Dixy significantly beefed up its presence in Russia’s food retail sector when it acquired local peer Victoria Group two years ago. While the company still has its foot on the throttle, with some ambitious plans to expand over the next three years, Dixy’s attention has now turned to a lower-capital intensive organic growth phase. Katy Askew spoke to Dixy’s head of investor relations Natalya Belyavskaya to find out more.

Dixy is a company that has been on a something of a march since its 2011 acquisition of Victoria Group. Quarter after quarter, the Russian food retailer has booked growing operating profit and higher sales. And, while higher financing costs have at times had a negative impact on the bottom line, it seems the firm has largely been able to ride out the financial crisis. Indeed, during 2012, Dixy said sales were up by almost one-half, boosted by the Victoria acquisition.

While Dixy’s 2012 numbers were boosted by M&A, the group also looked to drive growth through organic expansion, which in Russia includes store openings. On a pro-forma basis, stripping out the Victoria Group acquisition, the group’s sales in 2012 would have risen by 21% in local currency. Dixy opened 380 new outlets in the period, 368 of which were in the group’s small-footprint neighbourhood format.

During 2012, Dixy also drove same-store sales growth, which amounted to 7% for the year. This reflects a common dynamic in Russian retail: the rapid growth of retailers in the market is largely fuelled by space expansion and store openings. Nevertheless, Dixy also moved to strengthen its customer appeal and build loyalty through various ranging initiatives, such as the launch of a new own label line, much of the group’s like-for-like growth can be attributed to food inflation.

Looking to the future, Dixy is planning to focus on driving continued organic growth with the aim to double its revenues over the next three years, IR director Natalya Belyavskaya tells just-food.

“We have a target to double the size of the business in terms of revenues in three years. Thus, for 2015 our revenue is expected to be around US$10bn, versus roughly $4.7bn in 2012,” she reveals.

“It is achievable through both selling space expansion and like-for-like sales growth. We do not have specific targets in terms of number of stores, as selling space indicator is much more important for us. We have three very different formats – neighborhood store Dixy with an average selling space 280sq m, Victoria classical supermarkets of 1,600sq m, and compact hypermarket MegaMart of 2,100sq m. Thus, it makes more sense to budget selling space increase, and then decide, with which store portfolio we want to achieve it.”

This year, Belyavskaya says Dixy plans to open “at least” 400 stores on a net basis. This rate will at least be maintained until 2012 and in 2014 and 2015 store openings are “not to be less than that”.

As with last year, the majority of store openings will be in Dixy’s neighborhood format, Belyavskaya says. The rationalle behind this focus is primarily pragmatic: the smaller sized neighborhood stores are cheaper to open and their rollout can be achieved at a much quicker pace. Although hypermarkets and supermarkets offer better returns, Dixy aims to build up steam behind its revenue growth with the minimal capital investment.

“The main format to roll-out will be Dixy neighborhood stores. It is much less capex and time consuming to roll-out small boxes. We realise that supermarkets and hypermarkets are still more profitable and we aim to develop these two formats as well. But in mid-term our main focus will be on Dixy. The idea is to gain the scale with a relatively moderate capex programme, start to generate stronger cash flows and then be able to invest in supermarket and big boxes business to further improve profitability.”

The Dixy neighbourhood format aims to meet the daily needs of urban consumers. Therefore, the majority of store openings will be focused on Russia’s more densely populated cities and towns. Belyavskaya adds that the group is focused on strengthening its presence in markets that it already operates in before expanding into new regions.

“This year we will open stores mainly in Moscow, Moscow region, St Petersburg and the north west region. The central part of Russia, north west region, and Urals will stay in main focus in mid-term,” she says. “The idea is the same as in the case of our targeted formats portfolio – to increase our market share and penetration within regions [where we are already] present, our core markets and start to generate cash to be able to invest in new regions.”

Belyavskaya explains that entering new regions is a costly process because of the need to build and develop a logistical infrastructure, from distribution centres to delivery vehicles. “You need to build and develop… all the infrastructure which is pretty cash consuming,” she says.

Dixy’s capital expenditure for 2013 is projected to total RUB12-14bn, including store openings, the development of its property portfolio, store maintenance and refurbishments and other back end investments, such as new trucks for its delivery fleet. The group expects that over the next three years it will have to step-up its investment level to support its growth plans, Belyavskaya says.

“Over the next two years we will have at least the same pace of organic growth, plus we will likely have to construct and launch more distribution centres in the regions of presence, so our capex programme for the nearest three years is aimed to be approximately RUB45-50bn.”

Belyavskaya says that as Dixy expands it expects to increase its share of Russian grocery sales, benefiting from a process of consolidation underway in the market.

“We will be taking market share mainly from small regional retailers, smaller players, and unorganised trade,” she predicts. “We have 150-200 small regional chains in Russia, and the top-five leading players (X5, Magnit, Auchan, Metro and Dixy) control less than 20% of the Russian food retail market. The market is still unconsolidated and modern trade is still underdeveloped, even in big cities.”

Through a prudent approach to expansion, Dixy believes it can take advantage of this situation – growing sales and cash flow in order to then fuel further growth in the mid- to long-term.