Russia's growing food chain

By bne IntelliNews February 26, 2013

Ben Aris in Moscow -

Russian supermarkets have been the standout winners since the 2008 crisis struck, but Magnit - now arguably the country's most successful company - outdid even its own high standards in 2012.

The discount supermarket chain concentrated its efforts on Russia's fast evolving regions and has grown throughout the crisis years - even in 2009, a year when Russia's economy contracted by more than 7%. Rather than chase other retailers - both Russian and foreign - in the increasingly competitive mega-cities of Moscow and St Petersburg, its regions strategy resulted in a solid 32.6% of revenue growth last year, well ahead of analyst expectations, while profits almost doubled to reach $803m as the company became more efficient.

And it is expanding fast. Despite being the clear leader in its sector, Magnit still only controls less than 10% of Russia's organised retail - but it's rolling out new stores as fast as it can. In 2010 it opened 300 new stores; this year it plans 800-1,000 new stores, as well as 60 new hypermarkets. It has also been branched out into cosmetics (500 new stores planned this year alone) as well as power distribution for retail customers with MagnitEnergo. The company had a total of 6,921 stores as of the end of January and is rolling out about 37 new stores a month.

This is no flash in the pan, as almost all Russia's other supermarket chains such as X5 and Dixy, also did well, reporting around 20% rise in revenues and equally strong profits. Analysts expect another successful year for the food retailers due to strong consumer demand and regulatory changes, although growth may be knocked a bit by new tough restrictions on the sales of tobacco and hard spirits.

It is not only the Russian firms that are growing lickity split. French retailer Auchan is the biggest foreign supermarket chain and also plans to roll out at least 10 new mega-malls and buy another 16 from competitors this year, to bring its total of large format malls in Russia to 56.

And like Magnit, Auchan is also starting to branch out into new business lines. The big event for the company this year will be to break into the consumer electronics market. Auchan plans to launch the Elektrodiscount chain of discount white goods, with the first store already open in Moscow since September. Auchan will take a year to observe the first store and if the format succeeds, the company will look to open such stores near each Auchan in Russia, Elektrodiskont CEO Ludovic Hasquette told reporters at the opening, but ultimately the plan is to open a similar store next to each of the company's existing supermarkets throughout Russia. An online retail effort will be run in parallel, which is currently only available in the Moscow region.

Fast competition

Fast food in Russia is emerging as an equally frenetic and competitive market. McDonalds opened its first flagship store on Pushkin Square way back in 1990 and had 345 restaurants as of the end of 2012, with plans to move into new regions in Siberia this year. But a slew of its international competitors have entered the market over the last two years.

YUM! Restaurants International Russia & CIS, which owns KFC, is one of the most aggressive. It bought out its joint venture partners Rostiks (a KFC clone) in 2010 for an undisclosed sum and says that this year it plans to open 60-70 new restaurants across the former Soviet Union, but mostly in Russia. The company already opened 35 last year and aims to increase this to about 80 a year until 2015, according to CEO Oleg Pisklov. The company is not disclosing its 2012 revenue, but said revenue rose by 46% last year and forecasts revenue will hit $1bn in 2015.

In general, food is driving retail sales, as it remains a big part of most Russians' shopping baskets. Retail sales decelerated at the end of last year, falling from 7% year-on-year growth at the end of 2011 to 5.9% in December 2012. But food sales continue to grow more quickly, according to VTB Capital.

For all the talk of the government's big role in the economy (and no one is denying this is true), household spending has become a bigger force in recent years. In 2012, household spending made up 48% of Russia's GDP in terms of expenditure. The state accounted for another 19%, with exports accounting for another 7%, according to Rosstat.

All this shopping is driven by the government's socially oriented budget policies: the economy may have tanked in 2009, but thanks to the government's rescue and massive spending from the Reserve Fund wages have continued to rise over the last four years in both nominal and real terms. Real salaries were up 7.8% in 2012 and shopping was supplemented by a veritable boom in retail lending, up a whopping 39% in 2012.

Still, analysts are expecting things to cool down this year. "The key risk for consumption will be the substantial deceleration of budget spending from 18% year-on-year last year to 2% year-on-year in 2013. This will likely reduce real income growth to only 1.5% year-on-year this year," says Natalia Orlova, chief economist with Alfa Bank. "In the banking sector, the new provisioning rules effective from March 2013 have already started to lift lending rates and will trigger a slowdown in retail loan growth this year."

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