10.2 Facing fragmentation: Polish retail enterprises formulate new strategies

A detailed observation of the evolution of Polish retail enterprises after 1990 indicates a radical move away from state-controlled integrated structures toward individual solutions. This model of development of Polish trade stemmed from a rapid decline of the state-owned and co- operative trade enterprises, which were replaced with an atomized structure based on a large number of small independent private retail businesses. The number of these independent businesses reached nearly 410,000, equivalent to an increase of nearly 60 per cent between 1991 and 1998 ( Statistical Yearbook of Poland , 1999: 432). It is also worth highlighting that small and medium- sized trade enterprises (SMEs, up to 9 employees ) accounted for over one-third of all Polish SMEs. In 1998, 95 per cent of the sales turnover in Poland was generated by the private sector ( Statistical Yearbook of Poland , 1999: 432; Statistical Yearbook of Poland , 1993: 392).

10.2.1 Privatization in the Polish retail sector and its consequences

The decision for a radical privatization and de-concentration by the Polish state and co-operative trade taken in 1990 had several important aspects. First of all, it meant the clear rejection of the option of reforming the state-controlled centrally planned retail system as a whole. This was based on the assumption that large state and co-operative retail enterprises could not be reformed and that they would be unable to adjust swiftly to the new market environment. Secondly, the idea of selling off the national and regional retail systems to strategic investors was also rejected. Instead, Poland opted for a model of individual privatization and de-concentration of retail industry. Independent entrepreneurs, predominantly former shop or warehouse managers, were the main target group of this privatization process. They had relevant market knowledge, experience in the Polish retail sector, and a functioning network of contacts with wholesalers. This privatization model was supported by the rapid creation of adequate conditions for private business development in the retail industry which turned out to be a crucial element in the transformation of the entire retail industry in Poland. With the choice of this model of privatization and de-centralization, the large-scale retail conglomerates which had been established under the planned economy system temporarily disappeared from the market. This had significant consequences for the future model of development of foreign retail chains in Poland.

10.2.2 Independent entrepreneurship

The early model of transformation in the Polish retail sector was predicated on the assumption that independent small business would be the most successful. This assumption became the basis for building a new type of retail enterprise (Domanski, 1992: 57 “66).

This model had a direct link with the tradition of free trade, which was interrupted in Poland after 1948 and, subsequently, was cultivated only on the edge of the centrally planned economy. At the same time, it must be stated that the private sector, although in a rudimentary form, did function in Poland throughout the period of the so-called ˜ socialist economy , unlike other states of Central and Eastern Europe (Domanski, 1996: 96 “8).

The Polish model of transformation rejected public ownership in commerce. The idea of having commerce gradually reformed and adjusted to the new conditions was given up in favour of a rapid and irreversible privatization. However, the intensive development of independent and private trade also strengthened the feeling of reluctance towards various forms of integration of businesses. The need for independent entrepreneurship excluded the notion of integration for the majority of Polish small businesses.

This approach emphasized the need for internal development of small retail businesses. However, after 1990 in Poland, this model required time and capital resources as well as a certain readiness of the entrepreneurs to implement such a strategy. The author has come to an explicit conclusion: only a limited number of small entrepreneurs met the conditions necessary for achieving a dynamic development of their enterprises. It seems that in the case of trade, these barriers are often more serious than in the services and production sectors. In particular, this refers to the stage when a small-scale business seeks to compete with a retail enterprise operating in a medium or large-scale network. At the same time, the new category of Polish independent entrepreneurs were very sceptical about their mergers with foreign or domestic partners . Initially, this approach resulted from the lack of foreign competition on the Polish market (1990 “4) as far as the retail sector was concerned . Owners of small retail firms set themselves short-term objectives, and they continue to do so. They refrained from considering a long-term development strategy for their firm and often underestimated the consequences resulting from the entry of large foreign retailers onto the Polish market. The Polish model of transformation revealed that small retail businesses were not good at long- term planning (from three to five years ) and setting up integrated strategies of development. They were often unaware of the size of the challenges posed to their sector (at least through 1998 “9).

This explains their reluctance to use a model of growth based on the concentration of businesses and an integrated system of management. Additionally, the lack of Polish managers who were specialized in managing integrated retail chains formed another barrier for a broader use of this model of growth.

10.2.3 Integration as a defence strategy

The development of ˜bottom-up forms of horizontal and vertical integration among Polish retail firms has been precipitated by the strategies exploited by large international retail networks (particularly after 1997) (Domanski, 2001: 1 “41).

This was a characteristically defensive response to the strong position of international networks and potential threats resulting from their further growth. A delay in this process was caused by underestimating both the speed and the size of those challenges. It resulted once again from a very local strategy of the majority of Polish retail enterprises and from their short horizon for setting objectives. A tactical way of thinking with a maximum horizon of one year was predominant and typical for small retail businesses.

The development of the defensive strategies accelerated slightly with a weakening role of wholesalers and the fact that this group of firms had to look for a new strategic position in the market channel. Wholesalers, wholesale and retail firms, and associations of retailers with the greatest foresight initiated integrative links and were ahead of those who persisted in the older patterns of economic behaviour.

The activities undertaken by wholesalers or wholesale “retail firms trying to secure for themselves the function of the integrator of the market channel were highly efficient, as they had the dominant position in relation to a specific group of retailers on local and regional markets.

These attempts to adjust were often hindered by a shortage of capital at the disposal of Polish entrepreneurs, and their lack of readiness for friendly and strategic co-operation within a larger organized structure. Apart from the conflict of goals and interests, there was simply no precedent in Polish business culture. Processes of horizontal integration of retailers based on the principle of voluntary networks occurred even later owing to significant differences in the goals of the parties and the lack of skill in developing common objectives. A researcher of the integration processes of various groups of Polish retailers may conclude that one of the main obstacles for their development was a lack of positive examples in the area of harmonious co-operation. These forms of integration were thus introduced with far greater efforts than those inspired by the international franchisers (see below).

After a two “three-year incubation period, many Polish entrepreneurs saw the strengths of co-operation, but again conflicting interests of directly competitive wholesalers and retailers were a key problem. It seems that only the choice of non-competitive entities with similar parameters guaranteed a coherent strategy. The most efficient stages of the integration concerned the organization of the process of supply, negotiations with suppliers, joint marketing activity and establishing a unified image of the network. In 2002, one may already talk about positive effects of this integration. Associations of retailers (varying in size from 200 to 1000 entrepreneurs) currently operate all over Poland.

10.2.4 Prepackaged retail chains

This strategy was adopted by only a few Polish enterprises. In this model of integration, an integrator established a larger structure within two to three years, which could then be sold profitably to a foreign investor: the integrator sowed ˜a seed of the retail chain, which was refined by a foreign strategic investor. This strategy assumes that only a Polish company knows the actual market conditions and can carry out rapid integration processes and establish a new type of retail chain in a short period of time. In an excessively fragmented market, a foreign investor obtained access to a larger network by purchasing a firm prepared in this way. At the same time, this model could also prove ineffective : the acquired chain might, in fact, be a set of poorly managed and wrongly selected retail units. The strong diversity of the units in such a network could pose a problem to its management, and the number of units within the network did not always reflect the quality of the system of management.

The Polish company Elektromis is a good example of the effective use of this ˜pre-packaged integration strategy. It established two forms of integrated chains ˜for sale to two foreign investors. In 1995, it sold Eurocash, a network of cash and carry wholesale warehouses, to the Portuguese group Jeronimo Martins, and in 1998 a network of 363 discount stores Biedronka ( ˜Ladybird ) to the same investor. Elektromis continues to develop its ˜convenience-stores chain, with plans for expansion to include 1800 franchisers. One may speculate that at the time of completing the process of integrating these shops , their network will also be offered for sale to a foreign investor. Observation of the strategies used by Elektromis indicates its growing professionalism in developing increasingly improved concepts of networks for sale.

10.2.5 Resistance by small retainers

This type of strategy is characteristic for Polish retail enterprises. This group mainly includes independent merchants , who do not want to adjust to the changes occurring on the market. These small firms, which are often ˜bazaar-like , have a negative attitude toward foreign retail chains and want to block the process of their development. At the same time, they are not ready in terms of capital, management skills or organization to initiate any positive actions which would enhance their own competitive position. This group of entrepreneurs clearly wishes to ignore the changes occurring in the market. Similarly to France and other EU Member States, this group has a powerful lobby that promotes a negative attitude to modern forms of large-scale, integrated retailing .

This refusal to adjust to the changing retail environment and growing competition found support from local authorities that provided them with preferential conditions (for example, preferential rules of purchasing and leasing land, premises, and preferential rules of access to credit) that enable them to run small retail businesses in a manner that might otherwise prove non-competitive. This category of merchants does not present any positive vision of development of their own firms, and since they are not ready to bear investment expenses, they adopt a strategy of survival, rather than adjustment or innovation, in the market.

10.2.6 Franchising strategies (2000 “5 and later)

A lack of faith in the potential independent development of their own firms makes some Polish entrepreneurs get involved in the international franchise networks seeking to expand in the country. These independent retailers have a good knowledge of the local market and its strengths and weaknesses. Their decision to join a foreign franchise chain is due to a proper assessment of their own potential. This group of entrepreneurs also has the necessary resources for efficiently running their own businesses. In addition, these firms are often more open to partnership and transfer of modern managerial skills. It seems that with the use of a strict pre-selective procedure, it will be this group that will create a real symbiosis of Polish enterprises and foreign networks. These entrepreneurs are very realistic when assessing problems for running an independent business in the strongly competitive market.

It seems that this model will develop very rapidly between 2002 and 2005, owing to an invasion of foreign franchise networks (Intermarch , Spar, Leader-Price) and to a stronger pragmatism of Polish entrepreneurs. The involvement of Polish entrepreneurs in establishing Intermarch , an international network of supermarkets since 1996, is a positive example of this strategy ( Zycie Handlowe , 2001 : 9).

This formula of franchising provided Polish entrepreneurs with a safe model of development whereby they could combine the elements of the independent business activity with the strengths of an integrated network. In addition to the transfer of know-how, the new quality of these links is also determined by the agreements of Polish entrepreneurs participating in the management of the integrated network. According to the international rules of the Intermarch group, each member of the network contributes one-third of their time to perform managerial functions for the network, which is in addition to the time spent on their own business. This formula is very important for Polish entrepreneurs, as it teaches them positive ways of combining their individual business interests with the interests of the network as a whole.