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E-shops seek partners

their living rooms, which in turn is generating stronger competition in the market for internet shopping. To be able to grow further and to penetrate new markets, online shops are seeking additional capital from strong financial partners.

their living rooms, which in turn is generating stronger competition in the market for internet shopping. To be able to grow further and to penetrate new markets, online shops are seeking additional capital from strong financial partners.

The turnover of Slovak online shops exceeded Sk2 billion last year, according to the Slovak Association of Electronic Trade.

The association expects that in 2008 turnover could reach Sk3 billion. Market watchers see continuing interest in online shopping and say investments in this market are likely to bring positive results.

In April this year the Czech online shop Kasa.cz, which also operates in Slovakia through Hej.sk, joined forces with Slovak private equity company Arca Capital in order to implement its market growth plans.

After initially buying a 30-percent share in Kasa.cz, Arca Capital finally became the owner of 60 percent of the company’s shares.

Kasa.cz is one of the top two online shops in the Czech market, while Hej.sk is number one in Slovak market.

“Although we make an above-average profit compared to the competition, we need to invest in expansion faster than we are able to earn,” said Martin Kasa, director of Kasa.cz in an official press release. “That would needlessly slow our expansion, at the very least. We did not want to waste the right moment. That is why we looked for an investor.”

Kasa.cz’s intention is to access more European markets because internet shopping is an interesting and fast-growing industry, Jitka Součková, marketing manager of Kasa.cz, told The Slovak Spectator.

Moreover, internet penetration in Central and Eastern Europe is high and customer interest in online shopping continues to grow.

“We have addressed several potential investors with this idea,” said Součková.

Kasa.cz looked for a suitable investor for more than a year. As the company has been financially healthy, finance was not its only criterion for selecting an investor. A long-term partnership which would offer advantageous synergy was important. Finally, Arca Capital emerged the winner.

“In favour of Arca Capital’s participation in this internet project was, apart from others, the fact that it is in an industry with strong growth potential in Central and Eastern Europe,” said Monika Dobrovodská, marketing manger of Arca Capital.

Apart from increasing Kasa.cz’s share capital, which was the first thing Arca Capital did, the new investor will also help the online shop to finance new acquisitions and access new markets in Central and Eastern European countries.

“Our aim is to become a Europe-wide company which will always be in the top three in the countries where it operates,” Součková said.

At the beginning of July the group penetrated the Hungarian market and is preparing to expand into Ukraine and Romania.

As an online shopping group, Kasa.cz currently operates in five European markets – the Czech Republic, Germany, Poland, Slovakia, and now in Hungary. Through its German branch it also operates an online shop in Austria.

Over the past years, European online shops have recorded growth of 20 percent on average, said Součková.

However, high turnovers with relatively low profits are typical in the industry. E-shops with a turnover of about Sk1 billion record profits in the tens of millions of crowns, at most. That is why if an online shop wants to be competitive and wants to develop further, it must seek strategic investors, she added.

Arca Capital expects that the trend towards consolidation in the e-shop market will continue in the whole of Central and Eastern Europe.

Arca is itself conducting investment negotiations with similar companies in Hungary and Romania, Dobrovodská said.

Consolidation is inevitable because a good negotiating position with suppliers can be built up only through size and market share, according to Dobrovodská.

Better deals from suppliers mean higher profit margins which can then be used to support further growth.

“We are already witnessing online shops uniting and sharing their customers,” said Ondrej Macko, editor in chief of PC Revue, an IT magazine. “This trend is strongest in the Central European market because this way of shopping is still in its initial stages there and strong growth is expected in line with strong GDP growth.”

PC Revue has conducted a survey of online shops from the point of view of end customers over the last two years.

In 2007 it still showed significant teething problems; however this year the results were remarkably better.

“From the point of view of investment opportunities, the Slovak internet market is a good bet which will probably pay off,” Macko said.

In 2007, Kasa.cz grew by more than 70 percent, achieving a total turnover of Kc1.28 billion.

Hej.sk’s revenues in 2007 were Sk387 million, representing year-on-year growth of 79 percent. In total, Hej.sk registered 53,000 orders, which was 76 percent more than last year. The average value of each order was Sk7,183.

In the first quarter of this year, Hej.sk’s total revenues were Sk85.3 million, an increase of 21.5 percent compared to the same period last year. Over the first three months of 2008 the company handled almost 15,700 orders.

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