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Country Commercial Guides FY 2000: Bulgaria Report prepared by U.S. Embassy Sofia, released July 1999 Note*

CHAPTER IV. MARKETING U.S. PRODUCTS AND SERVICES

A. Distribution and Sales Channels

Traditionally, the service-oriented supply chain was rigidly segmented into production, intermediate services (i.e., transport, finance, insurance), wholesaling, and retailing. Economic changes are precipitating a blurring of these service demarcations. This is especially true in the rapidly changing consumer sector.

Stambouli, for example, is a Cyprus-based company which began operating dollar stores in 1984. Now Stambouli imports and distributes a wide range of consumer goods through eighteen distribution centers as well as for retailing through its nationwide Bonjour chain of mini-department stores. It has emerged as a vertically integrated importer, wholesaler, and retailer.

Shell gasoline stations all over the country also have clean minimarts well stocked with hard-to-find imported consumer goods and food products, and the newer shops are co-located with McDonalds restaurants.

In addition, the German firm Metro, the second-largest retailer in the world after Walmart, is opening its first megastore in Sofia in March 1999. Metro is expected to carry a wide variety of direct-imported consumer items. It is expected that the consumer choice, competitive prices and convenience of this type of store will further accelerate changes in Bulgaria's distribution sector.

Bulgaria's retail sector is, however, dominated by small-scale shops. Seventy-six percent of retail trade is already in private hands, with shops being either formerly state-owned shops that were privatized, or shops founded by private owners. Shop owners are quickly gathering experience in modern marketing and sales promotion. The structure of the retail sector is slowly being transformed. Retail chains are beginning to emerge.

An estimated 79 percent of food sales are handled by private shops and vendors. Local supermarket and food store chains such as Oazis and Fantastiko developing in the food sector. In Sofia, Dallas and Elemak are modern supermarkets which retail mainly imported food products. The stores use contemporary shelving displays, refrigeration display, and even point-of-sale promotions. Other food and non-food cash and carry type of stores opened in 1997 and 1998 in larger cities. Fruits and vegetables are typically sold at open-air, non-refrigerated public markets.

Larger cities have one or two stores on the scale of a department store. There are City Universal Stores (GUM) in other cities and Regional Universal Stores (RUM) in the suburbs. These stores retail nonperishable consumer products such as household appliances, furniture, apparel, personal care/hygiene items, and consumer electronics. The largest of these, the Central Universal Store (TSUM), located in Sofia, was privatized at the end of 1998 and sold to the British Richmond Pacific Group, which is presently renovating the building with plans turn the property into a shopping mall.

Consumer-oriented trade shows and seasonal bazaars are an important part of the retail scene. The Christmas Bazaar at the National Palace of Culture lasts almost two months and features hundreds of booths--actually small shops--on six floors of the complex, turning it into a temporary shopping mall, packed with consumers. Frequent sector-specific bazaars such as food shows and consumer electronics shows do a big business as well.

The transformation of the industrial products and raw material market segments is much slower paced. Bulgaria's wholesale sector is characterized by fragmentary development. Previously, wholesaling was handled by manufacturers who distributed products directly to retailers. Some wholesale operations were established in the consumer sector. The former monopoly position of Bulgarplod, the state-owned wholesaler of fruits and vegetables to retailers and canning factories, has long since been eroded by private entrepreneurs.

The wholesaling sector is increasingly composed of private companies. Many of these companies focus on the import and distribution of imported products. Trade liberalization encouraged many new companies to enter trading activities. Many former state-owned monopolies such as Izotimpex (computers and parts) or Electroimpex (electrical devices and equipment) no longer dominate the market. An array of companies has entered the market and expanded distribution and services. The introduction of marketing concepts and information technologies is not only accelerating but facilitating the transformation.

An interesting example of development has been the formation of Ilientsi. Located in Sofia's northwest industrial zone, Ilientsi is a warehouse and storage facility that is being leased to a broad spectrum of wholesalers. Food and non-food retailers throughout the country purchase substantial quantities through Ilientsi.

B. Information on Typical Product Pricing Structures

Importers typically mark-up prices 50 percent to wholesalers, who then mark-up their goods another 100 percent. Thus the end price to the consumer can be as much as 300 percent the import price. However, there are great variations, depending on the product, and prices of many goods with 25 percent of prices in the United States and the European Union.

C. Use of Agents and Distributors; Finding a Partner

U.S. exporters, especially small and medium size enterprises, will most likely choose to enter the Bulgarian market through an agent or distributor. This is because the small size of the Bulgarian market, distance and language differences will make it unattractive to set up a branch or subsidiary at the outset. Even some well-known large American companies are currently represented in Bulgaria by an agent for these reasons.

In considering a potential agent or distributor, common sense prevails: a U.S. company should not automatically sign up the first Bulgarian company that contacts them, and a due diligence background check of a potential business partner, plus frequent visits by the export sales manager, are essential.

Commercial Service Sofia can assist U.S. companies in finding an agent or distributor through the Agent and Distributor Service, which includes a search and report, and the Gold Key Service, which includes a search and in-country appointments.

Bulgarian retailers, particularly outside of Sofia, may require assistance in designing point-of-sale promotions. Foreign companies may have to advise their agents and distributors how to educate retailers on shelving displays, product location, promotional campaigns and promotional literature.

D. Franchising

Except in the fast food sector, franchising as a marketing method is still not well known or developed in Bulgaria. The Bulgarian retail market is ready for the many products and services that are typically marketed and sold in foreign-based franchise stores. Bulgarian consumers are looking for retailers that can provide a consistent selection of quality products, reasonable prices and good service. Bulgarian entrepreneurs are also eager to obtain transfer of technology and management expertise.

A study recently conducted in Bulgaria showed that profitable sectors with a relatively fast return of investment are tourism, the food industry, construction, and services. Potential in the service and food sectors include printing/photocopying, automotive product retailing and car rental, laundry and dry cleaning, hardware and retail stores, baked foods, candy and snacks, eye care and optical centers. The best opportunities are in the big cities (Sofia, Varna, Plovdiv, Burgas) where the population has a relatively high level of disposable income.

Despite franchising being a new concept for the Bulgarian business community, the Bulgarian legal system accommodates franchise agreements. Laws on labor relations are clearly spelled out, leases can be freely negotiated, and laws protect trademarks, patents and copyrights.

The primary challenge in establishing franchises is obtaining sites. In urban areas, especially Sofia, it is sometimes difficult to locate and lease properties at an affordable cost.

The most well-known U.S. franchises in Bulgaria are Kentucky Fried Chicken (KFC) and Dunkin Donuts, held by the Bulgarian firm SAMEX. The Bulgarian company EXCEL opened the first Pizza Hut in Sofia in July 1995. Now there are two in Sofia and one in Varna. Companies such as McDonald's, which owns stores throughout Bulgaria, and Days Inns have expressed interest in franchising in Bulgaria.

There are still no Bulgarian franchisors, although some Bulgarian companies consider franchising as a tool for their expansion and hope to become franchisors soon.

The International Executive Service Corps (IESC), a U.S. Agency for International Development (USAID)-funded organization, works with Bulgarian companies, matching them with potential U.S. franchise owners. In addition, there is a Bulgarian Franchise Association.

E. Direct Marketing

Direct marketing is relatively new to Bulgaria. There are few, if any Bulgarian mail-order catalogs. Vacuum cleaners and cosmetics are being sold fairly successfully door-to-door. Companies employ different marketing techniques. An Austrian company is currently using television home shopping "infomercials" to sell kitchen tools and appliances not available in local shops. Home demonstrations are not popular and have generated little success. Avon and the Swedish company Oriflame report success in the direct sale of cosmetics.

Limitations to expansion of telemarketing are poor telephone service in rural areas (not everyone has a telephone) and unreliable mail deliveries. There are also no toll-free telephone services offered by BTC. For the time being, direct marketing techniques may have more relevance to larger urban areas. According to industry professionals, the population of smaller towns is suspicious of direct marketing to end-users. In less populated areas where contact between people is infrequent, door-to-door selling is viewed as a way to socialize.

Direct marketing through catalogs, telemarketing and the Internet from the United States to Bulgaria is still quite difficult. Few Bulgarians have credit cards, and with residual lack of confidence in the banking system and undeveloped banking infrastructure, debit cards are just now coming into popularity. Together with the low purchasing power, the high cost of shipping and lack of security for parcels and mail at most homes, catalog shopping and Internet shopping from the United States is in its infancy. However, e-commerce is expected to grow in Bulgaria over the long term.

F. Joint Ventures/Licensing

1. Joint Ventures

There are several laws that govern joint ventures with foreign participation, including the Law on Foreign Person's Economic Activity and Foreign Investment Protection (hereinafter referred to as the Foreign Investment Law), and the Commercial Code.

Joint ventures with state-owned companies must be approved by the relevant ministry. In most instances, this is the Ministry of Industry. The "Regulations for the Regime of Exercising the State's Rights of Ownership in Enterprises" (amended), promulgated by the Council of Ministers in January 1994, provides the authority for the respective ministries have issued internal regulations for the negotiation and approval of joint ventures.

The negotiation phase usually addresses the evaluation of existing assets and contribution of the foreign partner. The foreign contribution can be in cash, capital in-kind and/or know-how. The contribution of the local partner is usually in long-term assets (i.e., existing equipment, facilities, etc.). Other usually discussed issues are: labor issues (employment guarantees), future business and marketing plans and management contracts.

Joint ventures with private companies do not follow the same procedures. No government involvement or approval is necessary. After completion of negotiations, the entity must be registered with the court. If a new legal entity is created, an evaluation of the assets is performed by a court-appointed expert. The expert's asset evaluation may not be satisfactory from the investor's perspective. A foreign investor who obtains a stake in an existing enterprise through an increase in the capital receives an increase in the stake based on the value of the already negotiated assets. Valuation is essentially negotiated by the parties rather than by appointed experts.

Among successful American joint ventures in Bulgaria has been between American Standard and the Bulgarian Vidima Ideal. American Standard has since bought out its Bulgarian partner and built its biggest factory in the world, which exports bathroom fixtures throughout Europe.

2. Licensing

Since Bulgarian companies do not have ready access to good financing, it might be difficult for a U.S. company to find a Bulgarian company able to invest large sums to acquire a production license or new manufacturing capability for an American product. However, enterprises with existing and suitable manufacturing capacity and good markets might be eager to take on the manufacturing of an American product. This might be a good market strategy for a U.S. company with high labor costs and product prices that are too high for Bulgarian customers. Production for Bulgaria's market in Bulgaria, with its low labor costs, might enable market entry. Caution is advised, however, as in any transfer of technology.

The Law on Obligations and Contracts and the Commercial Code set forth the rules for making a licensing contract.

G. Steps to Establishing an Office

Businesses may establish a representative office for information gathering activities. A representative office is not viewed as a legal entity in Bulgaria. Certain restrictions are placed on the office's activities. The Commercial Code and the Foreign Investment Law define the various forms of economic associations and regulate their foundation, organization, and termination. While it is possible to register a branch of a foreign entity in Bulgaria, the most common type of organization for foreign investors is a limited liability company (OOD).

The procedure for establishing a company in Bulgaria Companies involves registration with the local municipal court. Registration documents must include:

• Application
• Certificate of Incorporation of the parent company

• By-laws of the parent company

• Minutes of a meeting of the parent company at which the resolution for establishment of a subsidiary in Bulgaria is passed

• Specimens of the signatures of the manager
• Declaration of the management
• Bank receipt attesting to authorized capital on deposit in a Bulgarian bank
• Receipt of paid state fees for registration and publication in the State Gazette.

Foreign language documents must be duly translated and legalized (consular certification). The local court reviews the registration documents and provides approval. Within 14 days of the court decision, the company must register with:

• the Statistics Institute, which issues a classification number to be entered on all invoices.

• the local department of the Social Security Institute for social security purposes--issuance of a social security number to the company and social security books for the employees

• the tax authorities, after the first two registrations, to obtain a stamp on the company books, the corporate tax number and VAT number

• optionally, the Bulgarian Chamber of Commerce and Industry, useful because the Chamber issues certificates-of-origin for products.

Similar registration procedures as well as other statutory requirements apply to establishing other legal entities such as joint stock companies (ADs), general partnerships (SDs) and limited partnerships (KDs).

Finding an office may not be as straightforward as the registration process described above. There is a shortage of modern office space to suit the needs and requirements of foreign companies. Real estate firms will locate offices on a commission basis.

H. Selling Factors/Techniques

Market statistics are essential to choosing marketing strategies, but the Bulgarian market can be complex and difficult to gauge. Market size statistics are almost nonexistent. Available statistics are usually unreliable and do not assist in accurately predicting market responses. While low official disposable income statistics might initially discourage market entry, the size of the unofficial economy and inferences from observing actual sales activity paints a brighter picture. First-hand observation on the streets and in the shops is essential for gauging the amount of actual economic activity in Bulgaria.

Selling to state-owned companies, like selling to the government anywhere, has its own advantages and difficulties. As Bulgaria privatizes, American companies are advised to focus on the emerging private sector. The growth of the private sector augers well for foreign businesses that are accustomed to selling products based on price, product quality and after-sales service.

In the private segment of the economy, marketing techniques will not vary greatly from other foreign countries. Some techniques for developing greater product awareness include developing close relationships with professionals and non-profit organizations, as in the pharmaceutical, health care and medical equipment sectors, sponsoring research, participating in trade shows and events, and placing advertisements or writing articles in professional journals. Some companies have chosen sponsorship of game shows or events.

I. Advertising and Trade Promotion

Advertising is quickly becoming a key marketing tool in Bulgaria. Today, nearly all companies in Bulgaria engage in some form of advertising. The following advertising media are preferred by Bulgarian companies (in descending order): printed media, both newspapers and magazines, radio, outdoor billboards/signs, event sponsorship, trade shows, sales promotion literature, and last, television. Television is becoming more and more important but the price of commercial air time is simultaneously rising. While it is more than affordable for foreign companies, it is still expensive for many Bulgarian companies. Because of the cost, the leading users of television advertising are mainly foreign-affiliated companies, especially those specializing in consumer products. It may be necessary for a U.S. supplier to assist their Bulgarian agent or distributor in coping with the cost of television commercials.

Advertising is regulated by the 1998 Law on the Protection of Competition. This law prohibits advertisements which disseminate misleading information to consumers or malign the reputation of competitors.

Separate legislation regulates advertising for specific products. Article 35 of the Law on Tobacco and Tobacco Products explicitly prohibits any advertising of tobacco products with the exception of point-of-sale promotions. This provision appears not to be enforced, given ubiquitous advertising of cigarettes in all the media. The Pharmaceutical Law prohibits the advertising of pharmaceuticals that are not registered in Bulgaria. Advertising content for registered pharmaceuticals must be pre-approved by the National Institute for the Control of Pharmaceutical Products (the registration authority).

There are about thirty companies that provide a full range of professional advertising services. These companies have formed an advertising association, and there is at least one other association comprised of smaller companies. These companies have tried to influence the media to pay attention to international advertising norms and ethics. These firms persuaded the television stations to broadcast cigarette commercials only after 10 p.m. instead of during prime TV viewing hours when minors are watching. These companies are also in regular contact with the Parliamentary Committee on Television and Radio, which is charged with proposing new regulatory legislation.

The following are the major newspapers and business journals in Bulgaria. Except as indicated, each publication is in Bulgarian:

Daily Newspapers

24 Hours	
	47, Tsarigradsko Chausse Boulevard
	1504 Sofia
	Phone: (359)(2) 433-9276; 433-9273
	Fax: (359)(2) 433-9340

Banker
	13, Tsvetna Gradina St.
	1421 Sofia
	Phone:  (359 2) 66-23-62
	Fax:  (359 2) 66-23-62; 66-04-52

Kapital
	P.O. Box 198
	1000 Sofia
	20 Ivan Vazov Street, floor 2
	Sofia
	Phone:  (359)(2) 981-5816
	Fax:  (359)(2) 980-9439

Pari
	47A, Tsarigradsko Chausse Boulevard
	1504 Sofia 
	Phone: (359)(2) 943-3147
	Fax:(359)(2) 943-3188 

Demokratsia
	134, Rakovski Street
	1000 Sofia
	Phone: (359)(2) 981-8624
	Fax: (359)(2) 980-9354

Duma
	47, Tsarigradsko Chausse Boulevard
	1504 Sofia
	Phone: (359)(2) 44-38-44; 43-431
	Fax:	(359)(2) 944-1046

Standard
	113A, Tsarigradsko Chausse Boulevard
	IPK Rodina
	1504 Sofia
	Phone: (359)(2) 974-3142
	Fax: (359)(2) 76-2877

Trud (Labor Daily)
	119, Ekzarh Yosif St.
	1000 Sofia
	Phone: (359)(2) 98-449-209, 98-449-173
	Fax:(359)(2)(359)(2) 433-9304
	
	Weekly Journals

168 Hours 
	47, Tsarigradsko Chausse Boulevard
	1504 Sofia
	Phone: (359)(2) 433-9276; 433-9273
	Fax: (359)(2) 433-9340

Bulgarian Business News
	(English Edition)
	47, Tsarigradsko Chausse Boulevard
	1504 Sofia
	Phone: (359)(2) 433-9264; 433-9249; 433-9296
	Fax: (359)(2) 943-3058

Bulgarian Economic Outlook
	(English Edition)
	49, Tsarigradsko Chausse Boulevard
	1504 Sofia
	Phone: (359)(2) 70-6467
	Fax: (359)(2) 80-2480; 981-4208
	e-mail:  economic@bta.bg
	website:  www.bta-bg.net

The Sofia Echo
	(published in English)
	NKIA
	P.O. Box 132
	National Palace of Culture
	1463 Sofia
	Phone: (359)(2) 51-9063
	Fax: (359)(2) 65-7497
	E-mail:  christine@mail.erix.net
	Website:  www.online.bg/sofiaecho

J. Pricing Product

Price supports and state subsidies are being stripped away. The 1997 amendment to the Regulation for Implementing the Law on Prices substantially decreased the number of items subject to limited price control. The products affected are primarily basic necessities. All other prices are directly negotiated between the manufacturer and the distributor. Price competition is becoming more intensive. Realignment of prices has already occurred in many instances.

Consumer demand is price elastic in Bulgaria. Having low per capita income and purchasing power, consumers are highly price sensitive, but consumers will spend more in return for higher quality. Most people have generally restricted their purchasing to basic-necessity goods only. Imported products are typically higher priced than locally produced goods. Pent-up demand for goods not previously available is responsible for some sustained demand for imports.

Despite the disparities in purchasing power, a number of imported products in Bulgaria are actually more expensive than the same or similar products sold in stores in the United States. U.S. manufacturers considering export to Bulgaria should look closely at ways to cut transportation and distribution costs for selling to Bulgaria so that Bulgarian customers can benefit from the wide variety and attractive prices of American products.

K. Sales Service/Customer Support

Bulgarian consumers expect good after-sales service and customer support when purchasing products. Bulgarian state-owned companies have not met consumer demands for this. However, new private companies understand the importance of customer support and follow through on promises.

These companies also demand full service and support from the U.S. exporter when purchasing imported products. Given that prices are generally higher and their limited budgets are already stretched, service and support by their suppliers are mandatory in their view. Emphasis on customer support is an initial step in developing customer loyalty.

Most American companies operating in Bulgaria provide training to their distributors/agents. In many cases, agents and distributors are trained in the United States in order to communicate the firm's distinctive corporate policies, behavior and standards.

L. Selling to the Government

The Law on Assignment of Government and Municipal Contracts of 1997 is the first clear-cut procedure for government procurement to be introduced in Bulgaria. It is equally applicable to both local and foreign potential providers, and, with few exceptions, treats them both equally. How the law is being implemented and enforced is crucial, as in many cases bidders have complained that tendering processes are frequently subject to irregularities, which would imply that corruption has not yet been stamped out.

Government procurement is defined by complex criteria: to qualify, it must be done by a central governmental or municipal institution or agency, or by another entity disposing of central and municipal government, budgetary or other funds. The intended contract can be for the purchase, supply, transportation, rent, lease, manufacturing, assembly or maintenance of movables or immovables, for the provision of services, for the study, design, construction, or improvement of property. The contract must be preceded by a tender, a two-phase tender, a silent auction, or negotiations with three or more potential contractors (one in exceptional cases), to ensure competitiveness, equal opportunity and fairness.

The law allows participants in pre-contract procedures to appeal against violations of the applicable procedures. General government supervision for compliance with this law is exercised by the National Audit Chamber, which has the legal power to penalize violators when notified of violations and abuses. Each ministry has a government procurement office which is responsible for overseeing the process.

Selling to state-owned companies can be even more difficult. Selling to state-owned companies and other state entities still depends on cultivating relationships. Many foreign companies complain that state-owned company officials usually request some form of kick-back or bribe which American companies may not offer, pursuant to the U.S. Foreign Corrupt Practices Act. Public procurement financed by international financial institutions such as the EBRD offers the best opportunity for transparent purchasing decisions based on price and other competitive factors. Pursuant to the loan guidelines, tenders must be open and transparent. Results of the tender evaluation process are subject to the review and final approval of the financing institution.

M. Protecting Your Product from Intellectual Property Rights (IPR) Infringement

Bulgarian law protects the acquisition and disposition of property rights, including patents, trademarks, copyrights, designs, and tradenames, and prohibits unfair competition.

Manufacturers of trademarked consumer goods and computer software and music compact disk vendors report the most serious and pervasive problems. However, Bulgaria has made great progress in eliminating production of pirate music CD's and in reducing broadcast piracy. Also in December 1998, Microsoft and the Ministry of State Administration signed an agreement committing the Bulgarian government to license all the Microsoft products it uses. This has already started encouraging development of the software publishing and distribution sector and should further encourage users to purchase licensed software rather than illegally copy it.

Problems remain as deficiencies in staffing and training combined with low penalties which do not deter infringement hamper enforcement efforts.

N. Need for a Local Attorney

Bulgarian law stipulates that representation in court and before administrative agencies must be performed by a duly licensed member of the Bulgarian Bar Association, who are independent practitioners in law firms or who are certain employees of corporations. In the case of a corporation, either by an authorized senior executive of the firm such as executive director, or by an employee who has passed the practical examination of the Ministry of Justice and who has a power of attorney from the corporation to represent it as "in-house counsel". A Bulgarian patent representative who specializes in intellectual property rights and who is admitted to practice before the Bulgarian Patent Office is also essential for preparing documents to protect intellectual property rights. Some lawyers are patent representatives. Other services such as filing of corporate documents with the courts, legal opinions, and legal consultations, are in practice performed by self-styled "legal consultants," whose qualifications and experience may vary widely as the field is entirely unregulated. Some legal consultants may be former in-house counsel. Attorneys who are members of the Bulgarian Bar Association also provide such services. Many Bulgarian law firms have already established relationships and associations with foreign law firms, including American affiliates. Additionally, some of the larger international accounting and consultancy firms have established legal departments which perform some of the services offered by a law firm. While foreign attorneys not licensed in Bulgaria are not permitted to appear in court, foreign counsel may be used to review documents and to provide general advice as to joint venture or privatization negotiations. One Canadian law firm has established an office in Sofia, as has at least one Greek firm, subject to these limitations on scope of practice.

O. Performing Due Diligence/Checking Bona Fides of Banks/Agents/Customers

There is only one internationally recognized credit reporting agencies in Bulgaria, Credit Reform Bulgaria, headquartered in Germany, although there are new companies that have advertised their ability to check corporate references and provide corporate financial data. Interested U.S. companies should contact Commercial Service Sofia for details about these companies.

In addition, Commercial Service Sofia offers the International Corporate Profile service to help U.S. companies do background checks on companies in Bulgaria, and has plans to offer the Customized Market Analysis Service, to help U.S. companies better target the market for their specific products. Commercial Service Sofia recommends that U.S. companies desiring to check the bona fides of Bulgarian companies they are considering doing business with should apply for an International Corporate Profile Report through a U.S. Department of Commerce Export Assistance Center in the United States. Commercial Service Sofia will prepare the report within thirty days of receipt of the request.