Tom Daly in Moscow -

The global crisis has crushed most Russian companies, but one firm is blessing the meltdown because it has driven consumers through its doors in droves: Russia's leading regional supermarket chain Magnit is expecting to end this year by setting a new sales record and is one of the few Russian companies that is still expanding fast.

The Krasnodar-based discount retailer just reported first-quarter results that show sales are up by over a third year on year, an almost unique result in Russia at the moment. Moreover, not only is the company not scaling back on its investment plans for 2009, it is actually increasing them: the company said in February it was going ahead with spending of $660m of investment to add 400 new discount stores this year, up from the 371 stores it opened in 2008.

The company's performance has barely blipped in the midst of the global crash. Magnit's net profit almost doubled in 2008, even counting in the sharp economic slowdown that kicked in from the autumn of last year. And management says it can maintain its current growth momentum for all of 2009. Analysts are universally tipping the company's stock as a top performer for this year.

So why is the company doing so well? The logic is simple: in a crisis consumers cut spending on all their little luxuries, however, the last thing they cut is food. Indeed, in crises food sales usually go up as people simply stay in and eat at home more. On top of this trend is the fact that Magnit has targeted the lower end of the market and sells predominately Russian-made food. A devaluation of the ruble over the last six months has driven up the cost of imported food by about 40% and the Russian population has switched en masse to the cheaper home-made produce that Magnit sells.

Milking the regions

Magnit was set up in 1994 as a distributor of household products and cosmetics before moving into food retail. Its well-known motto - "always low prices" - is now a mantra for the whole shopping populace, but has always appealed to its core markets in Russia's regions.

While most of the company's competitors started life in Moscow and then moved out to the 13 so-called millionki (Russian cities with a population of more than a million people), from the start Magnit targeted regional cities with less than 500,000 people, home to three-quarters of the Russian population, avoiding the megalopolises such as Moscow and St Petersburg.

With incomes putting in double-digit gains for nearly a decade, all the supermarket chains have been racing to build up their branch networks in an effort to take market share while it was still up for grabs. Magnit now boasts a total of 2,676 stores and is continuing to expand aggressively.

All the supermarket chains have done well because of the crisis. Budget chain rival Pyaterochka, controlled by Alfa Group's X5, boosted sales by 28% in the first quarter and Seventh Continent, another big player in the supermarket business, saw sales up by 11%, according to VTB Capital. But Magnit outstripped them all, posting net sales up by 36% in the same period to RUB38.2bn ($1.37bn) and opened 94 new discount stores between January and March. "I think what helps it is that Magnit doesn't have a supermarket format," Anna Kochkina, consumer and retail analyst at UniCredit Securities, says. "It focuses on the mass-market formats - hypermarkets and discounters."

While the other chains fell over each other to capture a share of the admittedly rich Moscow market, Magnit has been largely left alone to develop the larger, albeit more diluted, regional market. But its virtual monopoly on the small regional towns has meant the company has a lot of bargaining power, so what it loses in the economies of scale of big cities, it gains in lower costs. "Due to the scope of their business, they get very good purchasing terms from their suppliers," says Ivan Kushch, consumer analyst at VTB. "When disposable income falls, people switch from supermarkets to discount stores and hypermarkets. Basically, the trend we see is that people are trading down in terms of baskets. Russians' average cheque remains, but they buy cheaper products and usually domestic products - less yoghurt, more milk."

Flying off the shelf

Magnit's business model is strong, but analysts also like the company's management. Russia is famous for its oligarchs and corporate governance abuses, but Russia's wide boys have mostly gone into the cash-rich sectors - things like oil and metals - leaving the hard work of high-volume, low-margin retailing to Russia's true entrepreneurs. "The owner knows the company very well. He's a shareholder and has a role in its senior management, so has a vested interest," says Kochkina, referring to 41-year-old Magnit founder and CEO Sergey Galitsky, who is also chairman of local football team FC Krasnodar. Said to be an admirer of US discount chain Wal-Mart, Galitskiy took Magnit public in Moscow in 2006 and last year listed it on the London Stock Exchange.

Still, despite the company's recent strong performance, Galitsky has been hit in the pocket like everyone else. He dropped off Forbes magazine's annual rich-list of billionaires for 2009. (He was ranked joint-652nd last year with an estimated net worth of $1.9bn.)

But the performance of his firm and its stock has nonetheless given him a lot more to smile about than his peers. Valuations on Russia's stock market have been crushed by the global crisis, but recently the market bounced back since the lows of February, putting in a 50% gain; in the same period, the value of Magnit's stock has increased an astounding four-fold, rising from a low of RUB206 set in November to close at RUB1,075 as of April 16. Even with this phenomenal rally, analysts expect the stock has further to go. "Magnit is our top pick and is the clear leader in terms of like-for-like sales growth and net retail sales increase, while growing in line with X5 in terms of net selling space increase," VTB's Kushch says.

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