In the course of the last decade, Central Europe has been undergoing a period of rapid change and liberalisation. This process has narrowed the economic and social gap between Western and Central Europe, and sparked aspiration for EU membership in some of the region’s most developed markets. The Czech Republic, Hungary and Poland are to be amongst the first wave of countries to make the transition to EU membership within the next few years. They will be expected to have achieved a number of objectives to meet EU requirements, namely:
– The completion of privatisation programmes;
– A sustainable reduction in inflation;
– Reduced unemployment levels;
– Harmonisation of financial and legal frameworks and trade regimes.
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Hungary has established itself as the most advanced reformer in the region, having privatised most of the industrial base and drastically reduced state spending. Today, Hungary is in many ways closer to a free market economy than its neighbours, having been the first to embark on a massive reform programme.
Poland, with GDP growth of around 5.5%, is one of the fastest-developing economies in Europe. Poland boasts a wide range of incentives and benefits to investors and is reputed to be the largest recipient of foreign investment in Central Europe.
The Czech Republic has traditionally been regarded as one of the fastest reformers in Central Europe, and still deserves this title despite its poor economic performance (reflected by its negative GDP growth). The Czech Republic has the second highest per capita GDP in Central Europe and the figure is growing.
In all of these leading Central European markets, economic and social restructuring and positive GDP growth are expected to continue at least to 2005. Increasing foreign investment and a stable political environment will continue to attract new players and facilitate the growth of consumer demand. High unemployment will remain a problem, however, and may lead to disillusionment with economic reform.
Economic criteria aside, the main challenges facing food manufacturers seeking to enter the Central European market undoubtedly revolve around developing a clear understanding of rapidly evolving consumer and market dynamics.
Levels of disposable income, and changing working and lifestyle patterns will have a significant influence on both consumer eating habits and purchasing decisions.
In Poland, Hungary and the Czech Republic, the consumer base is currently dominated by the middle-income group, which accounts for 55%, 65% and 70% of the markets respectively. Affluent consumers account for an average of only 7% of the population, lower income groups for an average of 30%. To 2010, this balance will swing further in favour of mid-high income groups.
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By GlobalDataIncreasingly, all Central European consumers are being forced to come to terms with striking changes in the labour market. The concept of a job for life is vanishing rapidly, as more employees are working under temporary contracts, with little or no security. Multi-jobbing is also becoming commonplace, as employees seek to boost income by holding down two, or even three, jobs. Income pressures are also encouraging more women to enter the workforce. Female employment in EU accession countries currently stands at 60%, compared to 56% in Western Europe. Such employment trends are driving an increase in snacking and raising demand for convenient food solutions despite barriers such as strong cooking skills and the low level of penetration of cooking appliances.
Whilst the family unit has traditionally been the focal point in Central European society, as lifestyles and working patterns approximate those in the West, it is likely to undergo gradual erosion. Household sizes are already diminishing and individualism is being further boosted by resentment towards pre-reform values, predominantly based on the enhanced role of the community and the diminished role of the private individual. Alongside the fragmentation of the family, the struggle for EU membership is driving change in nation state identity, which is making consumers feel less aligned to their country. This, in turn is provoking increasing nationalism and regionalism in terms of food purchasing. Whilst this is favourable for local food producers, there is opportunity for foreign manufacturers to exploit consumer desire for familiarity by using traditional-style marketing and promotional tools. Of prime importance to the manufacturer will be recognition of the need to treat each Central European market and its traditions as a separate entity, rather than as an extension of Western Europe.
Overall, market liberalisation and food market development in Central Europe over the last decade has had a favourable impact on industry. The popularity of imported foreign goods has led local producers to compete and innovate in terms of both production and marketing, and has fuelled the demise of inefficient and unresponsive players. Competitive boundaries are widening as both domestic and foreign companies fight for share of consumer spend.
Opportunity for foreign food manufacturers will be determined primarily by player type and product focus. Three main company types have emerged in the region:
- The national player is a non-Central European company, operating primarily in one country/region. The national player has insufficient resources to enter Central Europe on a large scale, preferring to build market presence firstly through imports, then ultimately through joint-venture with a local partner. Product portfolio tends to focus on standard and mass premium products (Intersnack, Schoeller) and companies tend to operate and specialise within one product sector (such as snacks, baby foods, etc).
- The international activist has developed marketing strategies across a number of selected countries. Product portfolios are built around brands positioned at the top end of the standard sector (Cadbury, Muller, Chupa Chups, UB) with some activity in the mass premium sector (Ferrero). These products are not tailored to local tastes but are marketed on the strength of brand image. The international activist tends to specialise within a single sector rather than spreading their activities too thinly (confectionery, dairy, snacks etc).
- The global dominator is present in many (if not most) countries world-wide. It has good access to finance and prefers to enter new markets through acquisition, which is exactly what this player type has done in Central Europe. As a result of its need to achieve economies of scale, brands tend to be in the mass standard sectors with some premium products to build margins. Global dominators are often involved in several product sectors such as snacks and confectionery or dairy and confectionery.
Market penetration is ultimately determined by a company’s financial resources and overall strategy (both on a corporate and marketing level). Therefore, product positioning emphasis will vary depending on company type. There are standard product opportunities across the whole Central European region, but manufacturers should bear in mind that what is classified as a standard product in Western Europe, will take on a more premium image in Central Europe. In addition, as more companies develop their presence in the central European market, the standard sector will become increasingly crowded. The time that it takes for the standard sector to reach maturity will, however, depend on each individual market and the attention it is receiving from foreign investors.
Clearly, the more advanced the country in terms of its transition to a free market economy, the greater the opportunities in the premium sector – consumers in the Czech Republic, Hungary and Poland are now more inclined to purchase premium products on a regular basis. The percentage of consumers in a position to purchase products with a perceived premium is still small, but is expanding fast. The core consumer base for premium products in the short to medium term is likely to be the 20-35 year old group. These consumers generally work for non-state companies and are adventurous in terms of food purchasing.
