Bulgaria
Bulgaria
Area (`000 sq km): 111
(US 9,600 ­ EU25 3,981 ­ World 133,700)
Capital: Sofia
(Number of inhabitants: 1.2 million)
Population (million): 7.7
(US 293 ­ EU25 456 ­ World 6,376)
GDP (USD billion): 24.17
(US 11,735 ­ EU25 12,723 ­ World 39,503.5)
GNI per capita (USD): 2,130
(US 37,870 ­ EU25 22,810 ­ World 5,110)
Currency: Bulgarian New Lev (BGN)
Languages: Bulgarian
Main religions: Bulgarian Orthodox (82.6%), Muslim (12.2%)
Government type: Parliamentary democracy
Sources: CIA Factbook; (1) World Bank 2005; (2) City Population;
(3) Economist Intelligence Unit 2004 data
GDP and CPI
Real GDP growth reached a high of 5.6% in 2004
compared to 4.5% in 2003. CPI rose to 6.1% which was
a significant jump compared to the 2.3% in 2003. The
change can be explained with the rising food and petrol
prices and one-off factors such as an increase in excise,
duties and a 10% increase in electricity prices in 2004.
GDP and CPI
2001 2002 2003 2004
GDP growth (%) 4.1 4.9 4.5 5.6
CPI (%) 7.4 5.8 2.3 6.1
Source: EIU, June 2005
Unemployment
The unemployment rate continued to fall steadily in
2004 and the first half of 2005. Simultaneously, growing
employment also contributed to the overall improvement
in the labour market, leading to a stronger bargaining
position for employees in wage negotiations.
Unemployment
2001 2002 2003 2004
Unemployment rate (%) 18.1 17.7 14.3 12.7
Source: EIU, June 2005
Economic forecasts
According to Economist Intelligence Unit (EIU) forecasts,
the real GDP growth is expected to slow to 4.8% in 2005
and perhaps drop to 4.3% in 2006. EIU's projection is for
a gradual slowdown in domestic demand from the second
half of 2005 as a result of the recent restrictions implied by
the Bulgarian National Bank on bank lending, with growth
in consumer spending easing from 4.8% in 2004 to 4.5%
in 2005 and 4.4% in 2006.
ECONOMIC OVERVIEW ______________________________________________________
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REGULATORY ENVIRONMENT________________________________________________
Foreign direct investment
The fall of FDI inflow from privatisation and the more
difficult conditions in foreign markets are expected to drive
lower FDI levels in 2005-2006.
According to preliminary data published by the Bulgarian
National Bank, FDI in Bulgaria for the period JanuaryApril
2005 was EUR334.5 million (2.1% of GDP) against
EUR402.4 million (2.6% of GDP) attracted in the same
period in 2004.
FDI
2001 2002 2003 2004
FDI
(BGN bn)
1.17 1.30 3.03 2.60
FDI
(USD bn)
0.81 0.90 2.10 1.80
Source: EIU, June 2005 (Exchange rate: December 31, 2004)
Expected impact following EU entry
Entry into the European Union (EU) will impact a broad
range of businesses, tax and legal issues. Businesses will
have to analyse their operations, identify potential risks
and opportunities arising from the EU rules and prepare
for the challenges of EU entry. Multinational companies
operating in EU member states that joined the EU in
2004 will probably have a lead on others, benefiting
from the experience. Most likely they will adapt existing
EU business models to their Bulgarian operations.
Nevertheless, Bulgaria's country-specific regulatory
requirements will need to be considered.
On one hand, companies in Bulgaria will face the threat of
increased competition, overregulation (especially in certain
areas such as environmental protection, agricultural policy,
The inflation rate will fall to an average of around 4.4% in
2005. The unemployment rate will continue its descending
path to 11.6% in 2005 and around 10% in 2006.
industrial standards, etc.) and uncertainty in relation to
the practical implications of joining the single market. On
the other hand, EU membership is expected to improve
economic stability, increase legal certainty and give more
business opportunities, such as access to the "big money"
and free access to new European markets and clients.
Below are some examples of the challenges EU entry will
present that businesses should prepare for in advance:
Removal of customs and trade barriers, and
adoption of EU Customs Tariff
No customs border controls will exist between Bulgaria
and the other 26 member states. The physical movement
of goods across borders will become easier with quicker
transportation of goods, new logistics planning and cash
flow savings.
Some companies will benefit from the expected reduction
of customs duties for import from non-EU countries as
a result of adopting the EU Customs Tariff (currently the
average customs duties applied by Bulgaria are about two
times higher than the average customs duties in EU). On
the other hand, importers of agricultural goods from nonEU
countries will face additional burdens on import of such
products (such as licensing requirements and specific
duties).
Increased reporting and compliance
requirements
Customs barriers will be replaced by additional
administrative barriers, mainly in the field of compliance
with indirect taxes, which are most harmonised across EU
(VAT, customs and excise). In particular, VAT treatment of
supplies of goods and services between different member
states will change significantly.
Key economic forecasts
2005 2006 2007
GDP growth (%) 4.8 4.3 4.5
CPI (%) 4.4 4.0 3.6
Unemployment rate (%) 11.6 10.5 10.1
Source: EIU, June 2005
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Bulgaria
Companies in Bulgaria will have to make significant
changes in their IT and accounting systems in order to
comply with EU rules and new invoicing requirements.
Extra processing will be required and new tax and
statistical documents will have to be generated.
What else can be expected?
The EU has implemented rules that prohibit state aid and
harmful tax competition. As a result, Bulgaria will abolish
or change any tax incentives that qualify as illegal state aid
or harmful tax competition.
Expected amendments to competition law, consumer
protection legislation, environmental law, intellectual
property rights, social security and labour law in view of
EU Accession will also directly affect businesses. Some
of these changes will be considerable and will require
review of existing structures, contracts and planning for
necessary changes.
What budget must be planned for the accession
preparation?
Businesses will have to include the costs of the accession
process into their budget planning, such as costs for
training, professional advice and assistance, adjustment
and upgrading of computer systems, necessary changes
of contractual arrangements, the growth of administrative
requirements and many other issues.
Property/Real estate regulations
In February 2005, an important amendment of the
Constitution of the Republic of Bulgaria concerning
property acquisition has been adopted. It shall be
implemented as of the date of entry into force of the Treaty
concerning the accession of the Republic of Bulgaria to
the EU.
Under this new constitutional provision, foreign individuals
and entities are entitled to acquire property over land
under the conditions ensuing from Bulgaria's accession to
the EU, or by virtue of an international treaty that has been
ratified, published and entered into force by the Republic
of Bulgaria, as well as through inheritance by operation of
the law.
Until the date of entry into force of the Treaty concerning
the Accession of the Republic of Bulgaria to the EU,
foreign individuals and entities are not entitled to acquire
ownership over land. Foreign individuals and entities are
allowed to acquire such ownership through inheritance
by operation of the law, however, they have to transfer it
within three years.
Foreign individuals and entities are entitled to acquire user
rights, building rights and other real rights in both land and
other real estate, on terms and conditions established by
law.
Other regulations
Bulgaria's regulatory environment contains numerous
legislations applicable to the retail and consumer sectors.
The following are the most important ones.
Consumers and competition regulations
The Commerce Act (effective 1 July 1991 as amended and
supplemented) regulates the types of companies by means
of which business may be conducted in Bulgaria, and
develops the principles of the Obligations and Contracts
Act as to certain types of contracts between traders,
and between traders and consumers. The insolvency
procedure is also regulated under the Commerce Act.
The Protection of Competition Act (effective 5 May 1998 as
amended and supplemented) provides protection against
agreements, decisions and concerted practices, abuse
of monopolistic and dominant position on the market,
concentration of economic activities, unfair competition
and other actions that may result in prevention, restriction
or distortion of competition. The authority in charge of
control over compliance with the requirements of the Act is
the Commission on Protection of Competition.
The Protection of Consumers and Trade Rules Act
(effective 3 July 1999 as amended and supplemented)
defines the main rights of consumers in their relation
with traders of goods and services, and regulates the
consumers' right to receive proper information on the
goods and services, guarantee periods, safety and
packaging requirements, claiming damages by consumers,
etc. The Act provides for nullity of certain types of clauses
in terms and conditions of traders that affect the rights
of the consumers. Consumers' and traders' rights are
protected against misleading and dishonest advertising.
Distance sales and out of trader's premises sales are also
regulated under the Act. The Bulgarian Commission on
Trade and Protection of Consumers is in charge of control
of compliance with the requirements of the Law.
A new draft Protection of Consumers and Trade Rules Law
has been prepared with the aim of achieving compliance
with the EC legislation. The draft Law has been passed by
the Parliament in the first hearing. The second hearing is
not expected until autumn 2005.
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retail companies. In general, discounts and rebates are
deductible for VAT purposes if provided at the date of
the taxable supply. Discounts in-kind are recognised if
they are of the same type as the main supply, or if they
are designed for testing or facilitating of the main supply.
Therefore, it is advisable that promotional and marketing
activities are structured from a VAT perspective.
VAT
VAT registered retailers are obliged to charge 20% VAT
on their local supplies. They are entitled to credit for the
VAT incurred in relation to supplies used for their taxable
activities.
One of the interesting VAT issues relevant for the retail
sector is the VAT treatment on discounts provided by
Urbanisation of the population
In 2003, almost 70% of the population, or 5.4 million
people lived in towns and 2.3 million in rural areas. The
highest share of internal migration was from town to town
at 45%, followed by 23% town to village and 21% village
to town.
Urban/Rural split
% of total population 1998 2003 2008 (f)
Urban 68.0 69.8 71.4
Rural 32.0 30.2 28.6
Source: EIU, August 2004
Income/Buying power
According to the preliminary data of the National Statistical
Institute (NSI), the average annual pay in the country in
2004 was EUR1,850. The annual household monetary
income per capita in 2004 was EUR937.
The average monthly salary reported by the NSI for the
first half of 2005 was EUR160, slightly higher in nominal
terms than that of the fourth quarter of 2004, but over
9.5% higher than the first half of 2004.
2001 2002 2003 2004
2001­
2004 (%)
Income
(BGN) 1,672 2,085 2,244 2,466 47.5
Expenditure
(BGN) 1,492 1,710 1,853 2,068 38.6
Savings
(BGN) 180 375 391 398 121.1
Source: NSI
DEMOGRAPHICS AND CONSUMER BEHAVIOUR ______________________________
Population
Population evolution
Bulgaria's population as of 31 December 2004 was just
over 7.7 million people, representing a 0.5% decrease
compared to 2003. This decrease is mainly due to the
trend towards fewer births and an increase in deaths over
the past few years, but it is also partly explained by the
high levels of external migration.
Population
2001 2002 2003 2004
Population (m) 7.9 7.8 7.8 7.7
Source: EIU, June 2005
Population by age group
The average age in the country in 2004 was 41 years. The
trend towards an ageing population continues with the
average age in rural areas higher than in urban centres.
As of end-2004, the active part of the population was 4.8
million people or 61.6%.
Age profile
% of total population 1998 2003 2008 (f)
0 ­ 14 years 16.5 14.2 12.5
15 ­ 64 years 67.5 68.8 69.8
Over 65 years 16.0 17.0 17.7
Source: EIU, August 2004
Annual average income, expenditure and savings rate per capita
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Bulgaria
Consumer behaviour
Average household spending patterns
According to a recent survey, there was a tendency for
growing household consumption in the fourth quarter of
2004. It is expressed by a higher increase in the quantity
of purchased products, compared to the expenditure
value, which is a result of the lower levels of average
prices of purchase. There are three main factors outlined
as influencing the average purchasing prices: bigger
packages, increased consumption of products from the
low-price segment and lower producer prices (mainly
local). The survey shows a 7.8% increase in purchased
quantity in fourth quarter of 2004 and 4.9% increase in
expenditure at a decreased end price of purchase at 2.7%.
Composition of household expenditure (by%), 1995 vs. 2004
1995 2004
Total expenditure 100 100
Consumer total expenditure 83.7 85.3
Foods and non-alcoholic 46.2 39.3
Alcoholic beverages and tobacco 4.0 4.2
Clothing and footwear 7.4 3.4
Housing, water, electricity, gas and
other fuels 7.0 13.8
Furnishing and maintenance of the
house 4.3 3.2
Health 1.9 4.5
Transport 6.2 5.3
Communications 0.8 4.8
Recreation, culture and education 3.0 3.5
Miscellaneous goods and services 2.9 3.3
Taxes, household plot and other
expenditures 16.3 14.7
Source: NSI
Shopping habits
A monitoring of the consumer models in Bulgaria made
by a market research media shows that the shopping
places, the attitude to the shopping process and the way
of payment are changing. The survey made among a target
group of early adopters reveals that Bulgarian consumers
are becoming more demanding and are ready to pay
more for better quality products. Remoteness is regarded
as one of the major disadvantages of hypermarkets.
Supermarkets are the most convenient stores, both for
small and large purchases, because they are located close
to people's homes. Cash is the preferred payment method,
however payment via debit cards is becoming popular.
Bulgarian consumers as a whole demonstrate a preference
for locally produced consumer goods. Recently the
Bulgarian Government started a national promotional
campaign under the motto "Choose Bulgarian", in
partnership with select Bulgarian media, to boost demand
for local products.
Fast moving consumer goods (FMCG) customer's choice
is based on high quality, rather than on the influence
of advertising, and they have a preference for local
products and brands, rather than foreign ones. Retail
customers are more price-oriented than brand-oriented,
and are influenced by friends and relatives, rather than by
promotions.
A ConsumerScan survey, conducted at the beginning of
2004, measured the FMCG bought on promotion in the
country. During the period between January and March,
the purchases made on promotion constituted 1.3% of the
total purchased products in all categories, amounting to
1.9% of the overall expenditures made by households.
Brand/Price sensitivity
There is a potential for development of retail brand
products. Retailers have been putting more emphasis on
private label products in order to provide cost efficiency
to the benefit of their customers. Large retailers such as
Metro, Billa and Ramstore already have their own private
labels.
In the attempt to meet growing consumer demand,
retailers are establishing their own point-of-sale
production. Additionally, in order to maintain competitive
price levels in the food sector, retailers are steadily
developing their supply chains in favour of domestic
suppliers, turning away from imports. Retailers have
started to concentrate on CRM activities and to observe
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consumer behaviour in order to retain their customers
and create brand loyalty. Some of the major retailers have
started implementing loyalty programmes in their stores.
Lately, consumer goods retailers have been teaming up
with local banks to offer financing schemes for purchasing
household appliances.
To increase market share, large supermarkets regularly
conduct promotional campaigns, have initiated phone and
internet purchases and delivery, and issued membership
cards.
RETAIL & CONSUMER SECTOR PERFORMANCE _______________________________
Major consumer goods players
Due to the absence of consolidated data, some of the
leading players in the consumer goods sector are not
included in the table below. If the sales revenue of their
subsidiaries were aggregated, the order below would be
different.
Global manufacturers of consumer goods took part in the
early privatisation and acquired factories in Bulgaria such
as confectionery (Nestle, Kraft Foods), soft drinks (CocaCola),
beer (Interbrew), refrigerators (Libherr), clothing and
footwear (Nike, Miroglio, Adidas). Some of these foreign
investors continued with further green field investment in
the country.
Apart from the privatisation deals, there have been a
number of significant acquisitions in the CPG sector,
such as the Bulgarian coffee market leader Nova Brasilia
acquired by Kraft Foods, the margarine producer Kaliakra
acquired by Unilever, the Bulgarian breweries Shumensko
pivo and Pirinsko pivo, acquired by Carlsberg.
Major consumer goods players
Company Name Core activity 2004 sales (EUR m)
1. Blagoevgrad BT Tobacco processing 104.1
2. Miroglio Bulgaria Textile production 93.9
3. Nestle Bulgaria Food processing 52.2
4. Sofia BT Tobacco processing 48.6
5. Chipita Bulgaria Food processing 38.2
6. Sugar Plants - Gorna Oriahovitsa Sugar processing 32.7
7. Danone Serdika Dairy processing 28.7
8. Meat Factory-Lovech Meat processing 28.6
9. Aroma Cosmetics production 26.6
10. Kaliakra-Dobrich Food processing 26.4
Source: Companies' annual reports
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Bulgaria
Major retail players
Retail sales
Total retail sales growth
2002 2003 2004 (e)
Total sales
(EUR m) 6,165 6,870 8,072
Growth rate (%) 10.9 11.4 17.5
Source: NSI
Breakdown by number of stores by size of sale space
under 120
sq m
120-399
sq m
400-999
sq m
over 1,000
sq m
2002 99,841 2,066 226 95
Source: NSI
Scope of organised retailing by retail format
The share of small convenience stores has been reduced;
medium-sized supermarkets gained popularity due to
their convenient locations and wide range of high-quality
products offered in less space than hypermarkets; and
large chain supermarkets gained significant share of the
national market.
New companies entering the country adopted the strategy
of simultaneously opening stores in a number of smaller
towns. This is in contrast to the first retail companies that
entered Bulgaria, which started by opening stores in the
capital city Sofia, followed by gradual development in the
biggest Bulgarian towns.
A significant decrease in the number of small garage
shops and all-in-one outlets is observed. At the same time,
there is still an unexplored market niche for high-segment
boutique shops specialising in sales of products such as
meat, fish, fruits and vegetables.
Key food retailers
Formats Group name Store brands Number of stores Net sales (EUR m)
FOOD 2004 2005 (f) 2003 2004
Hypermarkets Migros Turk
KOC Group
Ramstore 4 ­ 6.8 Dohle
Hit 1 2 N/A Supermarkets
Billa Bulgaria
REWE Group
Billa 13 19 ­ 21 74.3 95.7
Boliari Piccadilly 4 6 22.7 26.5
Convenience
stores
CBA Bulgaria CBA 200 210 N/A VAN
Holding Fantastico 24 27 26.5 Magazini
Familia
Plus
Familia 15 21 N/A Boliari
Mambo 4 7 N/A N/A
Cash and carry METRO Metro 7 ­ 319.7 327
Source: Companies' annual reports
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Bulgaria
Key specialty stores
Retail formats Group name Store brands Number of stores
2003 Net sales
(EUR m)
SPECIALTY STORES 2004 2005 (f)
DIY Metro Praktiker 1 7 5.0 (2004)
Doverie Brico Mr. Bricolage 3 4 22.7
Home equipment
(electrical goods, furniture)
Videolux Technopolis 6 10 33.1
Top Video and
K&K Electronics
Technomarket
Evropa
10 14 80.4
Technolux Technolux 23 29 12.5 (2004)
Zora Zora 16 21 9.7
Department stores Tzum Tzum 1 N/A 3.8
Source: Companies' annual reports
Food retail channels
The largest food retailers continue to build their networks
and a number of new big foreign players are planning to
start operations in the country in the following months.
Among the food retailers that recently entered the market
are Germany's Dohle and Lithuania's VP Market, operating
under the brand T-Market, which declared an ambitious
plan of opening 50 stores by the end of 2005. Germany's
Kaufland is building a number of hypermarkets in the
country, which will be simultaneously opened in 2006.
Other retailers said to be eyeing the Bulgarian market
include Germany's Lidl, Aldi and Penny Market, Slovenia's
Mercator, France's Carrefour and a large US retailer.
Foreign retailers regard their presence in the local market
as a natural development of their regional expansion
programmes, after having made successful investments
in neighbouring countries, not underestimating the higher
growth level of consumer demand compared to the
countries in the EU.
The expected foreign new comers are not regarded as
a threat by retail chains with already strong positions on
the Bulgarian market, but as an opportunity to put higher
pressure on the local grey market.
As the Bulgarian retail market moves to a more competitive
one, it is expected that retailers will promote a more
aggressive price policy in order to keep and gain new
customers, resulting in a reinforced competition among the
producers in the consumer goods market.
Problems experienced by foreign retail investors, already
present in the local market, in their attempts to buy land
plots to build new stores, led to limited investments in the
past year.
The main competitive advantages for domestic retail
chains are the ability to keep prices low and the favourable
locations of their stores.
Operational efficiency, better use of information technology
in inventory management, purchase planning, customer
data warehousing, customer relationship management
and category management are the main areas in which
Bulgarian retailers need to improve.
In their attempt to gain competitive advantage, local
retailers started building a new generation of shopping
centres that fulfil not only shopping needs, but also
entertainment and recreation. These shopping centres are
built around the hypermarkets and supermarkets, with
leisure facilities as additional attractions.
There are significant differences in modern retail
formats penetration in Bulgaria. Some investors show
commendable creativity in their market entry strategy, a
good example of which is the unique ownership structure
of CBA Bulgaria that includes the Hungary-based CBA
Kereskedelmi and another 24 local retailers with equal
shareholders rights. The nationwide network of some 200
smaller shops, which operate on a franchise basis, turned
out to be a successful investment move.
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Bulgaria
Hypermarkets and supermarkets
Foreign retailers that first entered the Bulgaria market,
continue to implement their expansion plans by building
stores in different country regions. They are adapting their
strategy to local market needs and will set up smaller
stores with no parking lots of their own in Bulgaria's
smaller towns. The turn in their strategies may be
explained with the fact that the profit generated by the
companies' hypermarkets and supermarkets outside the
Bulgarian capital Sofia is much lower than projected.
Some of the problems encountered when working in
the regions are lower consumer potential, infrastructure
problems, low-qualified labour force and less-developed
service networks.
Discount stores
Hard discount stores are expected to enter the local
market in the future and should be able to gain a
significant market share due to the uneven income
distribution and low level of disposable income.
Convenience stores
Convenience stores are a market niche dominated by local
retail chains, with their advantage being the established
network of well-positioned outlets in the most populated
areas of Sofia and other big cities.
A market niche is also occupied by convenience stores
located at petrol stations. Petrol retailers such as Shell,
OMV, LUKoil, Opet Aygas and Petrol, with outlets
across the whole country, provide a wide range of
consumer goods, ranging from food to auto supplies
and accessories, in almost all of their petrol stations. The
quality of retail services and consumer goods, together
with location, are regarded as being the main market
differentiator, not petrol prices.
Non-food retail channels
Department stores
Department stores were very popular in the past, but are
currently not an exploited retail format, mainly due to the
high rental prices of stores, reflected in the higher retail
prices of goods offered and therefore oriented towards the
high market segment.
Specialty stores
The opening of hypermarkets for electronic goods has
created significant pressure on the reduction of prices for
electronic consumer goods.
Largest importers of consumer electronics are also the
leaders of retail sales, owning household appliances and
electronics hypermarkets under own-brand chains.
Importers and retailers report increased demand and
volume of household appliances purchases, as the
reasons for the increasing number of leasing opportunities;
growing purchasing power; relatively secure employment
relationships and ability to forecast household budget;
and high competition between producers, importers
and retailers, leading to greater choice, lower prices and
attractive promotions for customers.
The specific feature of local importers and retail chain
owners is the production of household equipment and
electronics under own brands aimed at low-price buyers.
Two main reasons for this development are better quality
control for electronics assembled in Bulgaria and the
savings made from custom taxes on spare-parts import.
E-commerce
Although possible and used to some extent, online
purchasing is not yet developed in Bulgaria.
According to data gathered with a representative survey
for the Bulgarian people aged 15 years and over, internet
access and usage keeps rising. For the year 2003 access
was 14.5% and usage 12.8%.
The same survey shows that a majority of people (54%)
use the internet at internet clubs, followed by use at home
and work.
M&A activity
Consumer products are one of the preferred sectors for
investment made by private equity funds and venture
capital. The forthcoming accession of Bulgaria to the EU
is regarded as the right moment for funds to sell off to
strategic investors.
There are many attractive potential acquisition targets and
well-known local brands in the CPG industry that deserve
investors' consideration.
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Bulgaria
RETAIL & CONSUMER CHALLENGES,
OPPORTUNITIES AND EMERGING TRENDS____________________________________
Challenges
Increased competition due to growing number of
foreign big players entering the market
The Bulgarian retail market remains attractive for foreign
retail investors. There is still enough room for growth, even
though the number of outlets has increased considerably.
Price leadership and supplier relations have been core
success factors for foreign chains. However, in the attempt
to keep price levels low, they compromise on the quality
of products and services, which are lower than what is
offered by the same retailers in other European countries.
The next few years will see further expansion of foreign
chains in Bulgaria, and their share in retail sales will grow.
The main factor stimulating retailers to invest in the sector
and to build modern structures has certainly been growth
potential due to the unsaturated market conditions.
Moreover, factors such as low prices of land and labour
costs, expected growth of disposable income, lifestyles
and consumption patterns have all fostered positive
expectations.
More regulatory requirements
With the forthcoming accession of Bulgaria to the EU,
retail and consumer goods companies will face the
challenge of more regulatory requirements covering VAT
issues, legislation for protection of consumers' interests,
trained work force etc.
M&A activity since 2003
Year Acquiring company Acquirer/JV company Nature of business Equity stake
2004 Obedinena
Mlechna
Kompania
Vitalakt Milk Dairy products 100%
2004 Loulis Flour Mills Sofia Mel Flour mills 100%
2004 Chipita East Europe Bakery Foods Bulgaria Bakery foods 100%
2004 Slanchev Den TZUM shopping centre Central store 99.5%
2003 Mr. Bricolage SA Doverie Brico DIY retail 40.4%
2003 Loulis Flour Mills Kraps Mel Flour mills 100%
2003 Strandzha
Chateau
Rosenovo
Vinex Preslav Winery 100%
2003 Penguen Gida Storko Canned food 100%
2003 Unilever Kaliakra Margarine production 100%
2003 Finance Consult Gamza 1922 Winery 52%
2003 Global Finance Obedinena
Mlechna
Kompania
Dairy products 48.5%
Source: PricewaterhouseCoopers Central and Eastern Europe M&A Survey
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Bulgaria
Insufficiency of qualified work force
The recruitment of qualified staff appears not to be an easy
task for investors entering the Bulgarian market, mainly
due to the low salaries offered in the retail sector resulting
in low interest by potential employees.
The retail companies already active on the local market
experience the pressing need for staff training and for
improved human capital policy.
Opportunities and threats
EU accession
The EU accession process and the corresponding changes
in legislation are expected to have a positive impact on
the economic environment and investment activity in
Bulgaria. It is believed that Bulgaria's entry into the EU in
2007 will attract more foreign investment from European
companies looking for the expansion of their operations to
the Balkans. However, many small and medium enterprises
in the consumer products sector may not survive due to
inability to comply with the EC regulations.
Sustained economic growth
Consumer goods companies can look forward to stable
consumer demand in the next few years in Bulgaria and
the region as a whole.
Economic growth combined with stable but still low
disposable income and more cost-conscious consumers is
the prerequisite for a stable market, but without dramatic
growth of the retail market. The reliability of the official
statistics, however, may be questioned, as it is believed
Bulgarian consumers have, and spend more money than it
is generally thought.
Consumer credit, which in the past was not popular due to
high interest rates and insufficient income levels, is likely
to become more widely used. Banks reached a peak in
provision of consumer loans in the fist quarter of 2005.
However, the central bank's restrictions on bank lending
with effect from April 2005 are expected to lead to a
slowdown in domestic demand, with year-on-year growth
in consumer spending easing from 4.8% in 2004 to 4.4%
in 2005.
Developments in Bulgaria's retail and consumer sectors
reflect general trends of the overall economy. Big retail
chains have been expanding their networks by opening
new stores and shopping centres. Their expansion plans
are ambitious and the boom of store openings may be
expected to continue over the next two to three years.
Retail chain operators are making large investments in
new stores to secure a stronger position when the market
matures and growth slows. Big retailers will gain stronger
market power and smaller players will be exposed to
increased competitive pressures.
Increased M&A activity
Bulgaria today is regularly and systematically considered
for investment projects by international and regional
investors. In the coming years, the major part of FDI will
come from M&A and green field investment, with the
completion of the major part of privatisation in the country
(2004 was a record year in number of privatisation deals
concluded). It is likely that the new investments mainly will
be made by investors already active in the country and the
region.
Emerging trends
Forthcoming expansion
There is a trend for market expansion, mainly of foreign
food retail chains, simultaneously in a number of country
regions by building smaller scale shopping centres,
followed by local retailers of consumer electronics and
household equipment.
The main operation factors considered as potential
competitive advantages by new companies entering the
local market are convenient location, food quality, services
quality and available parking space.
Local food retail players are facing strong competition and
the need for more investments, long-term strategy and an
adequate people management policy. Despite their high
ambitions, they still show low performance.
A number of local retail chains back their future
development with financing received through bank loans,
usually provided by two banks, or through selling equity
share to venture capital funds.
32 2005/2006 FROM BEIJING TO BUDAPEST ­ Winning Brands, Winning Formats*
Bulgaria
Among the main development factors and areas
for investment outlined by the local retailers are the
building of new outlets with improvement of surrounding
infrastructure, personnel training, acquisition of know-how
and development of new products and services.
In their long-term development strategies, many of the
big local retail players displayed an interest in expanding
their presence to the neighbouring countries in Western
Balkans; some of them already have opened stores there.
The existence of large stores in city neighbourhoods
is likely to attract other businesses and induce further
development of these areas and the surrounding
infrastructure.
Consolidation in the retail sector
Local retail players are actively investing to increase
market share in order to become attractive to strategic
investors after 2007. EU entry will provoke a tendency
towards fair, market and rules-based competition, thus
more local players are trying to get out of the grey market,
which will also result in improved employment conditions.
Qualitative switch in consumer behaviour and
shopping habits
The main factor influencing the choice of outlet for the
Bulgarian consumers appears to be proximity to their
home.
A change in the general trend of the shopping habits of the
population can be noted. The "once-a-week" shopping
attitude is becoming more popular, which benefits, to
some extent, larger supermarkets and hypermarkets.