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China’s Investments in CEE: Sharing Benefits or Building Own Dominance?

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In 2012, China unveiled its plan to invest in Central and Eastern European Countries (CEECs) through transregional platform called the 16+1 Cooperation framework. Since the launch of this framework, China has been proposing various policies of mutual benefit, making efforts to become an important trade and economic partner of the CEECs.  While investments are welcome, several EU leaders and political experts in the region criticize such deals. They point at a threat of China’s growing dominance in the CEECs, as well as at China not keeping its promises made during the launch of this framework and negotiations of various deals.

China promises mutual benefits

The 2008 crisis brought worsened economic conditions to the CEECs, which have since been seeking capital to stimulate investment and facilitate higher economic growth, along with expanding exports beyond traditional European destinations.

Owing to China’s position as one of the largest economic power houses and due to the CEECs’ high trade deficit with China, the countries in this region showed interest in Chinese investments and opened their doors for potential avenues to increase trade with China. China too has looked for diversifying its export destinations and expanding its brands internationally, and CEECs could help it achieve just that. Chinese motivation to focus on CEECs has been fueled by two key factors: availability of skilled and cheaper workforce in CEECs (as compared to EU average) as well as China’s desire to gain stronger strategic influence in business and politics arena in the region as against the EU and Russia.

In this mutual interest, China and the 16 countries (Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Lithuania, Latvia, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia) signed a framework named 16+1 Cooperation in Warsaw in 2012. At the outset, this framework aimed at deepening the multi-lateral economic ties, intensifying infrastructural and cultural cooperation, and capitalizing on the emerging business opportunities for both China and the CEECs.

The scope of cooperation was set to cover projects in CEECs’ infrastructure through investing in transportation systems by establishing new rail routes connecting the 16 countries with other parts of the world (Asia, Africa, and Middle East). China also intended to focus on capitalizing on green technologies, expanding export and import of goods, bringing new technologies for manufacturing sector, enhancing exchange programs for science, architecture, literature etc., and improving cross-cultural relations with the 16 countries.

Framework institutionalization raises a few eyebrows

In order to execute all the cooperation plans, the institutionalization of this framework in the CEECs became the first task to accomplish. It began with launch of Permanent Secretariat at the Chinese Foreign Ministry in China in 2012, followed by opening of Business Council in Poland (2014), Secretariat of Investment Promotion in Poland (2014), New Silk Road Institute in Czech Republic (2015), Center for Dialogue and Cooperation on Energy Projects in Romania (2016), Regional Center of the China National Tourism Administration in Hungary (2016), Coordination Mechanism on Forestry Cooperation in Slovenia (2016), Association for the Promotion of Agricultural Cooperation in Bulgaria (2017), China-CEE Institute in Hungary (2017), and few more.

Such institutionalization in the form of CEECs national coordinators, establishment of several secretariats, and a number of associations and industry organizations for individual states, became a crucial step towards enhanced political and economic relations of China and CEECs, and paved the way for further projects.

On the other hand, however, it left room for criticism. Some organizations, such as Institute for Security and Development Policy, Sweden, pointed out that establishing these institutions in a scattered rather than centralized way will deeply affect proper coordination and flow of information about all projects and initiatives within the framework.

Other voices of criticism, mostly from EU diplomats, warned about the fact that these institutions will limit accessibility to the information for the public. These institutions tend to work in line with the Chinese culture which differs greatly from cultural norms in European (and thus CEECs) organizations. In CEECs’ political culture (prevalent to various degrees across the European region), institutions are expected to actively and symmetrically communicate information to the public, providing room for public criticism and ensuring transparent procedures.

However, in Chinese political culture, public consultation and individual opinion are not given such importance. This leaves many EU leaders to ponder whether China’s intentions are to actually enhance the Sino-CEECs relations or to grow its dominance over the CEECs and act as it pleases behind the veil of its own culture providing an excuse for limited transparency.

OBOR and 16+1 framework go hand in hand

One of China’s major initiatives (and perhaps the only one so far considered to bring real benefit for both sides) is the One Belt, One Road (OBOR) project, launched in 2013 (we wrote about it in our article OBOR – What’s in Store for Multinational Companies? in July 2017). Under this project, China is ambitiously investing in developing one road connectivity, and this plan includes connecting the 16 CEECs with Asia, Africa, and Middle East. According to National Development and Reform Commission of China, Chinese investment in OBOR is likely to reach anywhere between US$120 billion and US$130 billion and with the external investments, it is expected to be totaling to US$600-800 billion by 2022. The success of OBOR is likely to impact the economies of CEECs though increased trade not only with China but also with other countries in Asian Pacific region.

China’s Investment in CEE Sharing Benefits or Building Own Dominance

The Balkans remain important in China’s plans

As part of OBOR, China has increased investment in infrastructure development in CEECs countries, with the initial focus on a few Balkan projects, especially in Serbia, with which China have always had excellent bilateral relations. The country appears to be the central hub in the Balkans for OBOR, both at an infrastructural and political level.

China started with a couple of agreements for infrastructure development with Serbia. These included China’s first large infrastructure investment in the region – construction of “Mihajlo Pupin”, the second bridge over Danube River in Belgrade in 2014 by China Road and Bridge Corporation (CBRC). The bridge shortened the travel time between Zemun on the south bank and Borca on the north bank of the Danube River from more than an hour to just 10 minutes. It also considerably reduced traffic problem on the first bridge. The project was received well by Serbia and taken as a good sign of China’s efforts to strengthen relations between the two countries.

China and Serbia came together for three more deals under the 16+1 framework, leading to total Chinese investment of nearly US$1.06 billion. These included US$715 million for construction of Kostelac power generation unit and expansion of coal-fired plant complex started in 2013, another US$350 million for re-construction of 34.5 km long segment of Belgrade-Budapest railway line, started in 2014, and undisclosed-value project of construction of Surcin-Obrenovac segment on Serbia’s E763 highway developed by China Communication Construction Company (CCCC) in 2017. All the three projects are likely to be completed by 2020.

Another flagship project, which involved Serbia and Hungary, was the construction of China-Europe land-sea fast intermodal transport route that was initiated in 2014 and became operational in 2017. With these infrastructural developments, China showed it delivered on its promises, and took steps to facilitate an enhanced exchange of goods with the CEECs.

Asymmetrical distribution of opportunities also causes criticism

The fact that all these projects were developed predominantly by Chinese firms, has been a cause for concern for western European leaders who criticized Chinese companies for seizing all opportunities and profits. The critics point out that if China and CEECs are coming together for such projects, the local companies should be able to benefit and be given opportunity to contribute skillset and technologies to local infrastructure development.

On the other hand, according to numerous experts, several countries, including Serbia, lack the technical and financial capacity required for such projects. China’s perspective should also be considered here – as China is already investing in the CEECs in the development of infrastructure, it is only logical (and natural) that it would prefer to engage own firms in order to help their business and take back some revenue from the projects.

China strengthens its foothold through financing initiatives

Chinese investments in CEECs are not only limited to the infrastructure sector, but also include certain financing initiatives in the form of availability of loans and funds. During the launch of 16+1 Cooperation framework, China announced a special credit of US$10 billion to the 16 countries to be used as preferential loans for implementation of common projects. Apart from that, in 2013, China together with CEECs launched a Sino-CEE investment fund of US$435 million, which aims at contributing financially to the sustainable economic development of CEECs.

Further, various banks and financial institutions, such as Bank of China, China Development Bank, China Export-Import Bank, and Industrial and Commercial Bank, have opened their branches in the region. While the official reason for this was to provide financial support and availability of funds to the CEECs, a relevant reason was also for China to expand the reach of these financial institutions’ brands in the European market.

Chinese investments grow in size and breadth

It is clear that China’s interest in CEECs has been growing, as exhibited through the sectoral breadth of investment initiatives and the variety of investment modes. Chinese companies are also pursuing the path of acquisitions and joint ventures with CEECs-based companies, the key example of which was seen in 2016, when Polish waste management firm, NOVAGO, was acquired by China Everbright International (Hong Kong). The deal was signed up at a value of US$144.3 million and was one of the largest acquisitions by a Chinese firm in the environment sector in CEECs.

While it is expected that such acquisitions can certainly bring benefits to the local entities involved in the deal (through capital and technology transfers, and easier access to the Chinese market), some concerns have been raised that an intensive Chinese-dominated M&A activity is not healthy for the local market dynamics.

The extent of these investments and acquisitions resulted in year-on-year increase in China’s outward foreign direct investment (OFDI) stock in the 16 countries. According to data from the Chinese Ministry of Commerce, the OFDI stock in 2010 in CEECs was estimated at US$0.85 billion and it reached US$1.97 billion in 2015, depicting an overall increase of around 130% in five-year period. Overall, Hungary was the leading recipient of FDI in CEE region with US$571.1 million, followed by Romania with US$364.8 million, and Poland with US$352.1 million in 2015.

The increased FDI in these countries is partially also a result of their interest in attracting Chinese investments even before the 16+1 cooperation framework came into picture. Poland, for example, being the largest economy amongst CEECs, started promoting itself with Chinese firms since the EXPO 2010 in Shanghai. For long, Hungary seems to have made a point to maintain good relations with China, even before other CEECs intensified multilateral relations with China. Hungarian government also made efforts to attract FDI, including from China, by proposing deals such as introduction of special incentives for foreign investors from outside EU or residence visa programs for bringing in a certain level of investment in Hungary.

Trade intensifies, though less than expected

Not only has there been growth in Chinese FDI since the yearly 2010s, but also the trade between China and the CEECs has grown progressively. According to Department of European Affairs at China’s Ministry of Commerce, trade between CEECs and China was estimated at US$43.9 billion in 2010 and grew to US$68.0 billion in 2017, showing a growth at a CAGR of 6.5% during 2010-2017.

While this might seem impressive, it must be noted that at the time of the launch of 16+1 cooperation framework, China promised to increase the trade value to US$100 billion by the end of 2015, which is far from the actual results even by the end of 2017. This again led to the criticism by the western European leaders over China’s ability (and willingness) to deliver on its promises, indicating lack of credibility in Chinese assurances.

On the other hand, the numbers do depict growth in trade between China and CEECs from 2010 to 2017 as compared to the previous years. According to Chinese Ministry of Commerce, China exports to CEECs were US$49.4 billion and imports from CEECs were US$18.5 billion in 2017, with an increase of 13.1% and 24%, respectively, from 2016. China’s exports to CEE concentrate on technology (with high-tech products from telecommunication, service sectors, and e-commerce sectors). CEECs supply agricultural products including fruit, wine, meat, and dairy products to meet the growing demand of the large population of China. Further interest in expanding imports of agricultural and dairy products by China can be expected, and an increased ease of exporting to China is likely to help CEECs to reduce their continued trade deficit in the coming years.

EOS Perspective

The rising investments of China in the CEECs have been under scrutiny since formalizing the 16+1 cooperation framework in 2012. Ever since the launch, China has been taking a range of initiatives that on the one hand worked towards development of the CEECs, but on the other hand gradually built its dominance in various markets and sectors in the region.

It is clear that such steps are taken by China in order to strengthen its political and economic foothold in the region. European leaders continue to remain skeptical over the intentions of China, which might also indicate the EU’s insecurity about China capturing strong hold over CEECs markets and building its dominance, which potentially might be able to overpower the EU’s influence in the region (especially in the Balkans out of which several countries are not EU members).

From the development point of view, initiatives such as OBOR, China-Europe sea-land express way, Belgrade and Budapest railway line, and even the mergers and acquisition deals, certainly bring advantages not only for China but for the CEECs as well, through much needed funding of infrastructure projects as well as through increased trade revenue.

Although it is of paramount importance for European watchdogs to keep an eye on the ongoing trade imbalance and growing Chinese ownership in CEE enterprises, it must be noted that acquisitions of CEECs-based firms by Chinese firms have largely affected the business in a positive way till now, thanks to influx of capital and the possibility to get the base to expand in Asian markets. Under this framework, despite its inherent issues and associated risks, steps taken by China for future development in the form of ongoing projects, especially in the infrastructure sector, have the potential to create more opportunities for the parties involved to strengthen cross-regional trade and hence create a (almost equal) win-win situation for both China and the CEECs.

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Dual Quality of Food Products Questions EU’s Single Market Strategy

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Several countries in Central and Eastern Europe (CEE) allege that some multinational brands and supermarkets’ private-label food products sold in Western Europe are of superior quality than those available under the same brand name and packaging in their home markets. Food producers contend that they often change composition or characteristics of food products in different countries to adapt to local taste preferences. However, this practice has led to resentment among the CEE consumers who feel that food producers deliberately offer inferior quality products in CEE to save on costs. Taking into consideration the results of comparative tests (conducted by few CEE member states) indicating dual quality of food products to be a fact, European Commission has come out in support of countries complaining about double standards of food products. As European Commission is working out an approach to tackle the issue of dual quality of food products, the packaged food industry must prepare for possible impact.

Slovakia, Hungary, Czech Republic, Croatia, Bulgaria, Poland, Slovenia, Estonia, and Romania are among the countries that have voiced their concerns over dual quality of food products. These countries claim that some of the packaged food products sold in their home markets differ in composition and ingredients when compared to same brands’ food products sold in western markets, for instance, some products contain lower quality of the primary ingredient (e.g. less fish in fish fingers) or contain ingredients considered as less healthy (e.g. sweeteners instead of sugar in beverages). Some countries also complain about the difference in sensory characteristics such as taste, texture, or color.

Investigations by national institutions of few CEE countries revealed that, despite being marketed under identical packaging, many packaged food products differ in composition and characteristics across European Union (EU) member states. In many cases, food products available in CEE markets were less healthy as compared to same brand products available in western markets such as Austria, France, or Germany. In 2015, the Prague University of Chemistry and Technology tested 23 products marketed under the same brand name in Czech Republic and Germany and uncovered differences in eight products. Slovak Agriculture Ministry and the State Veterinary and Food Administration (ŠVPS) conducted a similar study in 2016 and found discrepancies in nearly 50% of the products tested. In 2017, NEBIH, Hungary’s food safety authority, compared 96 products in Hungary, Austria, and Italy. The study included multinational brands, supermarkets brands, as well as some products with similar composition but not the same brand. While 25 of these products were found to be identical, 8 products were different in composition and 30 products exhibited difference in sensory characteristics, whereas 33 products indicated differences in both.

Multinational companies contend that this is a common business practice to change the composition of the branded products as per the local preferences and demand, difference in purchasing power, local sourcing requirements, variation in production lines, etc. EU legislation requires companies to properly label ingredients, but it does not mandate sale of the same recipe under the same brand name across the EU markets. However, it is difficult for consumers to identify the difference in quality of products based solely on information presented on the label. Consumers generally expect that products of the same brands with identical packaging and appearance are the same and thus the purchase decision is often based on brand image and reputation.

The frustration and dissatisfaction is building up among consumers in these markets as they feel as if they are being unfairly treated as second-class consumers. The dual food quality issue has now come under the political radar as the concerned countries have joined forces compelling the European Commission to take necessary actions to eliminate double standards in the quality of food products sold across EU.

EU-Dual Quality of Food Products

After years of perseverant diplomatic efforts, in 2017, European Commission finally acknowledged the issue of dual quality in food products and pledged necessary action against such practices as they may lead to single market fragmentation. In September 2017, the European Commission offered a grant of EUR 1 million (~US$1.2 million) to the Joint Research Centre (European Commission’s science and knowledge service) to develop a common methodology which can be used across the EU market for comparison of products. Additional EUR 1 million (~US$1.2 million) will be offered to member states for conducting further tests and to take actions to ensure compliance.

Alongside, European Commission also released guidelines highlighting application of the existing EU food and consumer protection legislation to determine whether a brand is acting in breach of these laws when selling products of dual quality in different countries. Unfair Commercial Practices Directive (UCPD) prohibit “a misleading commercial practice if in any way it deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to the main characteristics of the product”. National authorities are directed to determine on case-by-case basis whether consumers would still buy a product of a particular brand if they were aware that its main characteristics differ from those of the product sold under the same brand name and packaging in most EU member states – if they would not, then the company can be considered acting in violation of UCPD (though such a determination will undoubtedly be challenging with regards to maintaining objectivity and common fixed criteria). European Commission, along with the help of industry stakeholders, is also preparing a new code of conduct that will include standards to improve transparency and thereby avoiding the dual quality issue.

EOS Perspective

Dual quality of food products has been proven to be a fact and is perceived as an unfair distortion of EU single market. European Commission advocates to strengthen enforcement of existing consumer protection laws, however, some of the EU member states’ representatives are demanding legislative amendments as they believe that the current laws are inadequate to tackle the issue of dual food quality. CEE countries demand that the multinational brands must standardize their food products across the EU market to put an end to the discriminatory practice. However, this would require revision of EU food legislation, a proposal relished by neither the European Commission nor the industry.

In May 2017, Hungary submitted a draft legislation to European Commission to introduce a labelling obligation to include distinctive warning on dual quality food products. However, food law experts contest that such an obligation will restrict the food producers to distribute their products freely in Hungary, unless they bear an additional cost for labelling. This conflicts with article 34 of EU’s treaty that guarantees free circulation of goods within EU. However, if a similar proposal is considered for EU, it would force the food producers to include a warning on the labels, and this could be perceived as a mark of a potentially negative marketing.

It is about time that multinational brands offering dual quality products acknowledge the intensity of the allegations. Companies must prepare an acceptable justification for the difference in quality of their products, more specifically, if their products in certain markets are of inferior quality. Companies may consider reformulating their products in CEE markets to standardize their product offering across the EU bloc. For instance, in September 2017, HiPPs, a German baby food producer, announced that it would reformulate one of its Croatia-sold products to match with the German recipe.

Rebranding is another option that the companies could explore. Products with significant difference in composition could be launched under a new brand name exclusively for that local market. Companies for whom rebranding and reformulating is not deemed feasible, should consider relabeling and repackaging their products to clearly differentiate the products across markets. For instance, Tulip is considering changing the packaging of canned luncheon meat in the Czech Republic to differentiate it from the similar product available in Germany. An unquestionable fact here is that whichever approach companies take to address the dual quality issue, it will result in additional costs, which might affect the products’ prices and make them less accessible, especially for consumers from low-income sections of the CEE population.

For the multinational brands offering identical products across EU, the dual quality issue can be seen as an opportunity. Such companies could consider multilingual labelling informing consumers that same product is sold across markets, and this approach would also help standardize the packaging and labelling across the region. Further, these companies could also benefit from a positive PR and marketing campaigns to reinforce the fact that they consider all their customers equal across EU single market.

Packaged food producers who have presence only in Western Europe are presented with a unique opportunity to expand in CEE markets. As the general perception in CEE is that packaged food products made in western EU countries are often of superior quality, the western-recipe version of a given product may be well received by the CEE consumer.

Local e-tailers as well as retailers in border cities can also be at gain. For instance, Czech e-tailers such as Rohlik.cz and Košík.cz have added special sections on their websites offering German products; likewise, supermarkets in German towns such as Altenberg and Heidenau have put up sign in two languages, due to increasing footfall from Czech cities across the border.

As the debate on dual quality of food products is gaining heat, multinational brands such as HiPPs and Tulip are already considering changing product composition or packaging to reflect the differentiation of their products across member states. Though food producers are not required to offer standard products across the EU countries, they will need to justify the difference in their products, and failure to do so may lead to legal action. The recent guidelines announced by European Commission are more of a soft warning to food producers. If the issue remains unresolved, then European Commission may consider more extreme measures. European Commission warned that if the situation does not improve, it will make the name of brands that are involved in the practice of dual quality publicly available. This might severely impact the brand image of these multinational brands in consumer’s view. Revision of packaging and labelling law is also one of the recommended alternatives that might be explored as a last resort.

by EOS Intelligence EOS Intelligence No Comments

Yet Another Word on Showrooming. Should Brick-and-Mortar Retailers Start Packing Their Bags?

We all seem to have heard the intriguing word of ‘showrooming’ some time recently, term that stands for consumers going to a physical store to see, touch, and test a product before buying it somewhere else, in most likelihood from an online store of a competitor retailer. Showrooming has been a buzzword for some time now and it is making some retailers very nervous. News article titles, ‘The Next Victims of Showrooming’ or ‘Retailers Stand to Suffer from ‘Showrooming,’ paint a rather grim picture for retailers. Is it really the case?

According to the 2013 TNS Mobile Life Study, some 30% of shoppers globally admit to showrooming, with an estimated 20% of them using mobile phones while doing it, in search of price comparisons, product specifications, consumer reviews, expert opinions, checking product availability in different stores, etc. Although showrooming is increasingly a worry for retailers, they might take relief from the fact that, at least for now, consumers still prefer to get product details from a store assistant, than to look up the information online. European consumers are particularly attached to shop assistants – over 50% of consumers prefer interacting with store staff over getting the information on their phone, with the ratio being as high as over 65% in some European countries, e.g. Poland. What retailers are unhappy to hear, is that this ratio is expected to continue to decline, as the penetration of smartphones increases, shopping and comparison applications proliferate, and consumers get familiar and comfortable with using them on a daily basis.

Online stores don’t mind at all

Obviously, online retailers are very eager to take advantage of this new trend, and encourage consumers to use their sites to compare prices and make final purchases. Some online stores, e.g. Amazon, offer free apps to check prices in their store and offer special discounts if the user purchases from them after using their price-check application.

Some online retailers go even beyond that. Bonobos, men clothing online retailer, made the headlines recently by opening “stores that don’t sell anything”, as quoted by USA Today. These ‘Guideshops’, which are regular brick-and-mortar locations, are used just to showcase the online offer, allow customers to feel the fabric, check the sizes, and try on the clothes, before purchasing them online. It seems silly and contradictive to the essence of online shopping, but Bonobos appears to have gotten on the path to strategically benefit from the showrooming trend.

Traditional retailers still slow to react

There is no way the showrooming (and e-tailing) will come to a halt and magically disappear to the satisfaction of traditional retailers. Thus, it is clear the retailers cannot just sit and wait for the trouble clouds to go away, as they risk becoming a showroom with high foot traffic with no sales to justify their operations. Physical, traditional retailing will inevitably decline to some extent, so the retailers must devise strategies to tackle the issue head on – fight it or embrace it.

We have already seen retailers’ attempts to counteract the showrooming. Some of them started charging an entry fee – for just looking through the products in the shop, a fee later deducted from the final bill if any purchase is made.

Overall, it’s neither good nor bad, depending on whether you view it as the death of physical retail or a kick to traditional retailers to innovate their cross-channel experience. Those who are tackling it head-on may actually consider showrooming the future of retail.” – Brian Gillespie, Continuum, Global Innovation and Design Consultancy, for Mashable.com, May 2013

Needless to say, such approach is likely to be very successful in limiting showrooming – and probably overall sales as well. There will be a group of consumers, who will never come in the shop that carries notification of entry fee on its door. People who will enter, but won’t find anything worth buying, will be left unsatisfied with spending money on… nothing in return. It can be fairly assumed that this group of consumers will not be converted into customers later on.

Customer experience is the key

The smarter option (though not necessarily an easier or cheaper one) is to deal with reality by embracing the new trend. With good strategic thinking, investment and willingness to change the way customer is handled day-to-day, showrooming can probably be flipped to an advantage, or at least considerably neutralized. Let’s look at some ideas of what retailers can and should do in this uneven battle with showrooming.

The key weapon, currently underutilized by many retailers, which should be improved and used against showrooming, is customer experience. Some industry experts say that it is not the price, but the lack of great experience in physical shops that is the key driver pushing consumers to buy online.

E-commerce is not the reason people don’t shop in the store. Customers come to a retail environment for the recognition.” – Jean-Pierre Lacroix, president of Shikatani Lacroix Design, for Stores Magazine, March 2013

If they lack the right experience, they focus on other criteria for store choice, such as price or convenience, which allow online stores to win growing share of consumers’ wallets. Industry experts indicate that excellent in-store experience can become the key weapon in retailers’ hands:

  • Engage with ‘showroomers’, as since they are showrooming and browsing, it means they have been hooked to the idea of purchase and are actively considering buying a given product. More importantly, they are already in your shop. Look for ways to engage with the ‘showroomers’, and you might be able to convert them into your customer. Reward them for already being at your store – offer better discounts, deals on immediate purchases, etc. available to those who are already in.

  • Online-enable the store. Encouraging online presence in your store might sound crazy. However, your store might be a physical location, but it does not mean it is cut off from the outer world. Don’t expect the customers to go off-line when they are in your brick-and-mortar shop – they probably stay online all the time. Entwine online experience with your in-store experience. Introduce store mode of your website, ability to connect via WIFI when on the premises, reward with deals accessible via this mode for purchases from the physical shop

  • Make it speak. Instead of placing product info in print on the shelf, allow customers to browse product information via their smartphone (or self-operated information kiosks on the store floor), searching via QR and barcodes, linking to interactive content available on the in-store mode website, including product specifications, reviews, additional content, e.g. virtual fitting rooms for clothes or visualization for furniture purchases, interactive maps guiding the customer through the store to specific products

  • Revamp the role of your floor staff. They are not there just to show the customer down the aisle, answer basic questions about the product, and ring the register bell. The staff is the element that can really make the difference, engage and capture the customer. The key here is to wow the customer with helpful and knowledgeable assistants, who offer depth of information that goes beyond what a typical consumer can anyway find online. Invest in turning your assistants into ‘mobile points of service’, that is create tablets and smartphones-equipped staff with access to CRM and product data, and provide them with certain level of autonomy to offer special discounts and other deals right on the spot when interacting with individual customer

  • In large stores, where self-service naturally dominates (e.g. groceries), invest in precision retailing. Your customers are probably enjoying the level of personalization when shopping on Amazon and the likes, so it is time to start using your big data effectively. Some developers already offer cloud-based enterprise solutions allowing for one-to-one, real-time retailing personalization, which includes personalized content allowing for virtual shopping lists, special offers presented at the point of decision in the shop, deals tailored depending on the past purchase history, shopping frequency, etc.

Retailers can also opt for other weapons, not necessarily linked directly to the customer in-store experience, but rather ways to attract them to come through the door:

  • Use technology to draw customers – adopt geo-location solutions and use GPS or NFC technologies to make yourself visible to the consumers remaining near your store

  • If you can afford it – try price matching. While customer experience might be the selling point of physical experience, a lot of customers are price-oriented after all. This might be dangerous to the margins, so not all retailers are able to afford this strategy

  • Emphasize the advantage of immediacy in two meanings. First, immediacy of information across all senses: the customer gets the information about the product (especially if in-store information incorporates elements of digital media and is as diverse and exhaustive as online) and can feel and try the product at the same time, something that online shopping will never be able to offer. Second, once the purchase decision is made, customers in general would prefer to get the product right away. This is a huge advantage for physical shops, where no shopping time has to be added (as still rather few online stores are able to execute ‘same-day-delivery’ on most of their products)

  • Make it exclusive by carrying unique products, limited editions, products with customized content, which will make it impossible to compare prices with other retailers and will attract the traffic towards your door. Unique products alone will not support all your sales, but will drive some level of unplanned purchases that are made ‘by-the-way’

There is no way to say which physical retailers will be able to withstand the pressures of the showrooming trend, and what mix of tactics will turn most successful. Showrooming potential to negatively impact retail industry indicates that it should be treated seriously, and dealt with by strategic solutions rather than immediate measures. The development of comprehensive solutions should therefore be a task for retailers’ strategy top executives, and must go far beyond attacking consumers for their willingness to participate in this trend.

by EOS Intelligence EOS Intelligence No Comments

Horse Meat Scandal That Has Nothing To Do With Horse Meat. Have We Been Fooled On Our Own Request?

In early 2013, an uninvited equine guest was found on several European beef-only plates, giving way to a series of accusations, finger-pointing and investigations. Meat adulteration scandal has now spread to allegedly involve slaughter houses, suppliers and meat-based food producers from across Europe, with names of France, Ireland, Romania, Poland, Germany and the UK popping up on the news. Regardless of the authorities’ investigation outcome, one thing stays for sure – the consumers’ trust in the meat processing industry, already not very strong, has been further shaken.

While DNA tests confirmed horse meat presence in several beef products (in some cases even 100% horse meat in supposedly 100% beef dishes), there is no certainty yet on how horse meat entered the food chain. And the problem is not just with horse meat, as pork was also found in beef-only products, with further investigation for donkey meat as well. Horse meat, as well as pork and donkey, are edible, and does not cause harm to humans per se, but the problem is big – it is consumer misinformation as well as the fact that since horse meat should not be found in beef products at all, we don’t know whether it met any safety standards. The scale and spread of the scandal may suggest that it was not a one-off case of a dishonest supplier, but rather a silent, probably not infrequent industry practice of deliberate product mislabeling.

Consumers are outraged at the ‘evil meat producers’ responsible for the malpractice. They announce their shaken trust in meat processing industry (and food industry in general). But this smells of hypocrisy on the consumer’s side as well. Majority of consumers across most markets (apart from a small health-conscious group) have long taught food producers one fundamental truth – price is the most important factor in their purchasing decisions, driving producers to take shortcuts wherever possible. While there is no justification for the malpractice and deliberate fraud, food producers and suppliers are oriented at cutting costs to deliver products at the demanded price yet still maintain margins. Same is true across other industries – we openly condemn child and underpaid labor in several Asian manufacturing centers, yet continue to demand extremely low prices on electronics, apparel, etc., knowing where and how it’s been produced (or conveniently forgetting about it at the time of purchase).

The consequences of the scandal around meat products are likely to go beyond a temporary dip in processed beef products sales. Early surveys in some of the European countries, such as UK, indicated that close to 1/3 adult consumers said they want to buy less processed meat (not only beef), indicating potentially harder times for producers across meat segments. This is likely to spike consumer interest in fish and seafood products. However, the changed meat demand dynamics might not necessarily lead to the lowering of meat prices, as more stringent safety and control procedures might allow prices to remain stable. The rapid, and in some cases unfair, finger-pointing towards suppliers from Central and Eastern Europe will continue to damage meat exports of these countries, unjustly affecting farmers and suppliers. Consequences will also include added effort by supermarket chains to rebuild the shaken trust in meat products, i.e. Tesco, Morrisons and Asda, for instance, will re-test meat products to ensure compliance and launching widespread reassurance campaigns; these will add to cost burden to the chains – costs that are eventually going to be passed onto the consumers.

It will be a difficult time for producers and suppliers found guilty of introducing horse meat to the human food chain, as under the pressure of public opinion, authorities aren’t likely to be easy on them. But meat producers who are able to be transparent and honest about their procurement and processing procedures, can actually benefit from the scandal, as more and more consumers will look beyond price and start to value quality (at least temporarily till the memory of the scandal is fresh).

So as the scandal unfolds, there are a few important questions here: Will it improve transparency of the supply chains in meat processing industry? Will it improve the quality of meat products we purchase and feed our families with? Will it force the authorities across Europe to improve control measures? Will it enforce correct labeling of products? And finally, will it make us, consumers, permanently shift our focus from price only to quality-oriented purchases? If the answer to these questions is ‘yes’, perhaps there is a silver lining to this scandal after all.

by EOS Intelligence EOS Intelligence No Comments

Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?

Since 2008, the economic crisis has been the subject of countless news headlines across the world with numerous economies sliding towards the verge of painful recession. Europe has been severely hit as well, with only one state, Poland, performing considerably better than those once believed to be more stable and better prepared for potential turmoil, resulting in the Polish economy being dubbed the ‘green island’ among weaker, crisis-ridden EU states.

As the economic crisis wave spread across the globe in 2008, it hit virtually all economies. The slowdown was visible in form of declining economic growth rates, which soon changed into negative growth in economies of Europe, USA and Japan. Interestingly, Poland was the only economy in the EU to register a positive growth during 2009, and, despite visible slowdown due to recession hitting its trading partners, Poland has managed to storm though the crisis reasonably well.

Real GDP Growth Rate 2009

Real GDP Growth Rate - 2000-2014F

Since the onset of the crisis, Poland’s good economic performance has surprised many analysts. Obviously, the country did not remain unaffected, and a look at a trend line of the country’s growth rates over the past decade clearly shows how its performance has mirrored EU’s economic struggles. Nevertheless, the Polish economy managed to grow throughout the crisis, and this year, again, as the EU economy is expected to shrink by 0.3%, Polish economy is expected to expand (though modestly). Poland’s position in terms of GDP per capita increased considerably by 11 percentage points, to 65% of EU’s average in 2011. The economic growth and persistence in defying the crisis is believed to be largely underpinned by strong internal consumption, as Poles took long to believe that the crisis could have an actual impact on them, thus did not cut down on their expenditure (e.g. in 2011, the Polish retail sector enjoyed one of the highest y-o-y growth rates in retail sales during the December holiday season in Europe, second only to Russia). This strong internal consumption, paired with attractiveness for foreign investors in production-oriented sectors, along with postponed entry to the Euro zone (a fact that has helped shield Poland from Euro quakes) and limited household and corporate debt, allowing for greater stability of banking assets – these factors are typically cited as reasons for Poland’s good performance amid the crisis.

However, there seems to be an air of negativity and the country might get its share of the crisis after all. Just in November 2012, the IMF and Morgan Stanley slashed Polish GDP 2013 growth forecasts by almost half, down to 1.75% and 1.5%, respectively, as rather modest export gains are expected to fail to offset weaker consumer spending. Indeed, private consumption boom is likely to significantly cool down, as for an average Polish citizen the situation does not appear bright. The mood amongst Poles seem to no longer reflect the earlier enthusiasm, with opinions that good performance of Polish economy is now more of a government propaganda, since what they see on a daily basis contradicts the positive overtone of analysts’ words. The change in moods has been already captured – in November 2012, the Indicator of Consumer Trust (BWUK) was down by 5.3 percentage points over November 2011.

In reality, Poland’s position in EU’s GDP per capita statistics improved more as a result of a decline of the EU average, rather than actual improvement in Poles’ incomes and standard of living. The accumulated negative impact of adverse situation in the country’s Euro zone-based trading partners, leads to increased cautiousness of firms, who are introducing cost control measures, including layoffs. Rising unemployment (registered unemployment reaching close to 13% overall and as high as 28% amongst graduates in November 2012), together with growing fear of losing jobs, as well as limited credit activity, seem to have put brakes on consumer spending and thus internal consumption, an element once considered as one of the fundamental forces allowing Poland to withstand the pressures of the crisis. The mood is increasingly pessimistic, and the Poles have now started to change their shopping habits – they buy less, think twice, postpone high-value purchases, downgrade to cheaper equivalents and demand higher value for money. Poles are finally increasingly aware of the economic storm going through neighbouring economies, and realize that they do not live on a safe ‘green island’ any more. This fear is escalated by recurring news and discussions filled with warnings of 2013 brining the crisis full-on to Poland. And what is definitely not helping is the opposition leaders’ lack of political will to constructively work with the government in averting the impending crisis.

Many economists urge Poles to remain calm and claim that there is no reason to panic (at least, not yet). Though the slowdown in economic growth is a fact, consumers’ calm approach is definitely recommended, as fear of the future might multiply the slowdown, resembling a self-fulfilling prophecy. But, one has to keep in mind that consumption levels, strongly correlated with consumer sentiments, has no capacity to remain the single force driving economic growth. Several cushions that previously protected the Polish economy slowly cease to exist – continuous, high value public spending, favourable VAT, weak currency that supported Polish exporters and high inflow of EU funds to sponsor infrastructure investments are becoming a story of the past. In this negative scenario, consumers’ wishful thinking, positive attitude and frequent shopping trips might turn out far too weak to lift Poland’s economy as Europe and the Euro zone continue to sink.

It seems that the story of the ‘green island’ may not remain true for long.

by EOS Intelligence EOS Intelligence No Comments

Will Retailers’ Cash Registers Ring This Holiday Season?

It’s a big moment for retailers as we enter the holiday season, which traditionally has been known to generate sales higher than in any other quarter during the year. But this year again, retailers cannot afford to sit back to enjoy the sweet sound of their cash registers ring. Despite the rebounding US economy and some European economies showing first signs of recovery, the ‘economic crisis’ phrase is still being heard in dozens of languages.

At the outset, the US retail holiday season outlook seems relatively optimistic, with National Retail Federation’s projections indicating a 4.1% increase in 2012 holiday retail sales over the 2011 season, to reach a healthy $586 billion this year. Though moderate, there is a visible increase in optimism compared with 2011, resulting in higher consumer confidence in economic recovery, employment stability, as well as individual and household finances, all of which should bring American retailers a sense of relief and may result in a brighter fiscal year-end.

Online shopping and mobile apps are expected to play an important role during this season in the American market. This, paradoxically, might mean a mixed bag of good and bad news for retailers. Well-informed consumers, empowered by easy access to online tools allowing for quick, on-the-spot price and offer comparisons, are bound to make retailers’ and marketers’ job harder. But, by now, any sane retailer should have realized the world of opportunities lying here, and only these retailers will be able to bite a bigger share of consumer’s holiday budget. Increased penetration of smartphones, in tandem with mobile apps, online shopping and social media, have opened several platforms for retailers to interact with consumers, leading to an increase in conversion rate of consumers from ‘online researchers’ to ‘actual buyers’. According to Deloitte’s research, shoppers using mobile apps are expected to spend 72% more than non-users this year, with the conversion rate for shoppers using dedicated mobile applications being 21% higher than shoppers not using such tools.

Although this data pertains to the American market, it offers a good learning for European retailers too, as for them, the 2012 holiday season outlook appears gloomier than for their American counterparts. They seem to be very much aware of what is at stake, especially remembering 2011, which was hoped to be the turning year for the European economy, but actually witnessed worsening of the retail sector across several European countries. Poor consumer confidence was reinforced with recurring news: “Italy Xmas sales seen down”, “Greece sales plunge”, “Retailers slash prices to clear stocks, hurting margins”. There were some instances of retail sales growth, mainly in Russia, Poland, Romania, and to some extent in the UK, which witnessed faster clearance of holiday stock, but, apart from Russia and Poland, it was far from the good old days of record sales.

Christmas shoppers brought little relief to Europe’s retailers last year, with online sales increasingly cannibalizing in-store purchases. Till date, 2012 has not been much better than 2011 in terms of hinting at better consumer confidence, with most Europeans constrained by lower disposable incomes, higher-than-average inflation, wage cuts, high unemployment and dwindling social benefits, all of which do not promise a very fruitful 2012 holiday season for retailers across Europe. Several European retailers, just like their American fellows, are also turning their eyes to online and mobile-app shopping, especially as 2012 has shown that online retail and mail order are relatively immune to economic volatility and falling consumer confidence (though online sales penetration varies considerably across EU states).

So can European retailers do anything or should they simply wait and watch the holiday season fare badly? While there are no magical solutions, some obvious aspects might help improve retail sales numbers a bit this year:

  • Christmas is the best time to play on emotions, but this alone will not charm consumers into opening their wallets during these difficult times. Retailers must offer great sale prices and monetary incentives to buy. As the gloomy outlook prolongs, consumers tend to be more perceptive to price cuts than Santa’s friendly image.

  • Price cuts, discounts and special holidays offers are a decent but rather ancient invention. Any retailer thinking of this being the sole instrument of gaining consumers will have to compete with the sea of price cuts available everywhere. Creating a sense of urgency and exclusivity allows one to stand out and force consumers to decide quickly, such as by offering sharp discounts but for a very short period.

  • It has never been more important for retailers to stay on their ones toes with excellent customer service. With a battle for consumer’s every euro and dollar, retailers just cannot afford unhappy customers, who are very likely to spread the news about their bad experience.

  • Offering a delayed payment option might not make the retailer excited, but it might be the best option to secure sales from those consumers who are worried about their liquidity and spending too much now. There might be a willingness to buy gifts, so a delayed payment option might help consumers make some purchase rather than nothing at all.

  • Retailers, even those who do not offer online shopping options, must make themselves visible online – this is not the right time to neglect social media (but is it ever?).

While the economic situation is slowly improving, consumers will undoubtedly remain cautious, and the 2012 holiday season is unlikely to break any sales record. With this rather mixed outlook, the good old basket of retailer tricks including Christmas special offers, jolly atmosphere and in-store decorations will turn out to be too weak to counterbalance the pressure on the consumer’s wallet and weak confidence. But perhaps the only thing that the European retailers CAN do is to pick from the old tricks basket as smartly as they can, wait out the worst times and just hope for the best.

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