Clare Nuttall in Yerevan -

Armenia's retail sector will see some dramatic changes in 2012 as the country's the largest local chain Star Supermarkets prepares to almost double its stores, while French hypermarket giant Carrefour takes a final decision on whether to enter the market.

When Star was launched back in 2004, it was the first formal retail chain in Armenia. The next eight years saw the emergence of fellow supermarket chains Galaxy, SAS and Yerevan City as Armenia made a gradual transition to a modern retail sector. However, the share of organised retail, as opposed to open-air bazaars and street vendors, remains low at just 10-12% of total turnover.

Now the process is starting to accelerate. Star's executive director Vahan Kerobyan points out that "the first 10-15% is the most difficult" in the transition to a modern retail sector. Given Armenia's large shadow economy, formal retail chains are not competing on a level playing field with private vendors, who are mainly operating in the shadows themselves.

Retailers in Armenia also face challenges on the logistics side, since two of the country's four borders (with Azerbaijan and Turkey) are firmly sealed. Of Armenia's other two neigbours, Iran's future is worryingly uncertain. Some 80% of Armenia's trade is channeled through Georgia, which acts as both a source of goods and a conduit for Russian trade - though the troubled relationship between Georgia and Russia raises questions over the future of this route too.

Domestic sourcing is therefore important for Armenian retailers, and under pressure from Star and other chains the goods available domestically have improved dramatically in recent years. Kerobyan notes that back in 2004, 90% of locally produced items did not even have barcodes; most items are now of a good standard. New segments of the food processing industry have grown up in tandem with the retail sector. Eight years ago, for example, 90% of the fruit juices Star sold were imported and 10% locally produced; these figures have now been reversed.

Small focus

Since GDP per capita in Armenia remains relatively low - at just under $5,500 in 2010 according to the World Bank - Star's strategy has been to focus on small stores. "Smaller is better because purchasing power is still very low in Armenia. The average transaction value in bigger stores is just a little bit higher than in our stores, so it doesn't make sense for us to invest into big stores," Kerobyan tells bne.

In September 2011, Star took over its direct competitor Fresh, which added six stores to its mainly Yerevan-based network, bringing the total to 28 as of early 2012. This year will see the opening of another 20 stores in and around Yerevan. "We think this is the right time to make a big move - the market is ready," says Kerobyan, citing the growing purchasing power in the country.

To fund the expansion, Star was initially considering an IPO, but given the turmoil on international financial markets coupled with Armenia's location in the increasingly volatile south Caucasus and the elections scheduled for May this year, these plans have been put on hold. An IPO is now not anticipated before 2013 or 2014, while Star will use its own resources for the expansion, as well as looking for a strategic investor.

Today, Star accounts for around half the turnover in Armenia's formal retail sector, with local rivals SAS, Galaxy and Yerevan City its main competitors in a market as yet largely ignored by international retailers. That, however, is set to change before long, as France's Carrefour is now looking at the Armenian market. Already established in neighbouring Georgia, Carrefour is understood to be in discussions with two malls due to open in the near future.