BauMax Chain Gladly Puts Eastern Europe in Its Future
The chief executive of the BauMax AG home-improvement chain was in his element.
Karl-Heinz Essl wandered past rows of shiny toilets, stacks of dusty plasterboard and shelves of power tools, greeting customers who came to the opening of the 84th BauMax do-it-yourself store and directing orders to store clerks.
The Eisenstadt retail outlet, about an hour south of Vienna, is the first of an expected 30 new openings planned for this year, but Austria isn’t the main focus of the company’s recent expansion plans.
“Look,” Essl said in a Bloomberg Forum interview, “our target is Eastern Europe because there is no competition and everything is building and we are the market leader.”
BauMax, the largest building-materials retail chain in Austria, sees its biggest opportunities in the former East Bloc, especially in the neighboring countries of Hungary, the Czech Republic, Slovakia and Slovenia, where it has 12 stores.
“The Eastern Europe market for BauMax is running very well,” said Folker Wintersberger, an analyst with Creditanstalt-Bankverein AG. “They are well advised not to go to Germany and stick to Eastern Europe. That is their strength.”
Essl is already sold on that advice.
“It is better [to expand in Eastern Europe] than to expand in countries where the competition is very high, like Germany,” Essl said. Those sentiments are similar to most Austrian companies, which are looking to the East, as tougher competition in the West makes growth almost impossible.
Essl said two-thirds of the new store openings in the next two years will be in Eastern Europe after sales there jumped 90% in 1995 to 475 million schillings ($45.98 million), from 250 million schillings in 1994.
Total sales for 1995 jumped 68%, to 6.7 billion schillings. The company has yet to announce net profit for the last year.
Though much of the Eastern European sales increase came from new store openings and not same-store sales, Essl sees the growth potential in that region as the cornerstone for the company’s future. He foresees an average 15% annual increase in Eastern European sales in the years ahead.
Eastern Europe expansion is not without its costs.
BauMax, for instance, plans to pay 1.1 billion schillings this year alone to build the new stores.
It is often not simply a matter of finding an empty building and moving in the goods. Most buildings in Eastern Europe are inadequate for large do-it-yourself-style retail outlets.
“We will have to erect our own stores because there are no chains which we can take over,” Essl said. “We have to start from the beginning.”
The company has also learned that it has to keep Eastern Europe prices lower than Austrian prices because of lagging salaries in those countries.
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Initially, the BauMax stores in such cities as Budapest and Prague stocked their shelves with Western goods at Western prices. Essl said the company has since changed the inventory to include about 40% domestically made products, with the corresponding lower prices.
“In the beginning, we had much more Western products,” he said. “But the people are poor. You know, they cannot refurbish their flats and so on. And so we changed.”
Essl also hoped to put to rest speculation that it is the target of a takeover by U.S.-based Home Depot do-it-yourself chain, saying Austria would be considered too small a market for the U.S. company.
“I think Austria would not be the first target for Home Depot in Europe,” he said. “They are looking to great Britain and to Germany, and there’s no plan to have any cooperation with Home Depot.”
He also said that BauMax does not plan to sell or spin off Buettinghaus, the building-material and ceramic-tile retailer it bought last year.
Buettinghaus brought 500 schilling in debt to BauMax, which in turn is majority owned by Shoemmer-Unternehmensgruppe.
“‘Buettinghaus was one of the most important acquisitions we ever did,” he said, adding that BauMax is now reorganizing the management and changing the stores to look more like BauMax outlets. “I think we will have the same productivity and profitability as the BauMax stores.”
Creditanstalt’s Wintersberger said the Buettinghaus acquisition still casts a shadow on BauMax’s financial sheet. He said the cost of integrating Buettinghaus has eroded 1995 earnings.
“We are not quite sure about the profit for the group,” Wintersberger said, adding that he predicts 1995 earnings per shares will stay unchanged at 24 schillings.
He predicts earnings-per-share growth for this year to jump to 28 schillings and 32 schillings for 1997 as the company finally absorbs Buettinghaus’s financial problems and reaches deeper into the Eastern European market. “I do think the management is working well,” Wintersberger said.
