Once upon a time, construction products chain Byko owned the Icelandic market. Then Husasmidjan appeared and began to provide competition. 2008 did considerable damage to both as the market collapsed from under their feet, sending income statements and balance sheets tumbling into chaos. Five years before the collapse, German DIY chain Bauhaus showed interest in opening a branch in Iceland and went ahead and build a megastore that was completed 2008. It has stood empty since 2003 as Bauhaus waited for economic conditions in Iceland to improve. Now that time has come but the question is, what makes Bauhaus act now when Iceland is almost as likely to descend back into the economic abyss as to enter into a period of long-term economic growth?
Before opening in Iceland, Bauhaus had operations in Austria, Croatia, Czech Republic, Estonia, Finland, Germany, Hungary, Norway, Slovenia, Spain, Sweden, Switzerland and Turkey. Of the 13 countries, 9 are EU members (Austria, Czech Republic, Estonia, Finland, Germany, Hungary, Slovenia, Spain and Sweden) and 6 have adopted the euro (Austria, Estonia, Finland, Germany, Slovenia and Spain). 69% of Bauhaus’s market territories is therefore dependent on economic development within the EU and 46% dependent on the stability of the euro. This does not factor in turnover per region or market size, but provides insight into why Bauhaus may be interested in the Icelandic micro market. Adding Iceland as a territory lowers economic dependency on the EU to 64% and exposure to euro risk to 43%; a healthy market risk management strategy. Were Iceland to adopt the euro and become a member, the risk exposure factors increase to 71% and 50% respectively. That, however, is unlikely to happen; a far more likely scenario is the fragmentation of the EU.
Given that the ISK has been at a low since the crash, it can really only go up from this point, increasing the profit spread between cost of goods sold and sales revenue. This opens up possibilities to either:
- Increase unit profitability in the Icelandic market by a larger revenue/cost spread here than in other regions.
- Maintain a consistent low price that domestic firms such as Byko cannot compete against despite sourcing raw materials from external regions.
Another reason why moving into the Icelandic market at this very moment may be of interest is increased real estate activity, reverse of what is happening in many parts of Europe. The Icelandic consumer profile also differs from Bauhaus’s other regions as Icelanders are not as thrifty as Germans, Swedes, Norwegians to name but three. There is a reason why KFC in Iceland has experienced such great success compared to other parts of the world as its wall certificates displayed on branch walls reveal. Icelanders are probably bigger spenders than the target audience of other Bauhaus regions and that can make this market, although minuscule, quite profitable if the cards are played right.
The reaction of Byko to Bauhaus is the typical Icelandic marketing ideology: aggressive advertising. This is possibly the most destructive defensive maneuver that can be deployed since it drains capital resources quickly and is unsustainable in the long run. Byko cannot win an advertising war against a giant that is capable of driving prices far below anything Byko can offer. Engaging in an aggressive advertising campaign without a solid long-term strategy in place will put Byko out of business, plain and simple. The name of the game is competitive positioning and advertising firms do not excel in that area since their primary objective is to get revenue from client advertising. New owners of Husasmidjan, Bygma, appear to be aware of this as they have operated in a sophisticated market environment for years and do not take the Bauhaus promotional bait. They have managed to deal successfully with Bauhaus in Denmark while Byko has never experienced anything of the sort. Icelandic firms have been alone on the market for too long and have no real concept of market positioning and confuse marketing strategy with advertising and PR. The lack of strategic marketing skills – largely caused by the immature market environment due to small size – threatens all Icelandic firms exposed to this type of competition.
It would be quite easy for Bauhaus – and possibly even Bygma – to engage in predatory pricing and sink Byko in 12 – 24 months or less. Challenging it on the legal front would be futile as the sheer scale of the operation would make it very hard to prove and only cause more damage to Byko’s bottom line. Byko’s strength lies in a close connection to the Icelandic construction sector, but there is some historical damage that needs to be repaired:
“BYKO and Husasmidjan have long been in the spotlight for a string of alleged cases of bad practice, including price-fixing and co-operation; even years before the banking crash. Now Icelandic consumers can hope for lower prices on hardware with Husasmidjan in Danish hands and added competition from Bauhaus.”
Survival of Byko can only be achieved by a complete company/brand repositioning and understanding of the mechanics and drivers that shape and influence the market environment. There’s a new reality in Iceland that must be fully understood before time runs out or many of Iceland’s leading business will fail once engaged by a competitor that knows how to remove the competition. Byko has strengths that can be deployed to capture a sufficient slice of the market but that is not achieved by beginning with an aggressive advertising campaign. Advertising is part of the execution of the strategy but not the strategy itself. The sooner Icelandic firms learn that, the better prepared they will be to meet this kind of competition.