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April 16, 2008

Russian question focusing minds of retail giants

Wal-Mart's move this week to appoint a top Rewe executive to study how to break into Russia has again raised the question of when the US giant - as well as Carrefour and Tesco - will enter the fast-growing market. Dean Best reports.

By Dean Best

Wal-Mart’s move this week to appoint a top Rewe executive to study how to break into Russia has again raised the question of when the US giant – as well as Carrefour and Tesco – will enter the fast-growing market. Dean Best reports.

Just how long will it be before the likes of Wal-Mart, Carrefour or Tesco break into one of the most attractive markets in retail – Russia?

The country, alongside China, is seen as potentially one of the most lucrative in retail. Russian consumers, buoyed by rising spending power in the – once again – oil-rich economy, are flocking to the country’s ever-growing network of supermarkets, hypermarkets and discount stores.

X5 Retail is Russia’s largest retailer and runs Perekrestok stores (pictured) and Pyaterochka outlets

The Russian grocery sector has seen double-digit growth in recent years as more affluent Russians look for higher-quality and a wider range of goods in Western-style stores. Traditional kiosks and pavilions still account for a majority of the Russian grocery market but more modern retail formats are gaining share and estimates from banking giant Citigroup forecast that modern retail formats will grow twice as fast as the unorganised trade in the next decade.

By 2015, Citigroup predicts supermarkets will account for a fifth of all grocery sales in Russia. A further 20% will be made at modern discount stores, while 15% of sales will go through hypermarkets. Cash-and-carry stores, meanwhile, will account for 4% of sales, according to Citigroup forecasts.

It’s clear, then, that industry watchers believe the growth of modern retail formats will drive the growth of Russian retail, which as a whole, Citigroup says, is expected to grow by 20% a year between now and 2010. Western retailers with their management expertise and financial power should, in theory, stand well-placed to exploit that growth.

Attendees at last week’s World Retail Congress in Barcelona were bullish about the prospects of further growth in Russia but, while packaged food giants like Nestlé, Kellogg and Kraft Foods have been busy building a presence in the country, the world’s multinational food retailers have so far been reluctant to push into the market.

Sure, the likes of France’s Auchan and German giants Metro Group and Rewe have made strides into Russia, but as yet there has not been the concerted push into Russia as there has been into China, where the world’s top three food retailers have invested heavily.

Germany’s Rewe – owner of the Billa chain – is one of only a handful of Western retailers in Russia

Time, however, is of the essence. Russia is home to some strong – and growing – food retail businesses of its own. The likes of X5 Retail Group, Russia’s largest grocer by sales, Magnit and Seventh Continent have been busy building store networks and there are signs that their expansionist ambitions have yet to be sated.

Last week, X5 secured the acquisition of hypermarket chain Karusel, in a deal worth a not insubstantial US$970m. That followed X5’s move last month to buy out a key licensee of its discount stores. Three weeks ago, rival retailer Magnit set the ball rolling for its own expansion with plans to raise funds by listing on the London Stock Exchange. And yesterday, Seventh Continent announced a 47% jump in profits for 2007, driven in part by its own store expansion.

Marat Ibragimov, an analyst at Citigroup, says multinational retailers have yet to emerge as a “serious threat” to domestic companies. “While they have an important advantage in terms of business expertise and access to cheap funding, they have not yet emerged as a serious threat to domestic players. Unlike the leading Russian retailers, they are cautious about regional expansion and focus on the hypermarket format, which targets a relatively small proportion of the Russian population.”

Ibragimov believes that “foreign retailers” will “gradually” increase their presence in Russia through greenfield projects and acquisitions but added that, the more they wait to enter, the more dominant local grocers will become. “We see foreigners are missing the Russian market rally, implying that it would be much more costly for them in the future to get a considerable stake of the local market than if they invested into the market share today,” Ibragimov says.

Perhaps, therefore, a sense of urgency has developed at Wal-Mart, the world’s largest retailer. Rumours of the US giant’s potential entry into Russia have rumbled on for months but this week the company signalled its renewed focus on the country with the appointment of former Rewe executive Dr Stephan Fanderl to explore how to break into Russia and neighbouring markets.

Wal-Mart has this week stayed tight-lipped on its ambitions for Russia. However, last autumn, president and CEO Lee Scott told analysts that Russia represented a “wonderful opportunity” for the company. “The population there has proven to have a real appetite for consumer goods. And retail is doing very well in Russia. We have to explore that and we have to be able to position ourselves to operate.”

International expansion is becoming increasingly important to Wal-Mart, which is finding growth at home harder to come by. Nevertheless, the company has a mixed record overseas. While, for instance, Wal-Mart’s UK business Asda has grown to become the second-largest grocer in the market, the company has been forced to take full control of its struggling Japanese arm, Seiyu. That move came after Wal-Mart pulled out of South Korea and Germany in 2006 after failing to make its businesses in those markets profitable.

Wal-Mart, therefore, will tread carefully before entering a Russian market where, despite the obvious growth, the regulatory environment remains less than ideal and where local knowledge of the market is vital.

However, Wal-Mart will recognise that entry into Russia will better come sooner rather than later. Earlier this month, Tesco played down claims that any move into Russia was imminent, citing the US, China and India as higher priorities. Carrefour, meanwhile, has already indicated its readiness to wait and wait before choosing the right partner for its possible venture into India.

Wal-Mart, therefore, could steal a march on its global rivals in a bid to tap into Russia’s riches.

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