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Profiting from preferential trade agreements and capitalizing on the excellent reputation of Slovenian products, the industry had sold more than two thirds of its exports on the 'southern' markets of ex-Yugoslavia, but after Slovenia's accession to the EU these trade agreements were revoked and had to be renegotiated as a part of the EU's common commercial policy towards third countries. Between a rock and a hard place The consequences of this are now beginning to show. Because the EU offered the ex-Yugoslav republics a European perspective that could sooner or later result in full EU membership, trade agreements concluded between the countries of the Western Balkans and the EU are asymmetrical as they aim to support the structural reforms embarked upon by these countries, i.e. they allow the former to export their goods to the single market under preferential conditions, while maintaining relatively high tariff barriers for imports from the latter. Slovenian companies, especially those from the food and beverage sector whose exposure to the southern markets is much greater than that of companies from other sectors, have thus artificially, via the imposition of higher tariffs by the governments of ex-Yugoslav countries, lost their competitive edge in relation to their southern counterparts as a result of Slovenia's accession to the EU. Consequentially, overall exports of the industry's products to the southern markets fell 12 per cent in 2004, with exports to Serbia and Montenegro (SCG) falling 25 per cent, to Bosnia and Herzegovina (BIH) by 15 per cent and to Croatia by 5 per cent. Moreover, Slovenia's EU membership opened up another front for the embattled food and beverage sector: as its traditional trading partners in the south were busy erecting trade barriers, its competitors from other EU countries, on the other hand, saw the remaining Slovenian trade defences dismantled as the Slovenian economy entered the single European market on the 1st of May 2004. Although only one foreign retailer is firmly established in Slovenia at the moment - Spar has a 20 per cent share of the retail market - this is set to change. Both Aldi and Lidl recently announced plans to start building their own premises in Slovenia and to lure consumers into their shops with discounted prices and special offers. Of course, that spells trouble for domestic retailers as well as for their suppliers: the biggest Slovenian retailer Mercator, known for its hard bargaining style, has already started applying pressure on its suppliers from the food and beverage industry in an effort to undercut its competitors' prices while protecting its profit margins. Because Mercator, which has a 45 per cent share of the Slovenian retail market as well as sizeable direct investments abroad, is the single most important buyer for the industry's products, the companies in the sector have found themselves in the unenviable position of being squeezed between plummeting export revenues on the one hand and downward pressure on the price of their products on the other. An industry in decline? Despite these developments, the food and beverage industry continued to be profitable in 2004. Although profit per employee fell 25 per cent compared to the previous year, some observers argue that the recent wave of consolidations in the industry go hand in hand with the shedding of excess jobs and the rationalization of production, thereby making the industry leaner and better prepared to meet the challenges posed by Slovenia's EU membership. In comparison with their competitors, the most formidable obstacle facing Slovenian companies in this sector is their exceptionally poor levels of productivity, which, on average, are only 50.3 per cent of the EU average. When that is coupled with Slovenia's relatively high labour costs - average labour costs in Slovakia, for example, are four times lower than in Slovenia - it makes it very difficult for the industry to maintain, let alone increase, its market share either in the EU or in any other market. However, when talking about the problems plaguing the Slovenian food and beverage industry, one often tends to forget that the industry is entangled in a complex web of interdependencies, especially with the retail and agricultural sectors. Respectively, they employ 27,000 and 98,000 people, while only 20,000 are employed in the food and beverage sector. While the latter depends on the agricultural sector for the raw materials it supplies, it is also dependent on retailers to generate demand for its products. Critics, including a number of CEO's from leading firms in the sector, claim that the risks flowing from the industry's precarious position have become even harder to manage and stem from the state's inability to come up with a clear strategy for restructuring the industry in the wake of Slovenia's entry into the EU. All that you can leave behind?: a new order emerges Although the food and beverage industry has largely been left to its own devices, some companies have nevertheless been pursuing their own ambitious plans for consolidating the industry. These companies see consolidation as a form of self-defence. It soon became clear that Istrabenz, a financial holding with interests in both tourism and the oil industry, was the prime mover behind the scenes. Once Istrabenz acquired a controlling stake in Kolinska, the establishment of Slovenia's largest food and beverage firm was only a matter of time, as both companies had substantial holdings in another food and beverage producer, the Portoroz-based Droga, mainly known for its coffee and pates. At the beginning of May, Istrabenz finally pulled it off: leaving behind its erstwhile core businesses such as oil and gas, it united the Slovenian food and beverage industry by merging Droga and Kolinska into the largest Slovenian food company to be known as Droga Kolinska. Istrabenz now holds 45 per cent of the shares of the new entity, although it may indirectly control as much 55 per cent. Be that as it may, the fact is that the newly acquired market power makes Droga Kolinska, with its 1,900 employees and revenues of nearly SIT 50 billion (EUR 200 m), less dependent on the whims of retailers - especially, of course, Mercator - and allows it more latitude to pursue its own business strategies. Even before the two companies merged in May, Istrabenz had exploited its influence on the companies to seal a strategic partnership with Serbia's largest coffee producer Gran Prom. In February, Droga and Kolinska thus agreed to acquire a 75 per cent stake in Gran Prom, paying EUR 45.5 m in cash and equity in the merged company worth EUR 7 m. This investment will make Droga Kolinska the largest food and beverage firm in the countries of ex-Yugoslavia and the biggest producer of coffee in the Balkans. Moreover, Droga Kolinska recently announced plans to streamline and restructure its business in order to exploit the synergies brought about by the merger. These plans inevitably include lay-offs as the company moves its production to the southern markets: it recently invested EUR 20 m into new production facilities in Bosnia and Herzegovina, aiming to capitalize on the region's lower labour costs and to acquire the status of a local producer, thus circumventing the tariff barriers erected after Slovenia's entry into the EU. One step too far? Recent developments, however, have shown that the consolidation of the industry is far from over. In early September, two state-run funds, KAD and SOD, sold their shares in Mercator to Slovenia's largest brewer Lasko and to Istrabenz. Between them, the suppliers could eventually control more than 40 per cent of Mercator. Zoran Jankovic, Mercator's CEO, had actively encouraged suppliers to take an interest in the company, but what he had in mind and what actually transpired were probably miles apart. Istrabenz and Lasko are now in a position to exert considerable influence on Mercator's business strategy: whether that means they will demand higher prices for their products remains to be seen, but it is unlikely that these two giants of the Slovenian food and beverage sector will be able to resist the temptation.