Tim Gosling in Moscow -
Born in the wake of the 1998 financial collapse and undergoing a restructuring during the 2008 version, Russian grocery retailer Dixy Group knows all about turning crisis into opportunity. Ilya Yakubson, president of Dixy, says it has now gained promotion to "the premier league" of Russian retail.
However, he adds with a smile, while competitors in the discounter segment such as Magnit and Pyatrochka gained greatly from the most recent economic downturn, for Dixy it came a little early. "Those that were already strong did best; Dixy was still restructuring. As the saying goes, you don't ever want to miss the crisis. Unfortunately, we did miss a little of that paradise."
That's not cynicism talking, but pride. Yakubson is gregarious and relaxed - he laments, for instance, that due to costs and incomes he can't offer his customers the tubs of blueberries he and his family tuck into when abroad - and clearly proud of the "remaking" of Dixy since Mercury Group bought a 50.96% stake in 2008.
Powered by an investment drive to build a new IT platform and logistics network, alongside a large marketing campaign, Dixy pushed into the Russian retailers' top five this year with the acquisition in June of the Victoria Group supermarket chain for RUB25.6bn ($915m), which added around 250 stores to swell the company's network to 944 overall.
That's no small achievement: the barriers to building a national retailer in such a vast country with infrastructure limitations and a paucity of third-party service providers are significant. At the same time, because the market remains so fragmented, "the opportunities are huge, with the five biggest grocers still controlling no more than 13% or so of the market."
Need for speed
"Organic growth is the main strategy for the next three or four years," Yakubson says. "With the infrastructure now in place, we're ready for a very fast store rollout. This year we plan to open 160 stores, next year more than 250. It's very aggressive, but in order to build a real market-driven business, we have to be very fast and we have to know how to grow."
With consumer confidence returning after the crisis, all the big Russian food retailers are chasing the same prize - the 87% of the market occupied by local chains, single store retailers, markets and kiosks. Magnit, for instance, is reported to be planning to open up to 1,000 new outlets this year. Dixy hopes it's rollout will help it grow sales at a rate of 30% a year to hit $5bn in 2012. That need for speed limits the options for growth. While you can find numerous grocery chains in any region of Russia, "there aren't many sizable targets," admits Yakubson. "Organic growth is also the cheapest option and offers higher quality."
However, that doesn't mean the acquisitions team has been retired. "At the same time," he says, "to build a really big business you can't forget about M&A."
Although there is some limited geographic expansion underway, the store expansion will look to deepen the retailer's presence in its current regions: the north-west around St Petersburg, Central Russia and the Urals.
That's also a reflection of a specific feature of the Russian market - how to expand through a country of such vast scale and low-population density. "In order to have logistics you need volume, and in order to have volume you need logistics," says Yakubson. "We've started to open stores in the Murmansk region, which is 1,000 kilometres from our existing network, but can't build a warehouse until we have 300 stores or more. But it's the same for everyone, and just means prices are higher in the stores."
The long-term plan is "of course" to push Dixy across the whole of Russia, he says, but major competitors can be found in practically every new location, reflecting the assertion that, "the grocery sector is the most competitive in the Russian economy. We're all very aggressive on advertising and offering deep discounts to compete against each other."
The expansion to the end of 2012 is set to cost up to $400m, and that will come from cash flow, explains Yakubson, pointing out that a listing in London or New York - as recently suggested by Igor Kesaev, head of Mercury - is not an immediate option. "We're quite comfortable with our debt/Ebitda ratio, but to drive this growth we won't need any outside financing. Issues such as listing on foreign exchanges or raising further debt are best discussed when we've made further investment decisions."
That means investors will need to come to Russia for exposure to a stock that analysts have rushed to upgrade since it announced the deal to buy Victoria, forecasting the retailer is set to reduce the discount to its peers, which is currently around 40-65%. Alexandra Melnikova of Alfa Bank reckons that alongside an secondary share offering held in mid-June to raise the cash for the acquisition, "the increase in scale and better liquidity... should help Dixy to narrow the gap and lead to increased quotes."
While foreign investors have snapped up Russian retailers' shares in recent years, international grocery store operators have found it much tougher going. France's Auchan and Germany's Metro arrived early and secured strong market share organically, but in the past two years both Carrefour and Walmart have given up in the face of the strength of Russian operators.
Without a giant M&A deal, Russian food retail will remain a mainly domestic affair for the meantime. "Quite frankly I don't care these days," laughs Yakubson. "Ten years ago we thought a lot about foreign players, but now the market tends to think about how to compete with the major Russian names by improving efficiency."
That includes fighting the rapid inflation in global food prices, which Dixy attempts by cutting out Russian importers to buy directly from foreign producers and wholesalers. Yakubson claims that with its expanded size, Dixy will be able to offer greater protection to the consumer. "It's not easy for our suppliers to raise prices," he claims. "For the most part, it takes a supplier several months at least to push a rise through."
Retailers have less control when it comes to government policy - which reverted to price caps in the wake of last year's devastating fires - he admits, before adding that the much criticised retail legislation introduced a year ago has accelerated the activity of the retailers lobby. "There's healthy dialogue with the government now," he says.
Meanwhile, he dismisses concerns that retailers risk getting caught in a pincer movement by food inflation and populist policy as Russia's election cycle cranks into life. "Pre-election years are great for retailers!" Yakubson declares. "Social spending rises and the retailers get the bulk of that cash. It's not a risk, but a great opportunity. Russia is still the epitome of that clichÃ©."
Still, the extra pennies in the purses of Russia's struggling pensioners are no longer his only priority. "We're now breaking our DNA. We were a discounter, so we thought only about prices - now we must concentrate on customer service and experience also," he insists.
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