Pole position

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With a population of 40m Poland is central Europe's largest food and drink market. Stefan Chomka looks at the potential for UK manufacturers to get in on the act

Poland is potentially a land of opportunity for UK manufacturers. With a population of 40m, it is the largest food and drink market in central Europe and has one of the largest working populations. According to the Polish Information and Foreign Investment Agency (PAIZ), with 35% of its inhabitants under the age of 35 it is also one of the youngest populations on the continent. Around 14m young people are expected to enter the labour market over the next few years.

Poland is also the place to find cheap yet high quality workers. The country's labour costs are some of the lowest in Europe yet its workforce is highly educated. In 2000, 47% of 18-24 year-olds were in education, compared with only 30% in the Czech Republic and 37% in Hungary, says PAIZ. Workers also have a reputation for being flexible and productive.

Despite all this, UK manufacturers have been slower than their European counterparts to recognise the potential for moving into Poland. While direct foreign investment into food processing in Poland reached euro 255m in 2003, Britain is only the sixth largest foreign investor on Polish soil, behind France, the Netherlands, the US, Germany, and Italy.

Yet British food and drink companies are starting to wake up to the opportunities of setting up in Poland. Partly because of the country's accession into the European Union (EU) on May 1, and partly because they are worried that if they don't they will lose out in the long-run, says Matthew Nash, head of new market development in central Europe at Food From Britain (FFB).

Nash says that the growing presence of Tesco in Poland, for one, is forcing companies to take a long look at their overseas operations -- or lack of them. "Suppliers to Tesco in the UK are concerned that it can source products significantly cheaper than in the UK," he says. "It has stimulated companies to look at central Europe, which has a low cost, high quality product base."

Tesco dominance

According to figures from grocery think tank the IGD, Tesco holds the dominant position in the Polish hypermarket sector with over 30 stores. It predicts by 2006 the retailer will have almost doubled this tally and will have a major impact on shaping the food and drink landscape of the country.

Yet manufacturers should not go on a mad dash to set up production plants in Poland purely based on the country's large population and the low cost of labour, warns Nash. "Anyone seeking to go into Poland and make a swift profit is unlikely to do so," he says.

A reason for this is that many British products are still largely unknown in Poland, which means that companies will have to re-build their brands from scratch. "Western products are not understood and require significant market support," he says. "Market entry costs are very high and you must be prepared to pay substantial amounts of money to get your products listed. You also need up-front investment to educate consumers."

British companies will also have a fight on their hands from companies from Germany, Spain and Italy, whose products have far greater recognition in Poland due to heightened promotional activities.

FFB advises that companies planning to invest in Poland carry out significant market research and take serious account of local tastes. "While in the UK we are 30 years into a convenience culture, up until a few years ago in central Europe a consumer did nothing but cook from scratch. Cuisine in Poland is quite plain and heavy, and normally consists of meat and two veg," says Nash.

However, Polish tastes could follow that of its neighbours, he adds: "We have seen a rapid move toward convenience foods in Hungary and the Czech Republic and it could follow in Poland."

Nash also says that the Polish consumer places great importance on locally-produced food, which could be another factor in deciding how well UK companies fare. "From a Polish consumer's perceptive there is a degree of suspicion about imported products. There is the opinion that if they have had to travel that far they must contain preservatives and be not as healthy as local products." He adds: "The government also encourages people to eat local produce."

However, while this may affect exports, firms that drop anchor in Poland and source locally can overcome this problem. "There has been a number of instances where suppliers have gone in to Poland, bought a company which had access to established distribution channels and taken a piggy back on them," says Nash. "If a product is made in Poland the consumer feels a lot better."

One company that has successfully done just this is Kraft Foods. Kraft moved to Poland in 1992 and claims to be the country's seventh biggest food company. Through acquisition it now owns two state-of-the-art confectionery plants -- a wafer production plant in Cieszyn, and a chocolate plant in Jankowice.

Fionnuala Tennyson, director of corporate affairs for western Europe at Kraft, says the company moved to Poland to concentrate on producing confectionery brands Milka, Alpen Gold and Prince Polo for the Polish market. It is also moving production of its Terry's Chocolate Orange from York to Poland in 2005 to fill extra capacity at the plants.

Tennyson says that setting up in Poland has offered both opportunities and challenges for Kraft. "Poland is not as mature a market place as the UK," she says. "It is not as saturated for particular products, such as chocolate, and is more accepting of new products and categories."

While Polish consumers can be wary of foreign products, there is also huge demand for well-known international brands, especially among aspirational consumers. "Global brands are very well accepted as they have a certain amount of novelty value," she says.

Low purchasing power

Despite this, she warns that a main obstacle is Polish consumers' low purchasing power due to low income levels. With raw material costs rising in Poland, UK companies will have to consider carefully what to produce.

The purchasing of products such as dairy, fruit and vegetables in particular have been badly affected by low incomes, says the Polish Ministry of Agriculture and Rural Development. However, at the same time, consumption of meat and offal has risen significantly with a rise in pig and poultry production and a drop in prices of these products.

In fact, according to FFB, price is still the key driver for purchase in Poland. Whereas the average Polish household spends 31% of its income on food and drink, compared with 24% in the Czech Republic, the Polish consumer is still more influenced by price than both Czechs and Hungarians.

The reason for this is that although main cities such as Warsaw have affluent populations, across the country unemployment is high at around 17%. "Companies can't price in the manner they do in the UK and only a minority of consumers can afford frequent purchases of premium or imported brands," says Nash.

Poland's infrastructure is also a consideration. According to Nash there are no real motorways in Poland which could make it difficult to move products around. The government body UK Trade and Investment echoes this, saying the road network is already stretched. Yet Kraft's Tennyson does not see the roads as a problem: "Trucks shouldn't travel faster than 100km/h and that is easily possible according to our local businesses in Poland."

Poland itself is busy improving its infrastructure. Kazimiera Wójcik at PAIZ, says the country is upgrading its roads to encourage more foreign investment. "Infrastructure will be significantly upgraded thanks to the EU structural aid," she says. "Poland will be the single largest beneficiary of EU aid among the acceding countries."

The signs are that all this improvement won't be without justification. Food Manufacture has learnt of a baby food producer that is switching production to Poland and Tennyson says she expects many more companies to follow suit. As long as they are in it for the long-haul it could pay off. FM

Related topics: World News

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