Thanks to relative political stability and strong oil and gas prices, Russia’s retail turnover more than quintupled from 2001 to 2011 and now exceeds US$600 billion annually. Data suggest that this sector is entering the steepest part of its growth curve. How will Russia’s retailers face the challenges of this critical period of expansion? Will foreign retailers manage to get a slice of this growing pie?
Russia’s enormous size and level of economic development mean that the retail market is currently divided among many players. While large retail chains dwarf the majority of competitors in market capitalization, their market share is relatively small. The X5 Retail Group, the largest food retailer, for example, controls only 5.6% of the market, and the top 10 food retailers comprise less than 20% of the market. This is in stark contrast to the developed markets of Western Europe, where leading food retailers hold a quarter of the market or more e.g., Tesco (30% market share) in the U.K. and Edeka (26% market share) in Germany.
This opportunity for consolidation is fueling a pitched battle among Russia’s retail chains to establish regional and national market share. Which chain prevails as top dog will depend on how well it can confront the logistical challenges of the country’s decaying infrastructure, responsibly manage expansion and successfully navigate an uncertain regulatory environment.
Russia’s road network stands at 610,000 miles, of which only 482,000 miles are paved. (In comparison, the U.S. has four million miles of roads, of which 2.7 million are paved.)
In addition, there is a lack of quality warehousing in the country. Colliers International reported that there are 81 million square feet of industrial space in all of Russia, while the Chicago market alone houses 537 million square feet, according to real estate service firm Newmark.
All the leaders in Russia’s retail sphere are rapidly modernizing their logistical operations. Retail chain Magnit is currently recognized as the cutting-edge logistics innovator. As a result, it is rapidly closing in on X5’s lead as Russia’s largest retailer in terms of revenues. Its profits more than doubled in the first half of 2012 compared to the previous year, while X5’s profits over the same period dropped 20.6%. X5 appears to be playing catch-up in logistics. During this period, its margins were hit by the high costs of opening a new distribution center and the set-up costs related to adopting a direct-import model.
Magnit’s main advantage over its competitors has been its effectiveness in bringing the supply chain completely in-house and cutting out the middle men who previously added costs and delays. Today, Magnit runs a fully independent supply chain, with over 3,900 of its own vehicles and a proprietary network of 15 distribution centers totaling close to 3.9 million square feet. It continues to expand this network, opening a new facility in late December 2012 to serve the Volga region and Ural region.
The Russian retail market is heavily saturated, and barriers to entry are high. The two foreign chains that have found success have one thing in common: They struck when the iron was hot. German retailer Metro and the French chain Auchan entered the Russian market in the early 2000s, before competitors became well-established. Of the top-10 leading food retailers, Metro and Auchan have been the only non-Russian firms to command a leading position in the retail sector.
Walmart is looking at a second attempt to access this market, having recently hired former X5 CEO Lev Khasis and appointing him senior vice president for international operations. Khasis was key in positioning X5 as the Russian market leader and grew the company to annual revenues of US$15 billion. He will likely be the strategic player for Walmart’s eventual entrance into the sector.
Source: www.freshplaza.com