X5s "soft discount" business will be bolstered

X5's "soft discount" business will be bolstered

The chief executive of Russia-based X5 Retail Group said today (6 December) that its planned acquisition of soft discounter Kopeyka will give his company a stronger base to drive organic growth.

X5 CEO Lev Khasis said that the move would make the retailer, Russia's largest by sales the leader in the soft discount channel. Speaking to analysts, Khasis said it would also "increase the opportunity for organic growth" adding that plans for organic growth will be much more aggressive in 2011.

Khasis said there is the capacity for some "200 new stores" once the two retailers combine their current distribution centres. Khasis also highlighted the "strong management" team that will make X5's expansion plans "more realistic".

The RUB51.5bn (US$1.6bn) deal, announced today (6 December), will mean that X5 takes on over 660 soft discount stores in Moscow and the European part of Russia.

The move will boost X5's share of sales that are accounted for by Russia's top ten retailers to 31.7%, increasing its buying power in a still very fragmented market. Additionally, it will entrench its leading position in the country, and increase its selling space by 25%.

Khasis explained Russia's organised retail sector in the country is highly fragmented, with the top ten retailers only accounting for 11% of total grocery sales, meaning that X5, as the leading retailer in the country, only holds some 4% of the total market.

The retailer is planning to fully integrate the Kopeyka stores into its business within two years. X5 plans to rebrand nearly all of the stores to its Pyaterochka banner, with a few larger stores to come under its Perekrestok supermarket chain.

X5 said it would work to improve sales densities by up to 75% in the acquired stores, with plans to drive traffic up to its standards. It said annual sales per square metre were RUB228 in the Kopeyka stores, while they are as high as RUB399 in its own stores.

However, Khasis highlighted the strength of Kopeyka's private label, which accounts for 20% of sales and over 570 SKUs. He added that it would help to drive X5's own-label strategy, which is to reach "not more than 50% penetration but not significantly less" over the next few years.

He also highlighted Kopeyka's "strong IT programme", driven by SAP, which X5 is in the process of rolling out in its own operations.

Khasis said the company would reveal further detail on its forecast and capex plans for 2011 before the end of the year.