Open war has been raging between Lidl and Konzum on the Croatian retail chains market since the end of November when German-based retail food chain Lidl opened its 13 first stores in Croatia and employed its first 600 workers.

After some Croatian companies, like Podravka, Kutjevo and Badel 1862, opened negotiations with Lidl to supply it with some of their products under special conditions, to be marketed by Lidl under its own retail brand, Konzum has told them that they could not be a partner both to them and to Lidl. This has apparently caused so much concern in Konzum's top management that they have told them that they will take all their products off their shelves if they decide to go forward with developing a partnership with Lidl.

Konzum denies this, but Lidl is openly accusing them of threatening some Croatian companies. Bojan Luncer, the director of Lidl Croatia, told Nacional that some Croatian producers had backed off cooperation with Lidl in the wake of threats from Konzum. "It is true that some Croatian producers were forced to abandon cooperation with Lidl following Konzum's threats that they would stop doing business with them. We will deliver the list of these suppliers only to the Croatian Competition Agency", said Bojan Luncer.

It was the intention of Podravka, Kutjevo, Badel 1862 and some other companies to supply Lidl with some of their products under special conditions, so that Lidl could sell them in its stores at lower prices and under its own brand name. Producers as a rule never look forward to doing this kind of business, because above all they want to sell as much of their own product line as they can. The majority of retail chains, however, insist on developing their own brand names because they get the product at a bargain and sell them cheaper, which draws consumers to their stores. In these complex relationships, retail chains often offer producers better conditions for the purchase of their products if they agree to supply products to them under the retailer's brand name. Among retail food chains Lidl is in fact best known for offering more of its own brand products in its stores than the competition does, as much as 20 to 50 percent cheaper than the better-known products they also offer in their stores. The products of some of the member companies of the Agrokor concern could likely be found among these articles, whose competition in Lidl stores would be the Lidl brand name products some Croatian companies, already in a partnership with Konzum, were to have produced. The Konzum management was concerned with the arrival of Lidl, one of the larger European retail chains that bases its development for the large part on promoting sales of its own brand name.

Ivica Todoric, the president of the Agrokor concern, recently met in Belgrade with Enver Moralic, the owner of the Bozjakovina and Kutjevo companies, who do business with Konzum. As Todoric had heard that one of Moralic's companies had closed a deal with Lidl to produce flour that Lidl would sell under its own brand name, he told Moralic that it was not in good form that his companies also develop partnerships with his competitors. Todoric told him that they cannot be partners to both companies, to which Moralic said that his company would certainly choose Konzum as a partner, that he would not renew the contract signed with Lidl, and that he might even cancel it ahead of time. Todoric told him he did not know what the future held in store, as this was a matter of principle.

Lidl began to spread across Europe in 1989 and today does business in 22 countries with 7 thousand employees. It is a part of the Schwarz Group based in Germany's Neckarsulm and is among the 10 largest retail food chains in Germany. The Schwarz Group is number three in financial turnover in Germany and also owns Kaufland. It is estimated that 7 million consumers shop in Lidl stores every day. In Croatia Lidl opened 13 stores in its first wave – three in Zagreb, and one each in Velika Gorica, Varazdin, Bjelovar, Sisak, Petrinja, Daruvar, Nova Gradiska, Koprivnica, Jastrebarsko and Durdevac. In 2007 Lidl plans to open a further 14 stores.

The Konzum retail chain is a part of the Agrokor concern and is the domestic market leader, with over 570 stores in all Croatian counties. It is estimated that over 500 thousand people shop in Konzum's retail stores every day. Konzum has also created Velpro, a strong wholesale chain targeted to professional buyers. Konzum this summer announced that it was forging links with Serbia's Delta and would operate on the Serbian market under the name of Idea. This move aims to secure the company a leadership position in the region and to see the amount of retail stores double over the next half year.

Konzum director Josip Zaher declined to comment the claims of Lidl's top executive that Konzum was threatening to break off cooperation with its clients if they started doing business with Lidl. Konzum sales director Renata Simekovic said that any claims that Konzum officials had threatened Croatian producers were untrue. She also said that at Konzum they had never taken it upon themselves to comment the moves made by competitors. She also did not wish to divulge the measures Konzum had taken to hold on to its own market position in the wake of Lidl's arrival in Croatia. "Konzum is the market leader, whose business position demands and presumes a good development strategy, and that requires that we do not base our development plans on the basis of the appearance of competing firms. The number of consumers in our stores indicates that we are doing well", says Renata Simekovic.

Bojan Luncer puts costumer satisfaction among his buyers at Lidl at the top of their list. Konzum is delivering the same message. In the background of their care for customer satisfaction, however, the two companies are waging a pitched battle.

Among the Croatian companies who had launched negotiations on producing retailer brand articles for Lidl were Podravka, Vindija and Badel 1862. Drenislav Zekic, corporative communications assistant to the CEO of Podravka, had this to say to Nacional on the subject. "It is true that we were to have manufactured some products under the Lidl brand name in Croatia. We were unable, however, to come to an agreement and the cooperation was abandoned. Our products can, however, be purchased there. It is not true that we had problems with Konzum because of our cooperation with Lidl. Our line of products is still available on Konzum shelves. Besides, Podravka manufactures Konzum brand products. In fact it is a service for the PIK Vrbovec brand, owned by Agrokor. Konzum is our best buyer. Every year we supply them with goods worth almost 400 million HRK."

The company Badel 1862 also had problems in the wake of the new situation on the retail market. Badel 1862 director Ante Perkovic told Nacional that he is still in the midst of talks concerning the new situation. "I am to meet with Konzum director Josip Zaher on 9 January and after that some relationships should be clearer. We opened negotiations with Lidl to manufacture water under their brand name. We have not yet, however, defined all of the conditions and everything remains open. We would be happiest if we never had to discuss the manufacture of someone else's brand name and could sell only our own products. I hope for an agreement with all parties", said Perkovic, avoiding a direct answer as to whether Konzum had threatened to stop doing business with them. Rumours then, that Konzum officials had threatened Perkovic that they would pull all Badel products off their shelves if his company decide to produce water under the Lidl brand name, remain without official confirmation.

Vindija chief executive Dragutin Drk told Nacional that he had been in negotiations on cooperation with Lidl, but without results. "They asked us if we would manufacture some articles that they would sell under their brand name for them. We told them that the Croatian market was too small for retail brand names, and offered them the possibility of manufacturing these products for them, but only if they would also sell them in other countries. The negotiators from their side did not take to the idea well. We did not take well to theirs either. Vindija is by far too large a system to pander to any retailer that appears on the Croatian market, even to Lidl. We have to keep our 3350 employees in mind. For the moment we are not doing business with Lidl. I do not believe in the claims that Konzum has threatened some Croatian producers who decided to work with Lidl. The best example of this is Lura, which does business with Lidl, and whose products are also very well positioned in Konzum's stores."

Kutjevo owner Enver Moralic was unpleasantly surprised recently by a move on the part of Lidl. Kutjevo supplied Lidl with its Kutjevacka grasevina wine, a product its considers to be its best performer, and the German chain started selling it a few days later 20 percent under cost, a classic example of dumping. Based on this contentious event, Lidl's competitors are saying that this kind of business policy on Lidl's part can be disastrous for many manufacturers in the long run. Lidl by doing so is in fact setting the stage for others to also demand that manufacturers sell them their products, in this case wine, at lower prices. In the long run this hurts the manufacturer, and allows Lidl to sell the competition's wines, and later on other products, in its stores at markdown prices. Some of Lidl's competitors are saying that Lidl, because of its massive profits on other markets can afford to operate in Croatia at a loss for a while in order to pave the way for a more significant breakthrough on the market. This has allowed them to take a calculated loss selling Kutjevacka grasevina under cost.

"By investing its profits on the Croatian and other markets they are in fact avoiding paying high taxes in Germany. That is why they can afford to behave uneconomically. Lidl has already created confusion among Croatian retail chains in one segment. They paid 700 – 1000 EUR per square metre of land, which is far above the level of the projects profitability, because it means that the price of real estate is as high as about 70 percent of the value of the overall investment. Other retail chains can allow the price of land to reach no more than 25 percent of the total investment cost into a new retail outlet. For Lidl, however, this is not a problem, because it invests its surplus profits this way instead of into taxes", Nacional was told by one of the leading Croatian retail experts.

Aldi has already announced its entry into Croatia, as has Austrian retail chain Hofer. Hofer plans to build and open around 300 retail outlets in Croatia. Estimates vary as to how much success they will reap. Marino Pucar had this to say: "According to some estimates the 'hard discounters' in Croatia will not achieve the kinds of market shares as they do, for example, in Germany, where they have taken as much as 30 percent of the market share. As consumer habits in Croatia are very similar to those in Italy, where the "hard discounters" have taken about 9 percent of the market, it is estimated that they could take between 5 and 10 percent of the market in Croatia over the coming three to five years."

These estimates could be wrong, something that Konzum is aware of, carefully monitoring every move the competition makes. As soon as Lidl's stores opened their doors special teams of Konzum's experts visited them. They visited them three times a day in order to see what kind of pricing policy Lidl was leading, and whether they changed them during the day. They did this in order to counter with their own prices and adjust the prices of some of its articles. Along with this, at Konzum they have drafted and approved a separate pricing policy for its stores particularly close to Lidl's. Some products can be bought at lower prices there than in other Konzum stores.

The Plus Market Partnership agreement, signed recently by Stjepan Safran, the president of the Croatian Chamber of Trades, Ivica Todoric, the president of Agrokor, and the chief executives of Konzum, Podravka, Kras, Lura, Saponia, Franck, Koestlin and Zvecevo, was largely brought on by the arrival of Lidl. The aim of the agreement is to strengthen the position of small retailers, improving Croatian commerce and manufacturing and the more efficient sales of goods and better access of all the signatories to consumers. Prime Minister Sanader was also at the signing ceremony with the ministers of the economy and finance.

It appears that Konzum has for now not suffered significant damage in the wake of Lidl's entry on the Croatian market. Sources close to Konzum have confirmed for Nacional that the company in 2006 surpassed its business plan by tens of millions Kunas and that 2006 was by many parameters the company's most successful year since it passed into Ivica Todoric's hands. These results have been attributed in part to a very active expansion policy – through the year they have opened new top grade sales outlets in Dubec, at Crnomerec, Dugave and at some other locations in Zagreb, and across Croatia.

The entry of Lidl on the Croatian market, however, could change things. Lidl is a powerful company that will certainly fight aggressively to win over the sympathy of consumers, and they have a great deal of experience in that from many countries. Slashing the prices of retail products is certainly good news for consumers. The expected reduction in prices, however, has yet to happen. That does not mean that Lidl will not succeed in this, which will lead to new skirmishes between the retail chains.