Challenge and opportunity in a widely diverse market

The economy of Eastern Europe covers a wide expanse - from eastern Central Europe to the countries bordering Asia - and, as in Western Europe, the situation varies from country to country.
Growth for laundry operators is still generally fairly slow, says Bernard Jomard at Danube International, which works across all countries in the region. "The situation in Romania and Ukraine is still down, while Bulgaria is unstable but recovering," Jomard says. "Laundry operators are just looking for a reasonable return on investment."
Mojca Krepek from Slovenia-based Krebe Tippo says Eastern Europe is a varied mix of countries that differ in economy as much as in culture. "For example, Slovenia is strongly connected to Germany and Austria, which helps to stabilise the position of our country with regard to the recession."
In addition to Slovenia, Krebe Tippo's main markets in Eastern Europe are those of the ex-Yugoslavia (Croatia, Bosnia and Herzegovina, Serbia, Montenegro, Kosovo and Macedonia), as well as Albania, the Czech Republic, Slovakia, Poland, Romania and Bulgaria.
Krepek says that while the recession is substantially over, it is still impacting on the public sector where investments have been postponed. "Slovenia has been very much affected by the Eurozone crisis, but it was mostly in terms of GDP growth which stopped public investment," she explains. "Banks have severely reduced their financial options. This has prevented healthy investment but still allows normal business flow."
However, she adds that while Slovenia is considered to be in recession, the market "is vibrant".
The Eastern European laundry sector tends to be more dispersed than in the West and international groups have a smaller market share. It is divided into large laundries processing 10 - 50tons a day, middle-sized laundries with a throughput of 1 - 10tons a day and several small commercial laundries processing less than a ton a day. The majority of laundries tend to be
family-run businesses where the owner plays a hands-on role in production or in delivering laundry to customers.
The main sectors are healthcare and groups of independents serving hotels and private institutions such as nursing homes, many of which have in-house laundries. However, according to Petr Jurutka, managing director for Lapauw in Central and Eastern Europe, about half of the hospitals rely on laundry services from larger commercial laundries, often in connection with rental linen. Textile rental is not yet common in the region, although there are signs that it is beginning to grow. Coin-op laundries are also not common but are beginning to appear, particularly in Estonia.
Kannegiesser director of sales and marketing Otto Burger observes that the health and hotel sector is moving towards outsourcing.
"In central European countries such as Poland and Slovakia, centralisation is very advanced but in other countries such as Bulgaria, where OPLs are most common, centralisation is still developing."
Ironers and washing machines take top place among the products sold by Kannegiesser in the region. These include the PowerTrans Plus batch washer and FavoritPlus washer-extractor, both of which help customers to reduce consumption costs, and Kannegiesser's modern ironer lines.
"Environmental regulations and other legislation are central topics in the laundry sector," says Burger. "They have a huge impact on the sector because they complicate modernisation. Not every laundry that wants to invest in machinery gets credit from a bank. But in some countries modernisation is subsidised by the government or financed by other European funds."
The lack of money in the region has meant that the privatisation of laundries has become a major trend. "Laundries are under pressure from international hotel groups entering the market to deliver high-quality linen at acceptable prices," comments Stig Jallov, sales director Eastern Europe for Jensen.
"Consolidation is key, involving large groups from both Western Europe and Eastern Europe." Jallov says that investment has moved from purchases of single machines to total automation, with highly productive single machines that are "knitted together" with materials handling solutions to provide the highest level of automation.
"By providing this competitive edge to their customers, they can grow their business in a profitable way and, at the same time, qualify for extra subsidies from the state or even the EU," he adds.

Competition and overcapacity
However, subsidies from the EU have not always had a positive impact, says Juha Niinisaari, Christeyns' regional director for North East Europe.
"Competition is a major concern. In some countries, laundries have built over capacity with EU financial help," he says. "This has led to a situation where most laundries are not especially interested in developing their processes to become more environmentally friendly." Environmental issues generally have less commercial weight in the region than in Western Europe and there are still many laundries with machines that are 20 - 30 years old.
However, as the region grows, new laundries are being built and they tend to get new machinery with a similar profile to that used in the West.
Lapauw's Jirutka agrees that overcapacity and competition has created challenges for the market in the region. "The price level is very low," he says. "In many cases, it enables them to only cover the direct costs of the washing and ironing process but not the cost of the depreciation of the machinery. Many laundries are not, therefore, able to invest in modern machinery when the old machinery is at the end of its economic and technical life cycle."
He suggests that while EU financing may help them buy new machines, it can also result in a further decrease in the level of laundry pricing, reducing the competitiveness of those laundries that do not receive subsidies and pushing some of them to the brink of bankruptcy.
However, he acknowledges that special financing from the EU, and grants from EU environmental programmes, may often be the only way for small- to medium-sized laundries, some of which still use coal-heated steam generators, to finance investment in modern equipment.
Jirutka says that one of the most difficult markets is Hungary. One reason is that it has very bad and long payment terms because of the lack of capital. "This means that one of the biggest laundries in Hungary would have around €700,000 worth of invoices overdue from hotels and hospitals. The situation is the same in all big laundries," he explains. In addition, banks in Hungary offer credit at an interest rate of around 8 - 10%, so it is impossible to finance investment in a new machine using bank credit.
Another problem is the unpredictable economic situation. He describes a case where a laundry had a five-year rental contract for a hospital laundry that was then cancelled by the new government. The court case for indemnification began two years ago but is still ongoing.
Speaking generally Jirutka says: "The big laundries are not able to plan their future. They haven't got any vision and are scared to make decisions about larger investments."
Lapauw's most popular products in the Central and Eastern European region are ironers and complete ironing lines, the majority of which are modern gas-heated chest ironers. It also often gets requests for its HotStream tunnel finisher and is expecting demand in future for its newly designed Mediwave barrier washer-extractor.
Alliance Laundry Systems is currently actively working in Poland, the Czech Republic, the Ukraine and Slovakia. Despite the financial constraints and the reduction in new government projects (the government is still the largest customer in Eastern Europe), Alliance's director of business development for Europe John Balman thinks there are great opportunities for future growth in these countries.
"One trend in Eastern Europe is to cut the prices on projects. If funds are available and price is not an issue, then customers in this region will start to ask for eco-friendly and energy-saving products, as they do in Western Europe," he says. "Recently we have started to see a lot of interest in laundromats. We're the perfect company to help the vended laundry segment grow in Eastern Europe because we have the broadest knowledge of this segment."
The company is gearing up to support the opening of Speed Queen-branded laundromats in Europe and other regions of the world, Balman says.
Although Poland is viewed by most suppliers as a growing market, financial constraints are biting, according to Szymon Wieckowski from Alux. He says it is not easy to sell new machines in either the laundry or the drycleaning sector. He says many people are nervous of spending the money required to buy new, modern machines and look instead for used machines. "It is easier with new investors," Wieckowski says. "They are more open to new technologies, such as machines that use new solvents and new machines for wetcleaning, a trend that is still developing."
The majority of Poland's laundries are medium-sized family businesses. Most provincial hospitals have their own laundries, while the private hospital sector often uses external laundries. There are a few coin-op laundries in the big cities but otherwise they are not common.
Poland's drycleaning sector consists of around 2,200 shops, about 10 - 15% of which are part of a chain.

Opportunities in the region
In the drycleaning sector, Marco Niccolini from Renzacci sees lots of opportunities in the region. "There is a lot of dynamism, especially in countries such as Hungary and Poland where there are opportunities from businesses opening up and from the replacement of old machines," he says.
There is a growing interest in new machines in Bulgaria and Romania, although business is currently not quite as dynamic as it is in Hungary and Poland. In the Czech Republic, the move to new machines began earlier so it is "a bit more saturated", Niccolini says.
As the middle class grows in the region, so too will the need for more, and more efficient, drycleaning equipment. While total expenditure on drycleaning is lower in Eastern Europe than in Western Europe, average expenditure is higher, and Niccolini believes that it will increase as the economy improves.
There are two main different types of drycleaning shop in Eastern Europe. There is the franchising chain, mainly made up of the main international brands operating in commercial centres in the big cities; and the traditional, family-owned businesses with a centralised processing unit that serves more than one drop store.
Although environmental regulation is still somewhat behind that of Western Europe in many of the countries, Niccolini says there is definite interest in alternative solvents such as hydrocarbons and K4. "In Eastern Europe, alternative solvents have revived drycleaning businesses a lot," he adds. Renzacci is currently working with a number of drycleaning chains that operate in the region on plans for new machines, one of which will bring the alternative solvent philosophy to six Eastern European countries, including Hungary, Slovakia, the Czech Republic and Poland.
GreenEarth is also exploring the growing opportunities for alternative solvents in the region. The company currently has affiliates operating in Russia and the Ukraine and is negotiating agreements in Poland, Latvia and the remaining CIS countries.
"Environmental awareness on the part of legislators, drycleaners and end users is on the rise," says GreenEarth president Tim Maxwell, adding that in addition to rising interest in fashion and brand awareness among the growing middle class, there is also more significant use of leather and furs in Eastern Europe than there is in Western Europe. "This factor, combined with the gentle nature of the GreenEarth Cleaning system, allows many garments that have decorative trims such as sequins and beads or with strong colours to be processed in a retail drycleaning shop rather than being sent out to a wholesale expert."
GreenEarth is hoping to replicate its success in Russia, where it signed up more than 20 affiliates in less than a year. "It is hard to quantify how much of GreenEarth's success is due to environmental factors and how much is due to its drycleaning efficacy," says Maxwell. "However, the prognosis looks good in any event."