Chocolate - an expensive habit
The WSE listed domestic confectioner hopes not only to survive, but to grab what it can in a post-May market fall-out.
Mieszko Chief Executive Marek Moczulski was brought in to run the company last October with a clear mandate to turn the company around. Considering his much-vaunted record as CEO at domestic soft drinks producer Agros Fortuna, which he brought back into credit within a year from zł.90 million losses in 2002, the challenge of spinning the much smaller Mieszko out of its zł. 8 million losses might seem an easy task. But for confectioners these days, it's a world of shifting sands.
Sugar prices will double come May 1, which means that domestic confectioners will have a struggle on their hands to remain competitive. Mieszko's strategy is to gain a competitive edge by reducing operation costs sufficiently to absorb the increased cost of sugar.
"I won't say that our retail prices won't rise at all, but we want to pass on as little as possible of the increased cost to the consumer," he says, "Most of our competitors, on the other hand, are already raising prices."
The company's biggest shareholder, Central European Confectionery Holdings, B.V. (CECH), a fund which owns 66 percent of the firm and is controlled by global investment bank, Dresdner Kleinwort, has only qualified hopes in this respect, however, "I don't think that any confectionery producers will be able to absorb entirely the doubling of sugar prices," says Andrzej Bartos, head of Dresdner Kleinwort's Warsaw Office, and director and partner of CECH in Poland.
"It will be very hard for domestic confectioners not to pass on the new sugar prices [to the consumer], but it is, in fact, the only possible strategy," says independent analyst Bogna Sikorska.
The problem of rising sugar prices will be compounded by the fact that fast consumable prices in general are expected to rise much more quickly than salaries when Poland joins the EU.
"Luxuries such as chocolate may be among the first casualties of shrinking consumer budgets," says Bogna Sikorska.
Since trade agreements with the EU already exist and as most of the major European players such as Cadbury, Nestlé, Kraft Foods and Master Foods are already present in Poland, no-one is expecting a major influx of new competitors. Nevertheless, companies on the competitive domestic market may find the rivalry intensifying in the face of consumers' reduced confectionery budget. In anticipation of this, Moczulski is stepping up the company's focus on merchandising at the retail end and concentrating on chocolates for presents and occasions, such as pralines and caramels, which are expected to survive better than everyday bars in the post-May chocolate era.
Despite the restructuring, however, as competition for shrinking local sales heats up, it is firms such as Mieszko, which currently sells 80 percent of its products on the domestic market, that will have the least room for maneuver.
"We see great potential for 'Zozole' on the German market," says Moczulski, referring to the company's brand targeting children, a brand which controls 90 percent of the domestic market for boiled sweets.
One route the company is exploring to increase sales in the richer West is through negotiations with hypermarket chains. And despite the comparatively small size of Mieszko, which currently controls just five to seven percent of the domestic market, the company's prospects here are actually optimistic, according to Marek Przeżdziak of the Association of Chocolate and Sweets Processors, Polbisco.
"Within the EU there is a lot of demand for niche products, which is an area where small local firms often have an advantage," he says. "And for companies like this, a contract with a hypermarket can often provide an effective way into the market."
Yet the immense power of hypermarket chains, he adds, which often enables them to dictate the terms of the market, could undermine the attractions of this sales route.
What is certain is that the smallest confectioners will almost certainly be pushed out of the market, as economies of scale become an essential weapon for processors trying to offset the impact of higher sugar prices. While domestic rival Wawel invests in a new factory, Mieszko, counting on the success of its restructuring process, is already planning acquisitions of similar sized domestic companies towards the end of the year. This is one reason for the company's December announcement of its intention to raise capital through a share offer in early February.
Stockbrokers, however, are showing little interest in the company.
"Most of the locally owned firms such as Mieszko, Jutrzenka and Wawel had export sales in Eastern European markets, so that since the Eastern European market collapsed in 1998, investors have simply lost interest and the domestic market has consequently been taken over by the biggest Europeans," remarks Radosław Solan, analyst at BDM PKO BP.
The prospect of doubling sugar prices is hardly a magnet for investors, either. And that's not all, "For one thing, there has been a conflict in management; for another, there has been a change in management and for another, the results for the third quarter of 2003 were worse than the ones before," says Robert Kurowski, analyst at DM Amerbrokers. "But who knows? We're waiting for the fourth quarter results in March."
CECH B.V. nevertheless, has publically expressed an interest in increasing its share. "We do see a lot of future in the company," says Andrzej Bartos.
Mieszko Chief Executive Marek Moczulski was brought in to run the company last October with a clear mandate to turn the company around. Considering his much-vaunted record as CEO at domestic soft drinks producer Agros Fortuna, which he brought back into credit within a year from zł.90 million losses in 2002, the challenge of spinning the much smaller Mieszko out of its zł. 8 million losses might seem an easy task. But for confectioners these days, it's a world of shifting sands.
Sugar prices will double come May 1, which means that domestic confectioners will have a struggle on their hands to remain competitive. Mieszko's strategy is to gain a competitive edge by reducing operation costs sufficiently to absorb the increased cost of sugar.
"I won't say that our retail prices won't rise at all, but we want to pass on as little as possible of the increased cost to the consumer," he says, "Most of our competitors, on the other hand, are already raising prices."
The company's biggest shareholder, Central European Confectionery Holdings, B.V. (CECH), a fund which owns 66 percent of the firm and is controlled by global investment bank, Dresdner Kleinwort, has only qualified hopes in this respect, however, "I don't think that any confectionery producers will be able to absorb entirely the doubling of sugar prices," says Andrzej Bartos, head of Dresdner Kleinwort's Warsaw Office, and director and partner of CECH in Poland.
"It will be very hard for domestic confectioners not to pass on the new sugar prices [to the consumer], but it is, in fact, the only possible strategy," says independent analyst Bogna Sikorska.
The problem of rising sugar prices will be compounded by the fact that fast consumable prices in general are expected to rise much more quickly than salaries when Poland joins the EU.
"Luxuries such as chocolate may be among the first casualties of shrinking consumer budgets," says Bogna Sikorska.
Since trade agreements with the EU already exist and as most of the major European players such as Cadbury, Nestlé, Kraft Foods and Master Foods are already present in Poland, no-one is expecting a major influx of new competitors. Nevertheless, companies on the competitive domestic market may find the rivalry intensifying in the face of consumers' reduced confectionery budget. In anticipation of this, Moczulski is stepping up the company's focus on merchandising at the retail end and concentrating on chocolates for presents and occasions, such as pralines and caramels, which are expected to survive better than everyday bars in the post-May chocolate era.
Despite the restructuring, however, as competition for shrinking local sales heats up, it is firms such as Mieszko, which currently sells 80 percent of its products on the domestic market, that will have the least room for maneuver.
"We see great potential for 'Zozole' on the German market," says Moczulski, referring to the company's brand targeting children, a brand which controls 90 percent of the domestic market for boiled sweets.
One route the company is exploring to increase sales in the richer West is through negotiations with hypermarket chains. And despite the comparatively small size of Mieszko, which currently controls just five to seven percent of the domestic market, the company's prospects here are actually optimistic, according to Marek Przeżdziak of the Association of Chocolate and Sweets Processors, Polbisco.
"Within the EU there is a lot of demand for niche products, which is an area where small local firms often have an advantage," he says. "And for companies like this, a contract with a hypermarket can often provide an effective way into the market."
Yet the immense power of hypermarket chains, he adds, which often enables them to dictate the terms of the market, could undermine the attractions of this sales route.
What is certain is that the smallest confectioners will almost certainly be pushed out of the market, as economies of scale become an essential weapon for processors trying to offset the impact of higher sugar prices. While domestic rival Wawel invests in a new factory, Mieszko, counting on the success of its restructuring process, is already planning acquisitions of similar sized domestic companies towards the end of the year. This is one reason for the company's December announcement of its intention to raise capital through a share offer in early February.
Stockbrokers, however, are showing little interest in the company.
"Most of the locally owned firms such as Mieszko, Jutrzenka and Wawel had export sales in Eastern European markets, so that since the Eastern European market collapsed in 1998, investors have simply lost interest and the domestic market has consequently been taken over by the biggest Europeans," remarks Radosław Solan, analyst at BDM PKO BP.
The prospect of doubling sugar prices is hardly a magnet for investors, either. And that's not all, "For one thing, there has been a conflict in management; for another, there has been a change in management and for another, the results for the third quarter of 2003 were worse than the ones before," says Robert Kurowski, analyst at DM Amerbrokers. "But who knows? We're waiting for the fourth quarter results in March."
CECH B.V. nevertheless, has publically expressed an interest in increasing its share. "We do see a lot of future in the company," says Andrzej Bartos.
