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'If we hesitate too long....' (Colgate-Palmolive Co.'s marketing tactics)

The Croatian journalist Slavenka Drakulic has written that communist governments failed because they could not supply their citizens with consumer goods like toothpaste and toilet Paper. With the dismantling of the Berlin Wall in 1989, Western business entertained visions of a truly global market economy that would stretch from New York to Novosibirsk and beyond.

The lingering residue of communist economic principles throughout the former Soviet bloc, however, has forced corporate investors to ask whether their expectations were prematurely euphoric. Is investment in Eastern Europe an opportunity for creative marketing or is it a gamble?

First, the good news, and it is considerable. The end of communism brought 410 million people into the worldwide consumer market. Many of them are well-educated, interested in Western culture, and hungry for consumer goods. While the process of change from a centrally planned economy to an open market has been challenging, and consumption levels remain low, American-based corporations nevertheless see this vast, potential market as a key to long-term business revenues.

The bad news, however, is sobering. First, balkanization has returned to Eastern Europe with a vengeance. Ethnic wars in the former federated Yugoslavia, for example, do not bode well for future investment. Neither do internal divisions in Czechoslovakia, which culminated last July in the resignation of free-market advocate President Vaclav Havel. Meanwhile, the governments of Albania and Bulgaria are threatened by faltering economies. Romania, a nation of deteriorated mass housing and wide, empty boulevards, still suffers from the fallout of the brutal Ceauceascu regime.

Second, the shift from centrally planned to free-market economies has neither rid the region of consumer shortages nor brought about capital improvements. In fact, declines in productivity are part of a pattern in every post-communist country. After decades of neglect, industrial plants, streets, and bridges are in need of repair. Hyperinflation and devaluation accompany free-market prices. Several currencies are nonconvertible, and hard currency is scarce. Except for Romania, all countries carry formidable debt burdens. Unemployment, previously unknown and distinctly unwelcome, is now a fact of life.

To their credit, the new market-oriented nations have welcomed foreign investment. They have offered provisions for majority control and granted guarantees on initial investment. With an eye to an uncertain future, several governments have ensured repatriation of invested funds. Relatively stable countries like Poland even offer some protection for technology, trademarks, and other intellectual property. Constant changes in investment law, however, pose a challenge to would-be investors.

Third, nearly three generations of Eastern Europe's people have had little acquaintance with the concept of marketing. Distribution structures are inefficient and transitional. Accounting methods are outmoded. Product planning and market research are new concepts; so are sales strategies. On the plus side, the Eastern European work force is highly skilled, particularly in areas of scientific research and technological development. But if Western corporations want to employ local workers in their plants, they will have to invest in training sessions and, more practically, in tools and parts.

No Models of Privatization

Fourth, a model of privatization exists nowhere. And the obstacles to enacting it reflect the region's history of state ownership: Who owns the site on which you set up shop? Do previous owners have rights? How do you value property and equipment when there is no market? Even though all the former communist governments have negotiated in good faith, "efficient privatization" remains an oxymoron.

Fifth, social conditions are explosive. Nationalist aspirations in the post-soviet countries have wrought violence in Azerbajian, Armenia, and Kazakhstan, to name three examples. As far as economic philosophy is concerned, it has been difficult to persuade millions of former Warsaw Pact citizens that capitalists are not merely unprincipled speculators. Witness Russian President Boris Yeltsin's wavering popularity. The fact is, people whose government once guaranteed lifetime employment are, economically speaking, worse off now than before the Soviet empire crumbled.

Finally, corporate investors must confront the legacy of air and water pollution. The nuclear accident at Chernobyl was only the first of many environmental crises to reach the Western press. Kazakhstan, the site of Nikita Khrushchev's "virgin lands" program, is cluttered today with the detritus of antiquated mining operations, iron foundries, and chemical industries. Splendid Lake Baikal in the East is partially polluted. And in 31 years, Uzbekistan's Aral Sea lost 75% of its volume to irrigate desert-grown cotton crops. Agricultural plans like this one have also polluted and salinated Central Asia's rivers and farmlands. Worst of all, the Soviet Union, now a non-entity, is not responsible for repairing the damage.

As Lenin himself might have asked, What is to be done?" Should Western business wait for Eastern Europe's political and economic skies to clear? Or should we take a calculated risk and invest? If we hesitate too long, we may be elbowed out of the way by competitors savvy enough to acquire profitable joint ventures in Poland, Hungary, and Czechoslovakia.

Outlining a regional strategy is risky. Economic data are rare and mostly irrelevant, as the government - not the consumer - determined price, labor costs, and profit margins. Moreover, trade agreements between countries do not exist yet. Western corporations must also consider what impact investment in Eastern Europe will have on pre-existing business in Western Europe.

First and Second Steps

At Colgate-palmolive Co., the company has devised a plan which would tap into this new consumer audience. As a first step, Colgate has expanded its export business by hiring and training sales forces, adding marketing personnel, and deploying significant budgets. Its overseas operations now exist in Poland, Hungary, Czechoslovakia, Romania, Slovenia, and Croatia. As a second step, Colgate has established joint ventures in Poland, Romania, and Ukraine. The company is working with local partners to acquire equipment and manufacturing facilities.

These strategies reflect Colgate's aggressiveness in entering markets before our competition. For example, Colgate has had successful markets throughout Latin America for 60 years, despite the continent's notorious currency fluctuations. Most recently, it acquired the Pine-Sol brand in Brazil, where it holds the No. 1 sales position for household cleaners. When Colgate recognized the demand for premium-quality soap in the global market, it opened modern facilities in India and Turkey. As one more case in point, it just opened a toothpaste plant in China. In total, Colgate sells its products in 170 countries. We were early entrants in most of them.

Ultimately, the Eastern European market poses an opportunity for Colgate. Over the long term, investment appears to be attractive. In the short term, we have to expect critical challenges, even setbacks. But for the company with an optimistic outlook, focused strategies, and staying power, the rewards are potentially handsome.
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Author:Spelling, Barrie M.
Publication:Directors & Boards
Date:Jan 1, 1993
Previous Article:Identifying tomorrow's great markets today.
Next Article:Ten commandments for investing in the Eastern Bloc.

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