Slovakia Food & Drink

The recent exit of Belgium's Delhaize group, through the sale of its Delvita chain, together with Carrefour's decision to swap its hypermarkets in Czech Republic and Slovakia with Tesco, leaves Slovakia's mass grocery retail (MGR) sector consolidated around a relatively small number of players. Alongside the giant Coop Jednota Slovensko stand UK's Tesco and German players Metro (in the cash & carry sector), Rewe, and Schwarz Group. Royal Ahold (Netherlands) is the other major player, although rumours persist - or perhaps are fanned by hungry competitors and investment banks - that the restructuring Dutch group may exit part or all of its Central European business. The Slovak food retail landscape is today divided between foreign hypermarkets and discounters and the 2 8regional co-ops that have about five times as many outlets as the foreign players combined.

Slovakia's current robust economic growth means that the current retailers still have much to fight over, with the large format international players looking to access smaller regional markets on one side and the locals expanding the number of larger format supermarkets in order to compete on scale and reduce the overheads needed to operate so many small outlets. Politics will likely play a role in determining the outcome. The new government outlined its broad manifesto in August. It was not as radical as some investors feared but is thus far short on specifics. There are hints that VAT on foodstuffs may be cut, a generally positive development for all retailers, but the colouring of the current administration suggests that protectionist moves may also be on the agenda. Moves to protect the country's farmers and food processors may prevent hypermarkets and discounters for selling certain products at a loss. There may also be changes in the current liberal regulations governing store opening hours.

The limits of a small market and political uncertainty have left Slovakia near the bottom again in BMI's Q306 business environment rankings. Foreign retailers and food producers arrived late to Slovakia due to the relatively poor and unpredictable business, economic and political conditions in this relatively small market before 1998. In Q306, however, Slovakia is approaching another turning point. Under the new populist coalition led by Robert Fico's Smer party, there is a sense that the environment could deteriorate after the ousting of the previous pro-business, liberalising regime of Mikulas Dzurinda. More concretely, the market has limited growth potential due its small size, although the economy is currently enjoying a period of robust growth.

It is the buoyant economy that should soothe some investor fears about the prospects of the Slovak food sector. The new government has committed itself to meeting the Maastricht criteria for EU entry in 2009 and this will limit its scope for radical economic moves. Similarly, the constraints of EU membership should prevent the imposition of draconian protectionist measures. The coming months should provide some clarity, with a better picture of the investment climate emerging in early 2007.