Baltic consumers stick with their own goods

The Baltic Times, TALLINN
Nov 26, 1998
By Kairi Kurm

Estonians will never prefer products of Latvian or Lithuanian origin. The same preference for home-grown goods applies in the other Baltic countries. This is not a big joint consumer market.

Although the general opinion is that Estonian, Latvian and Lithuanian consumer markets are similar, surveys conducted by Emor show that each country has its own characteristics.

People prefer local food production. The Baltic states are no exception.

“Estonians neither prefer Latvian nor Lithuanian products. The same goes for Lithuanians and Latvians – they do not prefer the product of the other two Baltic States. They would rather favour a Western product instead,” said Aivar Voog, senior project manager at Emor.

Emor is the biggest research company in the Baltics, which provides surveys of the Baltic states, Russia and the Ukraine through its partners in these regions.

“Lithuanians are the most conservative of the three, while Estonians are the most open to something new. In Latvia, the share of Russian people is biggest and therefore, due to national differences, the consumers are quite open,” said Voog.

The preference for local products has increased among people of all age groups. However, the older generation pays more attention to the country of origin than younger generation.

Brand preferences

In Latvia, the local confectionery Laima can claim the position of the most popular brand, followed by local brewery Aldaris. Three locals – confectionery Karuna, milk processor Birzu Pienas and breweries Kalnapilis and Utenos – command the Lithuanian market. In Estonia, local companies share top billing with many Western brands. Atop the Estonian list is local confectionery Kalev, Coca-Cola, local meat processor Rakvere Lihakombinaat and Philips.

In all of these countries, food brands that have been established for a long time are the best known. Some Western products (washing powders, chewing gums) that have been advertised a lot are also well known.

It is very hard for new brands to enter the market, as big and traditional producers have already conquered it. The new brand would have to spend much more on advertising in a blocked market.

Strategies for market entry

“Estonian products are marketable on the big Russian market thanks to the long trading traditions, but producers do not have any considerable position there,” said Ivar Risthein, marketing manager at Emor.

“Kalev did an excellent job. The management invested in the local market and opened a factory in Russia. The Russian crisis did not affect them as much as it affected the dairy Uhinenud Meiereid for example,” said Risthein.

Voog says it’s just as important for companies to know their markets and what products their consumers really want.

“It is important to be aware of what kind of a product you want to sell. If it is primary food, then wherever you start operating, you should not start by declaring that you are from Estonia. You should have a local image. For example, we like to think about Saku as our local brewery. However, it actually belongs to foreign investors, which have also acquired breweries in neighboring countries. Saku does not [mention] continuously who its owners are,” said Voog.

The same logic is applied to some other product categories of fast moving consumer goods, Voog said. For example, most local consumers do not know the most popular juice in Estonia – Gutta – is a Latvian brand.

On the other hand, Estonians know that Laima confectionery is made in Latvia, and therefore the relations with that product are not positive, said Voog.

Emor has also surveyed the Russian market through its partners in Moscow and St. Petersburg. Consumers’ tastes in these two cities vary noticeably. The people of St.Petersburg are more open to foreign, especially Scandinavian products, while Muscovites are loyal to Russian products. While at the beginning of the 1990s, Masterfoods was the number one confectionery, the situation has changed significantly. Only local producers enjoy this fame today.

In terms of manufactured goods, the production of luxury goods is the most risky business.

“It is not wise to produce goods that belong to the luxuries category for the local market. Luxury goods show the social status of a person, thus the brand has to be widely known and its image should be global,” said Ulle Parnoja, project manager for Emor. “The cost of creating a global image for the product is so high that it is very risky to count on the local market only. If produced locally, the manufacturer has to co-operate with a world-known partner to support the brand’s global image.”

Another important issue to keep in mind when creating a new brand is the protection of the brand name. A trademark does not protect brands that include a geographical name or a general name (eg department store). Such brands definitely have lower brand value because any company can cut profit from using the same words in their brand name. Coca-Cola, on the other hand, is an example of a well-promoted brand name, the cost of which may exceed the total value of the company’s assets.

Compensation fund dips into the red

The Baltic Times, TALLINN
Nov 26, 1998
Kairi Kurm

For the first time since it was established, the compensation fund Huvitusfond has found itself in the red. It posted an unaudited 300 million kroon ($22 million) loss for this year and is now planning to change its investment policy.

The predicted 300 million kroon loss is comprised of a nine-month 241 million kroon loss and a 66 million kroon loss on additional provisions.

Aare Tammemae, Huvitusfond board chairman, said, however, that the fund’s forecast is very conservative and the actual loss may be smaller.

“We hope to get back the money provisioned but not this year,” said Tammemae.

The fund was founded by the state to redeem compensation vouchers. Estonian taxpayers receive compensation vouchers according to years of employment. The vouchers are meant to compensate for losses incurred after the Soviet Union collapsed and citizens may use them to privatize their apartments or to sell back to the state.

The fund is also allowed to carry out business deals, which has led to the current projected losses. Forty-two percent of the fund’s nine-month loss comes from losses on decreasing prices of shares on the stock exchange, and 29 percent come from unprofitable investments.

The nine-month loss also includes the 80 million kroons the fund invested in a dubious deal with Uhispank, which the latter now denies. If the court proves this deal is still valid, the fund’s losses will be reduced by 80 million kroons.

“The fund would end this year with a loss, but changes in the management and the new and more conservative investment strategy should secure a better development in the future,” said Tammemae. The previous board was dismissed in September due to bad management and the company’s bad economic results.

During its six-year existence, this is the first time that the fund produced a loss and the first time assets decreased. The fund’s loss in nine months this year is nearly equal to the fund’s earlier years’ accumulated profit. The fund’s assets are about 1.5 billion kroons.

According to the more severe investment policy, the fund’s investments in stocks will be reduced and new investments will be directed mainly into shares of infrastructure companies, which have received a high international rating.

The fund is also planning to increase its investments in liquid assets, which make up about 40 percent of the fund’s investments. “The fund has no short run obligations, all the obligations we have are long run. This means that the compensation fund is quite liquid,” said Tammemae.

The fund, which made its last bond issue in late summer, intends to organize its next issue in the first quarter of 1999 to test the market’s interest in the bonds.

In its 12-bond issues so far, the fund has issued 447 million kroons’ worth of bonds, the average yield on the basis of market prices and guaranteed interest of which has been about 30 percent.

Compared to the 13 percent interest earned from bank deposits, the compensation fund was the best possible guaranteed investment, said Huvitusfond spokesman Andres Laisk. The fund has paid more than 90 million kroons in interest to people who have bought fixed income bonds in the fund.

In accordance with the law, Huvitusfond must issue bonds to the total value of its capital stock, which is presently about 1.2 billion kroons. The fund must conclude its issue of bonds by mid-2000.

“Our aim is to meet the obligation fixed by law, but bonds would be issued in accordance with the market’s ability to receive them,” said Jurgen Ligi, council chairman at Huvitusfond.

Hansapank receives major money shots

The Baltic Times, TALLINN
Nov 26, 1998
Kairi Kurm

Hansapank, the largest bank in the Baltic states, received a large loan and sold a big chunk of its share capital last week to Swedbank.

A total of 2.67 billion kroons ($198 million) was deposited in Hansapank’s account last week, 1.47 billion kroons of which came from a share issue and 1.2 billion kroons from a syndicated loan organized by the European Bank for Reconstruction and Development.

Hansapank has decided to use the money to pay back all its loans expiring this year and to lend money to Estonian companies.

“As the largest bank in the Baltics, Hansapank’s financial soundness and its ability to retain the confidence of the people are important to the health of the Estonian banking and enterprise sectors,” said EBRD Deputy Vice President David Hexter. “This project will therefore strengthen a key player and support it in meeting the financing requirements of the private sector.”

The 150 million deutschemark loan that Hansapank received on Nov. 17 is the biggest syndicated loan ever received by an Estonian financial institution. By completing this major loan, EBRD is supporting the development of the banking sector in the wake of the Russian crisis, reports EBRD in its press release.

The loan comprises a five-year 50 million DM loan from EBRD and a three-year 100 million DM loan from participant banks.

“There was a slight oversubscription to the syndicate loan and the fact that the loan interest is slightly higher than it has been earlier is quite normal in the present complicated market situation,” said Hexter.

According to Hansapank spokesman Mart Toevere, the interest rate is comparable to rates two years ago, but 1 percent higher than interest rates last summer.

“The money received from the loan will be used for the development of lending activities, but it should be kept in mind that the growth of Hansapank’s loan portfolio may not exceed the growth of the deposits,” said Toevere. “The amount of deposits decreased last month by 0.7 percent. We cannot predict a large increase in depositing although the interest rates on deposits have increased lately,” explained Toevere.

The interest rate on Hansapank loans excluding the percentage, which comes from additional risks, is about 17 percent.

Originally, the loan from EBRD had been intended to refinance Hansapank’s earlier loans, but the need for this disappeared in connection with the bank’s recent stock issue.

Hansapank raised 1.47 million kroons from its recent share issue that will cover three loans that Hansapank has to repay during this year for a total of 1.4 billion kroons.

Swedbank, which underwrote Hansapank’s issue at 100 kroons per share, bought most of the 14.708.890 shares issued from Nov. 2 to Nov. 15.

According to Lauri Lind, a broker at Hansapank, it was known that Swedbank would buy most of the shares, as the price of the shares issued was well above the market price. The average price of the Hansapank share during the subscription period was 57 kroons.

After the bank’s entry of the stock capital expansion in the business register, Hansapank’s share capital will rise from 588.4 million kroons to 735.4 million kroons, while the stake of Swedbank will rise to more than 60 percent. Swedbank has declared that its intention is to hold only one-third of the bank’s share capital and the rest will be sold to a strategic investor.


Tallinn brokers have seen better days

The Baltic Times, TALLINN
Nov 19, 1998
Kairi Kurm
As Tallinn Stock Exchange turnover is shrinking, some brokerage companies are thinking of quitting the bourse game.

With the total TSE turnover in October hardly reaching 340 million kroons ($24 million), the brokerage firms, which receive an 0.15 percent commission on average, were left with empty pockets.

According to the business newspaper Aripaev, brokerage firms have been looking for someone to buy them since spring. In an overall down period they don�t have much to do but to merge, be liquidated or find new markets.

Only 19 out of 24 TSE members are presently active. During the last two months, five brokerage licenses were suspended.

EVEA Pank and ERA Panks� brokerage licenses were suspended due to liquidation of the banks. The Vaartpaberiparisnike brokerage license was never renewed after it had expired. HF Kapital has stopped offering security services to its clients.

Handelsbanken Aktoris halted its license due to the company�s restructuring, but agreed with the TSE that it will get its status back.

Svenska Handelsbanken, which owns Handelsbanken Aktoris, may get a TSE remote member license in the future. A remote member is a brokerage company, which is not physically present in the country but can trade directly with the shares listed on the TSE.

The TSE plans to introduce the status of non-resident member next year, after the changes have been made in the law. According to TSE Board Chairman Gert Tiivas, foreign institutions have already expressed interest in this matter.

The biggest members of the Tallinn Stock Exchange are Hansapank, Uhispank, Forekspank, Beeta Varahaldus and Talinvest Suprema Securities. Those five biggest brokerage companies make up 80 percent of the TSE turnover. Hansapank covers about one third and Uhispank about 29 percent of the total turnover.


Uhispank reneges on deal

The Baltic Times, TALLINN
Nov 19, 1998
Kairi Kurm
Last year’s deal between the compensation fund Huvitusfond and Uhispank, Estonia’s second largest bank, may result in an 80 million kroon ($5.9 million) loss for one of the parties.

On Nov. 3, 1997, the fund concluded two transactions worth 143.7 million and 181 million kroons with Uhispank. Although both now agree that the 181 million kroon transaction was terminated the same day, both parties have different opinions on the other deal.

Huvitusfond says that on Nov. 3 they concluded a forward deal with Uhispank. According to this deal, Huvitusfond bought a number of different companies’ shares at current price to sell them for Uhispank on May 5, 1998. In return, the bank should have paid Huvitusfond 143.7 million kroons.

The bank now claims that both transactions were terminated the same evening because the Uhispank’s board was against taking such a big risk.

Huvitusfond representatives, on the other hand, say this deal was not scrapped because it is recorded in their 1997 annual report. They agree the 181 million kroon deal may have been terminated as the company has no documented information about it.

The fund, which was founded by the state to redeem compensation vouchers but was also allowed to carry out business deals, foresees 300 million kroon losses this year.

Andres Laisk, Huvitusfond’s spokesperson, said if the fund proves that the forward transaction is still valid, the 300 million kroon loss will be cut by 80 million kroons, the current value of shares the fund bought for Uhispank.

Uhispank�s Vice President Janek Maggi said the fund should not blame their losses on the bank. The 80 million kroon loss resulted because the shares lost their value, not because the bank did not pay for them, he said.

“The deal would have saved them from this loss. They acted as if the deal was valid in order to show the auditors that they did not [lose money on these shares],” said Maggi.

But Laisk denies the fund used the terminated deal to brighten up the balance sheet picture.

“Huvitusfond relies on documents, but Uhispank on emotions,” said Laisk.

At the beginning of 1998, Huvitusfond sent two confirmations of the deal to Uhispank, the first one to confirm the balance sheet liabilities and the second one to confirm the off-balance sheet liabilities, which also included the 143.7 million kroon transaction.

Uhispank, on the other hand, claims that the transaction was not recorded on the Huvitusfond�s confirmations, and if it were valid, it should have been concluded on May 5.

According to Andres Mannart, former Huvitusfond board member, the fund had several meetings with Uhispank�s representatives in order to find solutions to execute the deal.

Since relationships between the two organizations were still good at that time, Huvitusfond was ready to ease Uhispank’s liabilities, Mannart said.

Until Huvitusfond’s auditors and lawyers finish the investigation, the fund can not give any concrete opinion on the transaction, said Laisk.

But the fund still assures its bondholders that its bonds are still guaranteed and have a 7 percent fixed yearly interest regardless of the uncertainty surrounding the deal. The fund has issued bonds for 440 million kroons, the last date of purchase for which is 2002.

The board of Huvitusfond has been dismissed, and the new members are trying to clear up the present situation.

“As soon as the new board finds out what is going on, the truth will be told to the public,” said Maggi.

Huvitusfond and Uhispank both find that public argument about their controversies is neither conducive for business nor in the best interest of either party’s shareholders, clients and the whole community. The parties promised to inform the bourse and public immediately after the differences are resolved.