Russia's store wars

By bne IntelliNews November 15, 2012

Ben Aris in Moscow -

Russia's economy may be slowing, but the supermarket business there is flying. If Poland famously was the only EU country not to go into recession in 2009, then Russia's organised retail sector was the only one in the region to see sales and investment continue to climb at the same pace as before the bust at the end of 2008.

There are several factors going into supporting Russia's food courts and hypermarkets. Wages continued to rise throughout the crisis, while unemployment is currently at a 20-year low of 3.8%. The last item that consumers cut in times of trouble is food. But most importantly, the organised retail sector is a blue-sky sector with years of growth ahead of it. And this year's flu epidemic in Russia - an annual occurrence - was unusually mild, leaving more Russians than usual with healthy appetites.

Magnit remains the investor darling. During the worst of the downturn three years ago, the company actually reported a 33% increase in sales as Russians abandoned more expensive imports for cheaper Russian-made food products that are Magnit's stock in trade. And revenues were up by the same amount over the first seven months of this year.

The company didn't slow its investment programme, opening hundreds of new stores, and saw its annual revenues climb above $10bn for the first time. This year, the company will have opened nearly 600 stores of all formats by the close of the year, up from the 5,722 outlets it operated as of August. Magnit is growing so fast in some towns that the Federal Anti-monopoly service (FAS) accused the company of breaching Russia's anti-trust rules and exceeding a 25% market share in a town in the Ulyanovsk region.

Magnit more than doubled its profits in the first half of the year and is rapidly closing the gap on its main rival X5 as Russia's biggest supermarket chain in terms of revenues. Yet it still only has a 4.2% market share and all the top five players together control only 16% of the business, according to VTB Capital.

Cutthroat competition

All the chains are seeing similar results, with the growth of the Russian food retail market expected to average 7.8% in 2011-2015 - though that's still down from the boom years growth rates of around 17% a year in 2007-2011, according to Rosstat.

This slowdown is leading to cutthroat competition. "We see several opportunities for growth that could help us get ahead of our competitors in a year or two. The key objective for us is to constantly seek out new opportunities and also be aware of what our competitors are doing. It then takes them a year or two to catch up," Sergey Galitskiy, Magnit's founder, told investment bank Renaissance Capital. "For example, we are trying to catch up with X5 in terms of sales volume, while they are busy acquiring questionable assets for ridiculous amounts of money."

X5 is giving Magnit a run for its money. The company, owned by the Alfa Group, is growing fast and expects to see revenues up by 8% to top $16.6bn by the end of this year, according to Metropol. X5 bought the discount chain Kopeyka earlier this year and is in the process of rebranding all its stores. However, the company has been hit by the loss of its CEO, Andrei Gusev, who quit in July and has yet to be replaced.

The Dixy Group, which specialises in a small format local stores, was up to over 1,200 stores by August and saw revenues rise by 21% over the same period to just under half a billion dollars. Its growth has been accelerated after it bought smaller rival, the Victoria chain. In addition to the merger, the company rolled out another 165 new stories over the first seven months of the year (101 were opened in May and June alone) and wants to have opened 300 news stores by the end of the year.

Discounter O'Key by September had expanded its staff by a third from the year before and has seen margins go up by a quarter over the same period. And the company also intends to spend $20m on buying one new hypermarket and several new stores to maintain its fast pace of growth. Over the next two years, the company will spend another $25m on rolling out 100 new convenience stores and six new hypermarkets.

Despite all the growing room, the supermarket business (along with things like mobile phones) is already a modern market-based sector that is very similar to its peers in the West. Going forward, the fierce competition between the rival chains is starting to make itself felt as the easy gains are exhausted. "Rising saturation is pushing retailers to add new formats and expand geographically, which will inevitably lead to a consolidation phase in two to four years," says Andrei Nikitin, a retail analyst with Alfa Bank.

In August, Magnit announced it was going to invest €350m into farming as a way of producing its own brands and so cutting costs, opening up a new front in Russia's store wars.

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