Robert Jacek Włodarski explores the unstable luxury goods market in Poland.
When KPMG published a highly optimistic report on the £3.1bn Polish luxury goods market in 2015, its British counterpart stood at £40.2bn and continuously grew. Still, the auditing company was confident about the Polish market’s bright future.
Since then, Poland has been shocked by a wave of bankruptcies of domestic firms and the withdrawals of some popular foreign brands. Whereas the luxury goods market is developing, it remains unstable and surprisingly small for a high-income country such as Poland. Luxury clothes, foods, alcohol and cars are still being bought, but have all experienced instability caused by four main factors: excess supply resulting from overestimated demand, low levels of profitability, Poles’ attachment to local brands, and an overcomplicated legal system.
Torn Fashion Market
The fashion market is a vivid example of this pattern. An estimated 80 percent of luxurious garments are bought in shopping malls, which in part explains why a record number of malls are being built. However, most of these constructions occur in large cities that already suffer from an excess supply of fashion items. This has resulted in growing vacancy rates, lower average rents and decreasing clothes prices.
Because of this oversaturation, many domestic fashion companies such as Atlantic and Zień declared bankruptcies in recent years even though Poles spend more on clothes than ever. Many others, like Royal Collection, are struggling to stay afloat. Domestic firms seem to handle the small and fragmented Polish luxury clothes market better than their international counterparts do. International chains Esprit, Top Shop, and Marks & Spencer recently closed most of their branches, while Tallinder, Burberry, American Eagle Outfitters, River Island, Centro and Jackpot & Cottonfield have fully withdrawn from the Polish market.
The other segments of the luxury goods market either develop in an unstable way or stagnate. Although some brands, such as Belvedere Vodka, are successful domestically and internationally, others face an unpredictable future. For example, even though 69 percent of people buy high-quality food in shopping malls, Alma — the leading luxurious foods company — went bankrupt in 2017. Luxury car sales have never recovered from the Great Recession. While Porsche sales in 2016 resemble those in 2004, sales of Ferrari, Lamborghini, and Rolls-Royce still have not returned to their pre-crisis figures. Finally, although domestic companies dominate the luxury hotels market, it remains small and unpredictable. In 2017, Hotel Ossa in Zakopane declared bankruptcy due to prolonged formal problems with loans from the state-controlled PKO Bank.
What are the reasons for this widespread phenomenon? First of all, estimates of demand for luxury goods were clearly too optimistic. In Poland, there are merely 42,000 people earning more than £4,250 per month — the main target group of the luxury goods market — which constitutes no more than 0.1 percent of the Polish population. Despite steady development, clearly Poland’s market for luxury goods is still relatively weak.
Poland’s domestic luxury goods market is thus small in comparison to other European countries. While luxury fashion in Poland constitutes only 6 percent of the fashion market and is worth merely £500 million, in France it is 23 percent and £9 billion, respectively. Due to the relatively small luxury market, transitioning from medium- to large-size as to benefit from economies of scale is impossible for most Polish luxury enterprises. For example, Apart — Poland’s largest premium jewellery dealer — operates only 200 shops nationwide, which generates gross revenue of no more than £140 million annually.
According to Colliers International, foreign franchises suffer particularly from very low levels of profitability. Many shops experience losses in the months when Poles spend less, which the periodic peaks in the number of bankruptcies reflect. When the good months cannot make up for the bad ones, any prospects of growing a luxury goods firm deteriorate.
At the same time, medium-sized local companies cope slightly better with fragmentation and the low profitability of the luxury goods market. In the premium foods market, independent standalone stores meet most of the demand. Similarly, most domestic fashion and jewellery designers are the so-called ‘mom and pop’ shops.
An Unfriendly Environment
How do we explain these trends? Poles tend to favour domestic brands over foreign ones according to KPMG. The report presents a strong case for consumer ethnocentrism among the wealthiest Polish consumers, 40 per cent of whom strongly favour domestic luxury goods.
Additionally, the legal system for launching franchise expansions into the Polish market remains exceptionally complicated. Donald Tusk, Poland’s former Prime Minister, referred to the legal aspects of the Polish business environment as an ‘inflation of law’. For example, Parliament passed 34,600 pages of regulations in 2017 alone. For instance, there are four types of VATs that can be applied to one product; whether a company pays the correct kind is contingent on the tax assessor’s interpretation. If they apply the wrong VAT, the firm faces a ruinously high fine.
The Polish legal system has started to offer preferential treatment to multinational companies: possibly to level the playing field and attract further foreign direct investment. As a result, domestic firms pay a higher tax rate than international organisations. The Bisnode Report shows that on average the largest local companies pay a 22 percent tax on their profits, while the tax rate for foreign firms is a mere 17.5 percent.
The Polish case is undoubtedly interesting. It is the 6th largest EU economy and has a huge potential for development. However, the exceptional growth of the last two decades has failed to build a wealthy class large enough to absorb the luxury goods market products. The industry’s situation is unlikely to improve if the destabilising factors persist.