One of the paradoxes of the 1990s was that independent countries emerged – or re-emerged – at a time when the globalisation of business was accelerating. This threw up new borders as international capitalism was increasingly weakening them.

In the 25 years since Yugoslavia started to split up following the independence of Slovenia and Croatia, a number of regional companies have successfully reached across the redrawn borders, establishing themselves as regional giants – albeit in a small region that was once one country. Recent years have seen some of these companies capitalise on economic conditions to push consolidation and strengthen their position across the former Yugoslavia. The next goal is a more challenging one – looking for growth outside the ‘Yugosphere’.

Tomislav Bajic, head of research at regional brokerage InterCapital Securities in Zagreb, tells bne IntelliNews that pan-Yugoslav companies can be roughly divided into three groups.

First, there are former monopolies that remain wholly or partly in state hands, which tend to be inefficient and provide low returns on capital. Examples include Croatian power utility HEP and energy company INA (locked in a dispute between the Croatian state and Hungary’s MOL, its biggest shareholder).

Second, there are companies that started from scratch in the later years of communism, or since the break-up of Yugoslavia, and have established a regional presence since, expanding beyond the borders of their home country. Stand-outs include agriculture, food and retail group Agrokor, food and supplement producer Atlantic Grupa, and holding company Adris Group (with interests in tourism, real estate, and insurance), all from Croatia; and Serbia’s Delta Holding (real estate, retail, and agriculture) and agriculture company MK Group.

Bajic says that each of these companies succeeded in its own way, but that there is one factor that they all share – “the founders’ passion and dedication”. Indeed, in many cases the company founders are still at the helm, and are closely associated with their companies. Agrokor’s Ivica Todoric, who started out in business with a greenhouse, selling flowers; Delta’s Miroslav Miskovic; MK’s Miodrag Kostic; Adris’s Ante Vlahovic; and Atlantic’s Emil Tedeschi are all among the richest and most prominent businessmen in the region.

As such, they are not always universally popular: Todoric is accused of paying low wages and long payment periods for suppliers (which he denies), while Miskovic has become the focus of Serbian Prime Minister Aleksandar Vucic’s popular anti-corruption crusade and is on trial for fraud (he denies the charges).

While Croatian food producer Podravka was founded by two brothers in 1934 and has a different legacy – it was state-owned between 1947 and 1993 and the government retains a stake – its turnaround in recent years has also been closely associated with the leadership of Zvonimir Mrsic, management board president since 2012.

Bajic cites a third category: regional champions that are now truly international, fully diversified into markets beyond the former Yugoslavia. The most prominent example is Croatian pharmaceutical company Krka, a highly-profitable producer of generic drugs. The company has sales in more than 70 countries, generating 85% of its revenues from markets outside the region. Its profitability has allowed it to invest heavily in research and development, bolstering its competitive advantages. In 2015, the company’s sales totalled €1.164bn, with Ebitda of €306.7mn. 

Other examples include Slovenian white-goods manufacturer Gorenje. Gorenje appliances are ubiquitous in kitchens across the former Yugoslavia, but are increasingly found further afield. In 2015, 38% of the company’s €1.255bn sales came from Western Europe.

“The right approach is sensible corporate responsibility, governance, putting the right people in place, the right capital structure, reinvigorating brands familiar with old generations, creating economies of scale – these are key steps to achieving success for regional companies,” Miljan Zdrale, regional head of agribusiness for Central and South Eastern Europe at the European Bank for Reconstruction and Development (EBRD), tells bne IntelliNews.

Brand nationality

While nationalism is arguably on the rise again across the region, it has proved less of a barrier to regional companies than might be expected. Partly, this is due to consumers being “colour blind” when they shop, with value for money considerably more important than the nationality of a brand’s ownership (indeed, public scepticism towards tycoons Todoric and Miskovic has not prevented them from building consumer-sector empires). In some cases, this consumer secularism is also due to careful acquisition, development and targeting of brands.

“We haven't come across problems regarding the ‘nationality’ of brands,” Gabrijela Kasapovic, director of corporate communications at Atlantic Grupa, tells bne IntelliNews. “We operate on different levels – local, with strong national brands with no or limited regional potential in the context of investments and market saturation in respective categories; and regional – strong regional brands with long traditions perceived as ‘domestic’ in all of the markets of CEE, such as Argeta pate, Cedevita [vitamin drinks], and Cockta soft drinks.”

A bigger challenge is competition from international players in the region’s increasingly open markets. “There is no strong competition between the regional ‘giants’ because they stay within their [commercial] boundaries, but competition is a very strong between regional and international players,” says Bajic. “The reason is very simple: the local players usually have high market shares and compelling returns, so it is an open invitation for competition.”

But the biggest hurdle of all is the fact that the markets of the former Yugoslavia are small, and tend to be fairly slow-growing in the wake of the global economic crisis of the last decade. Croatia is expected to grow by just 1.5% this year, and Serbia by 1.8%, according to the latest forecasts by the EBRD. Slovenia has outperformed its neighbours, but will clock up 2.0% growth this year, but is a market of just 2mn people, while Kosovo, Macedonia, Montenegro and Bosnia & Herzegovina have respectable forecasts of 3-4%, but are both small and poor.

The most successful regional champions have taken advantage of the opportunities presented by the recession and its sluggish aftermath – favourable financing terms and lower valuations – to strengthen their position across the former Yugoslavia. “The key for successful companies from the former Yugoslavia is to position themselves at a regional level,” says Zrdale. “What we’ve been seeing is that the companies that were able to establish themselves and embark on major cross-border acquisitions within the former Yugoslavia during the recession years, for example Agrokor, have become the regional champions now.”

In many cases, these acquisitions took the form of consolidation in the consumer sector, boosted by Slovenia’s post-crisis push to sell off assets owned directly or indirectly by the state. In June 2014, Agrokor closed the acquisition of Slovenian supermarket chain Mercator after several failed attempts, in a transaction worth €544mn. In October 2015, Podravka finalised the acquisition a 51.55% stake in state-owned Slovenian baker Zito for €33mn, taking 100% control in March this year.

“The basic fundamentals of the region are not favourable for organic growth,” says Bajic. “For instance, GDP growth rates are very low and many of former Yugoslav countries are burdened by high levels of debt. But acquisitions can bring access to additional customers, markets and extension of product portfolios, which can additionally improve companies’ competitive position.”

Despite the unpromising macro outlook, Delta’s real estate subsidiary has been investing across the region in niches that it sees as untapped. These include the first five-star hotel in Ljubljana – an InterContinental, with investment of €40mn – and a plot with development potential of 195,000 square metres in Sarajevo.

Wider ambitions

But increasingly the regional champions are looking beyond the slow-growing and saturated markets former Yugoslavia, where the likes of Krka and Gorenje have already successfully trodden.

Atlantic is a leader in this sense, already selling products including Argeta, Cedevita and Bebi baby food outside the region. The company has established its own distribution subsidiaries in Austria and Germany, and is aiming to establish strategic partnerships in several other Western European markets, says Kasapovic. “Further internationalisation of our business is our main course for future development,” she adds.

In its drive to expand internationally, Atlantic is working closely with the EBRD, which has a 2% stake in the company. “Atlantic Grupa realised that the region was in recession for years, public debt is high, so it’s very difficult to grow, and they started to look for pan-European expansion, and this is where the EBRD as a minority shareholder can really make a difference,” says Zdrale. “We help high-potential regional companies gain credibility in the international markets.”

Both Agrokor and Podravka see recent regional acquisitions as part of a broader strategy that involves medium-term international expansion. Agrokor has been eyeing an IPO on the London Stock Exchange for some time, and Todoric has been open about his ambitions for using the capital raised to make acquistions beyond the former Yugoslavia; he has said that he regrets pulling out of a previous move to acquire Turkish retailer Migros in 2008.

Podravka already has widespread brand recognition and sales of €30mn in Poland, which Mrsic aims to ramp up to €100mn. It is in the process of establishing subsidiaries in Dubai, China and Tanzania, with production facilities in the latter, as it aims to tap into faster-growing emerging markets in which its products have a strategic fit with local culinary culture.

Marija Desivojevic Cvetkovic, Delta’s vice president for strategy and development, says that agricultural companies in Serbia in particular – and many of the regional champions have operations in the country – can leverage the country’s advantages to compete strongly on the Western European market. Delta’s Agrar Group subsidiary already exports 46% of its output to the EU.

But substantial investments in technology are needed, and access to this sort of financing for all but the biggest companies is tight. Agrar’s own investments have allowed it to achieve an average yield of 66 tonnes of apples per hectare, for example; the Serbian average is 15 tonnes.

Bajic is sanguine on the opportunities for regional companies outside the former Yugoslavia, saying that the probability of success is “very low”. “They don’t have the edge to bring something new to outside markets,” he says, adding that competition in the fast-moving consumer goods sector in which most regional champions operate is intense, and markets saturated. Over the longer term, he sees more scope for knowledge-based companies leveraging lower labour costs and a well-educated workforce in the former Yugoslavia to have  potential for international expansion.

But Zdrale argues that a strategy of first entering markets which have a Yugoslav diaspora familiar with prominent from the region can pay dividends – and indeed Podravka has done this with its iconic Vegeta seasoning, including in Scandinavia. Once established, the company can consider setting up local production to expand market share.

“Despite the challenges, barriers and prejudice, it’s possible to make it outside the Adriatic region, in the Western European market,” he says. “The challenges are not to be underestimated; there is a stigma and it is difficult to come to Western Europe as a Western Balkan company. It’s not easy to position products in Aldi or Lidl competing with Austrian, French, Italian or German producers. But the more successful examples we have, the more courage we’ll see from the other companies. This region doesn’t have high level of foreign direct investments, and it is relying on harnessing its own local champion investors.”

This article is part of a series bne IntelliNews is running to mark the 25th anniversary of the split of Yugoslavia on June 25.