Conversations with Entrepreneurs / CEO Series: Deepak Ohri and Adam Manikowski

Hello Deepak, hello everyone. Thank you for the invitation. Indeed, we spent many hours of conversation in Bangkok. It was a great time together, and after our meeting I have lots of thoughts. It was a really great time together. Thank you, and thank you for keeping with us.

Indeed, this is a very important year for Żabka because it's our 25th anniversary, and also this year we will open our 10,000th store, which will be a big event. As to myself, I joined around six years ago, so time goes really fast here.

You're right. COVID was very tough for businesses around the world, different sectors reacted differently. For retail, it was extremely difficult, especially at the beginning, to make sure we could provide our customers with proper protection. Everything like disinfectants, plexiglass, face masks were in deficit, so it was very difficult to acquire them. As Żabka, we managed, and we are known for the fact that we can react very quickly and adapt to the situation. So what we did: we helped our franchisees as a top priority, because our franchisees are running the stores. We provided them with all the proper equipment they needed to protect themselves and their customers during the beginning when nobody exactly knew what the implications could be. Then, of course having customers in our hearts, we quickly adapted to their changing needs. We could see that customers didn't want to travel and spend time in busy big hypermarkets; they wanted to visit smaller stores nearby, and Żabka is perfect for them. For example, to be closer to the customers, we adapted and aligned our assortment according to their needs. We introduced fresh meat or fresh fish to our stores to make sure they could do fuller top-up shopping and didn't need to travel to grocery stores. We could do it very quickly. We also spent almost $30 million to help our franchisees with the proper equipment so they could run their businesses properly. We worked with our suppliers to make sure we had full availability of all products and the range we wanted to sell to our customers and to franchisees. I think because of very huge cross-functional teamwork, we managed to successfully go through COVID and even more. During COVID we accelerated our expansion and started opening more than one thousand stores per year.

We are a convenience ecosystem for customers. We are creating a convenience ecosystem with the customer at the center. We have different businesses, but the biggest business is Żabka Poland, which are our stores. We have right now 9,351 stores, we are opening on average three stores per day, and we are one of the fastest-growing retailer companies in Europe. We are focusing on convenience. We say our mission is to simplify our customers' lives. We save our customers' time by providing, I'd even say not just convenience but ultra-convenience solutions. So Żabka is something more than a store. It's not only a place where you can do quick shopping—the average visit time is 122 seconds—but also use a variety of services, like withdrawing or transferring money, loading your top-up phone card, collecting or sending parcels, and many other services, even buying insurance or medical services. Lots of services combined with the convenience assortment we offer create ultra-convenient solutions for customers. Right now, if you do extensive research, still even during high inflation and difficult times, time for customers is extremely important and valuable. Customers value solutions that save their time, and this is the mission for Żabka. Our business model is designed to simplify our customers' lives. Furthermore, we have our physical stores, and among them we are also the largest operator in Europe of autonomous stores—stores where you don't have checkouts, no cashiers. The customer enters using the app or credit card, takes whatever they want from the shelves, and goes out, making their shopping time only 30 percent of the regular shopping time, which in Żabka is already 122 seconds. So I would summarize: we are a retailer, something more than a store, providing ultra-convenience solutions for customers, focusing on saving their time and simplifying their lives.

I'm happy that you mentioned our business model, because it is B2B2C, not only B2C like most retailers. That's why we say that Żabka has two hearts: one is the customer and one is the franchisee. If you ask me who is more important, customer or franchisee, I will say they are equally important. We can observe behavioral change in franchisees and customers. When we talk about franchisees, I would say that stability is much more important right now for franchisees after COVID. COVID showed that being a franchisee and cooperating with a strong, big brand supporting the business is extremely important. That is why we are working during and after COVID on many solutions that give stability and help franchisees run their stores. An example of stability and security is the most modern solution that nobody has in Europe: special insurance for franchisees to help them avoid possible debts when they finish cooperation with Żabka. That's great stability, and they value it a lot. From the customer perspective, we can see that our ready-made solutions, our quick meal solutions, and our Żabka Cafe (the food we sell) are becoming more and more popular because customers have less time. It was uncovered when people started working remotely; everyone, I think we experienced this as well, started to have less time because working remotely lets you manage many more things. This created a situation where customers have less time, so they are using solutions that save time. For example, convenience stores offer ready meals; they don't need to spend time going to a grocery store to buy ingredients and then cook at home. This behavioral change was very important. After COVID, during high inflation, we see that value is also becoming one of the topmost important things for customers. That's why we focus so much on creating the best shopping experience, which adds value to the shopping. From a franchisee perspective, it's stability and security; from a customer perspective, it's about time.

Yes, so we invested a lot in developing our range of QSR, of quick meal solutions. We invested a lot; we increased our new product development teams to make sure we have the best quality and best ready meals on the market. We also created a joint venture with some of our suppliers together with which we are creating these innovative quick meal solutions for customers. So if you have seen Żabka before COVID and you see Żabka now, you will see that our range of ready meals is much more extended, much richer, and this is gaining great momentum with sales. In some subcategories we have almost three-digit increases in sales, which is great. For franchisees, it's mainly the amount of resources we invested in creating solutions for franchisees to give them security and to help run the stores. For example, post-COVID, we had software that would help franchisees run all aspects of the stores from the screen of a smartphone. Right now, we call it Cyber Store. We have very intuitive solutions where franchisees can use a smartphone to run all aspects of the stores. We have automated replenishments, an AI system that helps franchisees with indications of how many products they should order. Franchisees no longer need to spend, on average, eight hours per week thinking about how many products to order; now it's just a few minutes to accept, and they have just enough quantities to meet all demand. Another solution is special software that tells franchisees step by step what tasks they should do at different times during the day in the store. It gives them the opportunity to plan their work better so they can have more time to focus on serving customers and creating a good shopping experience. COVID changed things; we saw behavioral changes in franchisees and customers, and we were able to quickly adapt and relocate resources to activities that create value. For franchisees, it was security, stability, and productivity in running the store; for customers, everything that saves their time and allows them to have more choice in ready meals and quick meal solutions, and speed of shopping. It was 120 seconds before and after COVID; we still say on average it's 120 seconds, but don't forget that is a big achievement to maintain such high speed while introducing much more new assortment and services.

Yes, it's to not be afraid to take tough choices, being agile, because we needed very quickly to make difficult choices in terms of resource allocation, as I described. We learned that waiting to see if we should take this decision or that decision would make us lose much more than taking the risks. So if you want to be successful, you need to take the risks, especially during crisis situations. You need to trust your business model, understand your customers and your franchisees. Once you have this, you need to take the risk. We made good decisions because during COVID, while many businesses were having problems or went bankrupt, we accelerated growth and started opening more than 1,000 stores per year.

The secret is the DNA of the company and the culture. We needed to spend some time to make sure we are creating and building a franchisee-centric organization. In the retail business, customer is very important, but in the B2B2C model, the challenge was to make sure everyone in the organization understands that the franchisee is as important as the customer. To do this, we needed to create a franchisee-centric organization. On all meetings, before we make any decisions, we ask ourselves: does it increase franchisee satisfaction? Is it helping the job of the franchisee? Is it helping the profitability of their business? If not, we review the decisions. Furthermore, we integrated franchisees into our key strategic decision-making process to make sure we are not in silos and understand the real reality. We created a Franchisee Council, elected every few years by all franchisees, which represents them. On key strategic decisions, we work together with this council to ensure decisions and the direction of the company are in line with what franchisees expect. We also make sure that every year we find efficiencies in the company and reinvest them in value for franchisees, either through new technological solutions or improving profitability of their businesses. This is ongoing work, but the key foundation was to make everyone understand what franchisee-centric organization means. The franchisee is the face of Żabka to the customer, so we need to maintain high satisfaction. Running a retail store is not easy; you need to like the speed, talking to customers, handling change. You need to be entrepreneurial. We do our best to help entrepreneurs and franchisees run their businesses.

You should be both. But franchisees: we have lots of successful franchisees. Because of heavy investment in solutions that facilitate running the store, everyone can become a franchisee; you don't need retail experience. We have fantastic training programs and tools. You only need to like retail and interaction with customers.

I would answer Zara. For me, they have more exciting collections.

From my personal experience, it's a mix. You need all of these: only products without proper customer service or customer interface is not enough; only customer service without the proper product mix is also not enough. From my experience and interactions with H&M and Zara, Zara had more of this.

I'm biased because I always, as a top priority, go to Żabka. I tell my team you need to visit the stores, try our products, buy our products to make sure you are grounded to the business. I do this with pleasure; it also gives me time to interact with franchisees and customers. So as a priority, I go to Żabka. But of course, I visit many other retailers, Deepak, because it's important to know you never operate in a silo. Customers, even with different shopping missions, have limited wallets, and we fight for share of wallet. So I need to know what value proposition is offered in discount channels, supermarket channels, hypermarket channels, and mom-and-pop stores. I visit all those different stores to keep my hand on the market and the newest trends. I also travel with my team abroad to observe the newest trends and position Żabka to be not one step but two steps ahead of competition. To determine this, you need to really know what's going on in the market and the newest trends.

I think it was, Deepak, when I went to study in France. And when I saw retail, I thought that my heart is for retail. That's why when I came back to Poland in 2009, I started working in retail. If I hadn't gone to study abroad, I think I would have ended up somewhere else.

I think I would be in the sector where I can for sure interact with customers. I couldn't do an analytical job; I need to interact with customers or different stakeholders. That makes me happy—human interaction. Also, I think I would subconsciously look for a very vivid and fast-growing developing place. I like change. If you look at my career, I always used opportunity to learn something new.

I think the biggest skill is understanding people. And when I say understanding people, it is both ways: your customers and your employees. For me, the strength is one has to believe in its own people. COVID taught us that empathy is very important, and more than empathy, the happiness of your people is very important.

Yes, we realized a few years ago that if we really want to be successful in the ultra-convenience business and in the market (especially in Poland, which is very competitive), we need to invest in technology. But investment alone is not enough; we needed to do transformational technological change within the company, changing the mindset of all teams to be technologically driven. So it's not just saying it; we wanted to make sure we did it. To do that, we needed resources. We made important CAPEX decisions to invest a lot in technological solutions, but also in the people and teams. Right now, almost 25 percent of everyone employed at Żabka is working only on technological and innovation solutions. We use technologies like cloud, AI, machine learning, and big data to help us make decisions. For example, where to open stores: many people ask how we open so many stores without cannibalization, because AI helps predict with 99% confidence the sales and profitability of each location. Technology helps us adapt assortment segmentation to different locations (ultra-high traffic, residential, seasonal, campus locations). Without AI, with almost 10,000 stores, it would be very difficult. We have all information in the cloud, sharing data with many teams, allowing real-time performance tracking of not only sales categories but each product—how it's selling compared to similar ones. We can make decisions on assortment adjustments based on customer preferences and profitability for franchisees. This was a big step a few years ago, a strategic decision that impacted the whole company because it required not only CAPEX and investment but also changing the mindset and culture and having skilled teams to implement and use these solutions for decision-making. Without this, we wouldn't be able to grow so fast, create so much value for franchisees and customers, or create the unique products found only in Żabka stores.

It's all about the teams. You need to know that the team is not working for the company; the team is working with a leader, with other team members. My philosophy is servant leadership: I don't want the team to work for me; I want to work for my team to make sure they feel motivated and can grow with the company. The uniqueness of Żabka is that on one hand you can grow with the company and develop your career, and on the other hand it's a great place to work because of the values and the fact that we invest in growing and developing our people. From an ESG perspective, we ensure diversity and inclusion is part of the company's DNA. For example, half of the board in Żabka are women, 60% of promotions during the last 12 months for senior manager positions were also women, and we have an equal salary certificate proving we meet all requirements. We are very proud of this; recently we received Gallup's Exceptional Workplace Award and are in the top 10% of places where employees are most satisfied and engaged. No other retailer in Poland has this world award. These many elements contribute, but the most important is creating a good working environment where people come to work happy. We discussed happiness when we met. You need to create a workplace where people want to work because they see growth, development, care, and friendship. It's about culture and DNA, but also about top management behavior, leading by example. I tell my teams that their teams are observing them; they need to give the best example. We are slowly getting there, but the Gallup award shows we are on a good track to attract and retain talent. When I see the growth of Żabka Group (we create a convenience ecosystem with the customer at the center), I'm happy that as the group grows, our teams grow because most promotions are internal. When there is a new senior manager role, we first look inside for promotion; it's rare to hire from outside. We focus on how to grow and develop people, and then we ensure diversity and inclusion so everyone is included.

Thank you. Yes, we are very proud of this, and we will continue to do this great work.

Well, I respect my competitors, but I'm not giving them advice. I would for sure respect you; we could meet for lunch or dinner, but it would be a general conversation about the markets, giving each other advice. I can tell you from a competitor's perspective: Poland is an extremely difficult retail market because if you look at the data, we have one of the lowest margins in the market due to discounters pushing prices very low. That's why I'm so happy our convenience business model is so accepted by customers, and we can grow as a financially strong and fast-growing company.

Yes, so we have to grow so fast. Last year we opened more than 1,100 stores; two years ago we opened 1,050; this year we will also open more than 1,000 stores. To grow so fast, you need a special model that helps connect the dots: at the right moment, finding the right location, finding the right franchisee, preparing the location to open, training the franchisee, and then shadowing them when they start running the business to ensure success. To connect all these dots, you need a very strong technological backbone; without it, managing all processes would be difficult. For example, to open a new store, you need to find the location. We have an experienced expansion team across Poland, and the software and AI we applied analyze almost 10 million addresses in Poland to indicate where to look for specific locations. Once a location is found, it's checked and modeled by algorithms that predict with very high certainty the future sales of the store. We compare the rent, check sales, know margins, and conclude on profitability and payback return. With all this information, we have investment committees that decide for each location whether to go for it. Once we have locations, we know where we are looking for franchisees. We have separate teams looking for franchisees, a very attractive franchisee offer, and a very elaborated training system. As I said, you don't need retail experience to successfully run a Żabka store. For selected locations, we meet with candidates; we have a strong pipeline of candidates willing to open a Żabka store, so they are waiting for the location. Once we have it, we start the training process, and at the same time we prepare the location to be opened. The franchisee does not need to bring or own the location. The only requirement to enter Żabka is to successfully pass the examination after the training process and to have a small contribution (a small investment where you buy the checkout, regulated by law) to have your own business. The entry barriers are really low because of our investment in our business model. We are also known in Poland as a flagship example of how to increase entrepreneurial spirit in a country, because every store is a new entrepreneur. Right now we are working with more than 8,000 franchisees. To do this efficiently and with discipline—as you mentioned, cause discipline—you need a very strong technological backbone; without it, with so many processes and dots to connect, it would be very difficult.

We have right now nine distribution centers in Poland, almost 20 cross-docks. Our supply chain is very sophisticated. In retail, logistics and supply chain are critical for cost effectiveness and to ensure full availability of products. It also impacts cash flow if you have too much stock. We invested a lot in logistics, making sure with almost 10,000 locations in many cities that logistics are as efficient as possible. We have small trucks going to separate stores, and software that establishes trips in a very efficient way, so the truck goes from the distribution center full and spends as few kilometers as needed to serve the most stores. We invest in processes and robotics. This year we opened a chilled and frozen distribution center near Warsaw, the newest and most modern automated distribution center, serving up to 5,000 stores with full automation and high bay, designed from scratch especially for Żabka. All systems, robotics, and automation are designed for us to gain as much efficiency as possible. Our supply chain efficiencies are a good example: once you have a very efficient supply chain, you can reinvest those efficiencies in value for franchisees every year, increasing their satisfaction, and for customers, making sure you are always two steps ahead of competitors. We have special programs and designs for the next 10 years elaborated in detail, so the supply chain maintains and supports the company's growth. If you open stores without growing your supply chain, it becomes difficult to have products on the shelf. You need to grow both the business from a store perspective and the supply chain simultaneously.