The just-food interview - Magnit deputy CEO Oleg Goncharov
Magnit have continued to prosper despite a challenging Russian economy
Russian retail colossus Magnit can lay claim to having had a rather buoyant year. As one of the country's largest food retailers, it has grown in tandem with the country's middle-class and seen its profits more than double in the first half of 2012. Michelle Russell talks to Oleg Goncharov, Magnit's deputy CEO, about the retailer's thoughts on the market, opportunities for growth and the year ahead.
Magnit operates in what could be described as the largest consumer market in Central and Eastern Europe - a country boasting a population of around 142m and a market that, over recent years, has attracted a substantial amount of interest from international players.
Despite the potential for growth, however, the country has experienced its fair share of challenges, with the recession causing the Russian economy to contract by around 7.9% in 2009 - a particularly bad period for consumer-dependent sectors such as retail.
With financial assistance from the Russian government, however, and improving oil prices, domestic retailers like Magnit have continued to prosper and the economy has experienced a gradual recovery, with consumer spending having now returned to more fruitful levels.
Magnit has undoubtedly taken full advantage of the upturn and certainly appears to be on a roll.
In the six months to the end of June, net profit climbed to RUB10.41bn (US$339.9m) from RUB4.02bn a year earlier, while EBITDA almost doubled to RUB20.55bn.
Speaking to just-food, Magnit deputy CEO Oleg Goncharov puts the increases simply down to the "improvement of all business directions" [but] first of all in purchasing prices".
This year, Magnit has been more actively pursuing investment in price of its stores, something that Goncharov tells just-food it will persevere with. "We continue to invest in prices of product on the shelves and we see positive changes here and so we will continue to invest at least until the year end."
Indeed, the strategy appears to be paying off as Magnit rapidly closes in on its closest rival X5 Retail Group, which has, in comparison, experienced a somewhat turbulent year with management changes and falling like-for-like sales.
But while Goncharov concedes the competition in Russia's retail market is nonetheless "growing stronger and stronger year by year", he appears confident of Magnit's position in the market.
"We are the largest player in terms of number of stores and in terms of sales we are number two," he tells just-food.
In January on the release of Magnit's full-year results, CEO Sergey Galitskiy said the company was "gaining confidence in the market". However, Goncharov believes there has been no "significant changes" in the market versus a few years ago despite the downturn in the country's economy.
"People still eat as much as they did. But what is positive is that the population in Russia has not declined. The most important problem and a problem that should be a concern is a demographic problem. Unfortunately, birth rates are still lower than death rates, but we hope that in time this situation will recover.
"During the [financial] crisis we didn't see any dramatic decline in consumer activity. Other sectors suffered from that crisis, sectors related to long-term consumption such as furniture and clothes. Here [in retail] we did not see any dramatic changes. That is why it is impossible to speak of any recovery if there was no decline."
Other retailers, like X5, may have a different view. As its long-time rival Magnit prospers, X5 has had to face numerous challenges.
The group's sales and margins trailed that of its Russian retail peers when it reported its first-half numbers this month. Its performance has been hit by a number of factors, including a management shake-up that has seen the retailer replace almost all of its top executive team.
Goncharov appears to shrug this off, declining to comment on the performance of its closest competitor versus its own fortunes.
"We try not to comment on the activity of our neighbours in the market, we think it is incorrect."
Magnit's strategy for expansion has seen the group open a substantial number of stores this year alone.
In the first half of the year, Magnit added 413 stores to its portfolio and increased selling space by 31.4% in comparison to the first half of 2011. This growth, Goncharov, says, will continue.
"We are still in line with the opening plans we announced before, which is to open 800 convenience stores during the full year, around 50 hypermarkets and around 500 cosmetic stores. We forecast sales growth will amount to 25-30%, but closer to the upper end of this range in rouble terms."
The target the retailer has set itself will include those of its newest format Magnit Family, which Goncharov says are "soft format" stores dedicated to premises "which aren't suitable for a regular hypermarket format due to the physical parameters".
The success of the format has meant Magnit opened its eighth Family store this week with plans for a further 15-20 by the year end.
"In total we see Magnit opening around 150 stores of this format closer to the year 2018," Goncharov says.
And the growth does not stop there. Last month, Magnit said it will keep expanding aggressively next year, with plans to spend between $1.8bn and $2bn to achieve this.
Goncharov, however, was less enthusiastic about sharing the retailer's plans on how it will spend the money, which he says will be financed through operating cash flow and debt.
"We have still not announced any confirmed plans and we are seeing there is no sense in confirming any preliminary plans at the moment."
While up to now Magnit's growth strategy has primarily focused on store expansion, the retailer has more recently chosen to walk a different path with investment in agriculture.
The move will see the group invest around EUR350m over the next three years in a scheme to grow vegetables to supply its expansive network of stores.
"This is just the company's willingness to reduce it cost of goods sold and improve the quality of the product in our stores," Goncharov tells just-food, admitting that it will also help reduce the company's dependence on expensive imports.
As for Magnit's dependence on the Russian market, the retailer is content for the country to remain its one and only market for the foreseeable future, dismissing any idea of international expansion.
"We are not considering expanding outside of Russia as there is still room for expansion here over the next couple of years," Goncharov says.
That expansion, he tells just-food, may involve the option of M&A, but at the present time the group has not found any "adequate" options. On the flip side, Goncharov says the company has "never received any bids" from domestic or international players.
Magnit appears content, for now, to ride solo, and is confident it will face few, if any headwinds for the remainder of the year.
"We don't see any changes that will affect the consumers of our products. We haven't changed our outlook," Goncharov says.
Magnit appears to be walking a path paved with gold. Its growth, in the face of a somewhat challenging Russian economy, has no doubt surpassed industry expectations and its faith in the medium- and long-term growth of the market is clear.
Its closest rivals will no doubt be keeping their eyes firmly on the group as it continues to build its empire and fight for Russian retail's top spot.
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