CHANGES IN TRADE SECTOR AFTER SYSTEMIC TRANSFORMATION IN POLAND

Joanna Wrzesińska
Department of Economics and Economic Policy, Warsaw University of Life Sciences - SGGW, Poland

ABSTRACT

In Poland in the nineties, after the creation of conditions that allowed the mechanisms of a market economy to function, profound structural changes took place. At the forefront of these changes there was trade sector, which was already in 94% privatised in 1990 and by 2008 almost in 100%. During the first period of socio-economic transformation the central pricing of most goods and services was abolished and grants and subsidies for production were eliminated. The conditions of the market economy allowed small medium and large shops (in terms of area as well as capital and employment) for the free entry into and withdrawal from the market.
In initial period of transition of many small trading firms, owned predominantly by domestic private capital were established. The Polish market in the nineties was characterised by high consumer demand and the availability of goods and services from domestic ally produced as well as imported. In urban areas this situation caused a never-before-seen growth of large-sized shops. Since the shortage of domestic capital that could be invested in trading at that time, this gap was filled by foreign capital in the form direct investments of.
This paper attempts to present the most important changes that occurred in the trade sector during the period 1989–2008.

Key words: retail trade, transformation, foreign capital, Poland.

INTRODUCTION

A domestic trade is an important and large sector of the Polish economy. It takes a significant position in overall generation of gross value added and total employment. In the market economy, the sector has impact both on demand and supply side, i.e. on producers and consumers of goods. Through its particular role in the market economy system, the sector is performing, economic, social and cultural functions.
This paper attempts to present the most important changes that occurred in the trade sector during the period studied.

The paper presents conditions of transformation in the trade sector and, particularly quantitative changes in retail trade. A period under examination covers years from 1990 to 2008. This research was carried out on the basis of literature and data obtained from the Polish Central Statistical Office (GUS) and Institute for Market, Consumption and Foreign Trade in Warsaw.

In Poland, in the nineties, just after the introduction of the mechanisms of a market economy, profound structural changes took place. Trading sector was at the forefront of these changes. The aim of this research is to present the changes in trade industry that occurred in Poland after the economic transformation. This paper focuses mainly on quantitative changes in retail trade between 1990 and 2008.

The research is descriptive. The methods used inched processing and interpretation of the collected data collected, mainly by comparison and description. The phenomena studied were illustrated with the help of tables and graphs.

CONDITIONS OF TRANSFORMATION IN THE TRADE SECTOR

The 1980s in Poland were the last period of real socialism and central planning. In 1988, the country's economic situation was characterised by lack of general equilibrium, hyperinflation, inefficient and unprofitable production, a huge imbalance between supply and demand of all goods (consumer and durable goods), empty shelves in shops and a system of regulated sales. This was the reality of the late 1980s.

The reason for this situation is recognised as the economic policy of "cheap commerce", which was regarded as the only possible way to eliminate social tensions. This policy was mandatory from 1950 and it introduced the principle of decreeing low margins for commerce. This rule did not foresee the accumulation of reserves by the business, and these socialised entities received funding for their development from the state budget for so-called "centrally planned investment". The allocation of grants to trading entities was not made on the basis of financial performance and need, but were based on the assumptions of the National Economic Plan. At the end of the 1970s the government restricted subsidies to state trading enterprises and the source of funds for development were supposed to be increased margins. However, these changes were not significant enough to allow the net income to grow enough to become a source of finance for the development of these commercial units. It is for these reasons that the profitability of socialised commerce sector is still corrected by grants from the budget [9].

The trend in this period was the creation of large business units in anticipation of so-called "economies of scale", while small businesses were considered ineffective. Legislation effectively hindered the capability of private trade entities to develop, namely the tax system as well as a system of bans, licenses and concessions that were necessary to run a business.

Before the start of the transition process in Poland in 1989, retail trade counted for 82% of the socialised sector and within this, 63% of shops were cooperative and 18% were state owned. Privately-owned commerce (mainly in the fruit and vegetable and grocery sectors) comprised approximately 18% of all shops and accounted for only 5% of the total retail turnover. Wholesale trade belonged almost entirely to the socialised sector.

Most of the commercial units were concentrated into three large socialised organisations that occupied monopoly positions [6]:

1. Consumers' cooperatives "Społem" which was engaged in selling food in urban areas. In 1989 it represented 80% of the Polish retail trade.

2. Rural cooperatives "Samopomoc Chłopska" (Peasant Self-Help) which sold food and industrial goods to customers in rural areas.

3. The National trade association of businesses, e.g. "Centrum" department stores, Moda Polska (Fashion Poland), which were engaged in selling non-food items and had at their disposal a network of industrial shops, which accounted for 18% of the total.

Prices in the command system of economic management were set centrally in order to deliver the desired economic policy. Commercial entities had a predetermined retail price and a set margin. They had the ability to make independent decisions on prices and margins only for a narrow range of goods and services [9].

The basic principle of operation of a free market economy is, along with the freedom of capital movement, the ability to set prices freely [2]. The main elements of the systemic transformation that created the conditions for a free market economy to function was the liberalisation of prices and the abolition of orders on the distribution of production resources and many subsidies. After many years of compulsory prices under administrated distribution system of the command economy, in 1989 the market became the main regulator of the prices of goods and services, the price of foreign currencies (exchange rates), interest rates and wages (the price of human capital, with except of the minimum wage) [9]. The pace of price liberalisation in the period 1988-1990 is illustrated in Table 1.

As is apparent from the data presented in Table 1, from 1989 the proportion of goods and services sold on the market as well as for production at the official state prices decreased. Official prices for agricultural products were abandoned in 1989. The later years of the transition completely eliminated the practice of official prices, and it was only for certain agricultural products that minimum prices were introduced under certain conditions in order to protect the producers, as occurs elsewhere in the European Union.

After the release of market prices, hyperinflation broke out in Poland in 1990 (the annual inflation rate was 585%) and there was a decline in real wages. The economic situation was critical, external debt amounted to USD 42.3 billion (64.8% of GDP), the country was technically backward and there was a high level of disinvestment in fixed assets. This situation forced the Polish Government to implement rapid reforms to stabilise the economy. The reform adopted by the government (The Balcerowicz Plan is the common name used for the package of economic and political reforms which consisted of 10 laws passed by the Sejm and signed by President Jaruzelski on 31 December 1989) was radical and affected the majority of Polish society; it was called "shock therapy" and was supposed to heal the economy [9].

The implementation of the program to adjust the Polish economy to a market system started in the first months of 1990 and consisted of two phases. The first was short (lasting a few months) and aimed at achieving economic stability through, inter alia, eliminating very high inflation. The second stage (measured in years) took on the institutional and physical transformation of the Polish economy. "However stabilisation took place at the expense of serious limitation of the scale of real demand and production. The economy did not start on the path of growth in production until 1992–1993" [11].

Changes in the trade sector began with the adoption of the Law on Economic Activity [17] in December 1988. It allowed every citizen to take up and pursue economic activity on equal terms, with equal responsibilities and on his own account. The person taking up such activity was authorised to employ employees without the mediation of an employment department, was given the right to arrange and use bank loans and, in common with all economic entities, became subject to public law [4]. On the basis of this law the freedom of establishment of economic activity was introduced, the monopoly and preferential access to the market were abolished and the conditions for the opening of the Polish economy to the world were created [9].

In 1989 the Ministry of Internal Market (MRW), introduced the "Trade Privatisation and Demonopolisation Programme" which aimed at rapid implementation structural and ownership changes in Polish trade. This programme placed particular emphasis on the demonopolisation of existing commercial structures in order to boost competitiveness, and competition in the market was to be between both private and cooperative stakeholders. The Programme placed emphasis on the enrichment of the assortment of goods and services offered, improving the quality of trading, increasing the service culture and reducing the time taken to make purchases. It abolished the complex structure of state and cooperative trade. At the same time, a rapid development of small and medium-sized private companies took place, emerging on the basis of assets that had been purchased or leased from former state enterprises and cooperatives, or municipal property [9].

In January 1989, a uniform tax on corporate profits was introduced. The tax system was very complex and did not intensify the development of businesses. High inflation undermined the rationale of creating reserves, the value of resources held by individuals and businesses reduced and the price of credit rose. Hyperinflation cut down demand and goods were bought not to satisfy current consumption needs, but as a way to invest capital. Thanks to this some goods served as a means of treasury.

In 1990, in order to reduce the excess money in the market, the government introduced a tax on above average salary increases (Act from 22 December 1990, on taxation of increases in wages), limited the budget deficit and restructured expenses.

Those persons engaged in their own business were provided financial assistance from the "Development and Demonopolisation of Trade Fund". The Fund gave a returnable loan for investment purposes and for leasing of equipment, machinery and fitting out of commercial premises. Another form of assistance in the formation of commercial companies was the pledge of guarantees by the Fund for loans to private traders by the PKO Bank as well as the State Credit Bank [4].

Furthermore, an exemption was granted from tax on the turnover and income of individuals and civil partnerships that generated revenues based on the following business types:

• Trade, including wholesale, with foodstuffs, agricultural and horticultural with the exception of the sale of flowers, beverages containing more than 4.5% alcohol;

• Trade, including wholesale, with industrial goods [21].

These exemptions did not apply to door-to-door selling and peddling.

In 1990, new leasehold legislation for commercial premises was introduced. Under the existing law [19] premises were rented on the basis of an administrative decision that allocated them to tenants according to rules regulated by the civil code, and store owners received the right to terminate the leases of state enterprises and cooperatives. Owners of shop premises were now able to choose new tenants for their premises or to sell them as a separate property, in accordance with the applicable law [23].

It was also established that the assets of state enterprises, for which city and municipal authorities perform the functions of the founding body, become the property of those enterprises [20].
The limits on the rents of premises were also abolished [22].

The process of change in Polish commerce can be divided into several stages:

• Phase I, covers the years 1990–1992

• Stage II, the years 1993–1995

• Stage III, the years 1996-2000

• Stage IV, the period after 2000

Stage I (1990-1992). During this stage, changes appeared that were characteristic of the process of transformation and restructuring of trade that began in 1989. The trade sector, in comparison with other sectors, was the least demanding, creating the cheapest jobs. Street and door-to-door commerce developed actively in this period, and over time was restricted and moved in the direction of marketplaces and bazaars. Booths and kiosks were erected in places selected for this purpose. Shop premises were taken over by former employees or agents and as a result, a dynamic growth of new private facilities occurred and the number of business entities increased. The participation of the private sector in commerce changed fundamentally. At the end of 1990, 383,000 commercial entities were registered, and by 1992 that number had doubled to 718,000 [3]. The private sector in 1992 included 97% of all players in this sector of the economy, including cooperatives. The core of the private sector were commercial businesses owned by individuals (95–98% of the total) [16]. The private sector also saw a rapid development in the number of joint ventures. Foreign capital started to flow into the Polish market in the form of foreign investment. International trade companies applied a "concave strategy", or diversification of the market, i.e. they entered the market slowly and carefully, then increased their efforts and moved with increasing speed towards their ultimate goal – maximisation of profits [10].

Stage II (1993–1995). This stage was characterised by a decrease in the number of trading entities in the market. The total number of trade entities fell by 92,164 outlets in this period [16]. The private sector, as in the previous stage, was dominated by businesses run by individuals. The number of cooperatives decreased, while there was a corresponding increase in the number of business entities as various forms of companies [3].

The key characteristic of the change in ownership at this stage was the steadily increasing number of commercial companies with foreign and mixed capital on the Polish market. Between 1993-1995, their number rose by over 63%. An example of such a company could be the entry of a large German commercial network such as "HIT", which has been operating on the Polish market since 1993, or the French "Leclerc" which entered Poland in 1995 [sd.tradepress.com.pl].

Stage III (1995–2000). This was a period of deepening of the restructuring and modernisation of the trade sector. Changes in ownership led to an almost complete privatisation of commercial companies. The processes of concentration deepened, expressed primarily by the systematic increase in the size of business units. In 1998, over 451 thousand shops operated in Poland (twice as many as in Spain and almost six times more than in the UK) and including kiosks and stalls, there were nearly 950,000 retail points of sale. On average there was 1 shop per 86 inhabitants and one point of sale for every 40 inhabitants. In 2000, the average retail sales area in Poland was 62.3 m², while the average sales area, calculated per 1000 population, was 697 m². The rate of investment in trade (46%) exceeded the growth rate of investment in the whole national economy (17%) by a factor of over 2 [7]. This was also a period of increased expansion of foreign commercial chains and over a period of five years, their share of retail sales increased from about 3% to 13% (Figure 1).

As a result of increasing competition from large and efficient international trading companies many owners of smaller shops in Poland joined the commercial networks. Following in the footsteps of the "Piotr i Pawe" retail chain that was established in 1990, various Polish franchise networks develop, such as Rabat (1997), "Chata Polska" (1997) and "Delikatesy Centrum" (1999).

Stage IV (post 2000). The processes of globalisation of trade deepen and the consolidation of Polish small and medium size companies accelerates in order to obtain a better market position. In February 2000, eleven Polish retail chains set up the Union of Polish Retail Chains that consisted of 1637 trading establishments operating across almost the whole country. The processes of capital acquisitions and mergers intensified, one example being the take over of thirteen German "HIT" hypermarkets by Tesco in 2002. Polish accession to the European Union in 2004 further promoted the process of globalisation. There was a notable growth in incomes, changes in the attitudes and purchasing preferences of consumers when buying goods and services and an increasingly important role was played by non-price factors (quality, fashion, brand, comfort).

This period also witnessed the development of e-commerce, logistics services and the building of logistics centres with full infrastructure. From 2007 a new dimension to the internationalisation of commerce emerged, as a network of specialist shops developed across Poland backed by investors of smaller potential. The existing retail chains changed their strategies and started to invest in smaller retail outlets in smaller towns (e.g. Tesco, Carrefour).

RESEARCH RESULTS

The structural transformation of ownership in Poland after 1989 had a significant influence on changes in the diversification of Polish trade, both quantitatively and qualitatively.

Most importantly, the number of retail outlets increased. At the end of 1990 their total number amounted to nearly 470,000 (representing 188% of the number in 1989) and by 2008 was almost twice as high. The largest increase occurred in 1997 when 960,000 entities were registered. This dynamic increase in the number of points of sale was due to the rapid development in the network of small retail outlets, i.e. kiosks, shelters and selling from vans. Small retail outlets developed very rapidly in urban areas [Kłosiewicz, 1991].

The increase in the total number of stores was slightly smaller than the growth in the network of small retail outlets, but still showed an upward trend. The number of stores almost doubled between 1990 (237,400.) and 1998 (450,200). In later years the situation stabilised and in 2008 there was a decrease in the number of stores to 385,600. The largest increase in the number of shops took place in the cities, especially large urban agglomerations such as Warsaw, Krakow, Katowice, Gdańsk, Poznań and Szczecin.

The rapid process of privatisation of the Polish commerce and the reconstruction of the cooperative movement (Act on "Changes in the organisation and functioning of cooperatives" [18] passed on 20.01.1990 which abolished the central and local cooperative associations. Members and former employees began to take over the assets of the cooperatives) caused a rapid reduction in the number of shops in the public sector (decreasing by 34% between 1990 and 1991). In 2008, some 1,621 retail outlets remained socialised, representing 0.41% of the total number of stores in Poland and over 99% of the shops were in the private sector (Figure 2).

"The Law of January 1990 weakened the role of the Polish cooperative, putting it back by a few decades compared to Scandinavian, German, British or American cooperatives." Only the amendment of the Act on Cooperative Law [24] in 1994 helped the entire cooperative sector when it established that the members of a cooperative could own the assets of the cooperative [9].

During the period studied, the number of cooperative shops belonging to private owners decreased from 68,400 stores in 1990, to 16.00 in 2003 (Figure 3).

Domestic trade in Poland underwent profound structural changes in the 1990s, not only in terms of ownership but also in terms of organisational and technical characteristics. The adjustment to market conditions brought forth entrepreneurship and competition in Poland, resulting in an increased range of goods and services becoming available [5].

In the new Polish economic conditions, the number of small shops (to 50m²) grew rapidly, as did the number of large stores (WOH). Between 1996 and 2001, the greatest growth was in WOH (Figure 4). In subsequent years, growth declined and an in-depth process of concentration and integration of capital through acquisitions and mergers of trade companies began.

Despite the much smaller number of WOH in comparison with the small trade (2.24% in 2008), their importance increased from year to year (Figure 5). The advantages of these shops included a better selection of goods, low and competitive prices and convenient opening hours, among others. These features attracted a more and more demanding consumer.

Modern distribution channels such as discount stores, supermarkets and hypermarkets quickly attracted the Polish consumer by using appropriate marketing techniques. In the period 1998-2008 their share of revenue from retail sales increased from 16% to 50% (Figure 6).

The growing potential of Poland as an attractive location for global retail chains ensured that in 2007 Poland was second only after Russia in Central and Eastern Europe in terms of saturation and in 15th place among the 15 most international retail markets in the world [13].

Of the eight countries of Central and Eastern Europe included in the PMR Retail Attractiveness Index, Poland is the highest ranked country of all the members of the European Union. The most attractive countries in terms of investment attractiveness are Russia and Ukraine [1].

The low degree of concentration in Poland is an incentive for large international retail chains that are able to gain market share through the acquisition of smaller firms. The ten leading retailers in Poland in 2007 had a combined market share of 27% (Figure 7). This result is incomparably lower than in the Czech Republic and Slovakia. PMR ranked the most attractive cities; the top scores were for Odessa, Bucharest and Donetsk while Warsaw came in 5th place [13].

Between 1990 and 2008 the number of Poles per store decreased from 161 to 99 people (Figure 8). This occurred due to a decrease in the number of small shops, which were not able to adjust to market demands and growing competition from large stores located near by.

Companies with foreign capital fulfil an important role in the processes of reconstruction and modernisation of the Polish economy as well as Polish trade. Since Polish accession to the European Union the number of companies with foreign capital has been gradually increasing, which resulted in pulling the employment. Between 2003–2007 the number of firms increased by 240 companies, and employment by 74.500 people (Figure 9).

During the studied period, Poland has also seen the development of WHO backed by domestic capital. The main retail chains with domestic capital include:

1. Consumers' co-operatives, which develop supermarkets and discount stores;

2. Companies with a national and regional presence, developing mainly supermarkets (but sometimes also hypermarkets) such as MarcPol, Piotr i Pawel, Krakchemia, Aldik, Bomi;

3. Integrated business groups (a group formed for the purpose of purchasing, franchise networks) that are developing all types of mass service shops, e.g. Lewiatan Detal LDT, Lewiatan'94 Holding, Chata Polka, Sklepy Familijne, Rabat (in Katowice and Bielsko-Biała), Rabat Pomorze, Grope Eldorado (the Groszek and Stokrotka chains) and others [8].

CONCLUSIONS

1. During the period considered by this research, there has been a development of domestic trade in Poland, both in terms of number of commercial buildings, their facilities as well as their customer service culture. Trade contribution to GDP has increased. In 2008, the "trade and repairs" sector was second only to industry in its contribution to GDP. The share of trade increased from 13% in 1990 to 17% in 2008, which indicates the growing importance of this sector in the national economy. During the studied period, Polish trade was almost in 100% contribution privatised.

2. A characteristic feature of the structure of Polish commerce is that on the one hand, there are a large number of small shops with an area of up to 50m², representing around 90% of the total number of shops in the country, while on the other hand, there are a small number of trading companies with shops of over 401m² (discount stores, supermarkets and hypermarkets). These tend to have the backing of large capital (mostly foreign, 2.24%) and a large share (50%) of the total turnover in the market.

3. Increasing market competition and the processes of integration means that traditional trade is becoming a more modern and organised network. New forms of trade are emerging and modern information and communication technologies are being introduced. Large sized retail stores are changing their strategies, and from 2007 have been investing in smaller retail outlets in smaller towns.

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Accepted for print: 4.07.2010

Responses to this article, comments are invited and should be submitted within three months of the publication of the article. If accepted for publication, they will be published in the chapter headed 'Discussions' and hyperlinked to the article.