The Impact of Private Equity in Emerging Markets

Case Study: Żabka ()

Żabka’s The Company Story Following a wave of privatizations in 1990, the Polish market was highly fragmented, with more than 90% of the market consisting of small grocery shops. As international firms and investors such as Groupe , and de- scended upon Poland to capitalize on the Essentials country’s economic growth and rising con- sumer income, they focused their attention Company: Zabka S.A., www2.zabka.pl on large-scale super- and hypermarkets. Country: Poland In the early 1990s, Polish entrepreneur Mariusz Sector: Retail Switalski seized an opportunity to build a chain of cash-and-carry warehouses ()—the Business focus: operator first in the CEE region—and subsequently went on to found , the largest discount Size: Turnover of US$400 million (FY 2007) store chain in Poland with more than 1,700 GP: PineBridge Investments, a global asset outlets. After selling the Biedronka chain to manager committed to sustainable private Jerónimo Martins, the Portuguese food distri- sector growth in emerging markets bution company and hypermarket operator, (www.pinebridge.com) Switalski and his team scoured the Polish retail market for the next great business idea. Date of investment: 2000 By 2000, Zabka had expanded rapidly, with In 1998, Switalski and his business partners roughly 400 stores located throughout the Investment: PineBridge invested US$24 million reflected upon the strong tradition among Polish country. However, the company needed out of its New Europe Fund I for a 46% stake consumers to shop in small neighborhood capital to finance further expansion. Zabka groceries, and zeroed in on the concept to confronted the “finance gap” common to create a national network of convenience stores. small- and medium-sized enterprises in emerg- Impact Highlights That year, they founded Zabka and opened ing markets: local banks and financial institu- With support from PineBridge, Zabka developed the company’s first eight stores; in 1999, the tions were unwilling to lend to the company. over 1,400 stores and increased its revenues Zabka network expanded to 50 stores. Zabka needed an alternative source of capital. from US$50 million in 2000 to roughly US$400 million in 2007; it is now one of the largest convenience store networks in Europe PineBridge helped to increase sales per store by expanding the product mix, improving The Role Played by inventory management and pursuing an advertising campaign Private Equity During PineBridge’s involvement, Zabka restructured and reduced the costs of store Zabka hired an advisor to identify sources team had proven themselves to be capable entre- owners (“Agents”) and company management of financing. Neither Switalski nor his preneurs given their previous successes with Euro- (“Partners”), and reduced store operating costs business partners had heard of private eq- cash and Biedronka. Moreover, Switalski had invest- uity, but the advisor suggested the Zabka ed US$13 million into Zabka, creating a favorable PineBridge helped to professionalize Zabka’s team look into PineBridge Investments—a alignment of incentives. Finally, the Zabka concept business by driving improvements in corporate private equity investor that was actively had demonstrated its potential through the solid governance and strengthening the Board of sourcing deals in the CEE region—not performance of its initial eight-store pilot program. Directors only as a source of capital, but also as Between 2000 and 2002, PineBridge invested a partner that could build Zabka’s cred- US$24 million to acquire a 46% stake in Zabka ibility with local financial institutions. and quickly set about working with the company’s From PineBridge’s perspective, Zabka offered a management team to scale its operations and cre- compelling investment thesis. Switalski and his ate value. 

September 2011 The Company View

“Thanks to the fruitful collaboration “Mariusz is an inspiring entrepreneur. Our investment in Żabka was with PineBridge, Zabka was able to a resounding success, so when we learned of his latest retail concept, implement international accounting both sides were delighted at the idea of joining forces together again standards and efficient management and bringing this new concept to the market without delay.” systems. These initiatives helped us Pierre Mellinger, President & CEO, PineBridge Investments increase our credibility among local financial institutions and prepared the company for sale.”  As a first order of business, PineBridge trend, PineBridge and Zabka embarked upon a “We are proud of the worked with Zabka to develop a corpo- marketing campaign to increase brand recogni- rate strategy and expansion plan. The deal tion, expanded the assortment of products on achievements we team’s sensitivity analysis on the investment offer in each store and extended the operat- accomplished with revealed that the capital required to scale ing hours to capture the market for middle up Zabka’s footprint was highly dependent class customers who worked long hours. PineBridge. Our upon some key variables, including the pace At the same time, PineBridge worked with of the roll-out, sales per store and sup- history together gives Zabka to adopt International Accounting ply chain efficiencies. As a result, the team Standards (IFRS) and improve corporate us confidence in our implemented SAP management information governance. These enhancements were critical systems to monitor company performance. subsequent projects, as Zabka sought to acquire bank financing including our latest In the first half of 2000, Zabka had been for its continued growth, and as PineBridge launching more than 50 stores per month; and Switalski sought to exit the company. company, Czerwona as the roll-out pace increased following The efforts paid off. Zabka secured debt PineBridge’s investment, Zabka’s manage- Torebka, and we know from local banks, and PineBridge and Swital- ment faced high rotation among its pool of ski exited Zabka in 2007 in a secondary that our greatest “Partners”—one-third of them were replaced sale to Penta Investments, realizing an IRR during the first six months. To deal with this successes are still of 22% and a 3.5x cash-on-cash return. churn, the company adopted a new incentive ahead of us.” system that enabled it to scale up its staff of Following their successful partnership, Mariusz Świtalski, “Partners” while maintaining low fixed costs. PineBridge recently invested in Switalski’s most recent business endeavor, Czerwona As the company scaled its footprint, its an- Founder, Żabka Torebka, a new platform for specialty re- nual sales per store were running lower than tailers, including banks, flower shops, the assumed figure, which was a key driver butchers and fast food operators. of the project’s economics. To counter this Beyond the Bottom Line While convenience stores can be found PineBridge’s support to Zabka was critical to the in most developed countries, the history, company’s growth. Without the improvements culture and regulatory environment in to corporate governance and the introduction of Poland—an economy that was in transition IFRS, Zabka would have been shut off from bank from communism to capitalism—created loans and faced a muted growth trajectory. Yet, unique challenges. as a result of the professionalized controls and re- porting, Zabka expanded its footprint and created The Zabka concept proved to be successful a number of jobs for Polish entrepreneurs—the because it targeted a broad customer base, and majority of Zabka’s stores are family-run businesses. it offered convenient shopping for the average Polish family. Moreover, the company adapted its business model to respond to the needs and expectations of its customers.

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