The shoppers of the former Eastern Bloc have huge pent-up spending power and a development boom is creating opportunities for Western retailers. Ben Cooper reports

The fall of the Berlin wall didn’t just allow a political wind of change to blow into Eastern Europe. It opened a door for retail as well. A generation that grew up in a political and economic desert, devoid of vitality inside the wall and prohibited from any stimulus from outside, is seeing a world that was once frozen by 50 years of cold war thawing in front of them.

Russia and neighbouring Eastern European countries are surging ahead with dramatic transformations of their cities and towns, outstripping Western counterparts in terms of growth and topping retailers’ wish lists of destinations to open stores. Wherever you look, there is big change happening – and there is still plenty more to come.

Retailers and developers throughout Europe are in top gear to stake a claim in the new land of opportunity which, despite the vast amount of retail property in the pipeline, is still relatively untouched. But it’s by no means a straightforward business to open up shop in a region with little history of development. In such a politically volatile and culturally distinct region, retailers need to tread carefully.

Life under communism was hard. Talk of a possible recession in the UK because of a slowdown in sales growth seems somewhat absurd compared with the depths of deprivation in the former Soviet economy that led to huge queues for basic food supplies and poverty on a mass scale. While this might sound more like an excerpt from a history book, it is worth bearing in mind because, today, the same population is shopping in Marks & Spencer, Zara and H&M.

This transformation fulfils a surge in consumer demand that had been suppressed for decades in a region that had been neglected for generations. “The markets have only really been developing for the past 15 years or so,” explains Jones Lang LaSalle head of retail for Central and Eastern Europe Beatrice Mouton. “People are becoming more sophisticated and they’ve got more money. Shoppers are longing for the brands that they’ve been deprived of for a long time under communism,” she says.

However, moving an entire economy to the free market is easier said than done. Throughout the 1990s, the economies of Eastern Europe struggled to repair the damage done by years of communist rule and pave the way for the international investment they craved.

In the past decade, the economic climate has ripened to such an extent that consumer spending on a mass scale is now a reality. For example, in Russia during the Putin era, the nation’s GDP grew six-fold, climbing from 22nd to 10th largest in the world. Industry grew 75 per cent, investments increased by 125 per cent and the average annual salary shot up from US$80 to US$640 (£41 to£329).

Claiming a stake

In a report published by property agency Cushman & Wakefield in January, it was revealed that nearly a fifth of all shopping centre development in Europe last year took place in Eastern Europe – 19.8 million sq ft (1.8 million sq m) out of the total of 88.3 million sq ft (8.2 million sq m) across the continent.

And when you look at the figures for this year and next, the scale of the change taking place becomes even more pronounced. About 34.4 million sq ft (3.2 million sq m) of shopping centre space – the equivalent of about 21 Bluewaters – is expected to be completed in Russia by the end of next year. Ukraine, Romania and Poland took the second, fourth and fifth spots in the top five respectively, with a total of 66 million sq ft (6.2 million sq m).

For retailers, the thought of claiming a stake in the new Russian revolution is extremely inviting. Of the retailers operating in the UK, some big names are actively expanding their Eastern European presence including M&S, Ikea, Zara, Next, H&M and New Look. In a Cushman & Wakefield survey published in December last year of 250 retailers across Europe, it was revealed that of the top 10 most sought-after destination cities, 10 were in Eastern Europe, with Amsterdam – the only Western European city – coming joint 10th place. Nine per cent of all the retailers surveyed were planning to open in Moscow during the next five years.

This year, M&S has nailed its colours to the mast and signed deals to take control of two of its franchise operators running stores in the region. This will effectively pave the way for at least 30 store openings across the Czech Republic, Slovakia, Lithuania, Latvia, Estonia, Romania and Bulgaria.

An M&S spokesman explains: “We see this as a real opportunity. The M&S brand is already recognised in many parts of Central and Eastern Europe and there is growing demand for good quality, great value, products in markets such as Slovakia, where wages, consumer spending and living standards are steadily increasing.”

But there are still many that underestimate the potential of the region. According to CB Richard Ellis head of cross-border EMEA retail Peter Gold, the extent to which it has come on has passed many retailers by. He says: “Many of them are surprised when they get there by the size and calibre of the schemes. They’re also surprised to see the retailers that are there and it gives them a degree of comfort.”

The speed of development in Eastern Europe is creating something of a bubble around the region. While in the West the fear of a global downturn is becoming a self-fulfilling prophecy, in Eastern Europe developers and retailers are pressing ahead regardless. With there being so much of a lag in the East behind the West, there is too much of an impetus now for countries to slow down and yet this is likely to insulate the region from the downturn to some extent.

“There’s a lot of momentum in these countries and that will continue,” says DTZ director of retail development for EMEA Iain Guest. “We can’t completely get away from the credit crunch, but it’s a powerful juggernaut that’s in place now. People want the retail and, while it might slow down, they’ve got so much catching up to do that they’re going to press on. From a retailer’s point of view, it could be a good port in a storm.”

However, despite the staggering growth that has already taken place, much of the region is still relatively untouched. While primary cities such as Warsaw, Moscow, Kiev, Sofia and Bucharest have become focal points of activity, there are hundreds of less developed cities in the region with increasingly affluent populations. In Russia alone, there are more than 30 cities with a population of 500,000 or more and 90 per cent of the population lives outside Moscow.

A helping hand

One factor enabling rapid growth is the relatively laissez-faire attitude of local governments to international developers coming in. Planning permission is a less bureaucratic procedure than in the UK; with support from local authorities, it can take two to three years from conception to completion compared with six to eight years in the UK.

Development company TriGranit is working on some 30 projects across 10 countries in Eastern Europe, including Romania, Serbia, Russia and Ukraine. Investment analyst Patrick Wigan says: “In the UK, there’s more red tape that holds up the process. In Central and Eastern Europe, once the planning is done the execution is much quicker. You have to make a commitment to a time frame and risk losing the site if you don’t honour it.”

The emphasis, according to Wigan, is on the regenerative role of retail-led schemes for the benefit of cities desperately in need of an economic transfusion. As a result, local governments tend to get very close to projects and public private partnerships are common. It is essential that UK developers get a firm local knowledge, and most likely a local partner, if the mistrust that exists towards purely western ventures is to be overcome. “They don’t want people land-banking when there’s a clear need to supply the city,” he explains.

Not only can opening up shop be politically complex but, economically, retailers could be in for a shock if they haven’t done their homework. Cushman & Wakefield’s European retailers’ report also revealed that among the concerns listed by retailers considering the move east were the performance of the economy, property occupancy costs and the availability of a workforce.

While Eastern Europe’s immaturity is perhaps its strongest asset, it also means that retailers are dealing in relatively unknown quantities. “It’s an evolving market,” explains Guest. “A lot of retailers are nervous about things like service charges. You could get yourself down some blind alleys if you don’t have the local knowledge.”

Eastern Europe is a large and diverse region and local economies vary. While in the most general of terms the population is becoming more affluent and growth is extraordinary, spending is not uniformly high and returns might easily fall short of the promise. But while these are valid concerns, they are inevitable side-effects of an immature market. The key factor, according to Gold, is time. He says: “Some retailers have expressed concerns that the rents they pay can be high compared with the spend that’s available. But other retailers I talk to say it’s more important to get there first and get well placed, even though returns might not be so high at the moment.”

Either way, there is certainly a new gold rush taking place. A huge market that was freed from the crippling effects of decades of communism is undergoing one of the most extraordinary transformations the modern world has seen and retail is playing a big part in laying the new foundations.

With any land of opportunity, there are fewer certainties but greater rewards at stake. While there are risks involved, for retailers looking East, fortune is likely to favour the brave.