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July 14, 2009

COMMENT: Russia’s food retailers playing for high stakes

Russia's food retail landscape is in a state of a flux - and the country's leading grocers are jostling for position. In recent days, there have been a raft of buoyant sales figures despite the impact the downturn has had on consumer spending. However, weak financial markets have hurt a number of smaller players and promises to herald a period of consolidation in Russia - involving both domestic and foreign heavyweights. Dean Best reports.

By Dean Best

Russia’s food retail landscape is in a state of a flux – and the country’s leading grocers are jostling for position. In recent days, there have been a raft of buoyant sales figures despite the impact the downturn has had on consumer spending. However, weak financial markets have hurt a number of smaller players and promises to herald a period of consolidation in Russia – involving both domestic and foreign heavyweights. Dean Best reports.

Along with India and China, Russia is often cited as one of the global retail sector’s most attractive emerging markets and, although the global economic downturn has poured cold water on some of the more fevered predictions, the country remains full of potential.

In a matter of days, X5 Retail Group, Russia’s largest retailer by sales, Magnit, the number one retailer in terms of stores and Seventh Continent, another among the country’s top ten grocers by revenue, have all posted buoyant half-year results.

Despite the impact of the downturn of consumer spending in Russia, X5 saw its like-for-like sales climb 12% in the first six months of 2009, Magnit’s like-for-likes rose by almost 11%, while Seventh Continent posted a 4.8% increase in like-for-like sales.

Russia’s retailers have reacted quickly to the recession through a series of price-cutting campaigns. X5 boss Lev Khasis said the retailer was staying “close” to its shoppers “by keeping prices down”, while discounters like Dixy Group and Magnit have prospered as consumers tightened their purse strings.

That said, the last year has proved a turbulent time for Russia’s retailers. A tightenening of credit has led to a number of the country’s grocers – even the likes of X5 and Dixy have received financial support from state-controlled banks.

However, the larger players stand best placed to take advantage of what remains a fragmented retail market and pounce for any M&A opportunities that present themselves. Russian chains are expanding throughout the country and outside the major urban centres of Moscow and St Petersburg and it is likely that smaller, weaker operators could be acquired.

A sign that Russia’s leading retailers are acutely aware of just how critical the months ahead will be in the development of the sector in the country was the news today that top-ten retailer Lenta has dismissed its general director.

A source within Lenta’s management team told just-food that general director Alexey Bobrov had been shown the door following the company’s poor peformance in recent months. Despite sales growth of 20%, the source said Lenta had been beset by “inertia”.

Multinational retailers would do well to move quickly as Russia’s retail market consolidates in the months and years ahead.

Last month, Carrefour formally opened its first hypermarket in the country, following the likes of fellow French firm Auchan and German retail giant Metro Group as foreign retailers present in Russia.

Wal-Mart has long been touted as another future investor in Russia, although, as yet, the world’s largest retailer has yet to show its hand.

However, some industry watchers believe Wal-Mart will not be alone in expanding in Russia in the years ahead. Dixy president and CEO Ilya Yakubson, for one, has forecast a “dramatic” increase in foreign invasion over the next three years.

Nevertheless, as this week’s raft of half-year results suggest, Russia’s homegrown retailers will not lie down and allow their foreign rivals to gain the upper hand in the battle for the country’s budding organised retail sector.

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