Belarus’ retail king Euroopt goes on the road

Belarus’ retail king Euroopt goes on the road
Euroopt store in Minsk, Belarus / Euroopt
By Ben Aris in Minsk July 5, 2017

Euroopt (aka Eurotorg) is arguably one of the best run and fastest growing companies in the Commonwealth of Independent States (CIS) and you have almost certainly never heard of it.

Over the last ten years the founders with the management team have quietly built up Euroopt into the dominant supermarket and grocery chain in the small northern republic of Belarus that outperforms its Russian peers on almost all metrics other the absolute volume of cash turnover. This week, Euroopt is on a no-deal road show in London to take their story out to the rest of the world for the first time: a successful and fast growing $2bn business based exclusively on Belarus’ domestic market.

Belarus is not famous for producing highly profitable and regionally competitive companies. But there are a handful of firms such as the state-owned giant mining truck-maker MAZ and the Belarus Potash company that are serious international players. From the private sector the only really notable name is New York listed software engineering company EPAM, but even that will call itself a US company, despite the fact that the bulk of its employees live and work in Minsk.

Now you can add Euroopt to this list, which is already the biggest privately owned company in the country and with a staff of over 33,000 it is the largest private sector employer too.

Having made a fortune in trading during the 1990s, its founders and majority shareholders Sergei Litvin and Vladimir Vasilko began to transform their wholesale business into a modern retail chain in 2007 and opened its first eight stores. When the store was founded the owners already had several wholesale depots that were turning over some $100mn a year, supplying Belarusian stores with goods.

Andrey Zubkov, CEO Euroopt“But slowly the company refocused and switched from wholesale to consumers,” CEO Andrei Zubkou exclusively tells bne IntelliNews in the company’s first every interview with the international press. “Today we have 459 stores in five formats – everything from the tiny corner stores to hypermarkets. We are unique in that we are the only company that is present in all the regions of the country.”

From a standing start today Euroopt is the dominate player in retail, “by a wide margin”, according to Zubkou, with a 19% market share and faces no real competition in the modern organised retail space. In 2016, the company’s net sales of $1.83bn was 4.5 times more than its nearest competitor and net sales have been growing at a compound growth rate (CARG) of 58% a year for the last six years.

To put that into perspective, the fastest growing retail chain in Russia is Lenta, which has a compound net sales growth rate of 27.8% over the same period, while Russia’s investor darling, the supermarket giant Magnit, has seen net sales grow at 26%.

The same is true in terms of traffic density in the stores: the traffic density of Euroopt's convenience format stores in 2016 was 1.9-times higher than that in Russia’s market leader Magnit and more than twice that of X5's convenience store format, according to Euroopt.

“We outperform our Russian peers in terms of net sales growth and also in terms of sales space growth, where we were growing at a compound growth rate of 37% over six years with Lenta in second place again at a rate of 32%,” says Zubkou, who has been with the company from the start of its transformation to a retail chain and was instrumental in building it into today’s market leader.

These impressive growth rates are partly possible due to the underdeveloped nature of the Belarus retail sector versus Russia. The penetration of organised retail is still low in Belarus at about 45% and it has just 0.5 square meters of space per capita, which is much lower than its emerging market peers so what consumption there is in stores like Euroopt is much more concentrated than in other markets in the region. By comparison Lithuania has 1.1 sqm per capita, Poland 0.9 and Russia 0.7. 

Euroopt is also unusual in the region in that the first generation of managers are largely self-taught and almost all homegrown. Elsewhere in the CIS many of the leading managers cut their teeth at one of the multinationals that moved in during the 90s or have worked aboard and brought their expertise home to local companies. Euroopt has its own “tough” training programme and is drawing lessons from watching Russia’s development – but not only; Zubkou say he remains agnostic to new ideas and is also watching markets like Lithuania and Poland, and remains open to taking the best from the West too.

“Russia is the nearby market that is similar to us and we benchmark to peers as they are also fast growing emerging markets. But as for the business models, procedures, IT etc we keep an open mind,” says Zubkou.


Slow economic growth affects the product mix

Euroopt’s concentration on the limited product mix of staples in high demand is a function of the relatively low level of income in the republic, compared with its regional peers and the smaller middle class. Customers are very price-conscious as economic development has been slow thanks to the lack of economic liberalisation and the high level of state ownership in the Belarusian economy.

Wages have been rising steadily but the government’s targeted wage increases in the boom years was the overriding macroeconomic goal and done without consideration of its inflationary effects, according to a recent Berlin Economics study. “The social and political goal of increasing wages was divorced from the need for macroeconomic stability. The upshot was a sharp increase in inflation, which cancelled out any benefit the population derived from seeing wages increase,” the think tank noted in a recent report. As a result in real terms, the average Belarusian has felt little benefit from the increases in nominal wages over the last few years.

The two pillars of Euroopt commercial model are to offer a limited array of products that enjoy high demand at the most competitive prices, as this reaches the widest audience.

“Our key advantage is our commercial model of price leadership,” says Zubkou. “[Market research company] Nielsen study in [the large regional city of] Gomel found that 80% of the respondents said that Euroopt offered the best prices on the market.”

Belarus has been hit by three currency devaluations in the last decade and suffered the shocks transmitted from crises in the surrounding countries, Russia first and foremost, as the republic’s main trading partner. But of all the firms in Belarus, Euroopt has been amongst the least affected as its business and supplies are all almost entirely domestically produced and so less exposed to FX risks. At the same time it has benefited from customers trading down to the cheaper goods the stores offer as the pain of the crisis bites and won customers from the premium retail chains. 

“The share of food in shopping baskets is about 50% and that has hardly changed during the various crises; it is the other products – the little luxuries – that saw spending fall. We have been relatively insulated from the worst impact of these shocks,” says Zubkou, sitting in the modern office complex in Minsk that is the company’s HQ. “But the economy is stabilising now says the National Bank and the international financial institutions like the EBRD and IMF say there are good prospects for economic growth.”

After a GDP fall of 3.9% in 2015 and 2% in 2016, the Belarusian economy is expected to return to growth in 2017 with the IMF forecasting a mild 0.6% expansion. The World Bank is more pessimistic saying the country will return to 1.1% growth, but only in 2018.

Expansion plans

While Euroopt is already well established and the first phase of building up the network is coming to a close there is still more to do. The company has a mixed strategy of owning its stores and leasing buildings out; Euroopt owns about 45% of its stores and is in the process of assessing a few dozen new locations.

“We have a long list of potential objects under review. What we are studying is the return on capital in each of them,” says Zubkou, flanked by his younger colleague and CIO Andrei Matsiavin, who cut his teeth in local corporate finance and is driving the expansion programme.

Zubkou says there is still plenty of growing room in the regions and Minsk but the focus is changing from simply expanding the chain to improving the Ebitda margins and improving the efficiency of the stores. Here too the company has already had stellar results after the Ebitda grew by more than 70% year-on-year in the first quarter of 2017.

Another way the company can improve the bottom line is to sell its own private label basic staples. Virtually all of the goods Euroopt offers are domestically produced and as it offers only a selected few alternatives, introducing its own brands to the productive mix is an obvious move.

“In other supermarkets you might see ten different brands of cooking oil, but with us there meybe only three,” says Zubkou. “It allows us to order in bulk that helps bring the cost down and we can pass those savings onto the customer to ensure we keep our price leadership.”

Given the tight list of product offered the company has begun to produce some of these products on its own private label, which already account for 11% of the product mix, a share the company wants to bring up to 20% in the near future.

With the retail network growing fast the shareholders decided to launch an online retail store in May 2014. It was not an obvious thing to do as despite being a European node for software development, e-commerce in Belarus itself is not well developed.

Progress has been good. From its four fulfilment centres around Minsk the online store can service the surrounding region and some of the nearby larger cities.

In the last two years, the online business has expanded and in 2016 made 2.5 million deliveries worth $60mn, or about 3% of the company’s total turnover. And the business is still expanding: in June alone online sales were up 40% y/y, a faster rate of expansion than the overall business.

While there are no plans to expand the physical stores into neighbouring markets, the same is not true of the online service.

“We are already stealing customers from our competitors via the online business. We have deliberately set the bar for free delivery low – any order of $13 or above gets free delivery – as we understand that we need to grow this business first. But that means even online we can maintain our price leadership model," says Zubkou.