Seize the day

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To the victor the spoils – or so the saying goes. Looking at Central and Eastern Europe and what the regions have to offer the global office products industry, the spoils could be – and already are in some cases – substantial indeed.
Flanked by Germany and Austria to the west and Russia (which will be covered as part II of this feature in the next issue of OPI) to the east, foreign direct investment (FDI) into the region continues to boom, with Poland, Hungary and the Czech Republic currently attracting the lion’s share of it.
And with annual GDP growth of up to 7.5 percent in countries such as Slovakia or new European Union (EU) recruit Romania, many of the markets in Central and Eastern Europe are dynamic and offer substantially more growth potential than their Western counterparts – although admittedly, they are starting from a much lower base.
Eastward migration
Manufacturers have been tapping into the potential of the region for years. Indeed, there’s been something of an eastward migration by firms with a previous manufacturing base in Western Europe. Central and Eastern Europe – which excludes the Baltics for the purpose of this article – represents a tempting combination of low wages, a good pool of talent, high productivity and physical proximity to Western-based headquarters (or even additional production plants). And with EU enlargement over the past four years almost solely concentrating on this region (with the exception of Malta and, arguably, Cyprus), the legislative and financial help that comes with EU membership is an added incentive.
David Bartlett, economic advisor at research consultancy RSM International, says: "What’s left of European manufacturing is now migrating to Eastern Europe, especially in the automotive and high-tech areas. In many cases, EU countries have even become more attractive than China because of physical proximity as well as the legislation and regulation in place."
The office products industry may not have the same concerns about transportation costs as the bulky automobile industry – though the environmental debate revolving increasingly around the reduction of carbon footprint has its own part to play – but the arguments in favour of investing in the Central and Eastern European regions are compelling to say the least.
And office products manufacturers in particular have taken note. Fellowes has been in the region since the early 1990s, directly through its Fellowes Poland subsidiary as well as via various distributor alliances. And the gamble of entering the region in the early stages of its development has paid off, says Fellowes Europe president Andrea Davis. "These markets are dynamic and offer great potential and high growth, and we believe it is important to serve local customers from local facilities."
She adds: "For all the potential issues and pitfalls, the advantages and opportunities for companies willing to commit and invest are enormous. Entering and establishing your business in a new developing market early enables you to establish your brand and way of doing business, and to guide and direct the market as such. From a Fellowes perspective, it allows us to provide global customers with a single ‘Fellowes way’ of service in their Eastern European operations."
Other companies such as Durable, HSM, Esselte and Avery Dennison have taken a similar route and are now reaping the rewards of a direct presence, with Poland and increasingly Slovakia often being the countries of choice as a base, sales or manufacturing-wise.
Avery Dennison’s VP for Central, Northern and Eastern Europe, Bjarne Mindested, says: "With an increased focus on Eastern Europe as one of our key strategic growth areas, we have had excellent business results. Last year, we grew sales more than 30 percent in the region, and we continue to win market share and develop new demand for our key printable media products.
"The main pillars of our growth strategy revolve around strengthening local teams and gaining distribution within all existing distribution channels, as well as adapting our products to local needs."
B2B focus
As far as the various distribution channels are concerned, B2B represents the biggest opportunities. That said, most countries remain highly fragmented and have a considerable number of multi-channel players, even the more established markets like Hungary, the Czech Republic, Poland and Slovakia.
Hungary-based Corwell is one of perhaps just a few companies that only operates in one channel – wholesale – and only sells to commercial operators rather than end-users. And this policy has served it well. With revenues of €31 million ($40.17 million) in 2006 and exclusive partnerships with a number of manufacturers, its imminent expansion into Slovakia likely to be met with enthusiasm from both suppliers and customers alike. Reliable distribution agreements are hugely important for cross-border trade in a region where languages, cultures and currencies vary so widely in a relatively small geographical space.
This is also where the challenge lies for the international reselling community wishing to enter the region. And on the whole, says Peter van der Vlis from Corporate Express (CE), entry into foreign markets with high levels of fragmentation is much easier via local partner agreements. Aside from wholly-owned subsidiaries in Poland and Hungary, this is exactly what CE has done in countries such as the Czech Republic, Slovakia and Slovenia (as well as all the Baltic states, not covered in this article). He says: "It is always much easier to go into new markets via an established player and you certainly always need strong local management, even for a greenfield operation."
Customer demand
CE’s foray into Central and Eastern Europe was very much the result of strong customer demand. Van der Vlis explains: "A lot of our customers – typically manufacturers – moved into countries in the region in 2002/3 and they simply expected that their suppliers also had a presence in those markets. That’s why we started proactively moving into Central and Eastern Europe in 2003."
In his role as VP of international accounts, the international market is clearly hugely relevant to him and van der Vlis makes no bones about the significance of this customer segment: "The international business is the fastest growing part of our company. As far as our international accounts are concerned, we believe that the more countries that you can cover, the stronger your position will be, and that is the force driving this process of entering new markets."
As mentioned before, the first multinational companies in the region were typically the manufacturers. But as a result of this migration, the need for financial institutions to be there has increased as well – another captive audience for the likes of CE. As markets mature and incomes increase, more companies are created, thereby resulting in the need for more office space and more office products.
Van der Vlis admits that CE’s market share in the countries where it has a direct presence is still comparatively small. That too, he hopes, will be changing as the markets mature and the concept of single-source supply is accepted.
Market saturation
For some of the markets in the region, however, particularly those with a small population, it might well already be too late for new entrants because markets become saturated. After all, local players haven’t stood still while the globals devised their long-term strategies.
CE’s distribution partner in Central and Eastern Europe, for example – DZS in Slovenia – commands a comprehensive share of the local market as well as being active in several of the neighbouring Balkan states. With a multi-channel distribution model – wholesale, retail, contract stationery as well as a publishing arm – DZS would be no pushover for any overzealous newcomers.
Unless, of course, that newcomer is intent on making a long-term commitment and buys its partner – or rival as the case may be – outright, like Office Depot has done. After several years of working as part of a franchise agreement with local operator Elso Iroda Superstore (and after severely getting its fingers burned in Poland prior to that when a franchise agreement ended in bankruptcy proceedings), Depot decided to buy the chain three years ago.
Today, Depot has 12 retail stores in the country and a delivery business that accounts for more than 30 percent of its overall business in Hungary. Its customer base is local as well as international and Office Depot has accumulated considerable market share – as well as recognition – since it entered the country in 1997.
Perhaps spurred by its success in Hungary, Depot last year made another giant leap in the region by buying Czech contract stationer/distributor Papirius, giving it instant access to the very mature Czech market as well as several other countries.
There’s certainly a lot to be said for working with a local company as well as being the first to market in a new territory.
Mark Baccash is the independent traveller of the office products industry with his Office 1 franchising concept and has gone where no other multinational player would venture.
And while Baccash is not immune to
set-backs and has repeatedly had to start again from scratch with a variety of franchise partners, his concept of working with a local player and local management, combined with the financial backing of a large company, seems to be paying off. In fact, it has been so successful that there is little room left for new entrants in some of the countries where he’s set up shop.
Says Baccash: "We’re the leader in Slovakia with our master franchisee Sevt. In Bulgaria we have 170 stores and 80 percent of our business there is B2B – that’s a total market share of 40 percent."
He adds: "There’s no room for any international players to come into the Balkans now because we control the region and are too strong. If you look at the population in Serbia, Macedonia and Bulgaria, it’s not very high and it just wouldn’t warrant a new entry there."
Indeed, much of the potential in the region comes down to the population of the individual countries. As such, Poland is the undisputed jewel in the crown of Central and Eastern Europe with nearly 40 million people. And with only Lyreco in the country as a full-blown global player and plenty of new investments from the international manufacturing fraternity, the opportunities are vast. Romania, following its new EU status, is similarly tempting.
Uncharted territory
Outside the EU and in the far Eastern corner of Europe are Belarus and the Ukraine, backing onto the mighty Russia. Here, the situation is somewhat different. From the outset, the Ukraine, with a population of over 46 million, has huge potential, but the same issues that prevail in vast parts of Russia – poverty, corruption, counterfeiting, channel blurring and convoluted bureaucracy – have so far put the brakes on a foreign investment invasion into the market.
A few exceptions, such as the omnipresent Office 1, plus a smattering of global manufacturers, prove the exception to the rule, but this is a market that will take several more years to mature from an international perspective.

 

Readers will note that the OP market in Russia was not covered in this article. Russia will constitute Part II of this Hot Topic focus and will be explored in full in the April issue of OPI