Central Europe's New Consumers
Philosophy professor Nina Gladziuk thinks carefully before shelling out her hard-earned zlotys for Poland's dazzling array of consumer goods. But spend she certainly does. Although she earns just $550 a month from two academic jobs, Gladziuk, 41, enjoys making purchases: They are changing her lifestyle after years of deprivation under communism. In the past year, she has furnished a new apartment in a popular neighborhood near Warsaw's Kabaty Forest, splurged on foreign-made beauty products, and spent a weekend in Paris before attending a seminar financed by her university. "None of this was available before," she says.
Meet Central Europe's fast-rising consumer class. From white-collar workers like Gladziuk to factory workers in Budapest to hip young professionals in Prague, incomes are rising and confidence surging as a result of four years of economic growth. In the region's leading economies--the Czech Republic, Hungary, and Poland--the new class of buyers is growing not only in numbers but also in sophistication. Although they earn only a fraction of the wages of their counterparts in Western Europe (table, page 44), half of all Czechs consider themselves middle class, according to a recent poll. In Hungary, ad agency Young & Rubicam Inc. labels 11% of the country as "aspirers," with dreams of the good life and buying habits to match. Nearly one-third of all Czechs, Hungarians, and Poles--some 17 million people--are under 30 years old, eager to snap up everything from the latest fashions to compact disks.
These rising wants and needs offer big opportunities to companies from Polish food group Agros Holding to Citicorp. Whether they are selling beauty aids or leisure activities, companies are delivering the idea that their products can improve--or transform--the lives of Central Europeans. That's an alluring message in a region that spent most of the past 50 years cloaked in communist drabness or, more recently, faced the harsh realities of the transition to capitalism. Although cash is still king, companies and banks are teaching Central Europeans how to expand their purchasing power through consumer borrowing. With annual inflation dropping from triple digits to under 15%, credit is fueling increases in the sale of big-ticket items such as appliances and autos. Indeed, car sales in Poland raced ahead by 30% last year alone.
TUMBLING TABOOS. In such a frenetic environment, marketers are spending big to capture--and hold--the attention of consumers. "It used to be as simple as putting your product out there and putting up a few billboards," says John K. Sheppard, president of Coca-Cola East Central Europe. No longer. This year, companies will pour $2.3 billion into advertising, twice as much as just three years ago (chart). Central Europe is awash in sweepstakes appealing to consumers' get-rich-quick fantasies as these companies test new products. Old taboos are falling, too. In communist days, sexual images were banned in the media. Now, in Prague, ads for an energy drink called Erektus depict a Pope-look-alike eyeing a woman's bare legs. "For the man who wants what he can't have," says the copy.
The shopping spree is remaking Central Europe's distribution networks. Traditional mom-and-pop shops are disappearing as hypermarkets and malls spring up in major cities. In December, German retailing giant Metro opened Poland's largest shopping center, a $56 million behemoth in Czeladz, in the industrial heartland. The company will plow $555 million into Poland in the next five years. Similarly, a venture headed by Lehman Brothers Inc., the U.S. investment bank, is sinking $150 million into 10 new malls in the Czech Republic, Hungary, and Poland.
Meanwhile, service companies such as DHL International are seeing their business take off--as they expand networks for distributing goods for foreign importers and local manufacturers alike. "We are predicting growth of at least 25% a year in the region for the next five years," says Douglas West, commercial director for Central, Eastern, and Southern Europe.
In and around Warsaw, the surge in consumer spending is rising from the very ground: Young professionals are building thousands of new houses on the outskirts of town. Others are renovating their socialist-era apartments, adding sparkling new kitchens, built-in wooden cabinets, and expensive double-paned windows. Ikea Holdings, the Swedish furnishing company, is cashing in big on that trend, as is Potten & Pannen, a Czech marketer of high-end Western cookware and cutlery.
CASHLESS. But the region's hottest marketing opportunity these days is clearly financial services. Until now, many Czechs, Hungarians, and Poles have been reluctant to open bank accounts. Some worry the banks are too shaky. Others deplore the abysmal service. To combat that image, Bank Handlowy, a big commercial lender in Poland, has launched a new consumer division that will soon be offering everything from life insurance to car loans. Salespeople for Citibank in Poland are calling on customers at homes to pitch credit-card services. And in Hungary, debit cards are taking off. OTP Bank, the nation's largest savings bank, plans to issue 1 million cards by yearend. Katalin Szekely, 30, a manager at L.M. Ericsson in Budapest, uses her new OTP debit card to buy groceries at Tesco PLC. "I feel a lot better because I don't have to carry around all that cash," she says.
Plastic is just the beginning, however. Next to come is an explosion in mutual funds, as governments begin to reform their overburdened state pension systems. Starting next year, for example, $2 billion in Polish pension contributions will begin to go to private companies for the first time. Three dozen mutual-fund and insurance companies are seeking licenses to set up pension funds. Some 6 million workers will have to sign up with a private fund manager, starting on Jan. 1, 1999. "Every company will spend millions of dollars on commercials and advertising," says Tomasz Orlik, director of Pioneer Investment, Poland's new pension-fund department.
Central Europe's surging financial industry is contributing to the growth of the new consumer class. Just as in the West, the region's financial types are becoming role models for some workers and professionals lower down the consumer pyramid. With incomes of $30,000 a year and often much more, they are indulging in purchases they once could only dream of. Take Dusan Tejkal, 25, owner of Private Investors, a Prague brokerage. With a yearly income exceeding $80,000, Tejkal can afford to spend freely on exotic vacations, fancy restaurants, and fine clothes. This past spring, he took time off to ski in Austria and dive in the coral reefs off the coast of Belize. "When you want to escape, it's worth paying extra," he says. "It's worth making sure that everything will be perfect."
Although such high rollers still make up a minute percentage of the population in Central Europe, more companies are targeting them. Czech mobile-phone company EuroTel saw its sales double last year, to $297 million, as it pushed its phones as symbols of worldliness for the country's young business class. Profits rose 89%, to $111 million. Travel companies, local nightclubs, auto makers such as BMW, and design houses such as Versace have all begun to cater to Central Europe's new rich.
TEEN ANGELS. With family incomes rising, Central Europe's youth are also a big new target. Since young people tend to live at home until they get married, they have money to spend on food, fashion, and fun. Coca-Cola Co. has gone to great lengths to grab their attention. One scheme: the Fanta Fun Taxi in Hungary. Coke joins local radio stations around the country to sponsor a weekly promotional event. Contestants peel the label off a bottle of Fanta and send it in to the station with their name, address, and phone number. The prize for the drawing: a 12-hour, chauffeur-driven joyride along the streets of the contestant's hometown in an orange, tail-finned, vintage Cadillac, with "Fanta" splashed in bold letters across the hood. On a recent Saturday night, Adam Szorenyi, 20, and three pals whooped and waved as they tooled around Budapest in their Fun Taxi.
In two years, Coke's marketing budget will have shifted from 90% advertising to a 50-50 split between advertising and promotions such as the fun taxi. "You've got to capture [consumers] with an experience," says Paul Garrison, managing director of Coca-Cola in Hungary. The strategy is paying off. Two years ago, Coke was neck and neck with Pepsi. Now, the company says, it outsells Pepsi 4 to 1.
Sportswear companies are also courting Central Europe's youth. Warsaw and Krakow are dotted with outlets of Nike Inc. and Reebok International Inc., selling shoes and other gym gear. In Hungary, mobile-phone companies such as Westel are chalking up sales among the under-20 crowd, as they offer service limited to domestic calls, along with low rates in the evening and on weekends.
While young people and professionals represent an important market for many companies, manufacturers of household goods are going after a much broader spectrum. Procter & Gamble Co. and Unilever Group have poured millions of dollars into selling detergent, shampoo, and deodorant since they entered the region in the late 1980s. Their advertisements are partly geared to explaining their products to consumers who previously couldn't afford them. "People have an extreme interest in how products work," says Stef G.H. Kranendijk, P&G's chief executive in Poland.
In some cases, Central Europeans snap up pricey, foreign brands for special occasions but rely on cheaper, local products for everyday use. Despite the efforts of P&G and Unilever to unseat Hypo as the No.1 bleach in Hungary, it still commands a 65% market share because it costs one-fourth as much as rival brands. "In low-end products, it is price loyalty, not brand loyalty, [that motivates consumers]," says Jeno Andics, head of Mareco, a Budapest market-research company.
Indeed, low-cost local brands are giving Western companies headaches. In response, P&G, for example, slashed the cost of its new Bonux laundry detergent in Poland by selling it in plastic bags rather than boxes. "Poles said they didn't need expensive packaging," says Kranendjik. The marketing message trumpeted the savings: "Bonux cleans everything except your pockets." Now, the company's Bonux and Vizir are top sellers in the detergent market, where P&G commands a 40% share. P&G's total sales in Poland are expected to hit $500 million this year.
The fight between foreign and local brands isn't only about price, however. As confidence grows, the appeal of exotic products from the West is fading. Local companies are using patriotic pitches to win back customers. In Hungary, Zwack Unicum Co., a distiller and wholesaler of spirits, airs TV spots that trace the 200-year history of Unicum, its big-selling after-dinner drink. In the Czech Republic, beverage producer Toma has knocked Pepsi into third place in the cola market by hawking its "Czech made" soft drinks as an antidote to the stresses of urban life. Says Zofia Gaber, president of food producer Agros, which makes popular Fortuna juices: "The inscription `Polish product' brings us more consumers" than foreign rivals can attract.
As a result, Western companies are having to step up efforts to develop products--and marketing campaigns--that are geared to local needs and attitudes. That in turn is creating a demand for local talent to fill advertising and marketing positions, which can pay as much as $180,000 a year. One of the new breed is 28-year-old Szymon Gutkowski, strategic director at Corporate Profiles DDB, a joint venture between a local company and DDB Needham Worldwide Communications Group Inc., based in New York. Back in the early 1990s, Gutkowski was a political organizer for the forerunner to today's Freedom Union party. Now, however, he advises foreign companies to replace dubbed-over TV spots with commercials conceived with Polish tastes in mind. One ad he created, for example, features characters from novels of Henryk Sienkiewicz, the Polish author who won the Nobel prize for literature in 1905.
As more manufacturers, distributors, and marketers pile into Central Europe, consumers will be the winners. They'll benefit most from price competition, as companies jostle to tally up sales. Perhaps more important is that Central Europe's long period of painful economic reform is starting to pay off. The growing middle class promises to be not just the source of new business for companies. It also offers Central Europe the hope that some day its prosperity will match that of its neighbors to the West.