Wednesday, 2 February 2011

What’s Broken in Greece? Ask an Entrepreneur

The recent NYT article about competitiveness in Greece (What’s Broken in Greece? Ask an EntrepreneurJanuary 29, 2011) leaves several important factors unexplained, and thus does little justice to the complexity of the situation. Although the general conclusions or recommendations that Greece needs to improve its competitiveness and deregulate certain sectors are certainly warranted, I was struck by the fact that the entrepreneur in question, Mr. Politopoulos of Macedonian Thrace Brewery, is hardly an example of good competitiveness or wise investment planning, and that no amount of deregulation is likely to improve his situation in his core market.

This is understandable only if one reviews the basic economics and business of beer production and distribution, and of the two companies in question. To put it mildly, a smaller player like Macedonian Thrace Brewery faces major commercial difficulty in competing against the Athens Brewery (the brewer of Heineken/Amstel) and this has little to do with deregulation:

·    Besides its dominant market position, the Athens Brewery has invested in a highly efficient distribution system which is optimised to Greece’s fragmented distribution system, characterised by many small retail points of sale, geographic fragmentation in the islands and extremely high variable demand between winter and summer seasons. In addition to the provision of equipment (refrigerators, taps, etc.), Heineken has the commercial power to offer generous credit terms to its customers, which is a key competitive advantage.

·       The Athens Brewery is located in Athens, the largest urban region in Greece with some 4 million inhabitants in the greater area, as well as in Thessaloniki, the second largest urban area with 1 million inhabitants. The Macedonian-Thrace Brewery, in contrast, is located in Komotini, a small town of 52,000 people about 250 km from Thessaloniki. This distance is a major competitive disadvantage, particularly given the high fuel costs in Greece. In many breweries, the direct costs of production are equalled and in some cases exceeded by the costs of transport, distribution, and advertising & promotion. Transporting beer 750 km from Komotini to Athens incurs major costs which cannot easily be absorbed, and which deregulation will not necessarily improve.

·      The Athens Brewery’s turnover in 2009 amounted to EUR 448.3 million, while its total fixed assets amounted to EUR 471.98 mln. Of this, accounts receivable amounted to 65.3 mln. A total of EUR 38.2 mln was invested in marketing, advertising and promotion in 2009. These basic financial indicators reveal the importance of (a) economies of scale in production; (b) the need for relative high accounts receivable (credit terms) and (c) the importance in marketing and promotion.

·      Macedonian Thrace Brewery is clearly both undercapitalised and, it would appear, poorly planned from the outset. The interview with Mr. Politopoulos reveals his lack of experience in the brewery sector, which is determined not only by production capacity, but by the ability to enter a complex, fragmented distribution chain which is dominated by wholesellers and large retail chains requiring large credit terms and frequent replenishment. The company is clearly not spending nearly enough on consumer promotion, trade marketing, or distribution, and is thus shutting itself out of the market.

·     I was amused to read that In emerging economies from Brazil to Turkey, South Africa and Mexico, beer companies have spun extraordinary profits. Mr. Politopoulos hoped to replicate this pattern. This is quite true, and I have in fact acted as a consultant to several breweries in emerging markets in the former Soviet Union and can attest to this. However, these breweries have started with a much greater economy of scale (basic investments on the scale of EUR 40-60 million are common), while Mr. Politopoulos and the NYT must also be aware that many breweries in emerging markets have also failed. Presence alone in an emerging market is no guarantee of success.

·        There is no indication that, even if the law mentioned by Mr. Politopoulos were rescinded, the factory would be able to break even on tea sales. There are at least three solutions to the problem of a single-use factory, if indeed this exists. (It would have been better had the exact requirements of this law been confirmed by other sources).

·        Nor would a Competition Committee finding on market dominance necessarily lead to greater sales for Macedonian Thrace Brewery, particularly in the Athens region. This is over 750 km from Macedonian Thrace Brewery in Komotini, and will therefore require a further investment in a distribution centre, staff and transport capacity, or a distribution partner. Either way, this is going to cost money or margin.

I also seriously question why it is remarkable that Heineken beer sold in Greece is more expensive than Heineken beer sold in Holland. There are three main reasons for this:

·    Greece increased its excise duties on beer production three times in 2010 by a total of 80%. Greece also increased its value-added tax (VAT) to an maximum rate of 23%, applicable to alcoholic beverages, and also passed a special tax on alcohol. The Netherlands has a VAT rate of 19%.

·       Economies of scale are greater in The Netherlands, which has a consolidated beer volume of 5.0 mln hectolitres, versus Greece, which has a consolidated beer volume of 3.2 mln hectolitres.

·        Greek costs will be higher due to the need to import equipment and certain raw materials, which incur higher transport costs, than equipment and raw materials in The Netherlands. This includes higher packaging prices.

In short, I found this case study on competitiveness in Greece to be, frankly, peculiar. The article has taken one of the strangest business cases available involving two private companies, without a proper assessment of the economics of the beer distribution business or other basic factors in the Greek market.  It appears to take the opinions of one company, Macedonian Thrace, as established fact, without cross-checking with other sources. It appears to mix the message that because Heineken is dominant in Greece, it must be an example of poor regulation, ignoring the fact that Heineken has been losing market share for years, and ignoring the history of the Amstel/Heineken merger. It also ignores the fact that Athens Brewery owes its market share not only to domestic production, but also to own imports; and that there is as of yet no finding of the Competition Committee or any other source which proves market dominance.

I could just as easily make the case that because a small, failing software firm in Boise, Idaho, is having problems, and because Microsoft has a 90% market share, then Microsoft must be the evil market leader which stifles innovation, and the United States must be poorly regulated and uncompetitive as a result. It’s an attractive conclusion, but it’s not necessarily the correct one.

General Competitiveness in Greece
I would also like to add a few words about general competitiveness. While it’s true that Greece’s exports as a share of GDP have been low, we should not forget that its two leading industries—shipping and tourism—are in fact service sector exports. Tourism accounted for between 15-20% of GDP in 2010 (depending on the methodology used), while shipping accounted for between 5-8% of GDP. Both sectors overwhelmingly serve international business. Over 92% of shipping value is incurred on non-Greek transport; over 87% of tourism receipts are from international arrivals in Greece. It is therefore not surprising that in the past, a good share of Greek domestic production is sold domestically, particularly in key segments such as construction, building materials, agricultural products and processed foods.

Greece’s record on attracting foreign investment is also better than would be believed by the article. Besides the example of Heineken itself, the Greek food and drinks sector includes production facilities by Barilla, Unilever, Nestle, Kraft Foods, Diageo, Coca Cola / Hellenic Bottlers and a range of other companies, while big-box food retail is dominated by international chains Carrefour, Delhaize, Lidl, Metro, Praktiker, Spar, and others. No mention is made of these investments, nor of equivalent investments by Greece’s national companies. We should remember that foreign direct investment, while a popular development indicator, is not by itself a final arbiter of national competitiveness. One could even argue the opposite.

There are, in fact, major problems with Greek competitiveness, but I would argue that these have more to do with other more important factors, namely:

·     The need to improve the independence, transparency, effectiveness and professionalism of the judiciary;

·   The need to lift Parliamentary immunity and prosecute past instances of corruption in public procurement;

·        The need to end public sector domination of certain economic segments;

·    The need to end a costly system of EU subsidies which is inflationary, is channelled almost exclusively through government agencies (engendering corruption and driving up costs), which is entirely supply-side oriented and which is not as efficient as it could be in furthering general competitiveness, innovation or demand-side orientation (including export orientation).

These issues have not been touched in the article.

In contrast, liberalising pharmacies, transport firms or legal fees is an minor point. The fact that Greece may have a high number of laywers is hardly important, given that general legal costs (both for lawyers, as well as in terms of legal awards) are far, far lower than more litigious countries such as the United Kingdom or the United States. The costs of the four points mentioned is far higher than the liberalisation of some professions, and unfortunately is not being systematically and transparently addressed either by the “Troika” or by any other political authority in Greece.

While I can’t help but wishing Mr. Politopoulos the best, I will probably stick to drinking Heineken or Corona beer, unless he can convince me otherwise.

© Philip Ammerman, 2011
Navigator Consulting Group

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