RETAIL MARKET STRUCTURE DEVELOPMENT IN CENTRAL EUROPE

22 Introduction The retail industry in Central Europe has changed dramatically over the last two decades, and it has become a model of successful transformation for emerging markets. During the communist regime, state owned companies dominated local markets and consumers had access to a limited offer of goods and services of very low quality. Over the last 20 years, we have observed important changes in many fi elds. Trends such as internationalization, market concentration, diversifi cation of business formats and usage of new technologies continue to strengthen in Central Europe. In this article, we will analyze all these trends and follow the development of retailing in Czech Republic, Hungary, Poland and Slovakia.


Introduction
The retail industry in Central Europe has changed dramatically over the last two decades, and it has become a model of successful transformation for emerging markets. During the communist regime, state owned companies dominated local markets and consumers had access to a limited offer of goods and services of very low quality. Over the last 20 years, we have observed important changes in many fi elds. Trends such as internationalization, market concentration, diversifi cation of business formats and usage of new technologies continue to strengthen in Central Europe. In this article, we will analyze all these trends and follow the development of retailing in Czech Republic, Hungary, Poland and Slovakia.

Retail market structure
Three stages appear to structure the path of change in the retail sector in the region (Dries, Reardon and Swinnen, 2004). The fi rst stage is the pre-transition, or "communist" period (the socialist regime ended in 1989 in all four countries), when the state played a dominant role in the retail sector (in former Czechoslovakia); this was combined in Hungary and Poland with a parallel retail sector that was private, informal, and small-scale. As import of consumer goods from capitalist countries was very limited due to the lack of hard currency as well as for political reasons, the offer of shops was also limited to domestic products of mostly poor quality. In a planned economy, the notion of "the consumer is king" did not exist and consumers suffered from a lack of many products, most goods were not in-stock in shops, opening hours were short, and state shops often had impolite and unmotivated staff. Shopping used to be more of a stress than pleasure for customers. The second stage is the early transition period of so-called "small privatization" when the transformation started by sales of shops to private owners. Foreign investors encountered obstacles to entering the market due to unclear ownership structures, a ban on participating in privatization auctions, unclear privatization of state enterprises, unstable macroeconomic situations, and in some cases (such as Croatia) civil strife and political instability (Dries, Reardon and Swinnen, 2004). The result of this stage was the existence of fragmented distribution with many domestic undercapitalized small private chains or single shops. Consequently, the shop's offer was much larger as the import of consumer goods rose and local consumers had an extreme consumer appetite. The third stage is the globalization period. Globalization started in the second half of the 1990s with the massive entry of international retailers.
The globalization stage is characterized by the opening of the market in Central Europe. This stage offered big retailers a chance to enter an unsaturated market. Central Europe became an opportunity for international retail fi rms to expand, and especially Western European retail chains were keen to gain as high of shares of the market as possible. American fi rms, however, have concentrated more on their huge domestic market or other regions and up to now, there are no U.S. fi rm operating in Central Europe.

Internationalization and Retail Market Concentration
The internationalization process of the Central European retail market was very fast. Conditions for entering the market in the mid-1990s were favorable -weak local competition without capital resources or business know-how, benevolent legislation and huge consumer appetite. For example, all four countries were listed among the top 30 most attractive emerging markets for international retailers (A.T. Kearney, 1995). Poland was positioned as one of the most interesting markets -it was in 2 nd place behind South Korea; Czech Republic was in 10 th place, Slovakia 23 th place and Hungary in 30 th position. Western European distribution chains understood the market potential and quickly became market leaders. The growth in their own saturated domestic markets was also often limited by legislation (limits of allowed market share, diffi culties in obtaining construction permission for new hypermarkets in some countries, etc.) and they started looking for new targets in emerging countries with a favorable geographic situation in the heart of Europe. On the other hand, international competition was tough as many retailers made the decision to enter the market at the same time. Today, there is strong concentration in the retail market. For example, according to a GfK ConsumerScan, in 2010 the share of the Top 10 in Czech Republic (CZ) was 76.5%, in Hungary (HU) 65.4%, and in Poland (PL) 57.9% (Drtina, 2010). The Central European retail market is dominated by 16 international chains, but only two retailers, Tesco and Schwarz Group -with its discount format Lidl -are doing business in all four countries.
As for the country of origin with regard to retail chains, the organizations present in the Central European market originate from six different countries. It is not surprising that Germany, because of its geographical and cultural proximity, is an important partner. Five German groups are -with the exception of the family-owned enterprise Globus -doing business in two or more countries. French companies are targeting mainly Poland (4 retail chains) and only Auchan and Carrefour were present in two countries (Poland and Slovakia) in 2010. Other countries are represented by only one chain. Surprisingly, the biggest player in the biggest market (Poland) is the Portuguese company Jeronimo Martins Group, operating only in one foreign country. This group acquired the Polish company Biedronka in 1997 and it is the only international chain keeping the local brand and using the "local passport strategy". This strategy consists of local positioning and is effi cient in countries where consumers tend to prioritize domestic fi rms over international ones (Machkova, 2009). Biedronka has a 17.5% market share, more than 1 800 stores and 98% spontaneous recognition, a very successful format.

Expansion of Modern Forms
The expansion of the modern forms of sales was unprecedented. In the early 1990s, it was normal to go shopping every day and about 80% of consumers bought fast moving goods in small shops owned by domestic retailers. For example, in 1997, the share of hypermarkets was only 3% in the Czech Republic and Poland, 2% in Hungary and there were no hypermarkets operating in Slovakia. In 2011, the ratio was completely reversed in all four countries and the main shopping place became modern format stores, e.g. hypermarkets, supermarkets and discount stores owned by foreign investors. Nowadays, hypermarkets are the most frequented shopping places in the Czech Republic and Hungary and they are in second place in Poland and Slovakia. In Poland, discount stores have more than 1/3 of the market share and they are in second position in the Czech Republic. The share   Fig. 2). The density of hypermarkets (1 hypermarket per some 35 000 inhabitants) is higher in the Czech Republic than in most EU countries. Only two EU countries have a higher share of grocery markets than the Czech Republic with 44%, i.e. France (55%) and UK (51%). The hypermarket business is run by fi ve international chains: Tesco, Schwarz, Ahold, Spar and Globus (Carrefour did not succeed to acquire sufficient market share and sold-out 11 hypermarkets to Tesco in 2006). The total hypermarket annual turnover was 4.842 billion euros, with the average basket value of 14 euros; the volume of sales per shop was 17.9 million euros in 2010.

The "Wal-Mart Effect" in Central Europe
The entry of high-effi ciency and low-cost modern retailers was favorable for local consumers as well as for national economies (Machkova, Sterbova 2010). Due to competition, prices remained low and the infl ation rate was reasonable (see Table 3). The term "Wall-Mart Effect" was coined to refer to the downward pressure on prices and is used by Igan and Suzuki to explain the effect of the changing retail industry landscape in Central and Eastern Europe on infl ation. The authors found that a 10 percent increase in retail competition reduced the infl ation rate for retail traded goods by around 0.5 percentage points. The decline in food infl ation associated with retail competition is estimated to be close to 0.6 percentage points, or roughly 30 percent of the average observed infl ation rate among the 2005 sample of countries. With more fi rms entering into the market, each fi rm found it more diffi cult to differentiate its characteristics such as assortment, product and service quality, location of shops, etc. from its competitors. Consequently, fi rms start bidding harder against each other, ending up with lower market price (A. T. Kearney, 1995). The pressure on low prices infl uences the marketing strategy of both retailers and suppliers, especially during the fi nancial crisis. In Poland, Hungary and Slovakia, price sensitivity is so important that for half of households, price has become the fi rst factor in a consumer's choice of where to grocery shop (see Fig. 3).  The terms "sale" or "price reduction" recently became one of the most frequently used expressions in the Central European retail market. Retailers, together with suppliers, put their money on intensive price marketing (Drtina, 2010). The share of households for which the most important factor of the choice of grocery shop was sale and/or price reduction was 42% in Slovakia, 41% in Czech Republic, 36% in Hungary and 17% in Poland (GfK Shopping Monitor, 2012). The phenomenon of ELPD (every-day-low-prices) infl uenced private label penetration in Central Europe. Compared to Western European countries (47% in UK, 42% in Germany and 36% in France for example), this penetration is lower: 29% in Hungary, 28% in Slovakia, 25% in Czech Republic and 24% in Poland. One of the reasons is that the price policy of producers was infl uenced by price wars and extreme consumer price sensitivity. For example, since 2009 the value of price reductions was more than 40% of total sales in the Czech Republic. In such situations, retailers are less motivated to promote their own private labels (Týra and Karlíček, 2012).

Usage of New Technologies -Example of the Czech Republic
Information technologies are becoming critically important as competitive tools. They are used to produce better forecasts as a tool of marketing intelligence, control inventory costs, support logistics, order electronically from suppliers, support in-store communication with shoppers, improve merchandising-handling systems, etc. The Internet allows promotion of multi-channel retailing, but most retailers have yet to make a bigger Internet push (Machkova and Sterbova, 2010

Managerial Implications
The specifi c conditions after the end of the communist era enabled rapid development of a modern retail industry in Central Europe. Czech Republic, Slovakia, Poland and Hungary represent attractive markets with more than 63 million inhabitants. These new potential markets have become extremely interesting, especially for Western European retail chains. As a result, the competition became very high, leading to a strong concentration, where the most successful chains dominated each market and other retailers left, as was the case of Carrefour in the Czech Republic. We have also observed intensive price wars and what is called the "Wal-Mart Effect" -a lowering effect of price wars on the infl ation rate. The entry of high-effi ciency and low-cost modern retailers was therefore favorable, not only for local consumers, but also for national economies. As a result of international retail chains, Central European countries can benefi t from a dense network of modern shopping places, including all formats of modern distribution. As we have described in this article, the expansion of modern forms of distribution in Central Europe, such as hypermarkets, supermarkets and discount stores, was unprecedented; this was illustrated by the hypermarket evolution in the Czech Republic (282 new hypermarkets in 15 years). As for the vision for the future of retailing in Central Europe, the most signifi cant factor will be usage of new technologies. Customers are open for Internet purchases and the development of smart phones and QR codes could be fast. Due to competition and a growing standard of living, customers will ask more for quality products and services as well as for the business ethics and corporate social responsibility of retailers.