Market Entry Strategy

We suggest a regional approach involving one or more Central and Eastern European countries.  It is also crucial to find a local partner.

Using an Agent or Distributor

The Czech Republic is geographically small, with 10 percent of the population and most decision-makers concentrated in the capital city of Prague. It is a market where good personal relationships are crucial, and everyone seems to know everyone else. Therefore, we recommend basing your approach on finding and supporting a Czech partner, agent, or distributor. An agent or distributor based in Prague can offer good coverage of the entire country. Though many will offer to represent your firm throughout Central Europe, we have found that a one-country, one-agent approach works best. In general, agents and distributors will expect exclusivity. Be careful to negotiate an agreement that ties exclusivity to performance, either with a time limitation on the agent/distributor agreement, or a clause that allows termination for non-performance. Good support and management of the agent-distributor relationship is crucial. Many distributors are thinly capitalized and understaffed, yet represent a wide variety of foreign companies. They often focus efforts on the hottest-selling product of the moment, at the neglect of others. Professional services firms, educational institutions, and engineering firms should use local partners as their entrée into the market. Using a local partner’s facilities and staff will bring costs down to competitive levels, and your local partner’s contacts will be crucial to developing business. Many U.S. firms use the Commercial Service’s Gold Key program and trade missions to meet and interview potential partners. For more information on these and other services, please view our website: http://www.buyusa.gov/czechrepublic/en/.

Establishing an Office

For most small or mid-sized firms, an office in the Czech Republic is not worth the time and expense. If you decide to do so, however, we recommend that you work with a local attorney who can take on the burden of corporate registration and other paperwork. Prague has a well-educated, multilingual population, many of whom have years of experience in working for Western firms. Companies offering attractive salaries can normally secure a talented nucleus of local staff for a new office. Executive recruiting firms are active in Prague, though most executives use word-of-mouth to make hiring decisions.

Franchising

Franchising is poised to see rapid growth in the Czech market in the next few years. There are approximately 90 franchised brands in the Czech Republic, compared to 330 in Austria and 170 in Belgium--this business model is still in its beginnings. However, the total number of licensee holders was increased 4 times in the last 5 years, from 143 to 752 holders. The number of franchising facilities was increased 9 times from 130 to 1450 units. There is still much room for growth. McDonald's and KFC have founded their own outlets in the Czech Republic, although a slowly increasing number are now owner-operated franchises. Hotel franchising, one of the most successful concepts worldwide, is still waiting for its boom in the Czech Republic, though it is more widespread than other types of franchising. Most franchised hotels, however, are clustered in Prague, and the Czech Republic’s second and third tier cities are hungry for internationally known hotel brands. One challenge is that few Czechs have the capital or experience to invest in their own franchises; typical master franchise networks have yet to develop. Franchise holders are in most cases recruited from abroad. Komercni Banka does offer a financing program geared towards potential franchisees in the Czech Republic (http://www.kb.cz/en/) From a legal perspective, franchising takes the form of a contract between two entities that is regulated by the Commercial Code pertaining to commercial contracts and sales and licensing agreements.

Direct Marketing

The top direct marketers in the Czech Republic are Amway, Avon, Just, Lux, Mary Kay, Oriflame, Tupperware, Vorwerk and WS International. Turnover in this market is about $201.1 million per year, and the number of registered dealers is 200,686. 96% of these are women, and 85% work part-time. Direct marketers enable these firms to reach clients in small towns and villages, where retail outlets are limited. Both Amway's multilevel and Lux's one-level marketing approaches have worked here. Network marketing has also developed with a number of successful "membership" stores in Prague, Brno, Plzen, and Ostrava. The Czech National Association of Direct Marketing organizes seminars and promotes international rules of direct marketing, such as the length of guarantees and the consumer's right to return a product. More information on direct marketing in the Czech Republic can be found on www.cnspp.cz.

Joint Ventures & Licensing

The Czech Republic has become an attractive destination for foreign investors seeking manufacturing and assembly operations. Perhaps the most common approach is a greenfield investment, but foreign companies also acquire existing Czech firms. Joint ventures are less popular. Although the law allows 100 percent foreign ownership, foreign companies are sometimes reluctant to acquire a Czech firm outright because of environmental or other long-term liabilities. Prague has a small, but skilled, local investment banking community, which can assist U.S. firms in structuring acquisitions or joint ventures.

Selling to the Government

The Czech government has a thin purse, but a long shopping list as it seeks to modernize its military to meet NATO commitments, and upgrade infrastructure to meet environmental and other European Union requirements. EU, U.S. Defense Department, and other international funds are available to help finance purchases. Both the Czech federal government and major municipal governments make increasing use of bond offerings to pay for infrastructure improvements, but this approach is still far less common than in the U.S. As a member of the EU, the Czech Republic is subject to the rules of the GATT Agreement on Government Procurement. The Czech government's current procurement law requires public tenders for major government and government-financed procurements. Tenders are publicized in the local daily press, particularly Hospodarske noviny (Economic News) and Mlada Fronta Dnes newspaper, as well as in the Obchodni vestnik (Trade Gazette) published by the Czech government. Major manufacturers of a particular product are usually notified directly. The period between calling and closing tenders is 180 days for internationally financed procurements. U.S. companies bidding on Czech government tenders must have their products approved for the EU market (see standards section below.) U. S. companies that find local Czech partners for joint bids can compete in tenders for environmental services, engineering services, and financial and management consulting services. Bid bonds from 1-5% may be required for large-scale contracts. An emphasis on total value (rather than low cost) has lessened the disadvantages U.S. companies once had against lowercost domestic and European firms. Lack of transparency throughout the procurement process remains a significant obstacle for U.S. companies. While the Czech government has publicly stated its commitment to fair, transparent tenders, rumors of corruption and preference for European suppliers are rife, particularly with regard to defense sector tenders. Government decision making is in addition notoriously slow, with tenders frequently delayed and cancelled.

Distribution & Sales Channels

U.S. products are typically shipped to a major European port (often Antwerp), and then transported to Prague via truck or rail. (Smaller products often come by air to Prague’s airport.) The area around Prague has many warehouses and distribution centers, and is the distribution hub of the country. The Czech Republic has a developed, European-style distribution system and a strong and growing cadre of professional sales agents and distributors in most market segments. Representative offices or industrial sales agents usually handle industrial sales. The cadre of agents has expanded rapidly in recent years. U.S. firms will find agents to be very strong technically; however, many will need help developing marketing and customer service strategies. Margins for distributors are similar to those prevalent in Western European countries. Field sales representatives usually earn a base salary of about 30,000 crowns ($1,230) per month plus commission (anywhere from 5 to 10 percent depending on the product), and travel benefits (company car, travel allowance). Prague's winding cobblestone streets are lined with tiny shops -- groceries, pharmacies, music stores, clothing boutiques, and bookstores. These small shops face stiff competition from American-style supermarkets, European "hypermarkets," and shopping malls with a broader selection, lower prices and extended weekend and evening hours (increasingly, 24-hour operation). Swedish IKEA, British TESCO, and German OBI, Hornbach and Baumax, among others, operate multiple locations throughout Prague
and have expanded throughout the nation. At this time, no large U.S. retailers are present in the market.

Selling Factors & Techniques

Having a sales force that speaks the local language (Czech) is essential to success in the market. In order to also compete in the European market, this same sales force should have employees that can communicate in English – speaking the local language (French, German, Spanish, Italian, Russian, etc.) is of course an advantage. Ideally, product literature should be in Czech, and it is advisable to also have some copies in English, as there are many international firms located in Prague with non-Czech speaking decision makers. A dual Czech/English brochure may be the most efficient way of handling this scenario. Any measurements used within the literature should be in metric. In addition, product labels must be in Czech. Your local partner/distributor can assist in this process. As in most markets, companies doing business in the Czech Republic should have a website in Czech, English and possibly a third language (German). Having a website gives legitimacy to a company’s presence in the market and plays an increasingly important role here in attracting potential customers.

Electronic Commerce

While most Czech consumers still do not regularly shop online, interest in e-commerce is growing and increasing numbers of Czechs are surfing – and buying- on the Web. During 2006, e-commerce in the Czech Republic grew by more than 13%, reaching almost $464.3 million in B2C sales and $351.2 million in B2B. The number of Internet users with e-shopping experience currently exceeds 305,600240,000 and rose steadily in 2006. The gap between end-use procurement and process-use e-commerce narrowed significantly last year, and the former is now only slightly ahead. A number of factors have supported this growth. Credit card use is on the rise, and lower telecommunication tariffs have prompted more Czech consumers to get online. In 2004, Ceska Sporitelna, a major Czech bank, began providing secure e-commerce transactions to online retailers. Finally, in 2005 the Ministry of Informatics introduced anti-Spam legislation (more information at http://www.micr.cz), which has been a benefit to legitimate online businesses.

Trade Promotion & Advertising

Though choosing and supporting a suitable agent is the most important factor in achieving success in the market, companies can stimulate sales further by working with Czech partners on effective marketing campaigns. A good agent or distributor should be able to help you craft an appropriate strategy. The Czech market is small, and market entry is relatively low-cost. Expensive marketing campaigns are probably not necessary, unless promoting a consumer product. U.S. firms can spur sales through trade shows, in-country promotions, and advertising. A U.S. firm can craft a targeted advertising campaign to introduce new products or support established ones for a fraction of the cost of advertising in the U.S. Retain a local public relations/advertising firm to provide an integrated program. Foreign firms most often pay for in-country advertising, while their local distributors provide facilities, warehousing, and equipment. With a history dating back to the Middle Ages, trade shows are a European way of life. Both Prague and Brno host many international shows. A small booth is a good -- and comparatively low-cost way -- to meet customers in the Czech Republic and neighboring countries.

The Czech Republic is a small market, and each sector has a few key decision-makers and opinion leaders. One way to reach these leaders quickly is to hold an innovative incountry promotion. Examples of good programs include technical seminars or small receptions at industry trade shows in Brno and Prague, media events and press conferences related to events like launching new lines or opening new offices, or annual holiday receptions for key clients and potential clients. The U.S. Commercial Service in Prague can help to organize such an event and target key decision makers. On the retail side, in-store promotions are utilized extensively.

Pricing

Czech consumers and firms are very price-sensitive. In the consumer market, however, increasing incomes and the wealth of products in the market have led to a shift toward prestigious name brands -- over low-cost competitors -- for certain high-end goods. U.S. firms are up against European competitors, who have lower transport costs and no import duties, as well as Czech firms that have home field advantage. A number of larger U.S. firms have lowered costs and improved sales prospects by doing some lowcost assembly or value-added production within the Czech Republic. With the weak dollar, Czech firms are giving American products a second look as they seek ways to reduce costs. The Czech economy has traditionally been a cash economy, although credit card use has grown exponentially as bank regulations for the issuance of credit cards have been relaxed to near-Western standards. Five years ago, it was rare for a Czech consumer to use a credit card to make a purchase; today, virtually all professionals in major cities have at least one.

Sales Service & Customer Support

Although not yet at the level of Western standards, customer service has come a long way since the market opened up. There is still room for improvement, and any firm able to implement a customer-friendly support system will have an edge in the market. This applies to both retail and industrial customers. The retail market is less consistent when it comes to service/support. Many local firms
still do not seem to have grasped the concept of employee customer service training in this post-Communist society, and this often leads to a mentality of “the customer is never right.” The industrial sector is somewhat more developed as the Czechs have made great
strides to become part of the international marketplace. U.S. companies should take pains to demonstrate to potential end users their after-sale service capacities. Some industrial users have the impression that European suppliers offer superior after-sale support, and the presence of a well-trained, well-supported local agent who can service equipment is important in closing a sale.

Protecting Your Intellectual Property

The Czech Republic is a signatory to the Bern, Paris, and Universal Copyright Conventions. In 2001, the government ratified the WIPO Copyright Treaty and the WIPO Treaty on Performances and Phonograms. Domestic legislation protects all intellectual property rights, including patents, copyrights, trademarks, and semiconductor chip layout design. Amendments to the trademark law and the copyright law have brought Czech law into compliance with relevant EU directives and WTO TRIPs requirements. The Czech Republic was taken off the 301 Intellectual Property Watch list in 2001. Although U.S. companies should exercise due diligence in choosing partners, theft of intellectual property is not a major problem here. We encourage technology-based companies to work with legal specialists to develop a global intellectual property protection strategy, using an appropriate mix of trade secret, copyright, or patent protection. U.S. companies will often find protection in the Czech Republic by gaining intellectual property protection within the European Union. Separate copyright and patent protection within the Czech Republic is possible, relatively low cost, and prudent.

Due Diligence

Due diligence on potential partners (as well as on suppliers, major clients, and other contacts) is important. The U.S. Commercial Service offers an International Company Profile service that researches the bona fides of Czech firms. Dun & Bradstreet also offers profiles and financial information on Czech firms.