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Financial Times, the
Date: December 17, 2007
Gateway to the Balkans
Frederick Studemann

For many people the names Bosnia or Kosovo are associated with ethnic strife and political instability. But for business leaders such as Ziga Debeljak they represent untapped opportunities offering the prospect of extraordinary returns.

The head of Mercator, Slovenia's biggest retailer, has little doubt that expanding across the western Balkans is the logical way forward for his company - already one of the largest in the region in terms of sales and employees. Faced with tight margins at home and a saturated retail sector in central and western Europe, the markets of former Yugoslavia offer "above average growth potential".

Even better, with many of the sector's big international players unlikely to be attracted to a fragmented market of 20m people spread across several countries all at various stages of development, Mr Debeljak reckons that companies like Mercator have a headstart on their larger rivals.

"If I were a big retailer looking where to go, I'd go for big markets like Russia and Ukraine first," he says, adding that the region's "size and diversity give us a better opportunity to survive as an independent".

After several years of aggressive expansion, roughly a third of group's 1,200 outlets are now in the western Balkans which is estimated to account for about 30 per cent of Mercator's expected revenues of 2.4bn this year. The group is number two in Serbia and Croatia with market share of 8 per cent and 9 per cent respectively in those countries, he says. Five years after going into the western Balkans, Mercator expects its activities there to turn an undisclosed profit.

The retailer is not alone in targeting the former Yugoslavia. In the early period after independence Slovenian business, which included many of Yugoslavia's exporters, concentrated on integrating with western markets. In recent years it has rediscovered its hinterland. "They are successfully going back in [to former Yugoslavia] and getting back business they lost during independence," says one Ljubljana-based banker. As well as untapped markets, the western Balkans also offer skilled workers at lower costs than back in Slovenia.

Marjan Kramar, chief executive of NLB, Slovenia's biggest bank, says the country's commercial advantage in the west Balkans lies in its deep knowledge of the region. "Better than anyone we know the past of these countries, these markets, these customs. We understand the present situation and we can more realistically analyse their future," he says.

He makes no bones about the "complex situation" in the region where questions about political stability are never far away. "You have to look at it country by country or even region by region, he says. The differences across the region are stark, ranging from developed, industrialised areas - such as northern Serbia - with a history of sophisticated financial services to underdeveloped, agrarian regions further south.

But he also points to the potential upside. "It's a more risky environment, but margins reflect the situation."

The longer-term prospect of European Union membership for the western Balkans - a goal the Slovenian government has put at the top of its agenda for it presidency of the 27-nation bloc and it big internal market - is a further attraction.

NLB is busily expanding across the west Balkans. It has some 50 branches in Kosovo, three times as many in Serbia and is building up a network in Bosnia. The strategy, says Mr Kramar, is to create "small Slovenian matrices" of services - such as trade finance, leasing, insurance and asset management - built around a core banking business.

Slovenia's position as gateway to the Balkans has also boosted the attraction of Ljubljana to foreign investors. "A lot of business in the region starts here and if you are not here you are not going to get it," says Klemens Nowotny, head of the Slovenian activities of Austria's Raiffeisen Bank. Much of the financing of the activities of the group's clients in the Balkans is done through the Ljubljana office

Cisco, the world's biggest maker of data networking equipment, has accompanied some of its Slovenian clients, such as Telecom Slovenia, on their expansion into the region. Jon Peters, the group's head of market development for central and eastern Europe, says that while Slovenia is a good place to do business, on its own it remains a relatively small market. "It's much more attractive if you have a super-regional option," he says.

But Slovenia cannot afford to rest on its laurels. Analysts warn that the prospect of Croatia - with its reputation of greater openness to foreign investment - joining the EU could bring with a challenge to Slovenia's role as bridgehead to the wider Balkan region.