Svyaznoy's transformation

By bne IntelliNews August 9, 2012

Ben Aris in Moscow -

The strip of shops on Gruzinsky Val near Beloruskaya station in the heart of Moscow are typical of the downmarket retail outlets in the Russian capital. Gaudy signs above rundown premises that are little more than a single room. There are cheap eateries, small clothes shops decorated with sun-bleached posters of models in their knickers that sell imported Chinese-made underwear and the odd flower shop.

Then you reach the new Svyaznoy store that juts out from the rest after its recent renovation. Clad in brown glossy stone with a slick and modern interior, it's a far cry from the glorified kiosks jammed onto a few square metres of pavement space at the corner of the road that for the last 20 years have been mostly mobile phone outlets.

Svyaznoy used to be merely Russia's second biggest retailer of mobile phones, but is now transforming itself into one of the most successful banks-cum-shops in the country, leveraging its 3,000 outlets around the country.

Retailing in Russia is developing fast, but the market is still wide open. What Svyaznoy has done is to leverage its existing retail platform and distribution network to expand into new areas of business; the company now offers a wide range of goods from household appliances to consumer electronics and is growing by 30% a year despite the crisis. But it is the banking services that have been the most successful and the company recently raised $300m to fund its expansion.

Initially, the holding group planned to sell a stake to raise money to fund the banking operations, but faced with the pall hanging over the stock markets it eventually went for debt. "We were looking at private equity deals as well as other options to raise money, among which we chose to finance our growth through debt in the end. Private equity is still open to us, and we consider it an option given the terms suit our expectations," says Dennis Ludkovsky, CEO of Svyaznoy.

The phone retailer remains a cash cow, so the debt was taken on at the holding level for the bank - a first for Svyaznoy, which has always had to use the cash-positive retailer as a backstop in past deals.

Still, the borrowing doesn't come cheap. While rates for loans in the West are on the order of 3%, in Russia the banks are charging closer to 9% even for well-known and solid customers, and more for smaller companies, if they can get money at all.

While consumer lending was growing at about 28% in the first quarter - a rate that the Central Bank of Russia's deputy chairman, Alexey Ulyukaev, says could lead to overheating - commercial lending remains the one part of the financial system yet to fully recover from the crisis and is growing at half the rate of consumer loans in the first quarter.

However, apart from the difficulties of raising money, from Svyaznoy's point of view the crisis has had little impact on its business. "In the worst of the crisis in 2009, mobile retail was down more than 10%, our sales remained almost unchanged. Now sales keep growing - in the first half they grew by 30% year on year and profits by even more," says Ludkovsky.

Part of the reason is that Russians are switching over from regular phones, where sales were predicated on the type of package you bought from one of the incumbent operators, to smart phones, where the add-on services like mobile internet are the money-makers. "And we are still expanding. We opened more than 250 new branches over the first five months of this year, which is by 25% more than in the first five months of 2011," says Ludkovsky.

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