As Eastern and Central Europe slowly emerges from the grip of recession, many international retailers are beginning to see new pockets of potential in the region, which boasts an under-14 population of 50 million and counting. The economic disparity between east and west still exists in Europe, but post-communist economies have been experiencing significant growth and increased foreign investment over the past decade. And although many regional areas are still plagued by lagging infrastructure and poverty, both income and spending levels are on a continued upswing.

German retail analysis group EuroHandelsinstitut expects sales in the region to have increased by 44% come 2005 (over 1997 figures), and the number of Eastern and Central European hypermarkets has exploded since the late ’90s in response to this growth. For example, British retail chain Tesco’s international corporate affairs manager Ian Hutchins says there were 36 hypermarkets in Poland five years ago, and he believes that number will have jumped to 175 by the end of 2003.

Despite the overall growth, there is still a marked sales disparity between urban and rural areas, says Hutchins. Income levels in capital cities like Prague and Budapest are getting close to EU averages now, and consumer spending is up accordingly. Moscow, for example, comprises just 7% of the Russian population but accounts for 30% of the country’s total spending. In contrast, rural areas such as Eastern Slovakia are still experiencing high unemployment and poverty levels, and an estimated 80% of the toy retail business there involves non-branded, inexpensive merchandise sold in small stores and market stalls.

Piracy is still one of the biggest hurdles faced by Eastern and Central European licensing players. And although governments in Poland, Hungary, Slovenia and Estonia are working hard to combat the problem on a national scale, Sándor Erdélyi, Hasbro’s export sales manager for Central and Eastern Europe (except Poland, Hungary and the Czech and Slovak republics), says trademark registration isn’t effective unless the local legal system is prepared to back it up. Sometimes, a company with enough market clout can force fakes off shelves, but intellectual property is generally not well-defended. And the problem is only confounded by the region’s continually changing political and regulatory climate and unstable market structures.

Despite these challenges, many foreign toy brands have managed to thrive. Traditional board games such as Monopoly established Hasbro’s Hungarian market share of the category at 31.3% in 2002. Action Man is another stand-out Hasbro brand in Central and Eastern Europe, achieving its highest sell-through rate in the world in Serbia at 70%.

Erdélyi says products based on TV characters generally sell better than movie merch because imported Hollywood films are often subtitled, which doesn’t appeal to kids. But Hasbro will be watching closely to see what effect the Q4 Croatian debut of Disney’s Finding Nemo (the CIS’s first dubbed mouse house feature) has in the toy aisle.

Because much of its population still resides in the low-income bracket, Central and Eastern Europe’s consumers are focused on price point and its retailers consumed with volume, which hasn’t traditionally left much budgetary room for marketing or promotions. But marketing and product quality are starting to play more of a role in spending patterns, says Hutchins, and that trend will continue as the economy grows. ‘Just offering low prices is no longer enough. Brand awareness is becoming increasingly important because the consumer is looking for value. As a toy manufacturer, it’s difficult to [build brand awareness] without adequate marketing support.’

Though there are some overarching trends, each country has its own unique economy and buying patterns. The Polish market is currently considered to boast both the best potential and the fiercest competitive landscape. Major hypermarket retail chains such as Tesco, German chain Metro, Dutch chain Ahold and French chains Carrefour and Auchan have many outlets in Poland. Swedish toy manufacturer Brio operates a wholesale toy distributor for its proprietary brands and licensed toys, as well as a franchised chain of 200 retail outlets. But the country is still dominated by small merchants; Plus Licens’ toy category head Eva Karlsson estimates that 90% of toy stores measure less than 50 square meters and sell mostly locally-produced product or inexpensive Chinese imports. Entertainment properties are particularly well-developed in Poland, and Karlsson says that 40% of toys sold there are character-based. A recent recession checked what many believed to be a period of over-expansion in the country that began in the early ’90s and triggered widescale corporate consolidation and the withdrawal of some foreign investment.

Like Poland, Hungary has experienced a steady influx of foreign hypermarket chains of late, though 69% of its annual business still takes place in smaller independent shops.

Russia, on the other hand, is the most insular market, and there is strong political opposition to the penetration of foreign brands and entertainment. Some international chains are pushing in, but it’s estimated that only 6% of Russian consumers do their shopping in supermarkets and malls. A low price point is key in this market, and Karlsson says low-end items like chewing gum, confectionery and stickers sell very well. The toy market is dominated by independent specialty retailers – the largest being Children’s World with 75 outlets throughout Russia – and non-branded toys account for about 80% of sales. ‘Russia is still one of the worst areas in this region for pirated toys,’ adds Karlsson.

The Czech market is not as competitive as Poland or Hungary, but there are several chains of smaller specialty retailers like Pompo and Sparkys (which have about seven or eight stores) that drive the branded merchandise market. The Czech Republic also has very strong local manufacturers and licenses. Though the ratio of character merch to traditional toys is about 50/50, Karlsson estimates that only 10% of the character merch half is comprised of foreign-owned properties.