International financial institutions often promote privatization as an early step in a successful transition to a market economy. But developments in Bulgaria's wine sector show that privatization alone isn't enough to make a firm profitable. Two of Bulgaria's largest privatized winemakers are merging parts of their operations in order to remain competitive in Western markets. RFE/RL correspondent Ron Synovitz takes a closer look.
Prague, 29 November 2000 (RFE/RL) -- A planned merger of activities by Bulgaria's two largest winemakers shows that privatization alone isn't enough to increase the productivity of firms in eastern Europe.
A key follow-up step to privatization and modernization is restructuring.
Privately owned winemakers Domaine Boyar and Vinprom Ruse hope to become more competitive in Western markets through a restructuring strategy that calls for management, investment, and marketing to be united under a single new holding company.
Vladimir Ishpekov, sales director for Domaine Boyar's London- based parent company, Boyar International, admits the deal is unusual for Eastern and Central Europe:
"It is true that this is not a process that is fast developing in Central and Eastern Europe. But it is a natural process of consolidation which effectively would reflect what is happening, let's say, in the retail sector of Western Europe."
Ishpekov told RFE/RL he expects the merger to be approved before year's end by Domaine Boyar's main creditor and minority shareholder -- the European Bank for Reconstruction and Development.
Boyar International first grabbed a strong market position in Britain during the 1980s before the collapse of communism. Domaine Boyar started as a marketing branch of Boyar International in 1991. As late as the mid-1990s, inexpensive wine was still one of the few agricultural products Bulgaria could sell to the West in quantities beyond the quota limits of its trade agreements with the European Union.
But problems began to emerge for Domaine Boyar in 1997 when Bulgaria's agriculture sector was ravaged by economic crisis. Domaine Boyar was dependent upon independent farmers in Bulgaria for its supply of grapes. But the crisis of 1997, followed by poor grape harvests in 1998 and 1999, forced the firm to pay higher prices for lower-quality grapes. Meanwhile, strong competition for inexpensive wines started to emerge in Chile, South Africa, Portugal, and even southern France.
Ishpekov told RFE/RL that Domaine Boyar sees its planned merger with Vinprom Ruse as a way to secure a consistent supply of quality grapes -- allowing both firms to build new market positions in the West with higher quality wines.
"The newly merged company, first of all, will be the largest producer and exporter of Bulgarian wines. Most importantly, through previous investments and the investment program for the future, it will become also one of the biggest grape growers in the country because the future investment program focuses primarily on planting new vineyards and acquisitions of vineyards."
Domaine Boyar is an unusual phenomenon in Eastern and Central Europe. It began as a private marketing firm soon after the collapse of communism. But faced with an unstable supply of grapes, Domaine Boyar has been reinvesting its profits back in Bulgaria -- buying up vineyards and winemaking facilities. The firm recently opened a new winery in the Bulgarian town of Sliven. It also has purchased and modernized two older wineries at Shumen and Iambol.
The EBRD's role has been to provide Domaine Boyar with $17 million in credits for the expansion, along with help to secure a more than $8 million loan from the Dutch ING Bank. The EBRD also has spent almost $2 million to obtain an 8 percent stake in Domaine Boyar. At the same time, the U.S.-based SeaBoard Overseas has invested $15 million since 1998 in Vinprom Ruse.
Not all players in the Bulgarian wine sector agree that mergers would improve the quality of the country's wines.
Bagdan Madzhukov, secretary of the Bulgarian Wine Producers' Community, argues that too much consolidation could drive some smaller winemakers out of business.
"When the conditions are right from the economic point of view, these kind of mergers could be regarded as positive. But I personally have reservations. I believe that good quality could be achieved in smaller production facilities. The bigger enterprises are good for mass production. For these big enterprises, it is difficult to achieve good quality."
Of all the wine-making countries of Eastern Europe, Bulgaria has been the most focused on directing production toward export markets. If the proposed merger between Domaine Boyar and Vinprom Ruse is successful, it will become a textbook example on how restructuring can improve the competitiveness of Eastern and Central European firms that are increasingly looking West for export markets.