As eight former communist countries join the EU, a middle class hungry for brands is emerging, says Jo Bowman.

It's more than a decade since the Iron Curtain fell, and even longer since many Eastern Europeans first smoked a Marlboro or drank a Coke. But when eight former communist countries join the European Union in May, a new world of opportunity for international brands will begin to open up.

These eight countries - with their 74 million consumers - are expected to see a huge surge in foreign investment, which along with massive EU subsidies, will generate jobs, improve infrastructure and put more money in the pockets of the proletariat.

That's good news for international firms - everything from soap and sunscreen to high-end fashion and luxury cars. But it is the smaller Western brands - not the big multinationals - that look set to benefit most from an expanded EU.

"What EU membership shows is that most of these countries want to be part of the Western world, so they will be quite welcoming to Western brands. And for those markets that are a bit behind, they still see the US and the West as freedom," says Jan Lindemann, global brand valuation managing director at Interbrand.

The world's biggest brands already have a strong presence in Central and Eastern Europe, where obvious imports such as Lux and Kit Kat are sold in Tesco or Carrefour, along with home-grown brands that have been bought out by Western manufacturing giants. Popular Polish chocolate brand Wedel is owned by Cadbury, while Heinz owns the Pudliszki ketchup brand.

Sizing up the market

But international marketing expert Sicco Van Gelder, author of the book Global Brand Strategy, says it is the next tier of brands that can now hear opportunity knocking and are preparing to enter the Eastern Eight: the Czech Republic, Slovakia, Slovenia, Poland, Hungary, Latvia, Lithuania and Estonia.

Joining the EU will open up these countries to less powerful brands that seek and need more security. What that security means for these brands is that the new EU members have court systems, property laws and intellectual property rights that are comparable with existing EU member states. They have also demonstrated that they have guaranteed democratic systems and functioning market economies able to cope with market forces, especially from within the EU.

These factors, along with the scrapping of generally high import tariffs, certainly make the Eastern Eight a more attractive business environment for Western producers looking for new customers.

Van Gelder says that for these smaller brands, size isn't everything - mass-market appeal is not necessarily the goal. What they are looking for is a smaller, but well-defined, group of consumers. "These are brands that can live with a small but more affluent target market," he says.

But the consumer market will not be transformed overnight; the evolution that has been taking place in recent years may accelerate, but for the time being, Eastern Europe remains very much foreign territory for many marketers from the West.

"Branding is obviously a function of choice and in the old communist days, you didn't have a choice of ten different things. A tie was a tie and that was it," says Lindemann. And that was when the shops had anything on the shelves to sell.

Fashion still doesn't exist outside the major centres in most of these countries, and for many, the struggle to make ends meet overrides any concern with brand. Price is often the only consideration.

Figures from Eurostat show that the average annual earnings in Hungary and the Czech Republic hover around the 5000 euro (£3400) mark. The lowest earners are in Latvia, where average income is just under 3500 euros (£2400), and the biggest earners are in Slovenia, with an average of 10,850 euros (£7400). That compares with an average salary of 39,200 euros (£27,000) in the UK and 41,600 euros (£28,000) in Germany.

As national economies continue to grow, those earnings are expected to creep up slowly to levels approaching those in Western Europe. But more exciting for Western brands is the emergence of a new middle class - people with both aspiration and money to spend.

Just as huge numbers of Eastern Europeans are for the first time moving out of state-subsidised housing and buying their own apartments, so they are looking for consumer goods that complete the lifestyle picture they want to paint. "Where quality and technology are relevant, the Western brands will have an advantage," says Lindemann.

Beauty and hair-care products, fashion and personal technology items from the West are generally regarded as superior to any made in Eastern Europe - usually because they are.

But being Western is no longer in itself enough to get shoppers to part with their money. The novelty of McDonald's, for example, has worn off, and Western brands must prove they offer quality and value for money if they are to be considered ahead of strong local brands. Labels cannot charge a premium simply because they hail from the US or Britain.

Indeed, some Eastern European brands are finding the opposite is true as they benefit from a resurgence in national pride and, in some cases, a degree of nostalgia for products that were common under communism, but faded away when the first wave of Western brands swept in.

Consumers who were teenagers in the 80s and knew little of the ruling regime's sinister side are now, in their 30s and 40s, craving the brands with which they grew up, and buying them for their own children. In the Hungarian capital Budapest, for instance, sales of Traubi-soda, made from grape juice and spring water, are only just behind Coca-Cola and Pepsi.

In the Czech Republic, Coke imitation Kofola, another communist-era drinks brand that was a sensation among teens in the 50s and 60s, was relaunched by a Czech firm two years ago and is the third-bestselling soft drink.

Slovakia's version, Cofola is also a hit, and in Poland it is the same story with Polo-Cofta.

In Estonia, a market of just 1.4 million people, a snack made as a substitute for chocolate during the Soviet era, is now selling well alongside imported chocolate bars, despite the fact that it is made from barley, rye and peas.

These are countries that still have limited exposure to international media, and an outlook on the rest of the world that cannot be understood by simply comparing their consumers with those in Western European markets 20 or 30 years ago.

Recent work by Research International, for instance, has found that the 'coolest man over 50' and, indeed, the 'coolest celebrity' in Poland is Pope John Paul II. In the Czech Republic, Madonna, David Beckham and Bruce Willis top the celebrity stakes, while in Hungary, it's Madonna and Beckham again, alongside Jennifer Lopez.

Eastern European consumers use products in a different way to their counterparts in the UK and the rest of the West - many shoppers only buy deodorant in the summer, for example - and often shop without paying any attention to brands at all, be they local or international.

A TNS survey found that only 38% of Czechs prefer to buy brand-name cosmetics and perfumes rather than no-name equivalents. It's higher in Slovakia, at 48%, but is still low compared with 61% in the UK. And while half of British shoppers buy brand-name soft drinks, just 22% of Czechs and Slovaks do the same. Only 21% of Polish consumers say brand labels are important when buying clothes, although about 60% of Poles and Czechs say they choose branded electronics.

Private-label or own-brands are therefore proving hugely popular. According to research by ACNielsen, their sales rose almost 50% in the 12 months to Sep-tember in Central and Eastern Europe, and were particularly strong in Hungary, the Czech Republic, Slovakia and Poland.

But international brands are beginning to recognise the opportunities that lie largely untapped in these countries. Seafood producer Shetland Catch, for one, plans to enter Poland when the country joins the EU and high import duties, which have prevented sales there in the past, come down.

Changing appetites

Van Gelder believes that with an expanding middle class will come a stronger appetite for new cars, along with demand for other specialised, aspirational brands. He believes Dutch home products and body-care company Rituals - which currently sells in the UK, France, Belgium and Germany - would be well-received further east, as would Finnish chewing-gum brand Xylifresh.

Of brands such as Dutch lingerie company, Hunkemoller, Van Gelder says their main chance lies in the future, "as incomes rise and women become more discerning about what they wear".

Similarly placed are no-frills airlines such as easyJet, which currently flies to Prague, but will foreseeably have a market elsewhere in the new EU countries as tourism and inter-European business trips become more commonplace.

But the consensus is that traffic for brands crossing between old and new Europe will be overwhelmingly one-way. The exceptions so far have been Skoda, which has been transformed by German owner VW from the laughing stock of the motoring world to a respectable name, and a handful of Czech beer brands such as Pilsner Urquell and Staropramen.

Lindemann says that while certain sectors of the food market will not be conquered by Western brands - no one is likely to rival kosher vodka sold in Poland - most home-grown brands will be squeezed out or bought by Western producers.

Among those that survive, few are likely to have appeal much beyond their own borders, save perhaps Hungarian wines and bottled water from the Czech Republic. "There are not a lot of good local brands to compete with the specialised international brands," says Nielsen Emerging Markets managing director Rob Clark.

The bigger branding issue for the EU's joiners in the short term is to create the right associations for themselves as countries. Having a cheap workforce won't be a selling point for much longer, with cheaper labour to be found further east. The Eastern Eight need to carve out names as places for something more than communist-era curiosities and pea and barley snack bars.


Consultant editor and part-author of Business Guide to EU Enlargement, published January 2004 (Kogan Page)

There will be no flash of lightning on May 1 when the ten accession states - Cyprus and Malta plus the Eastern Eight - take up their EU membership, as new rules and regulations are adopted.

During the long negotiation process from 1998 up to the final agreement on entry terms in December 2003, candidates were required to harmonise their laws and regulations with the EU's acquis communautaire.

This is the accumulated body of law and European Commission directives to which the EU 15 have adapted their national laws and regulations.

The process is largely complete, although some of the new members still have much detailed work to do.

For UK marketers experienced in doing business within the EU, the regulatory environment within each of the ten new EU countries will be broadly familiar. In particular, the EU Competition Law (Articles 85 and 86 of the Treaty of Rome) has been taken on-board and takes supremacy over previously enacted law in all member states.

Except for the few block exemptions to Article 85 which remain, there is a level playing field across the enlarged EU in respect of key areas of marketing, including distribution agreements, patent licensing, franchising and know-how licensing agreements.

The same is true of advertising standards. Price-fixing is outlawed and Article 86 prohibitions on the abuse of dominant positions within the EU, through the imposition of unfair purchase or selling prices, unfair trading conditions or the use of discriminatory contracts, have also been adopted by all entry states.

Issues where harmonisation may not have taken place relate to corporate taxation - in itself not a prerequisite of the EU. These involve withholding tax on dividends, intra-EU mergers and demergers, royalties and savings, where EU directives and European Court of Justice case law apply.

More significantly, the EU Code of Conduct, which abolishes preferential tax regimes, may not have been adopted universally. Retained tax breaks could frustrate the EU's internal market by diverting revenue and investments.

Instant changes on May 1 will be confined to the removal of customs duties on cross-border movements and the adaptation of national VAT systems to the intra-Community VAT system.