Xalq Retail, the people’s supermarket

Xalq Retail, the people’s supermarket
Uzbekistan's organised retail sector is wide open and the race is on to create a nationwide supermarket franchise, but cultural differences make the change from shopping in the bazaar to visiting a convenience store go slowly. / bne IntelliNews
By Ben Aris in Samarakand November 9, 2022

Xalq Retail (which means “People’s retail” in Uzbek) was only set up in 2020 and has 10 stores but intends to become the leading supermarket chain in the Central Asian market that is home to tens of millions of people.

The organised retail sector in Uzbekistan is wide open. Most people continue to shop at the open-air bazaars that have been operating for literally millennia, but a growing middle class and rising incomes are fuelling a shift to Western style supermarkets that offer a broader range of goods and are more convenient, as they are based in built-up areas.

In other markets such as Russia, Belarus and Ukraine supermarkets have already grown into major businesses with at least a billion dollars a year of turnover, but in Uzbekistan even the biggest chain has no more than around two hundred outlets.

Xalq Retail is one of four leading contenders for what should become a very lucrative business, but it has a lot of work to do and some deep-set cultural habits to overcome.

Xalq was founded by a group of private investors that cut their teeth in investing in the neighbouring markets. One of the investors is the current chairman, Ilya Yakubson, the former chairman of supermarket chain Dixy, one of Russia’s big four chains that was taken over by market leader Magnit a few years ago, putting him out of a job. The race is on, as in Russia the first decade of the supermarket business was simple a race to build out a comprehensive chain and capture as much market share as possible.

“After a long career in investment banking, including stints as an analyst with Russian Partners and [private equity market leader] Barings Vostok I came sniffing around in Uzbekistan and became excited,” says CEO Arman Alibekov, an ethnic Kazakh and one of the founding investors. “We looked at various opportunities – telecoms, establishing a fund, retail – and eventually settled on retail.”

The company hopes to emulate the success of Russia’s leading supermarket chains that are at least twenty years ahead of Uzbekistan.

Early days of organised retail

The biggest retailers in Uzbekistan today are Havas, with 270 stores, and Korzinka, with 110 stores, but the latter earns more revenue than Havas. The multi-industry conglomerate Orient Group has also launched the Makro supermarket chain in 2010 that it typically includes as one of the anchor stores in its shopping mall developments.

The European Bank for Reconstruction and Development (EBRD) has supported Korzinka.uz's ambitious expansion plans with a $40mn investment, which wants to expand to 140 stores by 2025, EastFruit reports.

A few local players are already established but with at most a few hundred outlets operating each, the Uzbek organised retail business remains wide open to new entrants.

“270 stores is nothing. Just one local chain in Siberia has more stores than that,” says Alibekov. “This market is still at ground zero.”

With a population of 34mn, Uzbekistan is already second in size to Russia in the Commonwealth of Independent States (CIS) and more populous than Ukraine if the pre-war economic migrants and war refugees are taken into account, although Ukraine’s official statistics puts it just ahead of Uzbekistan. And with one of the highest fertility rates in Eurasia, where most of the other countries are in decline, Uzbekistan’s population is set to overtake Poland in the next three years before reaching 70mn by 2050.

Although Russia remains the biggest market, its population is also due to halve in the next two decades as a result of its demographic problems that have been exacerbated by the war in Ukraine. Uzbekistan currently offers by far the most exciting retail prospects in the entire Former Soviet Union (FSU) region.

Other international retail companies are also being pulled in. UEA investor Majid Al Futtaim brought in the French retail franchise Carrefour to Tashkent in December 2020. Al Futtaim operates franchised Carrefour stores in 17 countries and already has tried to launched the brand in Kazakhstan but closed its one hyperstore after a year and half in 2019 due to strong local competition, EastFruit reports. Russian discount store Fix Price has also already come and gone after its attempt to enter the Uzbek market failed.

Magnum Cash & Carry, the largest trade and retail chain in Kazakhstan, has also announced plans to enter the Uzbek market.

Recently the French chain B1 that belongs to the Shiver group entered the market with a few stores.

Xalq Retail was set up by a group of international private investors and currently there are 12 shareholders that clubbed together to raise the initial capital to launch the chain. Now two years old, the company is currently in talks with leading international venture funds to raise a second round of financing to expand the chain. The ambition is to have 2,000 stores across all Central Asia in the next five years and become a retail supermarket powerhouse in Eurasia.

Fertile ground for new business

Uzbekistan is going through a major transformation since President Shavkat Mirziyoyev took over in 2016 and introduced a raft of pro-business reforms, opening the country up to international investment. Despite huge progress as those changes started to kick in around 2018, the economy is still stepping off square one as it begins what should be several decades of fast catch-up growth.

There are still many problems, but Alexander Zaitsev, Xalq’s chief commercial officer, says there is no oligarch class and that the country is a nation of traders with a tradition that stretches back to Alexander the Great and Emperor Tamerlane. The new government is pro-business and all power remains in the hands of the president, who has yet to put through any political reforms, but the business reforms are well in hand.

“It is good to be connected in Uzbekistan, but it is not good to be corrupted,” says Zaitsev commenting on the realities of this country in the midst of transition. There is still a powerful elite that can interfere in business, targeting the most attractive, cash-generating assets, but retail is low on their list of priorities.

“Retail is just too much work. It's a high turnover, low margin business. You have to fight for each quarter of a percent growth in revenues. The elite are more interested in the softer targets,” says Zaitsev.

“At the same time, the whole economy is being lifted. I’m sincere when I say we are on a mission to establish a business that is based on entrepreneurism and hard work. We are in the tax system and pay our taxes, which causes problems with landlords sometimes. But we want to be a model business that works for the betterment of the country. That is why it’s Xalq Retail, the People’s Retail, not Elite Retail or something else like that,” says Zaitsev.

Zaitsev argues that Uzbekistan’s fast growth – after dipping during the coronavirus (COVID) pandemic Uzbekistan’s GDP growth remains at around 6% a year – means all businesses are being lifted at once.

“It's the same in all Emerging Markets: while you are small you are ignored, but once you get big then the issues of pressure will be on the table… The powerful will start to attack the trophy assets like real estate objects, but by that time the economy will have grown and a solid layer of entrepreneurs will have emerged that are big enough to be able to push back… It is also one of the reasons we are reaching out to international investors,” says Zaitsev.

Russia went through an identical transformation. In the early 90s it was impossible to be a minority investor in a major Russian company, as your shareholder rights were ignored. But once the companies became large enough to IPO on an international exchange the management rapidly cleaned up their act and introduced tough corporate governance protections in order to boost their valuations. Uzbekistan is still a long way from that point, but after Russia blazed the trail the path to follow is pretty clear to most business leaders.

Zaitsev cut his teeth in the Russian retail market, but despite the relevance of that experience, he is also quick to point out that the Uzbek market is very different, and highlights Fix Price’s failure as an example.

“The culture here is very different. In Russia you can sign a lease contract in an hour. Here you have to go to the landlord and drink tea, discuss your business plans, and they want to talk with decisions-makers – equals. It takes at least a week or longer,” says Zaitsev. “You want to go fast, but you can’t be aggressive, as you need to earn the respect.”

Finding and training staff to run the stores is another bottleneck. And the limited access to cash or investment funds also slows the pace, says Zaitsev.

However, maybe the biggest challenge is the cultural difference in the way people shop. In the Eastern European countries to the north, it is a relatively short step from shopping in the ubiquitous “produckti”, or corner stores, that can be found in every former Soviet city, to changing to a modern urban supermarket. However, in Central Asia people have been shopping in the bazaar for centuries and, moreover, often go to the marketing only once a month to stock up in bulk on staples. Changing to a convenience store when you buy what you need for the next few days is a big shift in mentality.

“This is also a small market. You can't build a business in the same way as the Russian businesses were built. I head an anecdote of a couple that went into one of the newbuilds, all shiny and posh. The couple were awe struck by the glitz, but then turned to each other and said: “Enough of the museum show; now let's go and buy something,” and left the shop. You have to take these cultural differences into account,” Zaitsev relates, emphasising the store build-out needs to go slowly as the local population get used to the idea of convenience shopping.

Dixy experience

Xalq’s chairman Yakubson is one of the most experienced retail managers in the Former Soviet Union (FSU). He scored some notable successes in his six years heading Dixy in Russia, which was owned by multi-industry retail group Mercury.

In an exclusive interview with bne IntelliNews in November 2015, after the EU sanctioned Russia for the annexation of Crimea, Yakubson said he opened more stores in the first nine months of that year than in all of 2014, bringing the total to more than 2,600. But Dixy was in fierce competition with Russia’s two market leaders – X5 and Magnit – that both saw revenues grow faster over the same period, albeit more slowly than expected due to the economic downturn at the time.

Dixy had a troubled history in the hyper-competitive Russian retail market. Having built up an impressive business during the boom years, pitching itself slightly down market from the leading players, it struggled to compete effectively and eventual sold to Magnit in 2021 in a $1.3bn takeover deal.

Russia’s competitive supermarket business has matured and is now in the process of consolidating into a handful of leading brands that have increasingly been snapping up their smaller rivals in a series of very large M&A deals.

Dixy fought back with its own merger with leading alcohol retailer Bristol and Red & White to become the third largest supermarket chain in Russia in 2019 and also tied up with Russian e-commerce major Ozon to launch online sales a year later in an effort to revive flagging sales that had plagued the company for years during the four-year long recession that followed the 2014 oil and annexations crisis.

For most of the previous two decades the organised retail business had simply become a straight race to open more stores than your rivals so as to capture as much market share as possible while it was still up for grabs. By the second decade of this millennia the focus had changed to increasing profitability and the leading players began to close down their smaller stores as the sector consolidated.

And more recently the incumbents were facing increasing competition from the discounters, led by Fix Price, as real income began to fall thanks to President Vladimir Putin's focus on building up his Fiscal Fortress and ignoring Russia’s need for fixed investment.

Fix Price has burst onto the Russian market in the last few years, CFO Anton Makhnev told bne IntelliNews in an exclusive interview in June 2021, forcing the incumbents to respond by setting up their own discount chains after Fix Price began to seriously eat into their revenues.

Fix Price also launched an aggressive campaign to break into the Uzbek market, entering with 42 stores in the last year. With a per capita income one tenth of Russia’s, Uzbekistan should have become a fertile field for the sophisticated discount chain that models itself on the leading US discounters, but it miscalculated badly, by ignoring the cultural differences. A year later there are now only eight branches left, all run by franchisers, and the company officials counts its own Uzbek outlets at zero.

“Customers are shy. They are price sensitive. They like the format, but you can’t rush the stores out. Our competitors assume the market is the same as it is in Russia or Belarus, but it isn’t,” says Alibekov.