Fighting it out in Ljubljana
The controversial decision by Ljubljana's city councillors paved the way not only for a heated debate about Slovenian attitudes towards foreign investments, but also for broader inquiries into the structure of Slovenia's retail market. "The way the Ljubljana City Council handled the matter is scandalous. Not because it did not issue a building permission to Spar, but because the councillors acted hypocritically: although a majority of them supported the project eight months ago, they changed their minds in the run-up to the vote. That is irresponsible and immoral," the CEO of Spar Slovenija, Igor Mervic, said. He had nothing but harsh words for Ljubljana's city councillors after they had scrapped Spar's plans to build a new shopping centre in Siska, the largest of Ljubljana's districts, in the middle of February. However, not everybody shared Mr Mervic's disappointment with the contested decision, certainly not Zoran Jankovic, the CEO of the Slovenia's biggest retailer Mercator, which runs its own shopping centre in Siska. There is hardly any doubt that Mercator was relieved by the City Council's decision - a result of intense lobbying, which prevented its fiercest competitor establishing itself on Mercator's doorstep. How it all began The saga started five years ago, when the City Council announced that a prime, 41,000-square-metre location between the city's ring road and Celovska cesta was up for grabs. Spar soon entered into talks with the office of Ljubljana's mayor and various city agencies responsible for spatial planning, with the aim of reaching an agreement on how to develop the location. As the talks proceeded smoothly and Spar was receiving positive signals from city authorities, Mr Mervic decided to present them with a more ambitious project than the one Spar had had in mind - and authorities had approved - at the outset. Instead of building a smaller-scale retail store, Spar now proposed to build a large, multi-purpose shopping centre, an investment worth SIT 45 billion (EUR 187 m). The City Council and city authorities were favourably disposed towards the upgraded project - not least because of the 1,500 new jobs that were being promised - so Spar soon bought the location and began acquiring the various permits needed to start building on the site. With more than SIT 2.5 billion (EUR 10.4 m) already spent on these administrative procedures, Spar thought that February's vote on the issuance of a building permit was going to be a mere formality, but it erred: a majority of city councillors seemed to have undergone a profound change of mind or, as some would say, sided with Mercator against Spar. Mercator, of course, had every reason to oppose Spar's plans to build a shopping centre so close to its own flagship mall in Siska: if Spar succeeded with its plans that would eventually mean a 15 percent loss in revenue for Mercator's centre, a loss that Mr Jankovic could not afford to ignore. Observers say that both sides used almost all possible means to persuade the councillors to vote one way or the other, but in the end it was Mercator that emerged the winner. In the aftermath of the crucial vote, Mr Jankovic emphasized that: "Mercator has an advantage in the hearts and minds of the population. Mercator is definitely a Slovenian company and it definitely sells more Slovenian goods than any other retailer." In whose interest, actually? The notion of national interest that has dominated the political and economic media discourse, at least since the failed takeover bid of Belgian company Interbrew for Slovenian brewer Union, thus made a not-so-surprising reappearance. Given the disappointing experiences of Interbrew and Spar, one of the issues that now haunt commentators and business people alike is whether foreign firms will be willing to invest in Slovenia in the future. That is not to say that some kind of abstract national interest was the reason behind the rejection of Spar's plans - it was explicitly invoked by only one councillor, others cited the lack of traffic management arrangements as the reason for their opposition - but the fact is that the obvious lack of any strategy, particularly on the part of the city of Ljubljana, and the government in general, could lead to Slovenia being perceived as an unfriendly environment for foreign investment. This alleged image would certainly be made even more unflattering, if the councillors decided to issue a building permit for practically the same location to Mercator, once they have refused to issue it to its competitor. The decision whether to allow Mercator to expand its shopping centre in Siska will be taken at a city council meeting in May and will certainly be closely watched. After all, the councillors will have a chance to prove their critics wrong (or right, for that matter). As critical observers have consistently emphasized, it is bad politics that too often takes precedence over good economics; they have also made it clear that it is the consumers who will be left holding the bill in the end, because the lack of competitive pressure will, sooner or later, result in higher prices. That may hold as a general economic law, but are these observers justified in seizing upon the latest developments in the Slovenian retail market as proof that their prophecies are being materialized? Slovenia's retail market: not so bad after all? In order to answer this question, one should first take a closer look at the Slovenian retail landscape. Slovenia's retail industry rests on three pillars: Mercator, Spar and Tus. These companies account for more than 80 percent of all sales in Slovenia. Mercator is by far the largest: its market share reached 44.7 percent in autumn 2004, while those of Spar and Tus were 19.2 and 16 percent respectively. Mercator's aggressive strategy over the past ten years obviously paid off, as it was able to attain - mainly through acquisitions - a dominant position in the retail market. Although some criticism was voiced, alleging that the Competition Protection Office had let Mercator go too far in consolidating the Slovenian retail market, other supermarket chains, i.e. Spar and Tus, have nevertheless been able to enter the market and attain considerable market shares. Spar, for example, doubled the number of its employees in the last five years, while Tus increased its market share from 12 to 16 percent. There is, it seems, ample, or at least effective, competition in the Slovenian retail market and the things are set to improve, at least from the consumer's point of view: the Austrian retailer Hofer and the German low-price supermarket chain Aldi have recently announced that they are planning to enter the Slovenian market. That may spell trouble for Mercator, which makes almost 90 percent of its revenues on the domestic market, while its ambitions in the Serbian market have been thwarted - ironically - by a leading Serbian retailer. Analysts say that Mercator has already reached the limits of its domestic growth and that the only option left open for it is to expand into foreign markets. Slovenia's retail giant seems ready to follow the advice as it has already opened shopping malls in Croatia, Bosnia and Herzegovina as well as Serbia. However, this also creates a welcome opportunity for its competitors, such as Spar and Tus, to increase their market shares and boost their revenues. As competitors in the Slovenian retail market are gearing up for what seems will be a fierce battle for market share, where - as the dogfight between Mercator and Spar over Ljubljana has already shown - no prisoners will be taken, consumers can relax and enjoy the show. People, on the other hand, obviously just could not care less about Spar and Mercator; they just want to spend their hard-earned money. Be that as it may, there is no doubt that consumers can only benefit from retailers going out of their way to offer them the best deals possible - and that is what the retail business is all about.