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Boost for Cross-Border Economic Cooperation

09 11 2006  Merger of two Balkan retail giants shows market forces driving reintegration.

By Vesna Hadzivukovic in Belgrade (Balkan Insight, 9 Nov 06)

When Serbian and Croatian companies look to build partnerships with each other and combine business operations, they have to go back in time to find good examples of how to do it.
   
The last big joint venture to bind Serbian and Croatian companies together collapsed 15 years ago. Today it could hardly be more obsolete as a model for future business. Production of the T-84 tank, a centrally-orchestrated Yugoslav military procurement job that involved companies from both republics and others, halted inevitably with the country's violent breakup.

The fact that the T-84 remains the last major Serb-Croat joint venture on record is a stark reminder of how enduring the economic damage of war has been in the western Balkans.

But with the announcement this summer that two of the region's largest private companies are to merge - one Serbian and the other Croatian - the long disruption in large-scale cross-border economic partnership is due to end.

Tellingly, private businessmen are leading the way. A new deal on "joint operations" between Serbia's Delta and Croatia's Agrokor, each a leading retail conglomerate in its respective national market, promises to become an important post-war milestone.

With merger negotiations underway, both sides are closely guarding details of the arrangement. But whatever shape it takes over the next 12 months, the deal is likely to test the limits of commercial reintegration between the two countries. It may also provide an example for others.

The proposed deal would combine the business empires of two legendary moguls of the post-Yugoslav era - Miodrag Miskovic, the Serbian owner of Delta, and Ivica Todoric, the Croatian majority shareholder of Agrokor.

The two men are anything but natural allies, having held opposing loyalties through the tumultuous 1990s - a period of nationalist conflict and rough-and-tumble raw capitalism shaped by political patronage, during which both of them thrived.

But as consumer spending rises in the western Balkans, giant multinationals that dominate retail markets elsewhere in Europe want a big slice of the region's markets. Facing such robust competition, Miskovic and Todoric are both hustling to protect and expand their food and retail empires. Joining forces may just help.

"Miskovic and Todoric are far-sighted players who have proven they know what they need to do to stay in the game," said Midrag Sajatovic, an economic analyst with Lider, a Croatian business weekly.

"If they want to stand a chance against the big players, they will have to cover the region united."

Both intensely private, neither man agreed to speak to BIRN for this report. The companies’ public relations teams issued broad statements about the ongoing merger talks. "Our expert team continue to meet, both in Belgrade and Zagreb, as they seek to identify the best method of joint cooperation," said Branislava Milunov, the Delta spokeswoman.

In recent comments to Politika, a Belgrade daily, Todoric stressed that market forces would determine the extent of cooperation between Delta and Agrokor. He said the two companies, rather than becoming one, would adopt a "regional joint strategy".

The breadth of opportunity for the two, in partnership, is immense. Balance sheets from 2005 and business projections this year for Delta and Agrokor indicate that their combined sales revenue will reach 3.5 billion euro or higher in 2006.

The deal will undoubtedly be complex, but structural similarities between the two companies may help to simplify some terms of reciprocal cooperation. Each boasts a powerful retail network combining several distinctly branded chains. Delta's network includes Maxi, C Market Pekabeta and Tempo. Agrokor's network includes Konzum, Konzum Maxi, Superkonzum and Idea. Together they own close to 1000 retail stores. These extensive networks afford the companies near-comprehensive geographical reach in their respective countries.

Each draws also on large local agricultural production capacity, with tens of thousands of hectares of agricultural land, livestock farms, edible oil and meat processing facilities, behind numerous well-established brands.

The companies therefore bear resemblance to each other, much like their owners - businessmen "self-made" to the extent it was possible in a region where politics has traditionally dominated economy.

Labeled in the Croatian press as a "tycoon with a humane face", Todoric started his first private business, growing flowers, at the end of the 1970s. In only a few years, it grew into one of central Europe's largest flower producers. Agrokor thrived further and diversified as Yugoslavia gradually fell apart.

At the same time, Miskovic went into private business, leaving behind a spotless managerial record and brief career in Serbian government. Miskovic was quick to spot how a breakdown in relations between former Yugoslav republics would yield new opportunities. Delta, initially an import-export buisness, started up in a single cramped hotel room. Today it is the third largest company in Serbia, behind the state-owned oil and electricity suppliers.

Their successes were not strictly coincidental. Both men's reported closeness to their countries' wartime leaders - Miskovic to Slobodan Milosevic's Serbian government, Todoric to Franjo Tudjman's Croatian government - gave them access to cheap loans from state-controlled banks. For this they have often faced stern criticism from liberal corners of society.

But whatever the provenance of their wealth, their cumulative power makes them a political factor today, in a much-altered political scene. Some analysts therefore see the Agrokor-Delta partnership not just as a mere business venture, but a new phase in bilateral relations.

"What we have here is the creation of a pragmatic Serbo-Croat axis, and there may be a political idea hiding behind it," said Dimitrije Boarov, a business analyst with Vreme, a Belgrade weekly magazine.

Boarov describes the conservative prime ministers of Serbia and Croatia, Vojislav Kostunica and Ivo Sanader, as "ideological congenial", a view bolstered by the successful reciprocal visits they have made to Belgrade and Zagreb. Their governments, though still far apart on some key national questions, have supported a gradual political reconciliation running in parallel to economic re-engagement.

Under the watch of the Kostunica and Sanader governments, bilateral trade has grown to 400 million euro. Market analysts at the Serbian Chamber of Commerce project a potential for twice this amount. The Delta-Agrokor deal promises to hasten such growth.
Yet not everyone is happy about the proposed merger. Even before its announcement in August, small suppliers from both Serbia and Croatia were feeling the pinch of limited market competition. Combined operations for Delta and Agrokor would further limit room to maneuver.

In a Politika interview, Todoric said the two companies were developing a unified, centralized supply system to maximize purchasing power. Small suppliers are therefore understandably worried about retail margin and rebate growth, which could eat into their profits while enriching the retail giants.

One supplier described why, although he insisted on being quoted anonymously for fear of jeopardising his relationship with Agrokor. "Several years ago, when our products entered Konzum shops, the retail margin was under 10 per cent. The margins grew as Konzum grew, and today they are almost 40 per cent. I am afraid that with this new arrangement they might easily go up to 50 per cent," he said.

Market competition will keep store-shelf prices from rising to impractical levels. But reciprocal pricing arrangements between Delta and Agrokor could have the effect of blocking or even grabbing market share from aspiring competitors such as Slovenia's Mercator and Veropoulos of Greece, part of the German Spar chain owned by France's Intermarché

Meanwhile, both Delta and Agrokor seek new markets outside Serbia and Croatia. Their cumulative strength already exceeds the capacity of their home countries, with both companies uncomfortably close to monopolistic positions. Delta has launched large-scale projects in Montenegro and Macedonia. Agrokor is already in Bosnia and Herzegovina and Serbia.

"We cannot stop," Miskovic recently said in a rare public appearance. "Whoever stops stumbles. We just have to press forward with new investments. How far it will go, I do not know."

Vesna Hadzivukovic is a freelance journalist and the executive director of Southeast, a Belgrade-based business consultancy. Balkan Insight is BIRN`s online publication.