INTERVIEW: The Geeks shall inherit the earth... or at least CEE

By bne IntelliNews September 29, 2008

Mike Collier in Riga -

Tales of geeky young men locking themselves away in garages with electronic paraphernalia and emerging some years later as multi-millionaires are the modern take on the rags-to-riches fable. Only they are generally supposed to happen in sub-baked Silicon Valley, not windswept Rupniecibas street, Riga.

"This is where we started, four of us in a garage 14 metres square," says Egons Mednis, president of electronics wholesaler and distributor ELKO. Some 16 years on, it's where ELKO is still headquartered, though the company now owns the entire city block and Mednis himself is landlord of Dikli Palace, a stunning neo-baroque pile half an hour outside the Latvian capital. Not bad for a computer studies graduate who had the bright idea of screwing components together to create a new-fangled device called a Personal Computer in the early 1990s.

"As IT hardware students and engineers, this was what we knew. At the time, demand for computers was very high, the penetration rate was close to zero. From today's perspective it was the right decision at the right time and we had a lot of luck. On the other hand we spent a lot of our energy and time and made some good decisions, such as deciding we should move outside our region," Mednis tells bne.

Today, ELKO is present across a large swathe of Central and Eastern Europe, making it Latvia's biggest company by turnover, and recently it turned in strong half-year figures while most Baltic companies were reporting sharp downturns.

Turnover of €390m in the first half of 2008 was a 49% increase over the corresponding period in 2007 and generated a profit after taxes of €10m - a 136% increase over the first half of 2007, with a profitability ratio of 2.6%.

Mednis maintains that such strong results were achieved while retaining an essentially conservative corporate strategy. "Today, we are present in nine countries, but we've stopped our geographical development," he says. "The main reason is the fast rate of growth in markets where we are present and generally we are focusing on improving our market positions and structure in existing markets. These markets are so dynamic and fast-growing that it takes all of our resources and financial management to realise our potential."

"This is our policy right now - to try to be the best player in these markets and not to spread without additional need to do so. Our goal is not to enter different regions, it is to have a strong position in the marketplace and realise our growth that way."

Russian in

Entering the Russian market has proven to be a particularly smart move - in CIS markets ELKO achieved a 61% increase in turnover in the first half of the year - and Mednis sees plenty of opportunity for further growth among tech-hungry Russians, even if they tend not to take advantage of ELKO's swish online ordering technology.

"In the Baltics, up to 90% of orders are placed via the internet - certainly in Estonia that is the case. It is very high. Looking at Russia, sales are generally not so internet-oriented. Even though we have online platforms and solutions, there is a cultural tradition that people are used to feeling more comfortable dealing with paper," he says. "Secondly, there are things like IT infrastructure - maybe the internet connection is not always good enough or available, especially in the regions. Credit cards, bank development and internet accounts all require significant infrastructure. It is coming, though. If we look five years ago in the Baltics, people didn't know how to use these things, whereas today it's a must."

Indeed, Mednis says that despite regional variations, there is a clear pattern when it comes to the development of IT infrastructure across CEE, and that this awareness lies behind ELKO's ability to offer appropriate products from leading manufacturers such as Sony, Acer, TomTom and Samsung. "In one market, one brand is more popular than another, but if you are looking at products in general there are no major discrepancies. But one thing you can see is the development stage. For instance, if you are looking at something like mobile PC penetration, the development trends are the same in all countries, but each market is at a different stage of development.

"The most advanced markets are in Western Europe, then come our Central European countries like the Czech Republic and Slovenia, the Baltic countries follow perhaps half a year behind, and then we see the not-so-developed Eastern European countries including Bulgaria, Romania, Russia, and Ukraine, which have from two to three years delay, depending upon the market and product group. These trends are quite exact, but are starting to disappear and if we are speaking about Russia, they are catching up very, very fast."

Inevitably, trying to keep pace with Russian demand is not easy, and has led to suggestions that an IPO could be on the cards - an idea Mednis admits has merit. "We have had financial investors since 2005 and usually financial investors have some sort of exit strategy or a need for liquidity of their shares. An IPO? Well, our company is growing very fast and at the moment we can only finance our business by using our profits. It means we need some additional financing. Until now we solved this with financial investors and by increasing our bank financing but looking at long-term, yes, I think an IPO could be one of the possible scenarios to attract capital," he says. "At the same time, today's market situation is not the best, so possibly this is a project not for next year, but for the years after."

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INTERVIEW: The Geeks shall inherit the earth... or at least CEE

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