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Feeling the pinch 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 in the 'southern' markets of ex-Yugoslavia, but after Slovenia's accession to the EU, those trade agreements between Slovenia and the former Yugoslav republics had to be cancelled and renegotiated as a part of the EU's common commercial policy towards external countries. The challenges that Slovenia's largest dairy, Ljubljanske mlekarne, and the leading Slovenian poultry producer, Perutnina Ptuj, have had to face and the different ways that they have tackled them are a case in point. While their strong brands have always been respected in the markets of southeastern Europe, traditionally the most important export market for Slovenian companies from the food and beverage sector, this comparative advantage is being eroded by the imposition of tariff and non-tariff barriers. The dairy wrapped up 2005 with a net operating loss of EUR 4.56 m, with management laying part of the blame for this on an EU-accession-related drop in food prices - they have fallen by an average of 6% since Slovenia's entry into the EU - and the abrogation of bilateral free trade agreements with countries emerging from the former Yugoslavia. Moreover, competition from larger and more efficient producers from the EU and falling milk prices have eaten into profit margins. It is no small wonder then that Ljubljanske mlekarne has been eyed by foreign companies as a possible takeover target, enticing calls from farmers that national interests, i.e. the continuing production of milk in Slovenia, have to be protected and the sale of the dairy to foreign producers prevented at all costs. The farmers and producers have reason to be concerned. When Slovenia's only sugar processing plant, in Ormoz, was sold off to the Dutch food company Cosun and the Italian sugar producer SFIR, its employees were not aware of the impact that the reforms of the EU's sugar regime, i.e. reducing sugar prices, would have on the business decisions of the new owners. Because of its size - it employs 200 people and produces around 40,000 tons of sugar a year - the factory cannot benefit from economies of scale, which, in an environment of falling sugar prices, makes it a liability for its owners' bottom line. According to observers, the closure of the factory is inevitable once the reforms kick in. Consolidate and expand However, the challenges of EU competition and agricultural reforms on the one side and tariff-protected traditional export markets on the other can also be met in a more constructive way. Although Slovenia's largest poultry producer Perutnina Ptuj expects its profits this year to be a little lower than last year's EUR 4.4 m, largely as a consequence of the bird flu scare, its CEO Roman Glaser recently announced that the company is mulling further takeovers at home and abroad. It can be argued that such a strategy is primarily defensive as one of its goals is to increase its bargaining power vis-à-vis retailers, although it must be noted that, at least in Perutnina Ptuj's case, the option of organic growth in the heavily consolidated home market has been more or less exhausted. The Droga Kolinska group, with EUR 158.8 m in consolidated revenues in the first half of this year, is Slovenia's largest food and beverage company and is following a similar strategy. The company, itself a product of a merger between two leading Slovenian companies in the food sector, has been jumping borders by investing into production facilities in Bosnia and Serbia, while also pulling off a major coup by buying the leading coffee producer in the Balkans, Serbia's Gran Prom, in 2005. The company intends to generate 72% of its revenues from foreign markets this year, mainly in Serbia, Montenegro, Croatia and Bosnia-Herzegovina, which testifies to the importance of the so-called southern markets for the Slovenian food and beverage industry. Friend or foe? Although more ambitious companies from the sector have succeeded in adopting the strategy of inward consolidation and outward expansion as a remedy for deteriorating terms of trade vis-à-vis their main export markets, they still have to deal with increasingly assertive retailers slashing their profit margins. The Slovenian retail industry is largely consolidated: Mercator, with EUR 1.75 billion in sales making it Slovenia's largest company, holds 45% of the domestic market, followed by Spar-Interspar with 21.7% and Tus with 14.8%. With Mercator in such a dominant position, it is no wonder that suppliers are feeling the squeeze. But Istrabenz, a holding which owns 60% of Droga Kolinska, would have none of it: last year it teamed up with Slovenia's largest brewery, Pivovarna Lasko, and they together acquired a 40% share in Mercator. With their shareholding, Istrabenz and Lasko can greatly influence Mercator's business strategies: whether that means demanding higher prices for their products remains to be seen, but it is unlikely that the two largest companies in the Slovenian food and beverage sector will resist the temptation. However, Mercator's management seems undeterred by such considerations. In 2005, they earmarked EUR 278 m for investment and they plan to spend a further EUR 167 m this year. Mercator's shopping centres are mushrooming in Croatia, Bosnia, Macedonia, Montenegro and Serbia, where the company acquired the country's second largest retailer Rodic M&B. Mercator now controls 4% of the Croatian market, 2% in Serbia, 2% in Montenegro and 1% in Bosnia-Herzegovina. According to the company's CEO, Ziga Debeljak, Mercator wants to increase its presence in these markets to 12%, 10%, 10% and 5%, respectively, by 2010. Judging from Mercator's vigorous investment activity so far, Istrabenz and Lasko have bought themselves quite an outlet for their products.