Russia’s leading grocery retailer X5 Retail Group’s acquisition of soft discounter Kopeyka will give it a stronger base to drive aggressive growth plans in a heavily fragmented, but highly attractive market.
The top ten retailers still only account for 11% of total grocery sales in Russia, X5 Retail Group CEO Lev Khasis said following the announcement of the company’s US$1.6bn deal to buy Kopeyka, which was announced on Monday (6 December)
Khasis’s statistic was surprising but was confirmed by a number of analysts just-food spoke to to discuss X5’s move.
“The market is extremely fragmented. Even today, there’s the modern side of things [grocery retail] and there’s the old, traditional Soviet type of stores that still exist. That format alone accounts for about a third of the market,” said Troika Dialog managing director Victoria Sokolova.
However, growth in the BRIC economies is rapid and Sokolova said that shifting consumer habits and the development of modern retail in Russia will “eventually drive these stores out of business”. She added: “The share of open and closed markets will decline, as well as kiosks and pavilions.”
However, Sokolova said X5’s acquisition of Kopeyka would not have a “huge impact” on the competitive landscape across Russia as a whole, given that even after the deal, the retailer will still have less than 5% market share.
Nevertheless, she did say the move will mean X5 is able to “dictate better value to customers” as it will be “buying from a much larger platform” which may “draw some traffic from other retailers, especially in Moscow”.
Sokolova said the move would strengthen X5’s position in Moscow and the Moscow regions. “Moscow is one of the most lucrative markets in Russia and they will increase their market share to around 13% in the area,” she said.
More broadly speaking, analysts suggested that, following last week’s move from PepsiCo to buy Russia’s largest dairy processor Wimm-Bill-Dann, X5’s purchase of Kopeyka was another example that the country was again appealing to investors following the economic slump in 2009.
Additionally, UBS analyst Svetlana Sukhanova pointed to improving consumer health in the country. “We see some positive consumer trends,” she said. “Real wage growth has been in positive territory since December 2009, real retail sales have been growing since January, while demand is back even in discretionary categories – non-food retail sales have been growing since March.”
Meanwhile, for Wal-Mart Stores, a retailer that was long-mooted to have been in the bidding for Kopeyka, the deal may have reduced the number of targets. However, according to some analysts strong targets still remain. “We think there are other targets left although the list is getting smaller,” said Zagvozdina. “The market for Wal-Mart is still in favour of an M&A-based entry, and there are still targets available.”
Both Sokolova and Zagvozdina suggested Lenta, the troubled hypermarket operator based in St Petersburg could be a target for Wal-Mart. Sokolova also suggested publicly-listed retailer O’Key as well as Victoria Group, which she said was “eyeing a listing via an IPO, but has [since] changed its mind”.
Zagvozdina suggested Wal-Mart would be interested in looking to a combination of retailers, with Lenta forming the centre any acquisition. She suggested either Dixy or O’Key alongside a bid for Lenta, as possible avenues for Wal-Mart to enter Russia.
However, the world’s largest retailer will be facing a stern domestic competitor in the shape of X5. Following the acquisition of Kopeyka, X5 says it will have space in its distribution centres to service a further 200 stores.
The retailer believes discount stores will be the format to growth for the chain. Khasis said that discount retail has the “strongest appeal for a high percentage of the Russian population that have low-to-average incomes and shop close to home”.
Additionally, he said that the format’s penetration is low by international standards and that growth will be “underpinned by the long-term development of modern retail”.
In the shorter term, Khasis plans to reveal his aggressive organic growth plans for 2011, sometime before the New Year. And for other retailers looking to be a part of Russia’s potentially lucrative market, there may be opportunities now, but they will not last forever.