Cablegate: Polish Consumer E-Commerce: Considerations for New

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DE RUEHWR #1493/01 1791440
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R 281440Z JUN 07
FM AMEMBASSY WARSAW
TO RUEHC/SECSTATE WASHDC 4698
INFO RUEHKW/AMCONSUL KRAKOW 1761
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UNCLAS SECTION 01 OF 02 WARSAW 001493

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/NCE, EUR/ERA, EEB/CIP
EUR/NCE FOR DKOSTELANCIK, BPUTNEY
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS, JKIMBALL, MROGERS
TREASURY FOR MGAERTNER

E.O. 12958: N/A
TAGS: ECPS ECON EINT EINV PL
SUBJECT: Polish consumer e-commerce: Considerations for new
entrants.

REF: A) Warsaw 00735, B) Warsaw 01117

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Summary
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1. Leading Polish internet players have a recipe for success in the
Polish and other central European internet markets. New entrants
following the lead of these players should consider online
infrastructure, logistics, consumer market characteristics and
online consumer behavior when making the decision to invest. End
Summary.

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Who Are the Market Leaders?
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2. As mentioned in ref A, the Polish online consumer market is
expected to grow to 16 billion zloty ($5.4 billion) by 2010.
Stepping up to serve Polish online consumers are internet auction
houses and regular online stores. The most successful auction house
is Allegro.pl, with 2.5 billion ($950,000) zloty in sales for 2006,
7 million monthly users, and almost 2 million active auctions at any
time. With one eighth the active auctions, rival Swistak comes in
at second place, followed closely by ebay.pl. Among online stores,
Merlin leads with a little more than 60 million Zloty ($19 million)
in sales and 1.65 million monthly users, followed by wysylkowa.pl
and empik.com. American giant Amazon.com comes in fourth with
615,000 monthly users.

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What Are their Recipes for Success?
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3. The recipe for success of Allegro, Merlin, and other Polish
internet players includes being the first to market and having an
understanding of the Polish marketplace. These factors perhaps
explain why American giants ebay and Amazon are still far behind in
monthly customer visits. Polish internet players are now using this
recipe to expand into other central and eastern European markets
where competitors are few and market preferences similar. Allegro
already has a majority share in Hungarian and Czech markets, and
instant messenger player Gadu-Gadu has successfully established a
presence in the Baltic States. For many, the next target is
Ukraine, which has been described as "Poland circa 2000".

4. It is clear that being the first major player to market is a key
advantage over subsequent rivals. Both Allegro and Gadu-Gadu
established a strong domestic presence before the arrival of eBay
and Skype and maintain number-one positions in their respective
markets.

5. While it may be a matter of time and additional experience
before newer entrants can overcome the first-to-market advantage of
the current leaders, an understanding of the Polish market is also
important to success. Specifically, what challenges and market
peculiarities should new entrants be aware of. Our discussions with
a public relationship specialist for Merlin identified the
following: online infrastructure, logistics, consumer price
sensitivity, and internet behavior.

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What are the Challenges?
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6. One major challenge is the volume of Polish business
interactions that are still conducted on paper, which means that new
entrants may face supply chains that are not yet "internet ready"
when setting up their businesses. In Merlin's case, there was no
comprehensive electronic registry of Polish publications, a critical
component for an online bookstore. In the end, Merlin created its
own registry - an intensive and painstaking process. There has been
one advantage - Merlin created a competitive advantage for itself
and is now able to sell access rights to its publications database
to other interested partiesinthe Polish publishing industry.

7. Another challenge is fulfilling customer orders. The lower
volume of orders and relatively poorer transport infrastructure in
Poland made timely, cost effective deliveries to rural areas
difficult. Merlin experienced standard delivery times of three to
four weeks, and damaged deliveries are a consistent problem.
Package tracking availability and reliability is inconsistent.
Although such delivery services are technically outside of Merlin's
control, they are an important consideration and will become more so

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as Polish consumer demands for delivery reliability and information
mature.

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Consumer Behavior
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8. Besides some challenges associated with setting up an online
business, Polish online consumer characteristics are important to
product mix, website design, and payment type. Merlin's continued
focus on lowest price offerings indicates that even with the growth
and diversification of the Polish consumer market, the Polish
consumer continues to be price sensitive. As mentioned in ref B,
this sensitivity to price is reflected by the popularity of price
comparison websites such as ceneo.pl, and by the relatively low
market share of more expensive "lifestyle" products such as apple's
iPod, which comprises only 3% of the Polish mp3 player market.

9. Additionally, the Polish online consumer spends more time per
online session than others, and is not yet comfortable with finding
online solutions to questions - an overwhelming majority of
consumers still prefer to call the helpdesk. Only 2% of Merlin
customers use online tools to determine the status of their order.
This suggests that user-friendly websites can generate additional
purchases while reducing customer support expenses.

10. Another interesting characteristic is that Polish online
consumers avoid credit card payments. Cash on delivery and
electronic funds transfers each account for 35% of purchases;
pre-payments into Merlin customer accounts at the post office, a
further 5%. Credit cards account for only 25%, making other payment
methods vital to the success of any new entrant in the Polish
marketplace.

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Comment
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11. The Polish internet market, while potentially lucrative, still
encounters infrastructure and logistical challenges. In addition,
Polish consumers' online behavior and payment preferences suggest
that while the average online user can browse the internet, there is
a lower level of expertise and comfort when it comes to locating,
ordering, requesting help, and paying for products and services
online. Despite this, Polish market leaders have been successful in
Poland and are using their experience to expand into surrounding
countries.

12. In order to maximize the chance of success, there are two
strategies new entrants to the Polish market may wish to consider.
One strategy is partnering with a local firm that can help new
entrants understand the local market, its peculiarities, set up
considerations, and any supply chain and infrastructure challenges.
A second strategy is focusing on a product or service that is
appropriate for the current level of online market development,
delivery capability, and online consumer price sensitivity,
behavior, and maturity.

ASHE

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