The Latvian retail sector has been given a fillip by the arrival of Lithuania’s VP-Market. As foreign interest in the Baltic retail market intensifies, CAD-News & Catherine Sleep report on a Latvian retail market dominated by the discount formula, and keen to catch up with the progress made by its neighbours Estonia and Lithuania.

As with the neighbouring Baltic states, multiple retailing in Latvia dates back only as far as 1991, the year it gained independence following the break-up of the Soviet Union. Local chain Nelda quickly set up shop after independence, and is now the country’s third-largest player, with a market share of almost 10%.

However, Latvian retailers have been slower to gear up the competition for market share than their Baltic neighbours. “Estonia very quickly fell under the influence of Finnish companies such as Kesko or SOK. Lithuania, meanwhile, is the birthplace of VP-Market, created in 1992 and now an extremely dynamic retailer. But Latvia has not had the benefit of this driver of modernisation, which is why the country is still lagging a little behind,” explains Valda Kalnina, head of the agribusiness sector at the French economic mission at Riga.

Supermarkets and hypermarkets account for 41% of the Latvian retail sector, as opposed to 48% in Estonia and 52% in Lithuania. The entrance of the Lithuanian discounter VP-Market in 2001 is proving a real wake-up call for the sector. In the space of just two years, VP-Market has built up a portfolio of 81 outlets, including 71 T-Markets, its discount fascia, and ten Maxima supermarkets. In autumn 2003 this quick fire growth signalled the end of ICA Baltic’s leadership in Lativa. ICA Baltic is a Swedish group which merged with Dutch retailer Ahold to become ICA Ahold AB, which runs the Rimi Latvia subsidiary.

Ramped up by a highly aggressive pricing strategy, VP Market today enjoys a market share of 22%, while erstwhile market leader Rimi now has just 17%. “Since VP-Market arrived on the scene, prices have fallen by 5 to 10% depending on the product. The company arrived with a very targeted pricing campaign and a broader range than the other stores,” observes Kalnina.

Store openings, own-label in the pipeline

After notching up 88% growth in turnover in 2003 to €185m (US$221m), the Lithuanian company is aiming to double the size of its operation in 2004, with target turnover of €303m. VP-Market is expecting to achieve this by setting up shop in towns with fewer than 10,000 inhabitants.

Latvian retailers

VP Market: 81 stores
2003 turnover of €185m

Rimi Latvia (part of the ICA Ahold group): 36 stores
2003 turnover of €166m

Nelda: 22 stores
2003 turnover of €98m

Mego: 35 stores
2003 turnover of €76.3m

Kesko Food: 19 stores
2003 turnover of €41m

This year should see the opening of 20 new stores, including 18 T-Markets and two Maxima stores, at Valmiera in the north, and Yelgava in the central western regions of the country. This growth will be powered by investment worth €8.7m.

A further plank of the company’s expansion strategy is own-label product development. “We currently have two food brands, T-Market and Topa, but we are working to extend our own labels right across the product range, as we have done in Lithuania, where we control 14 brands,” comments Kestujis Litkus, director of marketing investment for the group in Latvia.

Joint venture between Rimi and Kesko

Against this background of heightened competition, the sector grew by 20-30% in 2003, according to the economic mission at Riga. The onus was therefore on the second-placed player, Rimi Latvia, to react. In May 2003 the Dutch-Scandinavian group opened a 29 000m2 regional distribution and administration centre for the Baltic countries at Riga. It has also just set up a joint venture with Finnish counterpart Kesko to exploit the Baltic markets together. This will come into force in the summer. Bolstered by this partnership, Rimi announced it was targeting a 30% market share in 2004, and would open 75 stores.

The Latvian retail sector

A decade after gaining independence, Latvia is gradually loosening its economic and political ties to Russia to establish its place more firmly as part of Western Europe. It joined the WTO in 1999 and NATO in 2002 and sends the lion’s share of its exports to the European Union, to which it acceded in May this year. Much of this goes to Germany.

Timber is Latvia’s flagship industry sector, accounting for 17% of industrial production and more than 30% of exports. More than half of Latvia’s 64 589 km2 of land is forested.

With economic growth estimated at 5.5%, inflation hovering at a modest 2.5% and unemployment gradually coming down, albeit from a high level of 11%, Latvia is firmly on the path to economic growth. The banking sector claims to be almost completely restructured; all Latvia’s banks are now privately held. Local authorities have worked hard to streamline tax collection and achieve financial stability.

Kesko, which has established itself as Estonian market leader with a market share of 20%, did not make its Latvian debut until 2001. It currently runs five Citymarket stores and 14 Supernetto discount stores, and it hopes to increase this number to 20 this year. Kesko will also invest €23.3m between now and 2005 in building new supermarkets. Across the three Baltic states, these two players together account for turnover of €550m and aim to capture, between them, 25% of the Baltic market within the coming three years to knock VP-Market off the top spot.

The latter company reported 2003 turnover of approximately €1bn across the three Baltic countries. However, in the Latvian retail market, their ambitions will soon be complicated by the arrival of German hard discount specialist Lidl. Spurred on by this dynamic activity in the Latvian market, Lidl has already opened a representative’s office in Riga and is currently using its Internet site to recruit executives to run its operations there.

Alongside the development of the discount format, there is a trend in Latvia for retailers to move into regions where competition is less intense than in the capital of Riga. This is the strategy adopted by VP-Market since its arrival in Latvia, as well as by the regional chains, notably Nelda, the leading domestic retailer, founded in 1991, and Mego, founded in 2001. Each with around 10% share of the market, both are beginning to struggle in the face of the aggressive low prices of the hard discounters.

A further trend is emerging in the shape of large specialist stores, which are mushrooming in Riga, notably selling building materials, DIY equipment or gardening essentials. To date, however, there are no dedicated stores selling textiles, footwear, leather goods or other fashion articles.

Catherine Sleep translated this article from the French with permission from its authors, French retail news service CAD.