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Croatia - Country Guide

Market Overview

Opportunities exist for UK companies in a wide range of sectors. Although Croatia’s traditional trading partners are Italy (17% of total imports), Germany and Austria, UK exports continue to grow year on year.

As Croatia enters the final phase of its preparations for accession into the European Union, the Government is putting strong emphasis on improving the business climate and attracting foreign direct investment. Led by a new President and Prime Minister, the Government of Croatia is working to address the issues of corruption, bureaucratic and judicial inefficiency and overly burdensome tax and regulatory regimes with the goal of emerging from the current economic downturn better positioned to succeed in the global marketplace.

Recent events have demonstrated the Government’s commitment to rein in corruption and create a more transparent government and market in Croatia. The arrests of several high-level political and business officials on charges of corruption demonstrated the desire of the current coalition government to institute a new culture of accountability in its leadership. This was further emphasized by the reshuffling of the cabinet as the new year began.

While these moves help meet EU obligations, they are also providing impetus for change in the business environment. The cabinet reorganization included the creation of a new position of Deputy Prime Minister in charge of Investments, and the announcement of a major public sector investment program promises significant opportunities for international firms both immediately and over the next several years. By addressing some of the more common concerns expressed by international businesses, Croatia is moving toward realization of its market potential.

Croatia is a small but complex market. It is about the size of West Virginia, but its geography divides it into two distinct markets – the more affluent and tourism-oriented Dalmatian costal region along the beautiful Adriatic Sea, and the bucolic inland Slavonian region, dominated by agricultural and industrial activities. The country’s population of roughly 4.5 million is largely homogenous in ethnicity, language and religion; but in the summer months its numbers are doubled by tourists from throughout Europe and the world, making it a cosmopolitan market for products and services. Its ports and transportation infrastructure make Croatia a natural trade gateway into southeast Europe, but its largest trading partners are Italy, Germany, Slovenia and Russia. Croatia is a strong democracy and a market economy but retains significant state control or involvement in a number of industries and has a considerable public financial burden from its social welfare policies. In brief, Croatia is a market of opportunity but one that should be entered with due diligence and support.

Market Challenges

Croatia is a developing economy and, despite progress in economic and administrative reforms, problems remain. These include a judiciary plagued by case backlogs and a lack of expertise in commercial affairs, an overly complex and sometimes non-transparent bureaucracy, the country's relatively high costs, and both real and perceived issues of corruption. The current government is addressing these problems but reform has been incremental and slow. Overall, the business and investment climate in Croatia is considered difficult, requiring caution and patience for success by foreign companies.

Market Opportunities

As Croatia prepares to integrate into the European Union, business opportunities will grow to assist in modernization of infrastructure, deployment of environmentally friendly energy technologies and information and communication technology networking. The expected increase in prosperity to accompany EU accession will also provide opportunities for franchisers, manufacturers of consumer goods and for travel and tourism marketers. Croatia’s physical beauty and natural resources also provide opportunity to firms capable of developing resort and spa destinations.

The greatest opportunities for investment in Croatia lie in the energy and infrastructure sectors. Croatia is committed to attracting investors to help upgrade and modernize public facilities and services. The recent announcement of an investment of EUR13.85 billion targeting thirty public sector projects in the areas of energy, tourism, water management and transport infrastructure is the latest example of this commitment. Lacking its own financial and technology resources, Croatia will highly depend on foreign investors and equipment/services suppliers.

Opportunities in the private sector are strongest in the travel and tourism sectors, the recreational boating market and franchising. Croatia has over 5,000 ports along its mainland and island coastlines that house over 22,000 boats, a vast market for marine products of all types.

Overall, Croatia is on the cusp of emerging as an important market and gateway in the southeast Europe region. Laying the groundwork now to capitalize on this emergence could be an attractive option for small- to medium sized enterprises looking to establish a position in a growing market.

Market Entry Strategy

Since the Croatian market is sophisticated, entry should be well planned and should take into consideration the following factors:

• The price sensitive nature of the majority of consumer demand;
• A judicious selection of one of three low-risk entry strategies: representation, agency or distributorship. (Note that a Croatian agent or distributor is preferable to a “European office” due to the difficulty of the language and other idiosyncratic market factors);
• After-sales service, follow-up and training are essential;
• The entrenched bias of a conservative market that sticks to known suppliers and therefore requires sustained market development;
• Croatia’s position as the pre-eminent stepping-stone for developing most sectors in southeast Europe: the marketing mix should anticipate this medium term option.

Using an Agent or Distributor

A carefully chosen local agent or distributor is the most effective method for entering the Croatian market. Croatia offers foreign suppliers a wide variety of methods to distribute and sell their products, including using an agent or distributor. Agents work on a commission basis after obtaining orders from customers whereas distributors buy, carry stock and sell products directly to customers. Agents often distribute durable and non-durable consumer goods, as well as some industrial raw materials. They may be particularly appropriate when products are highly competitive and lack a large market. It is common to appoint a single agent capable of providing national or regional coverage either through one office or a network of branch offices. In addition to their role as the local representatives, agents should be able to handle the necessary customs clearances, port and rail charges, documentation, warehousing and financing arrangements. Typical commission rates for agents in Croatia vary widely from industry to industry and depend upon the contract concluded and upon the representative's responsibility.

Distributors who buy for their own account and carry a wide range of spares often best handle capital equipment and commodities such as chemicals, pharmaceuticals, and brand new products on an exclusive basis. Leading distributors often have branch offices and sell to both wholesalers and retailers. In some cases, the distributor is also the principal with sub-agents or a major user of the products.

When appointing a Croatian distributor, exporters should take care to find out if the distributor handles a competing product. In Croatia's competitive marketplace, it is essential that the exporter provide adequate servicing, spare parts, and components, as well as qualified personnel capable of handling service inquiries. In most cases, after-sales service should be available locally since potential delays often lead purchasers to seek alternative suppliers.

Establishing an Office

An excellent first stop for information on establishing a Croatian company is the “Hitro” office (www.hitro.hr). The Croatian Companies Act regulates the establishment and organization of business entities in Croatia. All firms must register according to the Court Register Act and the Rules of Court Register Entry Procedures. Under the Companies Act, it is possible to start a company as a “company based on capital” or as a partnership (which is an association of persons regarded as corporate under Croatian regulations). The law also regulates the establishment of branch offices and the position of sole traders. Companies based on capital include:

Private Limited Company (d.o.o.)

Private limited companies are the most common type of company in Croatia. It is one in which one or more legal entities or natural persons invest in initial authorized stakes, with which they participate in the total authorized capital as contractually set beforehand. Owners may be domestic or foreign legal entities and natural persons.

Company assets are strictly separated from the property of owners. The company is liable for its debts with all its assets. The initial authorized capital of a private limited company must be shown in Croatian currency – Kuna (HRK). The minimum amount of initial authorized capital may not be below HRK 20,000.

Public Limited Company (d.d.)

A public limited company is based on capital, with owners (shareholders) investing in authorized capital divided into shares. The company is liable for its debts with all its assets. Shareholders are not liable for the debts of the company. The basic document for a public limited company is the articles of association, as it specifies the internal organization of the company. Authorized capital and shares must show par value in the currency of the Republic of Croatia. The minimum amount of authorized capital is HRK 200,000. The Companies Act provides for a simultaneous and a successive establishment of a public limited company. Company founders are the shareholders who have adopted the articles of association.

Economic Interest Association (GIU).

An economic interest association is a legal entity established by two or more natural persons or legal entities for the purpose of facilitating and promoting their business activities, but in a way that the legal entity earns no profit for itself. The association is established without authorized capital and the rights of members may not take the form of securities. The business activity of the association must be related to the members’ business activities as a supporting activity.

Partnerships include:

General Partnership (j.t.d.)

A general partnership is a business entity in which two or more individuals join to conduct business as a going concern under a common company name. Every partner has unlimited and joint liability to cover the partnership’s debts with all his/ her assets. A partner may not dispose of his/her ownership stake without consent from other partners. Any legal entity or individual, both domestic and foreign, may become a partner. The articles of association define the relations between partners. The partners enjoy maximum freedom in this respect, because the Companies Act applies only in cases when the articles of association do not regulate certain matters otherwise. A general partnership does not have authorized capital. Unless otherwise provided by the articles of association, partners should bring equal stakes into the company.

Limited Partnership (k.d.)

A limited partnership differs from a general partnership in that at least one partner has unlimited and joint liability for company debts with all his/her assets (general partner), and at least one partner has limited liability proportional to the assets invested (limited partner). Both domestic and foreign individuals and legal entities may be partners in a limited partnership.

Branch Office

Under Croatian legislation, foreign companies and sole traders may conduct business in Croatia by setting up a branch office. The start-up and operation of branch offices owned by foreign companies are governed by the same regulations that apply to the establishment of branches by domestic companies.

A branch office is not a legal entity. The liabilities and rights stemming from its operation do not belong to the branch office but to the founder. The founder legally holds all rights and obligations of branch offices. In case of dispute with third parties, the branch is not a party to it, but the company or sole trader that owns the branch. The branch office operates under its own name. The name should indicate both the branches and the founder’s registered office. If the same founder intends to establish several branch offices, the establishment procedure is carried out separately for each branch.

Franchising

Franchising in Croatia is yet to develop fully, but there is a strong ongoing initiative to promote the advantages of this business concept. There are between 120 and 150, mostly foreign, franchisors operating in the Croatian market. McDonald’s has been present in Croatia since 1996 and has a total of 16 restaurants today. The most recent U.S. franchises to enter the market include SIGNARAMA, RE/MAX, and New Horizons Computer Learning Centres. Tourism and hospitality are considered to be the most promising sectors for franchise development. The typical prospective franchisee knows little about franchising and needs to be educated by the franchisor on how he/she could benefit from the concept. Numerous opportunities for advertising exist in the local daily press and specialized magazines, and expert assistance to franchisors looking for local partners is available from at least two franchise development centres. The lack of franchise-specific legal and financial assistance is a market obstacle, but these issues are being systematically addressed, creating a strong and continuous trend of improvement of the business environment that will be further enhanced by Croatia’s impending membership in EU.

Direct Marketing

Although direct marketing is becoming more common in Croatia, it is still in its early stages compared with developed Western countries. An average potential customer is unlikely to get more than a few phone calls a year to his home number made by companies to market their services or products. Currently, local banks, insurance and telecommunication services companies are making most of these calls. Direct marketing by mail is far more common and households receive such mail on a daily basis, typically from local supermarket chains, restaurants and personal services providers. Credit card companies regularly include in their bills special offerings of various consumer goods in partnership with other companies. However, the sale of mailing lists is still rather limited.

Joint Ventures/Licensing

The Law on Companies regulates the establishment of joint-ventures, investment in companies with mixed ownership, as well as other types of foreign or domestic investment. This law, adopted in 1994, is very similar to the German Company Law. Establishment procedures require a Croatian lawyer, a notary public and registration with the local Commercial Court.

There are no specific laws regulating licensing other than the Law on Obligations ("Commercial Code") which addresses contract law. The licensing contract should also cover intellectual property rights issues (trademark, model, patent or copyright), payments/royalties, the term of the contract, restrictions on using trademarks, etc. (See Chapter 7 for more information on intellectual property rights.) A Croatian lawyer should be consulted to ensure that provisions of the contract do not contravene Croatian law, making the agreement null and void.

Selling to the Government

Distribution and Sales Channels

Croatia's distribution system is formalized by the Law on Trade which regulates the activities of wholesalers and retailers. Stringent application of customs, import and tax administration regulations as well as rapid modernization of the domestic distribution sector significantly reduced the illegal imports, unlicensed business activities and cross-border shopping that had previously flourished.

With over twenty per cent of the nation’s population and its central location, the capital city of Zagreb is the primary distribution centre for the country. The port cities of Split and Rijeka are also important distribution points and the eastern city of Osijek is the largest and most important distribution point in that region of the country. Croatia’s geographic location, access to seaports and well developed transportation system give it distinct advantages as a regional distribution point, particularly to the countries within the area that previously comprised Yugoslavia.

There are an estimated 7,500 retail outlets in Croatia (including kiosks, small shops, and open markets). In recent years newly developed shopping centres (such as Importanne, King Cross, Kaptol Centar, Avenue Mall, City Centar One, West Gate, Garden Mall, and Arena Centar in Zagreb), modernized or newly-established domestic supermarket and retail chains (such as Getro, Konzum, Diona, Prehrana), and foreign chains (such as Billa, DM, Merkator, Mercatone, Metro, Bauhaus, Baumax, Kaufland, and Lidl) have become dominant factors in the marketplace.

Capital goods and specialized equipment are normally sold directly to manufacturers and businesses. When selling capital goods or equipment to businesses, a good agent is essential.

Selling Factors/Techniques

Factors/techniques critical to success in Croatia are not different than from most other countries: a product/service that offers value for money, close and frequent contact with buyers, motivated and trained middlemen, aggressive market promotion, and, for technical products, a professional and customer friendly after-sales service network in place. Often, the ability to provide financing is also important.

New products entering the market require extensive market research and mass advertising to identify potential customers’ buying patterns and preferences. This applies particularly to unknown brand names, as Croatians are very brand conscious.

One way of launching a new product in Croatia is by exhibiting at a trade show. Promotional “give-aways” are also very popular. An editorial and/or advertisement in a specialized trade publication will also enhance awareness of the product. Due to the size of the Croatian and neighbouring markets, highly specialized products might be best marketed through a regional representative. Croatia’s location and established distribution channels make it a logical choice for establishing a regional base for the South East Europe region.

Electronic Commerce

The total value of e-commerce transactions in Croatia is estimated at USD500 million annually. Before the onset of the economic downturn, many analysts predicted that the total value of e-commerce transactions in Croatia would reach USD1.4 billion by 2012, with most of that figure attributable to the tourism sector. Depending on whether the term e-commerce refers only to transactions performed over the Internet or includes POS (Point of Sale) transactions as well, its total volume represents between 2% and 14% of the total retail trade in Croatia.

Use of cell phones to pay for goods and services has advanced beyond mobile banking and includes services such as M-Parking and M-transportation (paying for parking and public transportation via mobile phone).

Trade Promotion and Advertising

Trade events and fairs continue to be popular in Croatia. The single largest event in Croatia is the annual Zagreb Fall Fair (September) which attracts nationwide attention and includes numerous foreign exhibitors. The Zagreb Fair authority also organizes a number of industry-focused or specialty exhibitions during the year in sectors such as consumer goods, food processing, environmental technology, medical equipment, pharmaceuticals, automobiles and automotive parts, information technology, textiles and apparel, wine, etc.

Advertising is a key marketing tool in Croatia. Nearly all companies engage in some form of advertising. While the number of publications is growing, television is the most important media in Croatia. Outdoor advertising is also expanding. By distribution, about 60% of advertising expenditure goes to TV, 15% to newspapers, 10% to magazines, and 5% to outdoor billboards. Radio is experiencing growing interest, currently receiving about 10% of advertising expenditures. Television, which reaches 90% of the market, has the broadest reach of all media. Croatia has two state-owned and three private TV channels as well as five regional and six local channels; satellite and cable TV bring dozens of other channels into the market. The law restricts advertising on state television to nine minutes per hour for the first two national channels.

Advertising on privately-owned (regional and local) television stations may not exceed 25% of total program length. The most advertised products are telecommunications, vehicles, financial institutions, beverages and newspapers. Croatian regulations prohibit television advertisement of tobacco, alcohol, and spirits. Magazines, particularly specialized magazines, are growing in circulation. The six national daily newspapers account for 62 per cent of advertising expenditures for print periodicals. The balance of the revenue is shared among the sixteen high circulation periodicals and over 45 other specialized magazines. More than 6,000 billboards populate Croatia. Prices range from USD150 per month to USD250 per month depending on frequency and category. It is recommended that 150-200 billboards be used for a nationwide launch campaign. Key TV stations include state-owned Croatia Radio Television, and privately-owned RTL, Nova TV and Kapital Network. Key Internet service providers/portals include Croatian Telecom, Iskon, VipNet, Globalnet, and Index. There are many international advertising firms with offices in Croatia and a substantial number of Croatian advertising agencies.

Pricing

The level of prices in Croatia is generally high, even compared to prices of similar products/services in Western European countries and the United States, thus making imported products price competitive. The Croatian currency, the Kuna is tied to Euro and the Value Added Tax (VAT) in Croatia is 23%.

Although prices are generally determined by the market, certain necessities are still subject to government control. For example, price changes for milk and bread must be notified two weeks in advance to the Ministry of Economy and price alterations on approximately 30 other products must be reported to the Ministry of Economy within three days of modifications. The government retains the right to disapprove price changes although in practice this has been rare during the last few years. The government has the ability to influence pricing policy at companies under its direct or indirect control (the government still has significant influence on prices of gas and electricity, for example).

Sales Service/Customer Support

In the Croatian consumer market after-sales service is extremely important, especially in terms of providing technical and spare part services to prospective clients. Many Croatian consumers will base purchasing decisions on the prospective after-sales service for their products, especially in high-end luxury goods such as electronic equipment. Appointing a central distributor that stocks spare parts and provides maintenance and repair service is advisable for existing brands and new brands breaking into the market. Foreign companies that bring strong customer support systems to this market will find themselves with a competitive edge.

Protecting Your Intellectual Property

Registration of patents and trademarks is on a first-in-time, first-in-right basis, so one should consider applying for trademark and patent protection even before selling your products or services in the Croatian market. It is vital that companies understand that intellectual property is primarily a private right.

It is always advisable to conduct due diligence on potential partners. Negotiate from the position of your partner and give your partner clear incentives to honour the contract. A good partner is an important ally in protecting IP rights. Consider carefully, however, whether to permit your partner to register your IP rights on your behalf. Doing so may create a risk that your partner will list itself as the IP owner and fail to transfer the rights should the partnership end. Keep an eye on your cost structure and reduce the margins (and the incentive) of would-be bad actors. Projects and sales in Croatian require constant attention. Work with legal counsel familiar with Croatian laws to create a solid contract that includes non-compete clauses and confidentiality/non-disclosure provisions.

Leading Sectors for Export and Investment

Commercial Sectors

• Telecommunications Equipment
• Medical Equipment
• Environmental Technologies
• Renewable Energy
• Recreational Boating and Equipment
• Energy
• Franchising
• Pharmaceuticals
• Travel and Tourism
• Tourism Infrastructure

Agricultural Sectors

• Miscellaneous Consumer Foods
• Fish & Seafood
• Soybeans and Soybean Meal