Kazakhstan stands on verge of a retail revolution

By bne IntelliNews June 19, 2008

Clare Nuttall in Almaty -

A block away from President Nursultan Nazarbeyev's summer residence, signs outside a small row of shops discreetly display the names of the world's most exclusive brands - Cartier, Tiffany & Co, Van Cleef & Arpels. Uniformed doormen wait for the occasional customer, a nouveau Kazakh in a huge, gleaming SUV.

At the other end of town, trade is much livelier. In the streets around the Green Bazaar, hundreds of illegal traders squat with their wares - here a greenish-grey sheep's head perched on a cardboard box, there a holdall stuffed with freshly picked spring onions. Young Kazakhs in tight jeans and fake Dolce & Gabanna t-shirts saunter among them in search of the bazaar's pirate DVDs, mobile phone gadgetry and cheap clothes from China and Turkey.

Between these two extremes, the options are pretty limited. Kazakhstan hasn't yet been colonized by western high street chains, which have spread across Central and Eastern Europe over the last decade. A few successful local chains have sprung up in recent years, among them the Meloman music and entertainment stores, cosmetics retailer Mon Amie and electrical goods chain TechnoDom. However, in many of the more traditional clothing and household goods stores, the museum-like atmosphere is as off-putting as the fact that the goods are typically around 50% more expensive than their European equivalents.

Small wonder, then, that 52% of all trade turnover in Kazakhstan still takes place at open-air bazaars or through other informal means. "Open forms of trading have been in place for thousands of years, and people are still comfortable with them as places where they buy their household items," says Dimitry Revin, property developer Eurasia RED's director for finance and business development. "They are slowly moving over to 'civilised' forms of trade as GDP per capital increases and the population becomes richer."

Incomes have steadily risen in the last eight years, leading to an increase in consumer spending power. As a result, retail trade has also increased, by up to 10% a year. However, the development of Kazakhstan's retail sector lags behind that in other countries with a similar level of GDP. Cash-rich Kazakhs without the opportunity to spend their new wealth at home now jet off to London or Dubai for quarterly shopping sprees. "A major problem in Kazakhstan is not having places to shop," said Yusuf Sarimsakci, managing director of Capital Partners. "Because of this, people go to Dubai, the US, Moscow or Europe to shop. We are losing money and VAT in Kazakhstan."

Suitable space

The main obstacle for the retail sector is the lack of quality real estate. While a few western pioneers such as Benetton and iStore have set up in Almaty and Astana, most are waiting until suitable space becomes available.

According to Revin, Almaty's deficit of retail space is due to reach 220,000 square metres (sqm) by 2010. In Astana, which currently accounts for just 10% of Kazakhstan's total retail turnover compared with 40% in Almaty, there is currently an over-supply, but this is set to disappear as the capital's population continues to increase.

Quantity is an obstacle, but quality is equally problematic. The location of retail space, its state of repair and the maintenance services offered to tenants are, in the majority of cases, below what international retailers are accustomed to. Other problems cited by local retailers include shopping centre management with a tendency to slap unexplained "service charges" onto their tenants according to their personal cash flow issues.

However, there are signs the situation is changing. The Mega Centers in Almaty and Astana generate a similar Saturday afternoon buzz to successful shopping centres in Western Europe. Almaty's Mega is laid out in a window-shopper friendly style with a mix of retailers, restaurants and entertainment - a miniature skating rink in winter, and camel rides around the car park in summer.

Several mixed-use developments, among them the Almaty Plaza and Esentai Park developments, are due to open in the near future and will provide high-end retail space, as well as housing and offices. Sarimsakci of Capital Partners, which is managing the Esentai Park project, says that several western chains have confirmed they will set up there once building work is completed.

Shopping centre developer Acteeum Group is also planning to move into the market. The company's managing director, Henrik Stig Møller, says it's allocated €1.5bn for investments in Central Asia, the Caucasus, Turkey and Ukraine. Within this region, it will focus on Kazakhstan, Armenia and Georgia. "The Kazakh market meets our remits - there is a consumer market, increasing GDP and spending power, and proven retail demand," says Møller. "For us to be able to attract interest from investors, we need good projects, political stability and legal transparency. Again, all these conditions are fairly well met in Kazakhstan."

In Almaty, the city authorities are helping along the transition to a modern retail sector. The successful "struggle against kiosks" in late 2007 is now being followed by an attempt to move food bazaars outside the city ring-road, ostensibly for hygiene reasons. The process is likely to take some time (the ring-road is still being built), but it's part of the inexorable move towards formal trading. Although the Green Bazaar, a city landmark, is unlikely to be moved, it has already been sanitised. In its spotless food halls, licensed traders stand in red uniforms and white caps behind pyramids of highly polished vegetables, while the chaotic informal markets outside are periodically cleared away by police.

With bazaars and small local shops still accounting for the majority of Kazakhstan's food and drink sales, international supermarket chains are starting to look at this relatively untapped market. Russian hypermarket chain Vester opened its first store in Karaganda last year and is planning to blanket Kazakhstan in its stores between now and 2010. Other entrants to the market include Turkish Ramstore and Lithuanian Maxima.

"At present, modern formats of trade are not highly developed here and chain retail is in the initial stage of growth - that means that there is great potential for further development," says Timur Kushukov, CEO of Vester in Kazakhstan. "We should take into account that before the world financial crisis, the outlook for the Kazakhstan economy was very positive: in 2007, its growth was estimated at around 8.7%, the population's purchasing power was booming, everything was good. Let's hope that in a short time the situation will start changing for the better again."

Having tested the waters with its first store in Karaganda, one of the country's richest cities due to its location at the heart of the mining industry, Vester is planning to open eight super- and hypermarkets in the second half of this year - two in Astana and six in Almaty. Continuing with its ambitious pre-IPO expansion plan, the Russian company is planning to open a further eight hypermarkets in regional centres including Pavlodar, Shymkent and Ust-Kamenogorsk during 2009, and 15 more supermarkets the following year.

Unlike high street retailers, which are being held back by a lack of suitable shopping space, Vester and its competitors build their own warehouse-style stores so this is not an issue. Other large retailers set to enter the Kazakh market this year include Swedish furniture retailer Ikea and Metro, the world's largest cash-and-carry operator.

Logistical nightmare

In the past, the main obstacle deterring supermarkets and other large-scale retailers from entering Kazakhstan was logistics. With the fourth-lowest population density on earth and decrepit infrastructure, Kazakhstan presents some formidable challenges for retailers, especially those in the food industry. For retailers looking for market scale, there has also been the problem that while incomes in Almaty and Astana are sufficient to justify entry to those markets, incomes in provincial cities lag far behind and it's uncertain when they will catch up.

However, dwindling returns in the increasingly saturated markets of Russia, Ukraine and particularly Central Europe have caused retailers to look again at Kazakhstan. Eurasia RED's research reveals that the return-on-investment (ROE) in Russia's retail sector dropped from 11% in 2006 to 9.25% in 2007, and from 13% to 11% in Ukraine. By contrast, the firm's Dimitry Revin forecasts the ROE in the Kazakh retail sector to be between 15% and 17% over the next three years.

Given the attractiveness of this market, Kushukov anticipates that more international retailers will follow Vester into Kazakhstan. "All trends in the retail sector indicate that the regional expansion of national chains will continue for the next few years. We can also expect that one day new Russian and international players will come to Kazakhstan," he says. "Of course, foreign players are more cautious in terms of international expansion. Among the scary facts that restrain them from development in Russia and CIS countries are economy risks and the political situation. But now the situation is generally changing, so we think that it won't take long for other Russian and foreign chains to enter Kazakhstan."

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