Naughty but nice
By : Celia Barnes
Candy land: Germany's Stollwreck produces Alpen Gold chocolate in Poznan.
To borrow from celluloid's Forrest Gump, the Polish confectionery industry is like a box of chocolates: You're never sure what you're going to get. It all depends on who you talk to.
Ask Cadbury Wedel, and the company will tell you its E. Wedel and Cadbury goodies are No. 1 on the market. But ask Nestle Polska, makers of the Goplana brand, and it will tell you it's also the market leader.
Krakow's Wawel claims it's the country's No. 2 brand, while German brand Stollwerck believes it's fighting the No. 2 spot with Kraft Foods Polska, manufacturer of Milka chocolate.
As for what Kraft Foods Polska thinks about all this muscle flexing; the company's policy is strictly "no comment."
The reality is that few statistics exist when it comes to definition: Do you include only chocolates and chocolate products in the confectionery sector, or, like Nestle Polska, do you also include your lollies or "sugars," as the industry refers to them?
But according to AC Nielsen's share breakdown of Poland's chocolate market for December 2000-January 2001, Cadbury Wedel is king with 20% of the market, followed by Kraft Jacobs Suchard, which became Kraft Foods Polska early last year, with 15.6%.
Goplana and Nestle occupy the third spot with 10.4%. Master Foods Polska, makers of bars such as Mars, Snickers, and Twix, has 9.2% and Stollwerk, 7.3%.
But market share details aside, all the players agree on one thing: It's a highly competitive market with about 100 manufacturers.
Getting better slowly
After a few years of problematic trading for many operators following the 1998 collapse of the Russian market, things are beginning to get better slowly.
Polish chocolate consumption, which is much lower than in neighboring Western Europe, is expected to increase although it will be hindered by the slowdown in the economy. Compared to the rest of the food-processing industry, profit margins on confectionery are good.
The other key factor in the coming years will be consolidation with all operators fighting for a bigger slice of the zl. 2.5 billion ($609 million) chocolate pie that the Central Statistical Office (GUS) estimates Poland's 1999 confectionery market is worth.
But this definition of confectionery includes the GUS figures for sugars, chocolate and chocolate products containing less than 15% chocolate.
In 1991, Wedel was one of the first privatization projects for the Treasury Ministry. PepsiCo bought a controlling share, using the company to launch its Frito-Lay salty snacks. While the snacks prospered, the traditional Wedel business didn't do so well. By 1998, Pepsi had bought up Wedel's remaining shares and split the company into three parts chocolate, sugars, and biscuits and put it up for sale. Cadbury Schweppes, the U.K. company that is one of the biggest chocolate manufacturers in the world, stepped in and bought Wedel's chocolate business for $76.5 million.
It was a strategically smart move for Cadbury, which until then had been having only limited success with sales of the Cadbury products it was producing at the $50 million greenfield factory, built in Wroclaw in 1994.
Cadbury Schweppes' Simon Baldry: "Here in Poland people love Wedel."
But the unheard of had happened: During PepsiCo's reign, Wedel, Poland's best-loved chocolate, had slipped to No. 2.
"In the past, the brand E. Wedel has not really been nurtured or looked after as it should have been," said Simon Baldry, Cadbury Wedel's managing director. "I'm not criticizing Pepsi but it wasn't developed in a way that a chocolate brand should have been. I think one of the realities of the chocolate market is that consumers love the chocolate they grew up with. And clearly here in Poland, people love Wedel."
At Pepsi's expense, Cadbury was able to see how important the Wedel brand is to the Polish consumer. It is rare for Cadbury to subjugate its own brand for another, but Baldry said it has become the core focus of the company's strategy in Poland. The only Cadbury product that has really managed to capture the Polish market is Eclairs, which Baldry said account for 43% of the toffee market.
Over the next few years, Baldry expects the confectionery market will grow by around 2%, and Wedel's market share by up to 5%.
To cope with the competition, Wedel has boosted its marketing budget by 30-50% to relaunch many of its favorite brands including ptasie mleczko, or bird's milk chocolates, plus its chocolate blocks.
Baldry also plans to work hard on what he called "occasions" products.
"Cadbury, in its domestic markets, drove the Easter, Christmas and Halloween markets," he said. "That doesn't really exist in Poland today 'giving' markets, such as Mother's Day, Valentine's Day, all of those types of opportunities where giving gifts plays a role." Other niches of interest for Wedel include chocolate products for children and chocolate drinks.
You are what you eat
But while Poles may love chocolate compared to their Western counterparts, they appear to eat less. Baldry said the figure is somewhat illusory. He estimates Poles buy about 3.6 kilograms per capita every year, compared to 10-12 kilograms per capita in Western Europe. "Clearly the disposable income (in Poland) is significantly less," he said. "But if you look at chocolate consumption as a percentage of disposable income then Poles are spending a lot more money on chocolate than in Western Europe. There is certainly a sweet tooth in the market."
According to GUS, the amount of chocolate production in Poland was 10,000 tonnes in 1985. By 1995, when foreign investment started flooding in, production leapt to 59,200 tonnes. By 1999, it had reached 94,300 tonnes.
Nestle's Corrado Castrovllari: "Poles have switched from sugar to chocolate."
Part of this chocolate growth has been at the expense of "sugars."
At Sluzewiec, on the outskirts of Warsaw, Nestle Polska's business division head, Corrado Castrovillari, said sugars sales have declined by as much as 5% during the past two years.
"There's always an immigration in these (evolving) countries from sugar to chocolate, because in the past chocolate was very expensive and not readily available," Castrovillari said. "Sugar was cheap and widely available. But when people have had the choice, over the years there has been a net immigration from sugar to chocolate."
Nestle started importing its own Swiss product to Poland in 1993. In 1994, the company purchased the Poznan production facilities of 89-year-old Goplana, and invested $60 million. The two formally consolidated in January this year. To date, Nestle, which now has three confectionery factories, has invested $334 million in Poland. Some 90% of what the company sells is produced locally under the Goplana brand. Its products are available in 60,000 distribution points across the country.
Castrovillari said that as a best-case scenario, Polish confectionery consumption could increase by up to 50% during the next 10 years. Strong advertising and promotion has seen sales of the Princessa range of chocolate-coated wafers increase by 50%. The company's chocolate block sales are also growing, along with chocolate boxes. All these improved sales are linked to Poles' increasing spending power.
But this spending is now being tempered by the country's economic woes, Castrovillari said. He anticipates the years ahead will bring market consolidation.
"I think many producers will disappear in one way or another," he said. "Many will either be purchased in a consolidation, or they will close down and sell the assets because they have no brands."
For two of Poland's publicly listed confectionery companies, 2000 has been a year of revival. After losing the majority of its export business following the Russian crisis, Krakow-based Wawel came back in 2000, recording a zl. 3.5 million ($853,000) net profit; Jutrzenka reached a net profit of zl. 2.2 million ($536,000).
Wawel's export director, Jerzy Bubula, said that before 1998, the company exported 30% of its confectionery production to Russia. Following the crisis, the company lost zl. 27.2 million ($6.6 million).
But after a costly restructuring process, Bubula said the company is back on track.
These days Wawel sells nothing to Russia. Its only exports are to Polish ethnic communities in Canada and the United States, which represented 5.5% of its business last year and earned the company zl. 10 million ($2.4 million). By 2002, Wawel hopes it will be closer to 10%.
Last month, the company, which launched on the Warsaw Stock Exchange (WSE) in 1998, expanded its range by purchasing the chocolate brand "Michalki Zamkowe" from a smaller competitor, Jarmiko.
"And there is quite a long line of companies interested in cooperating with us and I think this is also the way to decrease operational costs and also to launch new products that are in the hands of some very interesting companies," Bubula said.
Bydgoszcz-based Jutrzenka listed on the WSE in 1995, raising about 85 million ($20.7 million) in revenue. Four years later, it lost 20% of its sales when the Ukrainian and Russian markets collapsed.
Last year, Jutrzenka launched a strategy to recreate itself. During the 1990s, the company invested zl. 100 million ($24.3 million) in a new plant as well as upgrading its four existing plants. The company also launched 17 products, including a chocolate bar called Alibi. Created to compete with Snickers and Picnic bars, this hazelnut, rice and wafer creation took seven months to produce, with marketing and advertising costs totaling zl. 4.4 million ($1 million) in 2000 and zl. 4 million ($975,000) this year.
"It was a very important part of our strategy to change our product portfolio and look for niches ... to look for possibilities to sell more modern products, said Jutrzenka's president, Grzegorz Dolkowski. "We are satisfied with the response of the market, but we're most satisfied in sales of Alibi, which was supported by advertising and promotion."
Advertising also played a big role in the success of the Cologne-based company, Stollwerck.
Relative to other Central and Eastern European countries, Poland's large population provides huge potential, and in 1995 Stollwerck invested more than DM60 million in a factory outside Poznan to produce its Alpen Gold range of chocolate.
"We chose the Wielkopolska region for our factory because we could exploit the whole area for our production sugar mills and dairies plus the international transport routes cross the region," said Stollwerck's marketing manager, Mariola Szerkus.
At a cost of DM2 million, the company launched the brand with a TV, radio, press and billboard advertising campaign that Szerkus said was revolutionary at the time because it targeted specific age groups. Being a Western product also helped and just over a year later Szerkus said sales were neck-and-neck with Wedel.
"When we entered the market, it wasn't saturated and the demand for chocolate was strong," she said. "Prior to that, chocolate had been a luxury product in Poland. So when the market opened, the consumers absorbed chocolate. Ours, and everybody's sales were soaring."
Those were the days
But the heady days of growth have slowed. "The demand has dropped and the supply now is bigger, unfortunately," said Szerkus, who estimates every Pole spends zl. 36 on chocolate each year.
She said the economy has a big role to play in this decline, but she also believes that for the first time Poles are beginning to consider their diets more. Szerkus said new product innovation is the key to market growth in the coming years and Stollwerck earmarks more than 10% of its expenditure for product research and development.
"To sum up," said Szerkus, "I think in three years, when Poland has fully integrated with Europe, there will be five players on the market; that's all. The others will either go bust or merge or develop some other kind of small production not necessarily chocolate."
