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Interview: Despite slower sales growth, the retail market situation is not bad


2012-11-04



Polish Market Review talks to Maria Andrzej Faliński, General Director of the Polish Trade and Distribution Association (POHiD), about the present situation on the Polish retail market and the near-term prospects and challenges for the sector.

Paweł Sionko, Polish Market Review: The pace of retail sales growth in Poland has been decelerating steadily since the spring of this year, and the trend has strengthened in recent months. How has Poles’ purchasing behaviour changed as a result of the economic slowdown? Are they cutting back on consumption, or rather seeking lower priced alternatives? And what effect does it have on the condition and strategies of retailers?

Maria Andrzej Faliński: Poles are after good deals. They are not abandoning quality, but they want quality at affordable prices. This is having an impact on the strategies of retailers, who are narrowing down their product selections and using the resulting savings to better manage the quality of the pared-down offering. The best illustration of this is the private label segment, where “standard” and “premium” items already account for two thirds of the total, with the share of “economy” products steadily declining. The strategy of the discount chains (Biedronka, Lidl, Netto) is clear: limited selection, big scale, good quality. Contrary to what some may think, this model leaves plenty of space for effective competition from other formats, including e.g. supermarkets with their deli sections, or traditional stores belonging to franchise networks or similar systems, which can provide a useful complement to the attractive but limited offering of discounters.

As a result, despite the significant slowdown of sales growth, the market is in a fairly good shape, and the lower growth rate measured at current prices is partly explained by fierce price competition between retailers. In terms of sales volume, the deceleration is not as pronounced, even despite higher average prices, particularly in the category of food products. We expect that in the months ahead retail sales will continue to grow at an annual rate of several percent (2-5% y-o-y in nominal terms). The crucial Christmas trading season should see a similar rate of growth.

Who is suffering the most from the downturn and who is likely to benefit from the new, tougher environment? What are the main challenges facing the sector going forward?

The mainstay of the Polish retail sector, and the key battleground in the price war, are smaller store formats, from supermarkets down. Discounters are the leaders of this part of the market and will remain so for several years. They are setting the trends that are followed by other players. On the one hand, they put pressure on wholesalers and their franchise networks to reduce product offerings and cut prices; on the other hand, they encourage supermarkets to enter into direct competition with them by offering more varied offerings.

The category of retail outlet that will find itself in the most difficult position are obviously independent, non-affiliated traditional stores, since their main competitors, i.e. traditional stores belonging to wholesalers’ networks, themselves under pressure from discounters, will be undercutting them on price and quality. Under these circumstances, the brutal market adage will apply: integrate or die. This kind of competition, based as it is on narrower product selections, also presents a major challenge for manufacturers: many small suppliers whose products do not belong to the core categories will lose contracts with retail chains. The situation is further compounded by the government’s reluctance to modify existing, irrational regulations on paid-for trade promotion services, which are hardly beneficial to small suppliers (as evidenced by recent court rulings in disputes with distributors). So the winners will be suppliers capable of maintaining scale and quality, in a version of mass market strategy focused on selling products that are “good and cheap”.

As always, fiercer competition brings benefits for the consumer. The question, however, is whether Polish consumer purses will avoid a major pinch in the years ahead. For while Poland is likely to attract new foreign investments from buyout firms and strategic buyers alike, particularly in food, retail and services sectors, as investors exit many existing markets in search of more profitable pastures, thus bringing jobs and supporting consumer demand in the country, the government’s fiscal appetite and the difficulties afflicting smaller companies could exert a downward pressure on wages or simply push up unemployment. We will have to wait and see. But there are more reasons for optimism than there are for doom-and-gloom scenarios.



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