V. Marketing U.S. Products and Services A. Distribution and Sales Channels Poland is a country of 38 million people whose appetite for Western imports has been strong over the past few years and, if trends continue, will remain healthy through the end of the century. Imports of consumer goods have been particularly heavy and, since the recent introduction of modern advertising practices, brand name recognition is strong and growing for Western and U.S. products. Imports of equipment and technology are also increasing, as Polish industry modernizes and restructures to compete with the Western world. What has been surprising to U.S. exporters in many industrial sectors is the familiarity among Poles with the technical parameters of their products prior to the actual introduction of those products on the marketplace. This is a combination of historical knowledge of some importers (who probably worked for a former foreign trade organization before 1989), and the fact that serious Polish importers do their homework. Distribution networks do exist in Poland. Recently developed, they are varied in their structure and scope. Most have been pieced together over the past few years and are product specific, particularly for consumer goods, with differing layers of agents, wholesalers or retailers. Industrial distributors may be lone rangers, with significant connections to their industry, or may be a part of a network that developed from former foreign trade organization. As industries and companies continue to privatize in Poland, distribution networks will expand in scope and complexity. A U.S. exporter seeking to sell in Poland should consider two important themes fundamental to the understanding of Polish distribution and sales channels. First, Poland's market (38 million consumers) is very large, often compared to but more than three times the size of Hungary, and 45 percent larger than Hungary, Slovakia, and the Czech Republic combined. Second, Poland's distribution system is only in its fifth year of development. It is supported by an educated and highly energized workforce with roots deep in entrepreneurism. Regulations on developing sales and distribution networks do not exist beyond those needed to establish a business. From the small company to the large multinational, U.S. firms still find it necessary to create modern distribution networks for their products in Poland. The pieces do exist including, as mentioned, some significant networks of sales contacts. Skilled labor is there, warehousing is abundant, and trucks are available. But, experience and practice in modern and efficient methods of distribution are still limited. Importantly, Poland is still a cash economy, and for consumer goods there are hundreds of thousands of small retail outlets across the country. Almost all are private, but pose a major logistical problem for the distributor. Large, modern, private department stores, grocery stores, and shopping malls are just beginning to pop-up in the major cities of Poland, Together, they can be counted on one hand. The shopping malls that do exist are mainly filled with up- scale boutiques. For example, consumer goods foster the need for local warehousing at points across the country and a broad-based sales force that must call upon the retailers. A distributor very often must train the retailers as well, e.g. convince them that they should carry and display the product, or provide a self standing display and convince them to take it, call on them again to collect the cash and check that the product has been sold (small retailers don't generally track their inventory), persuade them to replenish, and start the process over again in a continual cycle. It has been estimated that there are more than 3000 small retailers in Warsaw alone. Smaller U.S. companies usually begin with a small, regionally located distributor and then, "hands-on," develop a network from there. Larger firms may initially establish a regional warehouse system with a series of trucks and distributors to attack assorted markets across the country--a significant up-front investment. The poor road conditions, bad local telephone communications, and the still developing nature of the market itself make it difficult for one distributor (and extremely difficult for a foreign-based distributor) to cover all of Poland. B. Finding a Partner The word "distributor" is somewhat generic in Poland, often meaning any type of a Polish representative who will sell a product as a wholesaler, manufacturer's representative, or agent. A Polish distributor may take on one or many of these roles, and acts as importer and lead representative for the product in Poland. By nature, a U.S. company seeking to find a distributor in a developing foreign market like Poland generally hopes to find one that is experienced, knowledgeable, and well connected to existing lines of distribution for the product. Of course, as mentioned, existing lines of distribution for a particularly product often do not exist. Increasingly, U.S. companies are finding small, private Polish business owners who may need the product themselves for their business to be good candidates for distributors. In other cases, Polish companies in one line of business, for example a construction firm, may take on a product or act as a distributor for a product entirely different from their line of specialty, in order to generate additional income for their construction business. An entrepreneurial Pole, who perhaps worked in an automotive factory but because of the company's down-sizing lost his job, may with training make an excellent candidate as a representative for a specialty machine tool. One good way to locate potential distributors in Poland is through the U.S. and Foreign Commercial Service's (USFCS) "Agent/Distributor Service" (ADS) that finds and screens up to six potential contacts, or the USFCS "Gold Key" service that not only finds the contacts, but sets up meetings with them in advance of a U.S. exporter's business trip to Poland. Many business clubs and associations have been created in Poland, with thousands of company members. They too are excellent sources for potential business partners. Background checks can be conducted on potential partners through the USFCS "World Trader's Data Report' (WTDR). C. Franchising Franchising is new to Poland, but is already catching on as an exciting and profitable way of doing business. Well known U.S. franchises arrived first and introduced the concept and now dominate Poland's retail landscape. Their tremendous success over the last few years has proven the best advertisement for the promotion of franchising in Poland. The Polish Franchise Association (PFA), established in 1992, plays a predominant role in promoting franchising in Poland. The PFA assists potential Polish franchisees in their selection of international franchise concepts, and helps match local or foreign franchisors with potential Polish franchisees. The association also organizes training for Polish enterprises, government agencies, banks, and individuals. Although the total number of franchises in Poland is currently low (about 30 known trademarks), the PFA believes the Polish market has considerable demand for new, internationally known franchise concepts. Financing is the most critical element to successful market entry and penetration for U.S. businesses. The best franchise concept prospects are in services, inexpensive hotel chains, and fast food. High demand for new concepts and existing franchise expansions in Poland is directly related to very active and aggressive franchisors such as McDonald's and Pizza Hut (PepsiCo). These companies entered the market as known commodities with high levels of receptivity. Their recent expansions (new store openings), coupled with increased consumer demand for their products, are supported by aggressive print, radio, and television advertising campaigns. Though the market for new franchise concepts in Poland appears to be wide open, discussions with the Polish Franchise Association and with existing franchisees in Poland indicate that certain sectors may have more potential over the next few years. These include: maid and personal services, laundry and dry cleaning services, hotels and motels (including chains), and fast food operations. Given the recent surge in trade in various types of products, it also appears that franchise concepts such as auto parts and service, book and recorded music stores, and specialty food and consumer products stores have potential for success in Poland. It is customary for the franchisor to establish at least one successful pilot project before initiating an active search for franchisees. This aspect is less important when it is a large, well-known (e.g. U.S. brand) organization which already operates in several other European countries. In such cases, a local master franchisee can be expected to take on the responsibility of establishing the pilot project. Lesser-known franchisors attempting to locate Polish master licensees will face obstacles from a lack of name-recognition in Poland to inexperience with local business practices. There is no set practice in Poland for financing a franchise venture, as this depends greatly on the type of business it is. However financing might be the most critical element to successful market entry and penetration. Most Polish banks have yet to consider lending to franchisees as a safe way to start new business. They are slowly beginning to recognize benefits of supporting a franchise concept that has already been verified in practice. D. Direct Marketing Direct marketing of products and the techniques of directly promoting the product to the end-user is something relatively new to Poland. Polish companies appeared to be the originators of the practice in Poland, and most direct marketing is in Polish consumer products and services. Polish direct marketing practices, particularly those including direct mail leaflets or catalogs, can be directly correlated to the emergence of competition as a sales factor in Poland and the entry of advertising firms and new advertising concepts just a few years ago. As with other methods of promoting and selling products in Poland, the direct marketing field is wide open to innovations and new ideas. Direct marketing promotional materials, however, should be as detailed as possible, and products should be described in the Polish language with prices in Polish currency. E. Joint Ventures and Licensing Joint-ventures as a form of business are abundant in Poland, including those between Polish and Western partners. Most Polish joint-ventures are single shareholder companies set up, legally, for tax reasons under the automatic three- year tax holiday granted to all joint-ventures established before 1991. That general tax holiday has now expired. Tax holidays are still granted to joint-ventures provided the foreign capital contribution is: 1) more than 2 million ECU (about $3 million): and 2) the operation of the joint-venture is conducted in a region of high structural unemployment, leads to the transfer of new technology, and enables Polish exports of at least 20 percent of the company's sales. Many U.S. exporter and sales relationships in Poland are in the form of joint-ventures with Polish companies set up to handle the trade and share in the risks and rewards. As such, the joint-venture, if feasible, is an excellent way to facilitate the export sales on the Polish market. Many of the more than 200 members of the American Chamber of Commerce are joint-venture companies. Joint-ventures allow Polish partners access to increased capital, new products and services, and potential exports to world markets that they would not have on their own with limited working capital and expensive credit. The U.S. partner gains access to the Polish market and openings into the local government and local business environment that would take years to develop. The U.S. Department of Commerce's "Eastern European Business Information Center" (EEBIC) in Washington, with its branches at U.S. Embassies throughout Central and Eastern Europe (including 3 in Poland), is an excellent place to begin the search for a joint-venture partner. A joint-venture must be organized as either a "limited liability company" or a "joint stock company" in Poland, according to the Commercial Code. Special provisions apply to acquisitions of Polish companies. In certain cases, permission (a permit) is required to establish a joint venture. These include: the management of seaports and airports; real estate agencies or services; defense related industries; wholesale trade in imported consumer goods; or where a state-owned enterprise makes an in-kind contribution, as a part of itself, to the venture or leases its property for a period of more than six months. The minimum capital requirement for a limited liability company is 40 million zloty (currently about $1800), and 1 billion zloty (about $45,000) for a joint stock company. There are no maximum limits, and in-kind contributions are exempt from customs duty. Post tax profits from the venture, including those in foreign capital, may be exchanged into zloty and repatriated (at the end of each fiscal year of the venture) without subsequent permission. Proceeds from the sale of shares in the venture, or liquidation of the venture, may also be repatriated. Polish law does not allow interim dividends. Licensing of products, technology, technical data, and services has for the most part not been practiced in Poland, especially by U.S. firms. However, now that Poland has made major steps in intellectual property rights and copyright legislation it is probable that many U.S. firms will begin to license their products in Poland. On the day that the copyright law came into effect, Walt Disney announced the opening of its representative office in Poland, a private- sector signal to the importance of the legislation. Disney characters have been widely pirated for many years in Poland. F. Steps to Establishing an Office Short of a joint venture in Poland, and the legal intricacies of beginning that kind of operation, U.S. companies may establish representative offices in Poland through four types of arrangements. If a U.S. company needs to establish a presence to oversee or manage a project, it may establish a "site management" office for that operation alone without beginning any other form of trade or business activity. A U.S. company can also open a "technical information office" to provide general information about its products or services and technical assistance, but not sell those products or services. Services must be free of charge in Poland, and covered by the U.S. company. These two types of representative offices in Poland do not have legal status and no special permission is required to establish them. "Representative offices" are allowed to engage in business activity, including trade and the import of goods for sale in Poland. These offices should be fully funded by the U.S. parent company and cannot derive separate income from their activities. They are by law treated as parts of the U.S. company, and not separate legal entities. The alternative to the representative office is the "agency," whose activities are generally restricted to dealing in the goods and services of the parent company. These offices are subject to Value Added Tax (TAX) and income tax. They cannot receive tax holidays. Agencies may charge commission based upon their type of activity and the products and services they represent. An agency must be registered in the name of a Polish person or company. Office space in Poland varies in quality and price, depending upon its location in the country and in a city. Prices for premium office space is very expensive by world standards, and leases are generally quoted per square meter, per month. The current range is between $25 and $80 per meter per month in Warsaw. Making sure the office has telephone connections is still important in Poland. However, modern telephones, copy machines, faxes, computers, and office amenities are easily available and can be leased from a number of reputable Polish and Western firms. The secretarial labor pool is reasonably abundant, and an English speaking secretary with modest secretarial skills is easily found. Employees with Western management or accounting experience are difficult to find, as all Western firms are dipping into the same, limited labor pool. Heavy income taxes (20 to 40 percent) and social benefits (ZUS) packages (45 percent of the employees salary) for Polish personnel are the responsibility by law of the employing company, and foreign companies in Poland are treated as Polish entities. Expatriates who live and work in Poland for longer than six months (183 days) in one taxable year are treated as residents for tax and social benefits purposes. Poland has a double taxation treaty with the United States. G. Selling Factors and Techniques The book on selling in Poland has not been written. Because the market is young, diverse and rapidly developing, no factor or single set of factors will consistently influence a company's ability to sell its product. Certain things, however, are becoming apparent about the Polish business person and consumer. The Polish market is in most cases regional, and in some cases local. For example, Poles living along the Baltic and to the west, closer to Europe, have different views and are influenced differently than Poles in the industrial south of the country. It is also apparent that people in cities, particularly the major cities in Poland, have more purchasing power than those in rural areas. Unemployment is significantly lower in the cities. A product of the old system, the countryside is dotted with single-factory towns with high unemployment and the risk of significant job loss. Letters, faxes, and packages of product literature will introduce a Polish company to a product or service. However, a Polish customer generally won't consider making a final purchase until he has met with someone face-to-face about the product. Demonstrations of the product are also effective. This underscores the fact that in order to be successful in Poland, a U.S. company must have a representative in-country, whether it is an agent, distributor, or representative office. The Polish customer will want to discuss the technical parameters of the product, explain his needs, and negotiate the price. In addition, the product may not be sold in the first meeting, as the customer will want some time to further consider the points discussed, and try to arrange financing. Small, single first orders are usually the result, as major initial orders are unlikely due to limited amounts of working capital and high rates of interest on credit. Polish customers are generally enthusiastic about U.S. products and, if seriously interested, will travel across the country to meet with a U.S. representative who may be visiting Warsaw. This is an important point and should be recognized. If a customer has driven five hours from Krakow to Warsaw to meet with a U.S. company, the potential for a sale is good. If the proposal is well thought out, the pricing is flexible (or assistance with locating financing is offered), servicing and customer support is part of the package, chances are good that a contract will ultimately be written. Doing business in Poland is built upon personal relationships and trust. U.S. companies still have an advantage in Poland, as the U.S., its people, and its products are held in high regard. H. Advertising and Trade Promotion The trade fair business in Poland has boomed over the past few years, from a single major event (the June Poznan International Fair) to a year-long schedule of industry and product specific events in major cities around the country. Most industry specific trade fairs in Poland are newly emerged and still proving their worth. Some are better than others at attracting key Polish and international business. Fairs in computers, medical, environmental, automotive, agri-business, consumer goods, and building products have grown in popularity over recent years. The U.S. Embassy, through its Commercial Section (USFCS), currently operates a U.S. pavilion at the annual Polagra agri-business fair. U.S. company presence at trade fairs in Poland is increasing, as more and more U.S. firms and their dealers and representatives are finding them excellent avenues for product promotion. In order to expand their presence in the marketplace, U.S. companies must advertise their products in Poland. The most effective advertising media is now television--which reaches virtually every home in Poland via local channels and satellite. Products advertised through TV commercials show the greatest sales growth of all advertised products. Prices of these commercials are relatively high. Radio is another excellent means of advertising a product. There is perhaps more advertising on Polish radio today than music or programming. Both the radio and television sectors in Poland are privatizing, not only offering increased advertizing access to the media, but also export opportunities for U.S. broadcasting equipment and service firms. The most cost effective means of advertising a product, a job position, or the need for a agent or distributor, is through the print media. Major newspapers have circulations across the country and reach every corner of Poland. Poland is wholly literate, and people read the newspaper. In addition, the development of a market economy in Poland paralleled and exploded in new and private newspapers, magazines, and business journals. Most U.S. companies find them a highly effective means of reaching customers and candidates for jobs. Major international advertising and public relations agencies abound in Poland. They can assist with the wide variety of advertising mechanisms now available in Poland, including products displays on billboards and buses, and sophisticated electronic displays. In addition, many specialize in developing promotional venues for products or business start-ups. U.S. firms may also wish to participate in a number of promotional programs offered through the U.S. and Foreign Commercial Service (USFCS) in Warsaw, including catalog shows, specialized trade missions, matchmaking services, and the display of company literature in its Commercial Library. I. Pricing a Product Pricing is key to effectively selling a U.S. product in Poland. Exporters should be prepared to waive short-term profits for long-term gains and market share. High prices will bring frustration for the U.S. firm, and rejection from the Polish customer. Working capital is limited in Poland even among the larger, more successful Polish companies. Polish businesses generally spend money wisely, after thoughtful and sometimes significant consideration, as their survival as companies is often at stake. Polish distributors are not shy about telling the U.S. company that its prices may be too high for the market. Additional import duties, customs duties, and VAT will elevate the retail price dramatically. Distributors won't handle products that they cannot afford to sell, or those which won't be taken seriously by their customers. Learning that your products may be initially priced too high is extremely useful information. Being able to do something about it will breed success. Flexibility is the key, and initial market penetration to gain product knowledge among Polish consumers is the goal. Successful U.S. exporters work together with their Polish representatives to keep costs, particularly import costs, as low as possible while developing the market. Tight or non-existent profit margins may be the initial result. As the product sells and proves itself in the marketplace, prices can then be gradually increased and profit margins for the U.S. company and its Polish partner can be adjusted to expected levels. The Polish market for all kinds of products is huge and expanding, and U.S. companies that approach the market with a long-term view of creating market share for their products will reap great rewards. J. Sales Service and Customer Support After price, service is second on the list of the Polish customer's concerns. U.S. companies are strong in product servicing and customer support. They should use this to their advantage when promoting their products, particularly since they are disadvantaged in terms of duty treatment versus their European competition. However, a manufacturer in the United States is seen by both the Polish distributor and customer alike as being very far away from a product exported to Poland. A potential customer may shy away from a U.S. product only because of a fear of ineffective servicing, simply due to distance, should the product break down. U.S. manufacturers and exporters must combat this perception creatively and cost effectively. Shipping a product back to the United States for repair or service, even if paid for by the U.S. company, is not generally a preferred option for Polish customers. Sending spare parts to Poland is easily accomplished. But, unless the distributors or customers are trained in after sales service, they may be unable to repair the product. Unfortunately, this sometimes breeds distrust of the U.S. company. Some firms provide service for their exports to Poland through a European representatives or firms licensed to repair their products. Even then some distributors worry that may not get adequate support. The ideal method is to provide service and customer support through a trained Polish representative or U.S. affiliate company. U.S. manufacturers with major export accounts in Poland may wish to periodically send a service representative to Poland to work with the local representative and visit customers. K. Selling to the Government Legislation governing bid tendering procedures and government procurement is currently being drafted. There is evidence that the Polish government is striving to tender bids fairly and transparently, but the lack of clear legislation and resulting delays continue to frustrate U.S. business. Allegations of unfair play occasionally surface. The U.S. Embassy continues to encourage transparency in Poland's bid tendering procedure. The Polish government completed a draft public procurement law in March of 1994 and submitted it to the Polish parliament. The first draft of the public procurement law was originally included in a package of seven laws by the previous government aimed at reforming Polish public administration. The new version is slightly changed and reflects a preference for domestic companies. This law will apply in all cases where public money is used to procure commodities, services and construction works. The law's procurement procedures need not be followed in the case of purchases less than $25,000. If the law passes, the purchasing agency can request that the commodity to be purchased contains at least fifty percent Polish content. In the case of services, the use of Polish labor can be required. A public purchases office will oversee these activities and publish a bulletin listing public procurement opportunities. An open tender procedure will be used as the standard. This office will have the authority to exempt purchases over $250,000 from the open tender procedure. A two-stage tender (request for offers and negotiations with targeted potential suppliers) would be used only in justified cases, such as a natural catastrophe. Final implementation of this new law on public procurement is expected to help U.S. companies gain easier access and increase opportunities to sell to the Polish government and bid on major government projects. Introduction of transparent procedures for open bid processes in large- scale projects will lay additional groundwork for fair competition. In the past, major governmental projects and contracts in Poland have been reopened for examination and expanded bids. Governmental and quasi-governmental committees and consultants were set up to analyze and review major projects and consider bidders and their proposals. Revisions to proposals were requested. This often caused considerable questions and delayed projects. L. Protection from IPR Infringement Protection of intellectual property has been and continues to be a major concern for U.S. companies. It can be an obstacle to increased foreign investment in Poland. An amended law on trademarks and new copyright laws exist and will help, but enforcement of these laws will remain a key issue. Poland's trademark law of 1985 was recently amended to impose punishments on those who illegally use registered trademarks in Poland. According to estimates, approximately 80 percent of clothing and 50 percent of coffee on the Polish market is sold under "pirated" trademarks. The former trademark law prohibited the placing of counterfeit trademarks on goods, but did not prevent people or companies from selling or distributing products with pirated trademarks. The newly amended law provides for up to a year imprisonment or penalty for those who sell goods with counterfeit trademarks or place such trademarks on goods, and is expected to be an important step toward fighting trademark piracy. A new copyright law came into force in June 1994 and is now in place in Poland. It is in line with international standards and is considered the first significant step towards the protection of intellectual property rights in Poland. The new copyright law introduces protection of not only literary, musical and graphic works, but also of computer software, audio-visual works and industrial patterns. It extends copyright protection from 25 to 50 years to comply with international standards, and protects not only authors, but also producers, artists and performers. Estimates show that the State Treasury in Poland lost a minimum of $25 million in 1993, and Polish producers and artists lost about $50 million to audio and video cassette piracy alone. The new copyright legislation will allow legal battles to begin, and it provides for the confiscation of products, return of the profits attained, and up to a year imprisonment or penalty. It is strongly believed that both the new copyright law and the trademark law will effectively help fight existing piracy, while the quality of protected products legally manufactured will attract new customers. M. Need for a Local Attorney U.S. company perceptions vary on the need for legal assistance in Poland. Solid advice from experts skilled and experienced in Polish legal matters can benefit a U.S. company. This is particularly true when bidding on a major project, forming a joint-venture, or untangling a trade dispute. Most Polish and U.S. law firms offer business counseling in addition to legal advice. Some are even experienced in helping their contacts find Polish business partners, investments, or projects to pursue. U.S. accounting and consulting firms in Poland can also offer legal advice and business counseling. Most of the major international accounting firms have operations in Poland which focus on business formation, tax matters, and employee benefits. Many are also involved in the privatization process in Poland, including advising the Polish government. All can offer practical business counseling and assistance in establishing a representative office or incorporating a business. A U.S. exporter new to the Polish market may not initially need specialized legal, accounting, or consulting advice as it pursues potential partners. It can, however, take comfort in knowing that expert advice is abundant and available to them in Poland, through the offices of major U.S. law and consulting firms, when disputes arise.