pile into the small towns By Jan Cienski Published: September 21 2004 06:18 | Last updated: September 21 2004 06:18 Not far from the railway tracks cutting through the northern Polish town of Ilawa lies a huge car park leading to a new Kaufland hypermarket. A large sign announces it is open for business seven days a week. Shoppers in this lakeside holiday town are experiencing a new phenomenon: under one roof they can buy clothes, a bicycle and food, all at very low prices. Kaufland’s appearance in a town that previously had only discount shops, small local groceries and traditional farmers’ markets is part of the most noticeable trend in Polish retailing: chains are moving aggressively into smaller towns from the largest cities where retail competition is already very fierce. “There is room for growth but not on the scale of huge stores, more than 10,000 square metres,” says Piotr Byrski, a retail analyst with Krakow-based PMR. “The cities where it makes sense to build such large markets are already satisfied. Now they are aiming at smaller cities.” The new direction marks a dramatic change. In the 1990s, as Poland liberalised its economy and enjoyed years of strong growth, retail chains from across Europe piled in. Customers who had been forced to stand in lines and brave abuse from rude assistants to buy wilted vegetables were suddenly faced with consumer heaven – massive, well-stocked shops. For many retailers, the preferred format was the hypermarket, offering clothing, electronics and food. But that boom is ending. Poland, with a consumer market worth about €37bn a year, now has 198 hypermarkets run by eight western European chains. But the pace of new openings is slowing noticeably, with only about 30 scheduled this year. The leader in hypermarkets is Britain’s Tesco, which entered Poland in 1995. It controls 21 per cent of the market with 39 large stores and plans more. The overall retail leader in Poland is Germany’s Metro AG, which is strong in cash-and-carry, hypermarkets, do-it-yourself and electronics, and had sales of €2.6bn in 2003. Building in the largest cities has been hampered by increasing land prices, difficulty in finding plots far from competitors and by recent changes to the law, which imposes additional scrutiny on stores bigger than 2,000 sq metres. “There are ever larger problems with bureaucracy and getting permission to open such large stores,” says Barbara Mikusinska-Ozdobinska, editor of Handel, a trade magazine. That is prompting all the large chains to take a hard look at modifying the format and to open smaller hypermarkets or supermarkets in smaller and previously under-served markets. Tesco plans to open nine so-called compact hypermarkets this year. The most aggressive hypermarket retailer is Kaufland, owned by Germany’s Lidl & Schwarz, which entered the market only in 2002 and a year later had 25 stores. According to IGD, a British grocery analysis firm, Kaufland plans to open 100 stores in the next five years. Kaufland’s success is based on its discount hypermarket format, which has a more restricted range of choice than upmarket chains but at very low prices. That strategy has started to intrude on the discount sector, currently dominated by Biedronka, a chain owned by Portugal’s Jeronimo Martins. Biedronka has about 697 stores and plans to open hundreds more over the next few years. The stores are small, about 750 sq metres, and have only a limited range of food but focus on low prices. Biedronka, which controls more than half of the discount segment, had revenues of €930m last year, making it the second largest retailer in Poland. “We’re seeing an increase in the discount format throughout the region,” says Fiona Meldrum, a senior analyst with IGD. One of the main reasons is Poland’s economic stagnation during the years 2000 to 2003, which saw unemployment shoot to more than 19 per cent, and made shoppers much more careful with their spending. Even classic hypermarkets catering to more affluent urban buyers have had to make adjustments, strongly pushing discount and own-brands and emphasising price over choice. “The purchasing power of Polish clients has changed and we are adapting to that,” says Dorota Patejko, of Auchan, a French chain of 19 hypermarkets. “They buy for less money. They choose cheaper products and our offerings have moved in that direction.” Although Poland’s economy has revived in the last year and GDP growth for the second quarter was 6.1 per cent, retailers worry that the period of stagnation may have permanently changed shopping behaviour, sobering consumers after a spending orgy in the 1990s. That leaves a large opening for discounters such as Biedronka and Tengelmann, its nearest competitor. But Poland’s more than 100,000 traditional groceries, those with less than 100 sq metres of space, face a bleaker future. For the moment they are doing well because of many Poles’ preference for making frequent purchases close to home instead of making rarer forays to hypermarkets. However, the number of independent groceries – including the retailers who now have to battle Kaufland in Ilawa – could start to shrink once aggressive discount stores start to appear in smaller towns and urban neighbourhoods further from hypermarkets. Future growth is likely to come mainly through consolidation. Poland has one of the most fragmented retail markets in Europe, with the top five grocery chains accounting for only 15 per cent of the market, according to IGD. Spain, which has a similar number of people, has 719 people per grocery store while Poland has only 340 per store. “There is still room for growth,” says Mrs Patejko. 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