Shopping and eating in Russia

By bne IntelliNews April 8, 2013

bne -

Retailing and other businesses catering to the Russian consumer are moving into a new phase as the competition for rubles in shoppers' wallets heats up.

In January, bne reported that McDonald's, the world's largest fast-food chain that has been operating in Russia for over 20 years, had received permission to open its first five outlets in Novosibirsk, Siberia as part of its planned expansion into the region.

In March, the company went a step further to protect their mile-wide lead in the fast food business by introducing the franchise system to Russia that it uses in the developed markets.

The fast-food chain, which has run its own outlets since launching in Russia in 1990, is lining up more partners after last year picking Russia's largest restaurant holding company Rosinter, which already has a franchising deal with TGI Friday's, as its first franchisee. "Beyond the Urals, we are interested in Western and Eastern Siberia, and we are also considering franchising out restaurants in (Russia's western) enclave of Kaliningrad," Khamzat Khasbulatov, CEO of McDonald's Russia and president of the Eastern Division, told a news conference.

The franchise decision has been promoted by the explosion of international fast food companies that have suddenly arrived in Russia over the last 18 months, which include: Dunkin' Donuts, Chillis, Burger King, KFC, Krispy Kream, and others. In addition, Burger King, which is probably pursuing the most aggressive expansion policy, has set up a domestic joint venture called Rus Burgers to cater to the more patriotically minded luncher.

And one of Russia's largest restaurant chains, GMR Planet of Hospitality, plans to exploit a new fast-food opportunity thrown up by the government's heavy investment into modernizing the Russian railway system. With most stations getting a new paintjob and expanded facilities, the company says it will invest RUB1.5bn ($50m) into opening outlets in stations across the country. GMR Planet of Hospitality signed off on an agreement with the state-owned Russian Railways (RZD) in February and has already put the financing in place. Two-thirds of the money will be invested in regional stations and the remaining RUB500m will be spent on Moscow's stations. GMR Planet of Hospitality already has 312 restaurants in 47 cities in Russia, Moldova, Azerbaijan, the Czech Republic, and Slovakia.

All this frenetic activity is driven partly by the rise Russians on-going rise in disposable income, but probably more importantly by the deepening recession in western Europe. International retail companies are on the hunt for new sources of revenue and the Russian market is almost unique in Europe now for offering both fast growth and high margins.

Shop till you drop

While the most visible action has been in the fast-food segment, traditional retailers have also been laying out expansions plans in the last few weeks.

German Metro has been around for years and is dedicated to opening stores throughout the Commonwealth of Independent States (CIS). On March 20, it said that its METRO Cash & Carry operations in Russia, China and Turkey in particular contributed to a 1.7% rise in sales during 2012.

In light of this, the company says it will launch five to eight new Metro Cash & Carry branded stores in Russia this year. "We plan to launch five to eight stores annually. Last year we launched five stores. Now we have 68 outlets from Kaliningrad to Irkutsk," Pieter Boone, managing director of the company's Russian business, said on March 19.

France's Leroy Merlin also says it will open six new hypermarkets in Russia this year, according to Leroy Merlin Vostok CEO Vincent Gentil, speaking at the same Adam Smith Russia Retail Forum on March 19.

Leroy Merlin currently operates 24 hypermarkets in Russia. In 2012, it opened four stores and plans to open eight to ten hypermarkets a year on average over the next several years.

British high street retailer Marks & Spencer was a later entry into Russia, but it is now making up for lost time with plans to open 55-65 stores through to 2016, with the aim of doubling revenues, up from the 36 it operates now, according to Jan Heere, director of international business. The company also plans to launch an online store this year.

High-end fashion retailers have all been in Moscow since the 1990s, sucked in by the soaring sales of their products that were initially distributed by Russian traders. However, the whole business is rapidly going mass market as the source of profits switches from rich oligarchs (and especially their girlfriends) to the average man and woman in the street.

Leading British fashion retailer Blue Inc says it will enter the Russian market this year, opening at least two stores before the end of the year, Simon Hutchinson, international development director, said at the Adam Smith event. The company is currently negotiating with several Russian companies to find a local partner. Blue Inc also plans to develop online sales in Russia, Hutchinson said.

And German furniture retailer Hoff also plans to significantly boost its exposure to Russia. The firm currently operates seven hypermarkets in Russia and plans to open two more this year. Hoff hopes to see revenues increase by at least a third as a result, from RUB5.5bn in 2012 to RUB7.5bn by the end of this year - and sales were already up 44% in 2012 on 2011. In comparison, sales in its home market are expected to be flat at best.

The company has already launched an online shop. "The revenue from Internet sales in 2012 amounted to 10% of the total sales. Our products are being delivered all across Russia," Vice President Mikhail Kuchment told delegates at the conference.

Retailers are continuing their expansion plans despite a slowdown in the sector. Retail sales for February released on March 20 were disappointing to say the least. February posted the slowest growth rate in three years, rising just 2.5% on year, compared with forecasts of around a 3.3% rise (although some analysts pointed out the poor result was partly due to the fact last year was a leap year and February had an extra day).

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