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Country Commercial Guides
FY 2000: Czech Republic
CHAPTER IV: MARKETING U.S. PRODUCTS AND SERVICES
A. Distribution and Sales Channels
Distribution channels in the Czech Republic are similar to the type of private systems common in other European countries. In recent years, privatization and major improvements in infrastructure have resulted in enormous growth in transportation and distribution services, particularly in the trucking sector. Consumers now have more products to choose from as a result of increased competition in the market. This competition also has improved efficiency and economies of scale in the marketplace.
The retail sector, which is nearly all privatized, historically has consisted mainly of small shops such as grocery stores, pharmacies, music stores, clothing stores and bookstores. However, the current strong trend is toward larger stores with more products. Chain department stores (such as IKEA, TESCO, OBI) and grocery stores (such as Delvita) are operating throughout the country, with the most concentration being in Prague followed by Brno.
Czechs are increasingly embracing Western-style supermarkets and bulk-rate hypermarkets, which in 1998 expanded in number from seven to 25. Twenty-three more are expected to go up in 1999. Over the same period the percentage of the population shopping at hypermarkets increased from 1.5 % to 10%. The percentage of Czech households shopping at supermarkets increased last year from 26% to 31%, while the percentage shopping in small stores fell from 52% to 44%.
Consumer spending dropped during the same period, indicating that the success of these superstores reflects a transfer of market share rather than creation of new market share by increasing consumer spending. Analysts predict the increasing closing of small shops as the superstores take a larger and larger part of their market share, making many unprofitable.
Internet sales in the Czech Republic were valued at $1.1 million in 1998, but are expected to nearly triple to $2.9 million in 1999. This is a small fraction of the Czech total retail sales of $14 billion. Factors limiting the growth of internet sales include the historic Czech distrust of direct marketing and the relatively high calling rates charged by the state monopoly phone service SPT for Internet use.
There are several effective ways to develop a local distribution system in the Czech Republic. One way is to persuade a local partner to build and develop a local distribution system from the ground up. Providing support for a local partner to find and build a warehousing system, as well as providing assistance in inventory management, is a strategy that has been successful for some companies currently in the market. Another strategy is to find a distributor with an existing network already in place who has the ability to take on an additional product line or who may be interested in replacing a current line with something new.
B. Use of Agents/Distributors; Finding a Partner
The most common way to introduce a new product into the market is through a private distributor. The number of private distributors has grown rapidly over the past few years, giving U.S. companies many potential candidates from which to choose. The most efficient distributors are those who work closely with their foreign suppliers to develop strategies tailored to the nuances of the local market. This illustrates the distributor's experience and knowledge of local pricing strategies, level of advertising/promotion required and the competition. In most cases, one distributor can provide coverage throughout the entire country for a related line of products. If local servicing or warehousing is required, a sub-distributor may be required in certain parts of the country.
Wholesalers do not "sell" the product for the manufacturer. It is still the job of the manufacturer to ensure that the product is marketed properly so that it succeeds once it reaches the retailer. Most large American companies with manufacturing facilities or subsidiaries in the Czech Republic (Procter & Gamble, Colgate Palmolive, Wrigley and others) now have a network of regional sales managers and field sales personnel who oversee product marketing, distribution and retailing. Another common way to distribute products is to invest in a local retail operation (Lanc™me, Elizabeth Arden, Benetton and others) or to sell door-to-door (Electrolux, Avon, Mary Kay, Oriflame, Herbalife, Amway).
Margins for distributors are similar to those prevalent in Western European countries. With respect to salaries, field sales representatives usually earn a base salary (anywhere from 5,000 to 10,000 crowns per month, ($1 = app. 35 Czech crowns) plus commission (anywhere from 2 to 10% depending on the product), and travel benefits (company car, travel allowance).
Support for the distributor by the U.S. exporter is crucial to developing sales in the market. One example of this support is for the U.S. company to assist in the financing of the product into the distribution chain. The U.S. exporter may make the product available on a consignment basis to allow the distributor to develop local cash flow. The distributor can also sell products to retail stores on a consignment basis, although this could cause problems for smaller distributors, given their lack of working capital and the difficulties they experience in obtaining credit.
It is also quite common for distributors to use a form of "cash and carry" to get products into the retail marketplace. Instead of the distributor going to the retailer, the retailer goes to the distributor to buy as much product as can be afforded at one time.
One other example of support by the U.S. firm is assistance with local advertising. In many cases, foreign companies with local distributors provide all of the local advertising support for the product, while the Czech partner provides the physical facilities and equipment.
In general, U.S. exporters of consumer goods must have reasonable expectations when entering the Czech market. They must realize that it takes time to find the right distributor and create market demand before they are able to ship more than a container load of goods. Commitment and patience are required in order to succeed.
U.S. firms seeking qualified contacts in the Czech Republic should consider using the U.S. Commercial Service's Agent/Distributor Service and Gold Key Service. For a fee of $250, the Commercial Service in Prague (via requests from U.S. Department of Commerce Export Assistance Centers) will conduct an Agent/Distributor Search (ADS). This service provides U.S. companies with a short list of pre-screened contacts who have expressed an interest in representing the U.S. company after having seen the company's product literature. The Gold Key Service takes this process a step further by offering face-to-face appointments with Czech contacts when the U.S. company representative is visiting the Czech Republic. Essentially it is a personalized trade mission organized on behalf of the participating U.S. firm. The fee is $500 for the first day of appointments (8 maximum) and $50 for each additional appointment ($250 maximum per extra day). In addition to arrangement of the pre-screened appointments, this fee includes use of an interpreter, meeting room space and follow-up support. For more information, U.S. firms may contact their local U.S. Department of Commerce Export Assistance Center or the Commercial Section at the U.S. Embassy in Prague for details on using these and a variety of other market entry services.
C. Franchising
Franchising in the Czech Republic is a contractual cooperation between two independent entities. Franchising agreements are subject to the laws that govern commercial contracts in general and to those that govern sales or trademark licensing agreements. Business practices are regulated by the Commercial Code, but changes would be needed to create a legal environment specific to franchising activities.
One of the first and still fastest growing franchise industries in the Czech Republic is fast food. This is the result of a prosperous tourist industry and an increase in the country's standard of living. Although there are successful American franchises operating here (such as McDonald's, KFC and Dunkin Donuts), the lack of local capital has not allowed for typical master franchisor networks to develop. In the Czech Republic, all of the companies that have introduced their franchises have done so by initially investing their own experience and financial resources. This is necessary because there is still a lack of people who possess the type of capital and/or experience required for owning and operating a franchise.
With rising standards of living in the Czech Republic, consumers now have more income but much less time. Franchised products and services that save time have special appeal for Czech consumers. According to the Czech Franchise Association, other best prospects for franchising include consumer and business services, hotels/travel/tourism and real estate agencies.
D. Direct Marketing
Direct marketing has become a common way to distribute products in the Czech Republic. Individuals registered as entrepreneurs work door-to-door selling consumer products ranging from cosmetics and detergents to weight-loss aids and vacuum cleaners. Since direct marketing appeared about eight years ago, an estimated 100,000 people have become involved, mainly working for companies based outside of the Czech Republic. Out of this figure, it is the main source of income for roughly 40,000 people in this market. The Czech National Association of Direct Marketing was established to bring awareness of the international rules of direct marketing such as the length of guarantees and the consumer's right to return a product. Direct marketing companies active in the Czech market include Avon, Amway, Mary Kay Cosmetics, Oriflame, Herbalife and Lux. Amway has a distributor force of 37,000, while Oriflame, which sells cosmetics and beauty products, has 46,000 Czech distributors. Avon has a distributor base numbering 13,000.
Direct marketing as a sales technique seems to satisfy the need of many Czechs today to express their individuality and entrepreneurial spirit in an activity which requires little in the way of start-up costs. For direct marketing firms, this technique offers a better way of reaching consumers who may be under served by retail outlets, such as in the countryside or in small towns. Both multi-level (e.g. Amway) and one-level (e.g. Lux) marketing have proved successful in the Czech Republic. Network marketing has also gained a considerable number of customers in the last year, as four "membership" style stores are currently operating in Prague, Brno, Plzen and Ostrava.
Regarding mail order service firms, the general attitude of Czech consumers is not very positive. This is probably because many of the firms to first offer mail order services in the country delivered poor quality products that were often not sent on time, or in some cases, not sent at all. An Association of Mail Order Services was founded in the Czech Republic in 1994 by Schober Direct Marketing, Reader's Digest Vyber, Magnet and the Czech Postal Service to support this sales technique and repair its tarnished image.
E. Joint Ventures/Licensing
With the development of a regional market economy in the heart of Europe, the Czech Republic has become increasingly attractive as a destination for foreign investment. Given the emergence of market economies in neighboring countries as well, the potential of the Czech Republic as a base of operations for the entire Central European region is high. In addition to offering a small but growing consumer market, the Czech Republic's competitive wage rates and productive labor force make it an attractive location for manufacturing and assembly operations. Now that most large firms have been privatized or are undergoing privatization, greenfield operations and joint ventures are more common. Although the law allows 100% foreign ownership, foreign companies are sometimes not willing to acquire a Czech firm outright because of environmental or other long-term liabilities. In general, joint ventures are viewed as an opportunity to increase cooperation and develop a longer-term relationship in country.
F. Establishing an Office
In order to do business in the Czech Republic a company must be registered at the district office at the place of residence (for a physical person/sole proprietor) or at the district office of the region where the company has a permanent place for doing business. Some of the documents required include: a statement of the type of company that will be formed; a formation agreement (articles of incorporation); a trade license (if necessary); bank account information and proof that the company's basic capital is on deposit; description of business activity; and a copy of the firm's U.S. incorporation documents (if the firm is a subsidiary). The fact that there is a set procedure should not lead potential business people to think that the process is simple. Obtaining all the green lights can be a lengthy, complex and often baffling process. Many foreigners choose to work through a service provider who is well acquainted with the procedures and pitfalls. American accounting and law firms operating in the Czech Republic provide total market entry strategies, including assistance in establishing an office. For those having the time and patience to accept the cross-cultural challenge, the Commercial Service-Prague library has materials on how to get a business license, how to obtain a green card and how to get a residency permit. Whatever route is chosen, the advice of a local lawyer is always strongly recommended.
G. Selling Factors/Techniques
Disposable income in the Czech Republic remains low in relation to Western European countries, and most Czech consumers still buy mainly on the basis of price. However, the increase in the amount of competing name brands on the market has started to shift consumer tastes towards quality over price when making certain purchases. Czech firms mainly buy equipment based on quality, price, after-sales service and financing. U.S. companies should be aware that the ability to offer flexible financing and payment terms plays a key role in achieving successful sales results in the Czech market.
H. Advertising and Trade Promotion
Advertising has become a powerful tool in the Czech market, as both consumers and companies generally place a high value on its effectiveness as a means for marketing products. Relative to this, both U.S. and Western European firms selling new-to-market products or seeking company name recognition use advertising quite frequently in the Czech Republic. All forms of media are used, including television, radio, print, public transit advertising and outdoor billboards.
Following is a list of widely circulated newspapers and business journals in the Czech Republic that may be considered as potential advertising tools:
Mlada Fronta Dnes (largest national daily newspaper), tel.: (+420 2) 2206 2111, fax: (+420 2) 2206 2229.
Hospodarske noviny (daily business newspaper), tel.: (+420 2) 3307 1111, fax: (+420 2) 3307 2070,3307 2029.
Profit (weekly business newspaper), tel.: (+420 2) 2287 7446; fax: (+420 2) 697 0702.
Ekonom (weekly business magazine), tel.: (+420 2) 3307 1301; fax: (+420 2) 3307 2002.
Obchodnik (weekly business magazine), tel.: (+420 2) 3307 1117, fax: (+420 2) 3307 2009.
The Prague Post (weekly English-language newspaper), tel.: (+420 2) 2487-5000, fax: (+420 2) 2487 5050.
The Prague Tribune (bilingual bi-monthly magazine, English/Czech), tel.: (+420 2) 548 072, 548 190, fax: (+420 2) 542 289.
Prague Business Journal (weekly English-language business paper), tel.: (+420 2) 2426 1360, fax: (+420 2) 2426 1361.
Metro (daily free newspaper distributed in public transportation stations), tel.: (+420 2) 282 20 30, fax: (+420 2) 242 29 775, 2421 5228.
Euro ekonomicky tydenik (economic weekly), tel.: (420-2) 5102 6107, fax: (420-2) 538 364.
I. Product Pricing
Czech consumers are extremely price sensitive and consistently seek value in their purchases. Compared to Western standards, wage levels are low but are slowly rising. In relative terms, disposable income has grown considerably over the past few years among the professional workforce, leading to an increase in demand for a diverse base of both essential and non-essential consumer goods. Transportation costs, import duties, advertising and competition all must be considered when pricing products for the Czech market. Prospects for selling products improve when the products can be manufactured at a lower cost with some local value-added production. In general, imported consumer products and industrial equipment will have to compete against equivalent European products (German products in particular).
J. Sales Service/Customer Support
Almost all imported products and services sold in the Czech Republic are supported by either a U.S. subsidiary or a local representative. Customer support and after-sales services have become key components in the marketing mix of successful companies in the Czech Republic. This is the result of maturing consumer behavior in a market comprised of customers who are learning to expect knowledgeable sales people and reliable service. The industrial market also expects a high level of service, especially when dealing with U.S. companies who have a general reputation of providing quality support in a timely manner.
K. Selling to the Government
The Czech Government is required by law to hold tenders for major procurements. In the past, American companies have been major suppliers of radio and telecommunication equipment, computers and software. In July 1996, the Czech Republic's procurement law was revised to help clarify and simplify procedures for public tenders. In addition, new emphasis was placed on the total value rather than minimum cost. American companies that can provide high quality/low maintenance products as well as top management expertise, are now, at least theoretically, more competitive in the tender process. The most significant problem facing bidders is the general lack of transparency throughout the procurement process. While the revised procurement law has helped standardize government tenders, there is still a lack of executing regulations to guide the tender process. This means that the government procurement process remains complex and often unpredictable.
Defense Procurement: After President Clinton unveiled the "Partnership for Peace" program in 1994, the number of U.S. defense and electronics firms visiting the region increased dramatically. The Czech Government upgraded its defense capabilities as it prepared for NATO membership, presenting significant export opportunities for U.S. firms. American companies that have successfully participated in defense procurement tenders include Boeing, Allied Signal and EDS. Overall, however, procurement in the defense sector has proved difficult and frustrating largely due to the following problems.
1. Lack of familiarity with local language, contacts and business practices: While many Czech commercial firms have English-speaking staff members, the same is not true at some offices of the Ministry of Defense (MOD) or within the Armed Forces. Having bilingual Czech-English employees is thus essential for American firms to effectively operate in this and in many other fields. Establishing a physical presence in the Czech Republic also is important. Many U.S. firms have local offices registered in the Czech Republic and others have affiliation arrangements with Czech firms. However, a large number of firms interested in doing business in the Czech defense sector still have only a limited local presence. This can be an impediment, given the rapid and often unpredictable development of the acquisition process at the official level. In addition, continued legislative and organizational changes in the defense sector at the official and commercial levels have left many U.S. firms with outdated contacts and an obsolete understanding of acquisition practices.
2. Lack of experienced personnel within MOD and Armed Forces staff: The Czech defense sector has been open to widespread commercial relations with Western firms only since 1990. There has been a huge turnover in civilian and military staff. The majority of senior civilian and military officials have been in place only for a few years and most of them have very little prior experience with Western commercial practices.
3. Lack of a stable planning and programming system for defense procurement: Major efforts to transform the old defense procurement system began only in 1993, following the "Velvet Divorce" which separated the Czech Republic from Slovakia. Out of necessity, the Czech Defense Ministry has taken an incremental approach to the transformation. Major reorganizations and personnel turnover, combined with lack of experience, have made it difficult to implement Western-style systems all at once. The MOD has implemented a long-range planning system similar to the U.S. Planning, Programming, Budgeting System (PPBS). While this system is still in the early stages, the MOD now has guarantees for long-range funding for key projects, which enables the Czechs to predict and plan ahead for their acquisition projects.
4. Lack of transparency and accountability in the defense acquisition process: One of the results of the lack of transparency is the tendency to bury responsibility for evaluation and selection of bids. This takes two forms: Failure to set and adhere to objective criteria for the evaluation process; and referral of decisions to ad hoc committees that are not publicly accountable for their recommendations. In several recent acquisition projects, tenders have been made on the basis of required military capability, but during the evaluation and selection process the relative weights of capability-based versus economically or politically based criteria have tended to shift unpredictably. Ad hoc commissions have been used at the evaluation and decision stage of the acquisition, but there has been little clarity in advance as to the composition and responsibility of the commissions or even about whether part of the process would be referred to a commission at all. The exact responsibilities and qualifications of these commissions have been unclear, and there has been little direct information -- either in advance or after the fact -- about the criteria used and the information considered in the selection process. This has left an air of mystery that has led to accusations of unfairness, bias, and improper influence, and has not contributed to confidence in the accuracy of the evaluation process or the integrity of the specific findings used in making key decisions. In recent years, several high-value tenders awarded by the MOD were overturned. These highly publicized and "politicized" tenders not only caused controversy with the military and the government, but also pushed back acquisitions that were already long overdue.
U.S. companies looking to benefit from the defense procurement process must realize that the process runs very slowly and requires patience, flexibility, full-time monitoring, and a long-term commitment.
L. Protecting Your Product from IPR Infringement
The Czech Republic is a party to the Berne, Paris, and Universal Copyright Conventions. Please refer to Section VII.K., Protection of Property Rights, for additional information.
M. Need for a Local Attorney and Accountant
Lawyers are instrumental in reviewing contracts, setting up a legal entity and advising on taxes and other issues. A good accountant can help with the structuring of the company and its operations to minimize corporate taxes, which are considered high by U.S. standards. U.S. companies exporting to the Czech Republic from offshore should experience minimal legal difficulties as long as they adhere to prudent business practices and common sense. As with any business venture, it may be helpful to have sales and distribution contracts reviewed by a knowledgeable person before entering into any binding commitments.
N. Performing Due Diligence/Checking Bona Fides of Banks/Agents/Customers
Corporate profile information on Czech firms is available for a fee from a number of different companies operating in the Czech Republic. Among those that CS Prague is familiar with that provide such information are Dun & Bradstreet (tel.: +420 2 2490 9235, fax: +420 2 2491 1834) and VVV Most, spol. s.r.o. (tel./fax: +420 35 610 5888). Both offer a variety of profiles and should be contacted directly for pricing and turn-around time information.
[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title17, United States Code.
