As consumers in Eastern Europe becomes ever more affluent, family businesses around the world are looking to the region for growth rather than cheap land and labour, says Reg Crowder
Family businesses are increasingly turning to Eastern Europe for growth opportunities. But it's a completely different story from what the world saw in the years following the collapse of the Soviet Union.
Eastern Europe is no longer just a place to shop for cheap land and labour. Changes in the world economy have taken the old clichés about the region and turned them on their heads.
A recent World Bank study described what has been going on in Eastern Europe as "a productivity surge". And that skyrocketing productivity is boosting income and the region's standard of living.
When family businesses look east for expansion today, they aren't simply looking for production. Just as often, they are looking for consumption.
And some surprising new players are showing up in Eastern Europe, hungry for investment opportunities.
For most of its history in business, New York-based WP Carey & Co – founded by William Polk Carey who still serves as its chairman – was content with sale-leaseback investments in the US. No more. The firm is now a major investor in Eastern Europe.
Carey founded the specialist sale-leaseback company in 1973 and today owns 33% of the business, which last year had revenues of $263 million. His brother Frank is chairman of the executive committee and a board member, while H Augustus Carey, Frank's son, has held a variety of positions in the company.
In a speech Carey delivered in 1991, he said the business would always focus principally upon deals in the US. But the world changed and so did the company. "Last year we did more business in Europe than we did in the US," he said.
Sale-leaseback financing is a "refuge" for corporate borrowers in times – such as today – when credit is tight. This year WP Carey's European property portfolio reached the point at which its London investment office just wasn't sufficient to manage its investments which have been moving ever further to the east.
The company has a global portfolio exceeding $10 billion and assets under management in Europe approaching $3 billion. The firm has invested over $150 million in Europe this July and August alone.
Carey's first big move into Eastern Europe was a $180 million deal to buy 15 properties from OBI AG, the fourth largest "do-it-yourself" retailer in the world in 2006. Although all of the properties were in Poland, OBI operates its DIY stores in Austria, Bosnia-Herzegovina, the Czech Republic, Germany, Hungary, Italy, Poland, Russia, Slovenia and Switzerland.
WP Carey has closed two additional sale-leaseback transactions with OBI, acquiring the company's Rybnik, Poland property for $11 million in 2007 and its Wroclaw, Poland retail store for $14 million this year.
Carey said his company's pursuit of deals in Europe, and particularly Eastern Europe, amounts to nothing more than going where the business is. Annual sale-leaseback volume in the US is about $11 billion but international investment manager Jones Lang LaSalle Inc estimates that sale-leasebacks in Europe exceed $30 billion a year.
But the driving force behind all of Carey's investments in Poland is the growing affluence of consumers in Eastern Europe.
The companies looking east
No company perhaps better demonstrates the dramatic shift of global wealth from the consumer nations to the producer nations more than German car manufacturer Porsche, built by the Porsche and Pieche families.
Where once the company looked east for cheap land, labour and buildings, today it scouts the now-independent states of the former Soviet Union for prime Porsche dealership sites.
In its latest annual report, Porsche celebrated the opening of its first dealership in oil and gas rich Azerbaijan. The country is considered one of the world's most important areas for energy exploration.
Porsche's Southern and Eastern Europe sales region set an all time sales record last year, delivering 3,002 vehicles compared to 2,413 the previous year. The new Cayenne series was particularly popular in the region, as was the 911 series.
The company opened new dealerships in Serbia, Cyprus and Turkey and is looking to further expand its dealer network in the region. The Porsche Russia subsidiary enjoyed a 77% increase in the number of vehicles delivered last year.
"Porsche aims to match the high prior year level of unit sales and sales revenue with the growth markets of Eastern Europe and Asia contributing substantially to sales," said non-family CEO Wendelin Wiedeking. He said the biggest constraint to expanding the dealership network is a shortage of properly trained service personnel.
A look at the health care sector reveals pretty much the same story of demand driven by a rising standard of living.
Switzerland's F Hoffman-La Roche & Co, whose founding family is represented by vice chairman Andre Hoffmann, reports spectacular sales growth so far this year for its pharmaceutical division in the region that includes Eastern Europe. The region out-performed Roche globally and the pharmaceutical sector as a whole in every part of the world except Latin America.
Roche reports sales in Eastern Europe as a part of its CEMIA (Central and Eastern Europe, Middle East and Indian) region.
Excluding pandemic Tamiflu sales, the Roche pharmaceutical division for the first half of this year reported sales growth of 14% in the CEMIA sales region, compared to 10% in North America, 8% in Western Europe and no growth at all in Japan. Only Latin America with 15% growth turned in better results.
Even traditional heavy industries have been touched by the changing demographics of Eastern Europe. Global steel giant ArcelorMittal, headed by Lakshmi Mittal, continues to cherry pick the most promising steel processing facilities in Eastern Europe.
Leading the company's acquisitive drive is Lakshmi's son Aditya, who, as chair of the corporate finance and tax committee, is responsible for mergers and acquisitions. But even for such a basic industry as steel, Eastern Europe is no longer just a producer. Today, it is also an important buyer.
The company has reported that increased prices and shipments for the "flat carbon Europe" segment of its business can be attributed to strong growing demand for the products from Central and Eastern Europe.
ArcelorMittal's strategic planning ranks Eastern Europe as a crucial growth market, in the same class with the so-called "BRIC" (Brazil, Russia, India and China) cluster of growth markets, according to the company's securities filings.
In common with many other business-owning families that are already up and running in Eastern Europe, the Mittals are their finding that the region's robust sales growth is offsetting the pain of softening sales in North America and Western Europe.
Their expansion to the east couldn't have come at a better time.