Rich shoppers and cheap talent quell CEE slump fears

A bustling consumer sector and a growing crowd of graduates are giving CEE GPs something to cheer about, as an industrial slowdown in western Europe threatens the export-heavy economies of their neighbours to the east.

Some market segments even stand to benefit from the cost-cutting efforts of European businesses in a downturn. "The slowdown and global FX movements could impact our portfolio companies, but domestic consumption is growing steadily," says Resource Partners co-founder Małgorzata Bobrowska-Jarzabek. "It has not declined for almost 20 years now."

However, she adds a word of caution. EU funding, now being withdrawn, has been a factor that has helped Poland, the region’s buyout stalwart, navigate previous dips. "When the next crisis hits, the region’s economy may be more affected than in previous episodes," she says.

A side effect of this cautious outlook is a valuations gap between disciplined GPs and entrepreneurs who are experiencing an economic boom and reading about elevated multiples in western Europe.

The slowdown and global FX movements could impact our portfolio companies, but domestic consumption is growing steadily" - Małgorzata Bobrowska-Jarzabek, Resource Partners

Meanwhile, the rising wealth and incomes of local consumers, as well as millennials’ eating habits, are creating key consumer opportunities.

"The strongest consumer trends are healthy eating and convenience, which is underdeveloped in Poland compared with western European markets," Bobrowska-Jarzabek says. A recent investment by Resource Partners, Maczfit, covers both by delivering healthy meal plans. Polish convenience store chain Zabka is on its third private equity owner and improving convenience remains a large part of its development plan.

A third key opportunity, perhaps more exposed to the slowdown, is the exportability of Polish consumer products to western Europe. "The competitive edge of local companies is not necessarily based on cheap labour," says Bobrowska-Jarzabek. "It’s mainly related to the fact that many production facilities are relatively new." Another Resource Portfolio company, Artgeist, produces home decor with a high degree of customisation. Its business model is only possible because of its modern facility and good logistics location, which allows for export to both western Europe and the US.

Economic schadenfreude
Europe’s industrial slowdown could be costly for some CEE states, but is expected to create opportunities for others. "The countries most exposed to the potential industrial slowdown are the Czech Republic, Slovakia and Hungary," says Mid Europa Partners co-managing partner Matthew Strassberg. "They are the go-to near-shoring markets for German industrial companies. They ride the wave of the German might, but if the Germans slow down, they get knocked by that as well."

Strassberg is more optimistic about the outlook for Poland and Romania, adding: "If you look at what drives growth in Poland and Romania at the moment, a lot of it is investment in technology platforms and non-industrial offshoring - middle-office functions for investment banks, for example. The volume of jobs being created is quite sizeable."

JP Morgan, Citi, UBS, Deutsche Bank and Credit Suisse have set up offices employing thousands of graduates across Poland and Romania in recent years. "These people instantaneously become wealthy consumers of private healthcare, premium grocery shopping, e-commerce and so on," Strassberg says. Mid Europa recently acquired Urgent Cargus, a Romanian courier building its business on the growth of local e-commerce.

Strassberg believes some firms could even benefit from a small dip in western Europe. A slump tends to lead to more targeted advertising through the internet rather than TV, radio and billboards, which would benefit firms like RTB House, a Polish internet marketing firm recently acquired by Cinven.

Pressure on bottom lines could encourage a shift to automation - a boost to the region’s tech sector, which is already being buoyed by an eager and growing number of graduates. "Eastern Europe is not sweatshops making t-shirts," Strassberg says. "Eastern Europe is selling know-how - graduate degree education - at a discount to what it costs in western Europe."

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