M.Video-Eldorado Group – Russia's retail lion

M.Video-Eldorado Group – Russia's retail lion
In the first retail race the game was to open as many stores as fast as you could to win market share. A new race has started where the game is to get as many people into your app as possible, and this race has pitted the bricks and mortar stores against the e-commerce upstarts. / wiki
By Ben Aris in Berlin June 27, 2021

“The winner is the lion and takes most of the business. You cannot do things halfway,” said M.Video-Eldorado Group CEO Alexander Izosimov in an exclusive interview with bne IntelliNews.  

The merger between Russian consumer electronics giants M.Video and Eldorado in March 2018 was a big success. It created not just one of the biggest electronics retailers in Europe, but a top-10 global player.  

It was already the bricks and mortar consumer electronics market leader, but thanks to the pandemic’s catalysing effect on e-commerce the ground is shifting. M.Video-Eldorado Group will have to be the nimble giant if it is going to hang on to its lead and double gross merchandise value (GMV), which retailers increasing use to measure sales, in the next five years, as the company intends to do.  

Most focus on Russia’s huge raw material resources but it has another extremely valuable resource that can make businesses billions of dollars a year: its people. With a population of some 146mn and income levels on a par with the lower echelons of the EU in real terms, Russia is head and shoulders above its emerging European peers as the largest consumer market in Europe.  

“The merger worked. We successfully brought two strong brands together and we were ready for the speeding-up transition to online brought on by the pandemic,” M.Video-Eldorado’s new CEO Alexander Izosimov told bne IntelliNews in an exclusive interview. “The market had been developing quickly in the first half of 2020, but as it changed it was not clear how the pieces would fall. The pandemic accelerated the emergence of new e-commerce players and ecosystems, but as the leading consumer electronics retailer in Russia, we already had [a] head start of several years – which means we can focus on our transformation strategy while the others are trying to catch up.”  

The noughties saw the end of the Yeltsin-era chaos and wages grew 10% a year for a decade, creating a middle class that went out to get all the gizmos and widgets that are the hallmark of a capitalist society. As the leading player on the consumer electronics and white goods market, the combined M.Video and Eldorado retailer firm has boomed.

The company was hurt by the coronacrisis in 2020 but Izosimov says sales bounced back fast in the early part of 2020 and have been rising strongly in the first quarter of this year too. There was a one-off boost last March when the oil prices collapsed, and Russians resorted to one of their classic wealth protection ruses: buy a nice washing machine to lock up savings in an easy-to-sell asset. Russians have been doing this since 1991, and it led to a spike in sales at M.Video-Eldorado stores that month.

Another reason for the uptick in sales, says Izosimov, is that not only were Russians happy to sink some of their savings into devaluation-proof washing machines, but Russians also took some of the money they normally spend on foreign travel and invested it into upgrading home entertainment systems and new phones due to the long periods stuck at home under the quarantine restrictions.

But the pandemic has catalysed and accelerated a major change that Russian retail was already going through. Russia’s e-commerce is booming and that has fundamentally altered the nature of the game. Being the biggest bricks and mortar retailer in your category group does not make you as unassailable as it used to.

Traditional bricks and mortar outlets have suddenly found themselves in direct competition with several big tech companies that are all trying to become the Russian answer to Amazon and are growing at between five and twenty times faster than the rest of the economy.  

“There are now five well capitalised pure online players, and they have good technological base. The way it could go for all Russian e-commerce is that the winner is the lion and takes most of the business. The number two gets some of the meat as well and players 3-5 probably will not make any money ever,” said Izosimov. “This is now a high stakes game. You cannot do things halfway.”

Doubling GMV in five years

At a capital markets day in February M.Video-Eldorado set the guidance to double its gross merchandise volume (GMV) in five years, from RUB0.5 trillion ($6.92bn) in 2020 to RUB1 trillion by 2025.

“If we play our cards right we can double the business in five years, earn a good return with a decent margin,” said Izosimov. “We are already working on expanding or deploying a number of technology solutions and choosing which categories to stay in.”

The race is on and it's already clear that not everyone will survive it. Russia has already been through this in the 90s and 00s, when the game was to open as many stores as possible as fast as possible to capture as much market share as you could. That race came to an end a few years ago, but now a new race has started: to bring in as many users into your app or ecosystem as possible as fast as possible and again capture as much market share as you can.  

The new e-commerce rivals have powerful technological systems and millions of registered users, but what they don't have is M.Video-Eldorado’s store network that spans the country. It may be old school, but it’s also the company’s secret weapon.

“The in-store experience remains a key part of the selling process,” said Izosimov. “And we also use stores as fulfilment centres. Russia is so huge that logistics and distribution are big problems for any retailer. Delivering in Moscow or St Petersburg is easy, but not in a country with 11 times zones with relatively underdeveloped logistics.”

M.Video-Eldorado has about half of its stock in its stores scattered across more than 100 cities and towns, and it often has several stores in a single city which can also deliver stock missing in one to another.

“We believe that our store network gives us a couple of years head start in which time we can develop our system,” said Izosimov. “For the marketplace the logistic costs could be about 15% of the average check. For us they are about 3%... The new competitors will grow, but we can limit their growth. No one is going to become an Amazon here with a 60% market share.”

Izosimov said that M.Video-Eldorado currently has a 26.5% market share, whereas the marketplace e-vendors have about a 5% market share but they are growing very fast and are aggressive.

“At the moment in Russian consumer electronics, sales are about 60% bricks and mortar, 40% online. In five years, that will flip to 40% bricks and mortar and 60% online,” said Izosimov. “The question is: who will own what share?”

Izosimov said it is inevitable that the e-commerce rivals will continue to increase their market share and says they will probably double it to 10% or 12% in the next five years. But M.Video-Eldorado’s strategy is to maintain its leading position thanks to its mobile platform development, store network and its grip on the premium product categories with high service levels, where pure online players will struggle to compete. “They will grow. But they are likely to retain a relatively small part of the Consumer Electronics market,” said Izosimov.  


OneRetail and the customer journey

Selling consumer electronics is a little more complicated than selling groceries or plane tickets, which have become retail commodities: the only decision to be made is whether you want a loaf of bread or a weekend in Tbilisi. Once that decision has been made there is nothing else to think about except ordering online.

Buying a new stereo or washing machine is a lot more involved, as there are many factors that go into the decision: price, functions, service contract, reliability, reputation and the opinion of the rest of the family. 

M.Video-Eldorado only holds part of its stock in the store, and a customer visiting the store is encouraged to download a mobile app where they can explore and compare all the options and functions associated with each product.  

There are also sales staff who also have a “consultant” version of the same app that not only allows them to showcase the product variants but also feeds them data such as what the customer has searched for and their previous purchase history. Artificial intelligence predictive technology then gives the sales assistant a good idea of what the customer is looking for.

“Two thirds of the customers start the journey online where they check out the options and at the same time, over 80% of our customers use stores, so they switch from online to offline spontaneously and it can take around two weeks to complete the transaction,” said Izosimov. To win the market and keep customers throughout their ‘shopping journey’ you have to provide a seamless customer experience, which is why our focus is on what we call OneRetail, our mobile-centric platform that lets us provide a more personal experience no matter where the customer is shopping, even in stores.”

“The touch and feel experience is an important part of the sales process, and the sales assistant can help the customer find the product that suits them best,” said Izosimov. “The purely online companies can’t offer this service. And it makes a big difference, especially when selling the premium end of the product range.”

Izosimov said that even this in-store service can be considered online sales, as while the customer can look at a real fridge, the version they actually buy is via the app and can be very different, with a lot more bells and whistles. Moreover, the completion of the deal is when they press the “buy” button and that can happen anywhere, in the store at your mother-in-law’s.

The vendors and producers of the goods also value M.Video-Eldorado’s added service and sales as the premium products are also the most profitable. Selling via online marketplaces boosts volumes, but the goods most suited to this anonymous approach are commoditised electronic goods such as toothbrushes or headphones. Moreover, while the marketplaces have large volumes of sales, the share of the producer in the overall sale is small. With M.Video-Eldorado their share is large and producers value the extra attention to sales details that this more intimate relationship brings, said Izosimov.

So far, so good

The plan is working so far. M.Video-Eldorado posted 14% year-on-year growth in GMV to RUB138bn ($1.8bn) in 1Q21. Notably, online sales of jumped by 63% y/y, accounting for 67% of the total top line in the reporting quarter. In the same period the average monthly number of active users of the customer mobile apps increased by more than 5-fold y/y to 3.2mn.

M.Video plans to open 500 new stores and enter 100 cities this year from the 1,098 stores it was running at the end of March. However, that is only a 5% space expansion annually, as half of the new stores will be in a small format (250-square metre Eldorados).  This is a trend in Russia seen across the retail gamut, where stores are getting smaller and moving to locations that are physically closer to the customers.

"The consumer electronics market is expected to grow at just 5-6% CAGR, reaching RUB2.7 trillion in 2025 (RUB3.1 trillion including services)," Sberbank CIB forecasts. However, most of the growth will come from the online channel and the premium segment, where M.Video is strong. “The company should continue to dominate in the market, and sees its share of marketplaces at 10% over the long term,” analysts said in a recent report.  

M.Video-Eldorado technology strategy is going to play a key role in the plan, as the really strong sales growth is already coming from online, which doubled in 2020, growing five times faster than the traditional sales.

“The retailer is also going to focus on retaining existing clients in the OneRetail model. The share of registered customers making purchases through the web/mobile platform is now 42%, and they generate a higher purchase frequency and larger tickets. As the company promotes and enhances OneRetail, the ratio is anticipated to grow to 84%,” Sberbank said in a recent research note.

Getting customers to download the app is a key goal, as the company has already found that once a customer has bought one product using the app they are much more likely to buy a second.  

“We are moving from anonymous sales to a loyal customer base. So we use our OneRetail tech to identify the customer in store at an early stage, when they are just thinking about a purchase. Our customers are more likely to stay with us if we can provide best selection of models and personalised prices,” said Izosimov.  

Switching to online has caught analysts’ attention and BCM GM has marked the company up to a Buy, calling it a growth story.

"The bright outlook stems from its 27.6% share of the Russia market via >1,000 branded stores, continued store expansion and innovation (e.g., introduction of the ONE RETAIL concept) to meet changing customer behaviour amid the increasingly online era, accelerated by COVID," BCS GM said in a recent note, adding that retailer’s financials are stable, with a comfortable debt repayment schedule.

VTB Capital (VTBC) did the same in May, adding the company to its “most liked” stock recommendations with a Buy recommendation and a target price for the stock of RUB8,800 per share and an estimated total return of 32%.

The stock came into focus in June after Russian tycoon Mikhail Gutseriev, the founder of Safmar Group was added to the EU sanction list. Safmar Group owned 60% of M.Video-Eldorado shares before control was passed to Gutseriev’s son, Said Gutseriev, and the father no longer owns or is involved in the business. Moreover, the minority shareholders, including MediaMarkt that gave up its Russian business to M.Video-Eldorado in exchange for a 15% stake in the merged company, told Russian press the same week it had no intention of quitting its holding.

"Ceconomy, which owns a 15% stake in M.Video PJSC, does not intend to withdraw from the company's capital due to Mikhail Gutseriyev's inclusion on EU sanctions list" the company told Interfax.

The sanctions on Gutseriev senior are extremely unlikely to have any material impact on M.Video.

The company says that it will invest into capex to continue growing its network but only 20% will go into new openings, whereas 60% will go into IT, and the rest into maintenance. From the cash that is left over 100% of profits will be paid out as dividends. And as promised, the board recommended a dividend of RUB38 per share for 2H20, making a total payment of RUB6.8bn ($89mn) of 100% of net adjusted income.

“The results so far in 2021 have been strong and we are confident that we are on track to reach our strategic plans to double GMV to 1 trillion by 2025,” said Izosimov. “The capex will remain less than 2% of the GMV.”