Shop Owners in Hungary Worry About Their Future

Some band together to better withstand powerful foreign competition

THE shelves of Jozsef Krupp's corner food store are well stocked. There's a steady stream of customers, and the electronic cash register crackles as it rings up sales.

But as he sits in a cramped office above his shop, Mr. Krupp doesn't revel in his current success. Instead, he frets about the future. ``It is getting difficult for a small shopowner to make it on his own,'' Krupp says. ``The next few years are going to be tough for retailing. There will probably be a big consolidation.''

The days of seemingly boundless optimism following Communism's collapse in 1989 are gone. And Hungary's burgeoning entrepreneurial class is struggling to come to grips with the cruel laws of capitalist competition.

Of all the cities in Central Europe, the Hungarian capital arguably has undergone the greatest transformation since 1989. With the help of a large influx of foreign investment, downtown Budapest's economic facade has been drastically overhauled and now bristles with sleek-looking stores. But despite the changes, Krupp and others say they expect the city's look to undergo many more, as bankruptcies, mergers, and acquisitions shake out the retail landscape.

Small-business people in Hungary face the twin enemies of high overhead costs and a population that does not have much spare cash to spend. In the food sector, for example, suppliers charge high prices, but shopowners have trouble passing along those costs to customers who can't afford to pay higher prices. The wrenching economic transformation from the Communist system to market economics has drained individuals' savings, and the majority earn subsistence-level salaries.

The appearance of foreign-based food chains in the Hungarian market - especially Austria's Julius Meinl and Germany's Spar - has increased pressure on the plethora of mom-and-pop shopowners. Krupp and other small foodstore operators have banded together in the fight for survival. Founded 20 months ago, Krupp's consortium is called CBA and has grown from seven participants to 27 entrepreneurs who together own 45 shops. Collectively, the stores have an annual turnover of about $4 million. ``CBA is sort of protection,'' says Ferenc Gerstner, the consortium's chief financial officer. ``We buy from suppliers as a group and that allows us to get price reductions. Thus, our prices can stay competitive.''

Krupp and Mr. Gerstner complain about what they perceive as unfair competition from foreign food retailers. They criticize Hungary's privatization process, which permitted cash-abundant foreign buyers to gobble up formerly state-owned food networks at relatively little cost. Local entrepreneurs, many of whom were managers in the old state-run system, couldn't come up with the cash to outbid the foreign rivals, Krupp says. ``Now the foreigners are charging low prices for staples such as milk and are trying to use underpricing to squash local competition,'' he claims.

Werner Ziegler, manager of Julius Meinl's Hungarian operations, rejects complaints about undercutting the competition. Meinl has 160 stores throughout Hungary, 50 in Budapest alone. If the Austrian chain is increasing its market share, it is because ``we have better management,'' Mr. Ziegler says in a telephone interview. Meinl's supply networks are more reliable than those of many local stores, so customers are assured of finding the items they want, he explains.

Now that competition is becoming fierce, local entrepreneurs must focus on improving management skills, says Janos Vecsenyi, associate dean of the Budapest-based International Management Center. The IMC, established five years ago, offers a one-year, ``MBA-type of program in English'' designed to help create ``the new business elite for Central and Eastern Europe,'' Mr. Vecsenyi says. ``Managers under the previous [Communist] system, no matter how flexible they were, weren't able to learn about operating under real competitive conditions.''

Vecsenyi is also chairman of Centrum, a low-cost department store chain. The stores are doing well, he says, but that could change quickly if a foreign competitor such as K Mart Corporation or Wal-Mart Stores Inc. set up shop. To stave off that threat, it is necessary to import foreign methods, Vecsenyi says. ``I want to employ at my stores some basic concepts employed by Sam Walton,'' Vecsenyi says, referring to Wal-Mart's founder. ``But it's very hard to change attitudes in a large organization like Centrum. It takes time.''

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