(Bloomberg) -- In 2017, just after CVC Capital Partners Plc bought a relatively obscure Polish chain of shops, its managers and the business’s chief executive officer set out on a trip to Japan. Their goal: To study first hand what it takes to create a vast, successful network of 7-Eleven-like convenience stores.
Seven years on, the company, Zabka Group, operates Europe’s biggest chain of convenience stores, with more than 10,500 outlets in Poland alone and ambitious plans to expand across the region. On Monday, CVC said in a statement that it is planning to list Zabka in Warsaw. An initial public offering could value the company at as much as $8 billion — several times CVC’s cost in 2017 of just over €1 billion ($1.1 billion).
“Zabka could represent that classic emerging market consumer sector growth story that is often liked by EM investors,” said Eglé Fredriksson, a portfolio manager at East Capital fund.
While supermarkets are suffering in large swaths of the world, smaller convenience stores that combine takeaway food, groceries and other household items are emerging as fixtures of urban and semi-urban settings. The appeal of that business prompted Canadian company Alimentation Couche-Tard Inc. last month to make an offer valued at about $39 billion for Japan’s Seven & i Holdings Co., the operator of the 7-Eleven stores that Zabka’s modeled on.
“This is an attractive direction in which the world is heading,” said Marcin Okonski, partner & managing director at Kearney advisory services firm in Warsaw. “In Poland, we can see that the ‘middle ground’, i.e. traditional retail, is dying out, and what remains are discount stores and stores combining grocery and takeaway food.”
Several factors have coalesced to drive the success of Zabka, which means frog in Polish. They include an upwardly mobile population that’s earning more, laws requiring supermarkets to shutter on Sundays and a clever AI-driven mobile-phone app to lure customers.
The company’s stores, with their green logo, sell everything from coffee, ready-to-eat meals including pizzas, hot-dogs and French fries in addition to groceries. They have become ubiquitous across the eastern European nation. Sales soared to about 22.8 billion zloty ($5.9 billion) last year from 4.3 billion zloty in 2017. What was an unprofitable company when CVC bought it, posted an income of 2.8 billion zloty in 2023.
Still, intensifying competition and differences in food-shopping cultures across Europe may curb the company’s expansion efforts and limit growth, some analysts said. Zabka, which is selling existing shares in its IPO, plans to access capital markets in case of potential takeover possibilities.
Founded by entrepreneur Mariusz Świtalski in 1998, Zabka was a chain of stores that mostly sold alcohol and tobacco in its early years. Over time, it expanded its offerings — currently, meals account for a sizable chunk of purchases. It also changed owners, going from Penta Investments to Mid Europa Partners, which then sold it to CVC.
Not long after CVC bought it, Poland’s conservative government in 2018 launched its Sunday trade ban, which forced supermarkets and other stores to close on that day. But Zabka’s status as a pickup point for e-commerce deliveries allowed it to keep its door open. In many places, Zabka became the only point where Poles could get groceries on Sunday. The Covid-19 pandemic additionally strengthened the segment.
As the stores became popular with young Poles, Zabka in 2019 unveiled a new loyalty app that now counts about 8 million users in a country with a population of about 37 million. Zabka uses AI to help customers find best locations for shops and notifies them on deals when they are close to a particular store.
“You easily find almost everything you need, including a variety of hot snacks,” says Jakub Kowalczuk, a 20-year-old who was recently in a Zabka store in a Warsaw suburb that was open until 11pm. “It saves your time, and if you’re a frequent app user, you may get some good offers.”
Like 7-Eleven, Zabka uses the franchise model. The company rode the generational shift away from traditional mom-and-pop grocery stores, very often convincing such shop owners to become franchisees.
The push to expand has sometimes resulted in competition between Zabka stores, raising questions about whether the company risks saturation in Poland. That said, the openings — at about 1,100 stores a year - still far outnumber closures, which stood at 107 in 2023.
On the back of its success in Poland, Zabka has targeted other markets. Earlier this year, it expanded into Romania under the brand Froo. It now has over 20 outlets in Romania, with analysts saying it’s too early to gauge how well it will do there. Zabka says initial signs are promising, with strong demand for meal-to-go products.
In its latest annual report, the retailer said it’s eyeing other eastern European countries. Further afield, it has sought to test markets by making small forays: In Germany, for instance, it opened a fully automated store at a Tesla factory in Grunheide.
Expansion won’t be easy, said Kearney’s Okonski, noting that the model might be difficult to copy. He pointed to entrenched shopping cultures in countries like Italy or France, with a tradition of small restaurants and bakeries, or Germany, where residents, especially in small towns, still prefer supermarkets.
Another challenge to Zabka’s expansion plans is that large supermarket chains like French grocery giant Carrefour SA are opening their own outlets modeled on convenience stores. An even bigger threat might come from the “gold standard” of convenience stores: 7-Eleven. In April, the Japanese retailer identified Europe as its “fourth pillar of growth” after having massively expanded across Asia, the Americas and Australia. It has already established a foothold in Scandinavia.
Zabka’s ambitions come against the backdrop of hard times for food retailers. In Poland, price wars eroded earnings at Dino Polska SA and Jeronimo Martins SGPS SA this year. Zabka shrugs off such concerns, saying its clients are less price sensitive. It also argues that while it’s more expensive than discounters, its food offerings are cheaper than the typical fast-food restaurant.
For some industry experts, the jury is out, especially on the company’s expansion plans.
“The company must show whether it has determination and is ready to allocate significant funds for a stronger, more aggressive expansion outside Poland, and to face the competition,” said Okonski. “Building a position organically without takeovers will be very tough.”
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