Posted on 07/08/2004 11:55:32 AM PDT by Grzegorz 246
With the fall of communism in Poland more than a decade ago, enterprising capitalists saw opportunity.
One U.S. outfit, Central European Distribution Corp., (CEDC) went on to become Poland's largest wine, beer and liquor distributor. It did so largely by buying local vodka distributors and letting the owners stay on to run the operations.
Now CEDC is celebrating another market-changing event: Poland's entry on May 1 into the European Union.
"We've been looking forward to the EU date for the last five years," said CEDC Chief Executive William Carey, a Florida native who's based in Warsaw, Poland.
With Poland's admission to the EU, all duties on the firm's imported beer, wine and spirits went away.
That's significant because CEDC's import business includes about 115 well-known brands, including Johnnie Walker Scotch, Jose Cuervo Tequila, Mondavi, Corona, Foster's and Budweiser.
Most of CEDC's sales, about 70%, come from distributing inexpensive local vodka. But imports carry much higher margins — 30% to 40% vs. a little more than 10% for local vodka.
Another benefit of inclusion in the EU is it should have a favorable impact on Poland's economy, analysts say. If that's the case, disposable incomes will likely rise.
"People might buy more imported beers and go out to bars and restaurants more," said analyst Kathleen Heaney of Maxim Group.
CEDC stands to gain because it distributes its products to restaurants, bars, gas stations and other retail stores throughout the country.
The company's wine and liquor sales are already getting a lift since Poland joined the EU, Carey says.
Prior to May 1, import duties on wine and liquor were higher than they were for imported beers. When the duties were lifted, CEDC decided to lower prices on imported wine and liquor about 20% in order to generate higher volume.
The scheme worked. Sales volume went up 40%, Carey says.
Meanwhile, CEDC's large domestic distribution business in Polish vodka is growing 40% to 50% annually, Carey says.
There's no lack of demand. About 40 million cases a year of cheaply priced domestic vodkas are snapped up in Poland.
"With a population of 40 million, that's a case a person," Heaney said.
CEDC controls about 32% of the fragmented domestic vodka market. The company looks to extend its presence in the market by becoming a distiller.
It's bidding on the government's largest and, Carey says, most profitable distillery, located in the northeast town of Bialystok. The distillery makes one of the top domestic brands, a clear vodka called Absolwent, as well as a flavored vodka, Zubrowka.
"(Carey) has the inside track," said analyst Douglas Lane of Avondale Partners. "The government indicated its desire to sell it to a strategic buyer, and if any of the big global players wanted it, they could have had it by now."
Some say it's too early for Carey to buy everyone a drink on the house, however. Heaney points out that the French company Belvedere also is known to have an interest in owning the distillery.
"You don't know who's going to come out of the woodwork," Heaney said. "There are so many moving parts to say it's a slam dunk for Central Distribution."
Carey seems determined to enter the distillery business. He's also looking into buying a couple of smaller distilleries.
One advantage of owning distilleries is that CEDC could build an export business in domestic vodka — something the government hasn't actively pursued outside Europe and Japan.
"Vodka is still the fastest growing international segment in the world in spirits. Tequila is second," Carey said. "They are the only two segments growing in the world spirits market."
Carey admits he knows nothing about the distillery business. If CEDC does enter the business, it might make a buy or two and keep experienced managers aboard. That's what it did in the distribution business.
The Bialystok distillery clears about $100 million a year in revenue, Carey says. He figures CEDC can do a lot better.
It's hard to knock the company's track record. Annual sales and earnings have both averaged 49% growth the past five years. First-quarter revenue climbed 39% from a year earlier to $110.5 million. Earnings went up 36% to 19 cents a share.
Analysts polled by First Call estimate full-year profit will grow 38% to $1.32 a share.
Analyst Lane says making an accurate call now is difficult until the impact of the EU membership on the Polish economy becomes clearer.
More certain is this: CEDC will keep on buying distributors, but at a slower pace.
"Now the smaller distributors realize it's hard to compete because (CEDC has) more leverage," Heaney said.
Cheers. Or, as a Polish saying (from Communist times) goes, "light beer for light future"
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