Big bucks for Christmas

Judging by economic indicators, this Christmas will be a very merry one indeed for retailers in Poland. Since the beginning of 2007, Poland's GDP growth has been consistently strong, reaching a higher- than-expected 6.4 percent in Q3. The average salary in Poland was 11 percent higher in October than at the beginning of the year, reaching zl.2,951.67, according to the Central Statistical Office (GUS). Although they may seem unimpressive by Western standards, the higher wages add up to increasing purchasing power and the retail sector expects record profits in the Christmas shopping season. "Given the economic prosperity, we expect our revenues to be at least as good as in recent years," said Katarzyna Górecka, the spokesman of EM&F Group, the largest retailer and distributor of media and fashion and other "lifestyle products" in Poland. "This [Christmas] will be a record year for the retail sector," said Marek Dietl, an expert in the branch from consultancy Simon-Kucher. Consumer optimism is high and expectations are quite positive, maybe a little too positive, he added.

Spending will be even higher since the largest salary increases have come in the part of society in which salaries have typically been low. These people will increase their consumption greatly if they see their earnings growing, Dietl added.

Reaching higher shelves

Poles appear more eager to reach for non-essential goods this year. "The sales of refrigerators and dishwashers are good indicators here," Dietl said. Unlike refrigerators, dishwashers are not considered essential items in Polish households and, since their sales have increased, this shows that society is growing richer, he explained. The cars on Poland's streets are also increasing in quality, Dietl noted.

"Society has grown considerably richer over the last two years," he concluded. Agnieszka ¸ukiewicz- Stachera, a spokesperson for hypermarket chain Real, said that her firm has noted growing affluence as well. "This year we've seen a significant increase in the sales of white and electronic goods," she told WBJ. The quality of goods purchased is improving too, with name-brand products gaining popularity - not only during the Christmas season.

"We have seen a general increase in the sales of premium brands ... the price of a product matters less than it used to, instead the quality has gained in importance," said EM&F Group's Górecka. Sales of high-quality food and alcohol are on the rise too, said Real's ¸ukiewicz- Stachera. Cause for optimism on this front may be premature, however - discount chains are still popular among a majority of consumers, Marcin Szaleniec, a retail expert from PMR Consulting, noted.

Rocketing Christmas consumption is expected throughout the country, and the difference in spending between the biggest cities and the countryside is getting smaller. Even so, non-essential goods are less common in the countryside, even in very well-off households, Dietl stressed.

Mr. Kowalski's wallet

As in most countries where Christmas is celebrated, high expectations for revenue in Q4 push companies to maximize their efforts to tap customers' wallets. The holiday period sees the biggest increase in advertising budgets, said Krzysztof Najder, the CEO of media house Stratosfera.

"[This season] we want to diversify our offer and extend the range of goods available for our clients. Each of our chains has its own marketing campaign. The company also carries out intense PR activities in the media," said EM&F's Górecka.

But marketing and advertising campaigns during the Christmas period use the same themes repeatedly and it is difficult to move beyond them, especially because the Polish consumer is rather traditional. "The most common marketing target is a 30-something woman with a secondary education and two children," Stratosfera's Najder stressed. But change is occurring. A new polarizing trend in marketing and branding, driven by growing demand for quality products, has appeared, for example. Goods are branded as either high quality or low price, while the middle ground is disappearing, Najder said. Moreover, new marketing solutions are appearing. This year the Arkadia shopping center in Warsaw became the first Polish shopping center to offer a pre-paid gift card, which can be credited with up to $750 (zl.1,850) and used at most stores in the center. Arkadia has sold over 10,000 such cards so far.

Welcome to borrowing

The Christmas season is a hot time for banks too, as twothirds expect growth in loans in Q4, according to National Bank of Poland (NBP) data. "Christmas is the driving force for growth in consumer loans," said Andrzej Sowa, director of the retail loans department at ING Bank Âlŕski. He added that the average consumer loan ranges from zl.3,500- 4,000 and is generally used for presents.

The consumer loans sector, although smaller than in the West, is growing fast in Poland. The total value of debt in Polish households reached over zl.247 billion in October this year. The total value of loans has recently surpassed the total value of bank deposits.

"Although the actual amount of debt in Poland is much lower than in Western European countries, its proportion to local GDP is comparable," said Mateusz Ostrowski, an expert from financial advisory Open Finance. In fact, Poland's consumer debt amounted to eight percent of GDP in H1 2007, on par with Spain but much less than in Germany or Great Britain (14 percent), according to PricewaterhouseCoopers data. Loan products remain relatively expensive but their availability has increased, mainly due to growing competition on the market. "Many banks give loans of up to zl.20,000, demanding an individual declaration of income rather than a document from the workplace," said Ostrowski.

The other side of the coin

Although opportunities for consumer loans offered by banks at Christmastime are tempting, paying them off may be more difficult than many borrowers now expect. "We need to be careful and, unless necessary, avoid taking a loan for Christmas," said Open Finance's Ostrowski. The macroeconomic data encourage caution. GDP growth is expected to slow down in Q1 of 2008 and the pace of productivity growth is far lower than the rise in wages. Moreover, growing remuneration will be balanced by rising prices for retail goods and services. These grew by 0.6 percent between September and October, according to GUS. In Q1-Q3 2007 they were 2.1 percent higher than in the comparable period of 2006. Food prices have risen significantly as well. Poles seem to expect these trends to continue. In October, 28.7 percent of Poles thought prices would grow even faster in the following 12 months, and 48.8 believed that growth rate would remain stable, according to data from Ipsos, GUS and the NBP. Only 4.2 percent of Poles expected them to remain the same and 0.7 percent said prices would fall. Rising prices of food are spurring inflation. In October consumer inflation was 2.9 percent as compared with 2.3 percent in September, according to experts questioned by Internet Security Businesswire. Poles expect the inflation rate next year to come in at around 2.6 percent, according to NBP data. With rising inflation, the NBP has been hawkish. The bank's Monetary Policy Council raised rates for the fourth time this year in November, and the bank's main interest rate now stands at five percent.

The rise in interest rates, the global credit crunch and other factors have made banks more wary. Around 60 percent have made their consumer loan policy slightly stricter in Q3, NBP data shows. According to the NBP, however, half of Polish banks declared they would make their loan-granting policies more lenient in the near future.

Christmas hangover?

While Poland looks set for a shopping spree, the effects of excessive spending will be felt most acutely around eight to nine months after the holidays, Simon-Kucher's Dietl predicted. The pinch Poles feel then will likely affect their spending next December.

"While this Christmas will see big money, the next one will be leaner," he concluded.