Russia's Mercury Retail bets on ultra-convenience format to win food shoppers, boost growth

Russia's Mercury Retail bets on ultra-convenience format to win food shoppers, boost growth
Mercury Retail has been around since the 1990s serving a high-end customer base then and now the middle classes. While many go online, Mercury is focused on an ultra-convenience store format as it continues expansion of what is already Russia's third-largest store-network by sales. / wiki
By Ben Aris in Berlin September 30, 2021

Mercury Retail Group, the owner of Russia's Red & White and Bristol food chains, is focusing on its ultra-convenience store format as it continues expansion of what is already Russia's third-largest store-network by sales.  

Having sold its Dixy chain of larger outlets to Magnit for RUB97bn (about $1.3bn) earlier this year, Mercury is focusing on developing stores in just one format. Ultra-convenience – characterised by small stores in residential areas with a limited assortment and low prices – is already a RUB1.8 trillion market and is the fastest-growing segment of the Russian food retail market, with sales forecast to triple by 2025 to account for as much as a quarter of the market, according to InfoLine.  

Annual sales at Red & White and Bristol chains rose on average by 34% in 2017-2020, more than twice the rates of their larger competitors X5 Retail Group and Magnit, according to a September report by InfoLine. The chains were about twice as profitable as Russia’s biggest food retailers in the first six months of the year, according to the researcher.  

“The most efficient retailer is the one who offers a limited assortment, like Aldi does in Europe,” Red & White founder Sergey Studennikov said in an interview with Bloomberg in October 2018. “Having too many items to choose from raises costs that are ultimately passed on to consumers.”

Now Mercury Retail favours comparison of its stores with those of the Polish food retailer Dino, because of its rapid store openings and strong revenue growth. Mercury opened 770 outlets in the first six months of the year, boosting revenue by 27% to RUB330bn ($4.5bn), with like-for-like (LfL)sales jumping by 20%. For comparison, the Polish chain opened 150 outlets over the period, with revenue jumping 28% to PLN6bn ($1.5bn) and LfL sales rising 9.5%.   

Bloomberg News recently reported that Mercury is planning an initial public offering (IPO) as part of its growth story and may go public as early as this year, seeking a valuation of as much as $20bn. If so, it would follow that of Fix Price earlier this year among industry peers. The Russian dollar store operator in March conducted the largest Russian retail IPO ever, raising $1.8bn and listing shares in Moscow and London. The transaction valued Fix Price, which pioneered the dollar store format in Russia, at about $8.3bn.

Mercury already has triple the store numbers of Fix Price at about 13,500, compared with Fix Price’s 4,585 as of the end of the first half of this year. While the dollar store format offers primarily non-food goods such as personal care products and children’s toys at a number of low price points, Mercury’s major product categories – everyday consumables including alcohol, in which it is Russia’s largest retailer – give it a potentially much broader market to target.

“Russians will continue to demonstrate rational purchasing behaviour and a high level of awareness while making food purchases, accompanied by comparison of prices, quality, contents and environmental friendliness,” InfoLine said in a September report on the Russian food retail industry. Consumers will focus on saving time and on shopping convenience, which will be one of the key trends in 2021-2025, driving ultra-convenience and online sales growth, according to the researcher.

While online food retail is where Mercury can’t compete because the current legislation in Russia bans retail alcohol sales over the internet, the segment accounts for just 1.8% of total food sales in Russia, according to InfoLine. Mercury stores offer a pre-order for pickup option, compensating at least somewhat for the lack of online sales. They are also ready and equipped to start providing deliveries as soon as the legislation allows for those.  

Red & White was founded by Studennikov in Russia’s Chelyabinsk region in 2006. The businessman, who had set up his SPS-Holding in the 1980s to sell alcohol and tobacco products, decided to open ultra-convenient shops after realising that nothing was convenient to him as a shopper at local supermarkets. His outlets were contrastingly small, very close to residential buildings and aimed at offering people most necessary daily products at best prices.  

Businessmen Sergey Katsiev, co-owner of Russia’s biggest tobacco distributor with his business partner Igor Kesaev, opened the first Bristol shop in September 2012 in Nizhniy Novgorod, mirroring the already successful format adopted by Red & White. Separately, Katsiev and Kesaev had already owned the Dixy chain of traditional supermarkets since 2007. The three retail networks eventually merged seven years later, when Studennikov agreed to combine Red & White with Bristol and Dixy in 2019.  

“The business became so big that we didn’t have enough management skills,” the businessman told Forbes in an interview in November, explaining his reasoning for the merger. “We never worked on such a scale before.”

The partners this year agreed to sell the Dixy chain to Magnit, the country's second-biggest food retailer, to focus on the ultra-convenience format and accelerate the expansion of the Red & White and Bristol chains. InfoLine estimates that the number of ultra-convenience stores across Russia may more than double by 2025, and expects Red & White and Bristol to accelerate store openings to maintain leadership in the format.

Mercury Retail’s focus on providing best prices certainly seems to be paying off, with customers remaining loyal to the stores. While Red & White has goods supplied from across Russia, Bristol stores offer products from local suppliers. The overall assortment of goods at the two chains allows them to meet a range of shoppers’ daily needs and keep them away from competitors.

Now, the group is aiming to become Russia’s biggest food retailer in the next few years – an ambitious goal that sees Mercury Retail going up against the long-established giants like X5 and Magnit. Currently at least the company is outperforming its larger rivals: Red & White and Bristol chains boosted net sales by 27% in the first six months of the year, according to InfoLine. By contrast, X5 Retail, Russia’s largest retailer, increased sales by 9.3% over the period, and number-two player Magnit by 7.7%.  

In retail you are number one or a no-one,” Studennikov said in an interview with Russia’s RBC in 2015. “This is the attitude that’s required.”