In the first in a series about grocery’s global hot spots, we visit Russia, set to be Europe’s biggest market. Liz Hamson reports
Securing half way decent locations within the major cities is another issue, especially when others have got in first. Barnes says: “I’ve been impressed with Auchan. It has found some very good sites and has a good landbank. It has secured the Moscow Ring Road and Moscow is a Godawful place in terms of congestion.”
But perhaps the biggest challenge is the nature of the market itself. So far, the main focus of activity has been Moscow and St Petersburg. They are now highly competitive markets, making entry tricky for new players. The other dilemma is format. There is no consensus as to which is the best. The top
chains operate different models, Pyaterochka putting its money on neighbourhood soft discount, Perekriostok going multi-format and other retailers, such as Metro, plumping for hypermarkets and cash and carries.
They may not look much compared with their slick counterparts in the UK. But Russian supermarket chains such as Pyaterochka and Perekriostok could be the future of European retail. Most Russians still buy their groceries from open markets, street kiosks and small independents. That spells the largest single growth opportunity for grocery retailers - domestic and foreign - in Europe, according to IGD’s latest European Grocery Retailing report, which predicts the market will be worth 1375bn by 2020, making it Europe’s biggest grocery market.
Steve Barnes, IGD business director, says: “In a market where the leader has less than a 1% share, there are clearly huge opportunities. I suspect a number of international players are circling.”
The two leading domestic chains - Pyaterochka and Perekriostok - have been quick to make the most of their first mover advantage (see over) ahead of the anticipated influx of foreign players.
But so far, only the vanguard appears to have arrived. Auchan, Metro and Spar International are in and expanding their presence, while German co-operative Rewe entered a joint venture with Marta Holding last year and M&S is to open two non-food franchise stores in Moscow this autumn.
Wal-Mart, Tesco, Intermarché, Carrefour, Aldi and Lidl, meanwhile, hover on the sidelines. There are a number of reasons for their caution: red tape, poor distribution infrastructure and sky-high property costs in Greater Moscow, to name a few.
For the international players such as Wal-Mart that favour the hypermarket format, there may only be limited opportunities in a country where most people do not have cars and do small but regular shops near home.
Wal-Mart chief executive Lee Scott is said to have admitted that at the moment either the market isn’t right for Wal-Mart or Wal-Mart isn’t right for Russia, while Tesco chief executive Sir Terry Leahy has likened Russian retail to London Zoo, a place that is worth a visit, but you wouldn’t want to live there.
What is clear is that competition is beginning to really heat up. Indeed, in Kearney’s 2005 Global Retail Development Index of the top 30 emerging markets, Russia slipped off the top spot - India taking its place - because of the level of competition.
In other words, those eyeing the market had better finalise their market entry strategies quickly. The domestic players are no pushovers, warns Barnes: “I’ve been impressed by the quality of management in place. They’re not afraid to look around and that’s laudable. But I wouldn’t rule out the likes of Lidl, which has an aggressive expansion plan in Europe.”
Soft discounter Pyaterochka expands into regional Russia
It has been a watershed year for Pyaterochka, Russia’s biggest grocery chain. In May, it floated on the London Stock Exchange at $13 a share.Within weeks, the share price had risen to $16 and and analysts were initiating coverage with outperform ratings. Not bad for a chain that started life in 1999.
The chain specialises in the neighbourhood soft discount format, often located at the base of apartment blocks. The stores tend to be small - 700 to 1,000 sq m - and the range is limited, though it has grown rapidly since launching with 600 to 700 lines, and now boasts 3,600 lines.
While on the face of it, there seem to be several competing formats in the Russian market, consumers don’t see it that way, according to the chain’s corporate strategy director, Victor Beliakov. “In Russia, people don’t differentiate food outlets by format. They just expect to find more or less what they need. We have 3,600 products and that covers 95% of what the everyday customer needs.
“Being a discounter doesn’t mean we sell poor quality food. We sell what the customer wants but a bit cheaper.”
Chairman and former Somerfield director, David Noble, stresses the importance of keen prices in such a young, rapidly evolving market. “Over 70% of the population is low to mid income. As we squeeze our suppliers, we’ll put it back into low prices.”
The proof is in the footfall: Pyaterochka stores attract 2,800 shoppers a day on average compared with 700 to 800 at similar sized rival stores. Although on average Pyaterochka shoppers spend just $6 a visit, compared to Perekriostok’s $10 to $12, they visit more frequently.
The discount format stands at 10% of Russian’s retail market. Beliakov says: “In the fullness of time, I think they can capture 30% to 35% - at the moment, there is only one discounter for every 80,000 people.”
Private label is a key focus. Pyaterochka will have increased its offer from 9% to 15% by December and wants to push it to 50% by 2008. Noble says: “Our cola outsells Coke in our stores. The success of private label is not in focusing on undercutting brand prices, but developing brand substitutions that can become brand leaders. On average, our own-label goods are 15% cheaper than brands.”
Improving sourcing is another priority. When the first stores opened, the chain was sourcing 50% of products from Western Europe. Now almost everything is bought in Russia.
“What’s also important is to have good distribution facilities,”adds Beliakov. A warehouse is being built in Moscow to add to its existing one in St Petersburg, so that 80% of deliveries can be made from its own facilities.
Pyaterochka will drive expansion through regional franchises, says Noble. There are 263 self-operated stores, most of which are in St Petersburg and Moscow, and 292 franchise stores in 10 Russian regions and two neighbouring countries: Ukraine and Kazakhstan. “We knew we had so much to do in Moscow and St Petersburg. But suddenly we had an opportunity to look at the regions. It is a way of getting your name and brand out there and helps us negotiate with suppliers.”
The chain is ambitious: it has set a target of 1,000 company-run stores by 2012. It is also pondering whether to diversify into larger stores.
Meanwhile, Noble believes foreign competition has been overplayed. He points out that Pyaterochka has one of the strongest land banks, adding: “We sit very happily next to hypermarkets - there’s plenty of room for growth for everyone. At the moment, we’ve got just under 1% of the market share. We’d like to see that grow to 15% in the long term.”
Multi-format Perekriostok is not afraid of foreign competition
Russian grocery shoppers are not so different from their counterparts elsewhere in Europe, says Alexander Kosianenko, Perekriostok’s chief executive. “The typical shopper is a global shopper,” he quips. “They eat three times a day and like Pepsi and Coca-Cola.”
What is different is where they shop, which has presented a huge opportunity for the new modern format retailers such as Perekriostok.
Since its launch in 1995, it has carved a 0.4% niche of the grocery market [IGD]. It doesn’t sound much, but it has done so totally from scratch and despite highly volatile economic conditions. “It was complete chaos in Russia,” says Kosianenko. “It is very important to understand this.”
Most of the top managers who initially joined the company were from the worlds of banking and real estate. Despite the challenging environment, he says: “We don’t think it is too much of a risk. Vice versa: I think it is one of the most stable businesses in Russia.”
Perekriostok has grown 60% a year in the past three years and this year expects to generate a turnover of $1.2bn, compared with $766m last year. Apart from German retailer Metro, Pyaterochka is the only chain that is bigger.
However, Kosianenko does not see its Russian rival as true competition. “By the end of 2004, Perekriostok had 95 stores, Pyaterochka 444. There is only a 10% overlap in our customer base. And our businesses are based on different principles. We do not have so many stores operating on a franchise basis, for instance.”
Perekriostok operates three main formats - supermarket mini, a traditional supermarket and supermarket plus (a city hypermarket). The hypermarkets stock 35,000 lines, but Kosianenko insists that there is virtually no price differential between Perekriostok and the discounters. He adds: “In Russia there is no uniform understanding of what a “nearby” store should be. We were the first chain to open a discounter in Moscow, in June 1996. Later, the management seriously discussed a strategy related to the development of “hard” discounter.
But the idea was discarded. “The mission of Perekriostok is to offer quality goods at affordable prices.We think our success will be in forming of a multi-format chain. In the near future, we will have something to say.”
So far, most of the group’s expansion has focused on Moscow and St Petersburg, but by the end of July, it was in 14 regions. This year, it entered the Ukraine with the purchase of Spar Ukraine and by the end of this year it is expected to have 122 stores. In the next three years it plans to expand into the regions, including the Urals, one of the fastest-growing Russian consumer markets.
With modern supermarkets making up just 9% of the current market, there are huge growth opportunities, says Kosianenko. Household incomes are rising rapidly, and consumer demand is changing to reflect that. In 2003, for instance, there were only two fresh products in Perekriostok’s top 10 selling items - tomatoes and bananas. Last year, however, apples, grapes, fresh chicken and pears joined the list.
Kosianenko also says there is potential to develop non-food, 20% of the supermarket offer and up to 40% of its supermarket plus.
As for the influx of foreign players, in the short term he is not worried. “We are going to compete with them and we’ve gained experience working with chains that are already here.”
Western retailers will struggle to negotiate the red tape and shortage of sites, he adds. “Problems relating to the lack of real estate and bureaucracy will restrain their advance.”
Securing half way decent locations within the major cities is another issue, especially when others have got in first. Barnes says: “I’ve been impressed with Auchan. It has found some very good sites and has a good landbank. It has secured the Moscow Ring Road and Moscow is a Godawful place in terms of congestion.”
But perhaps the biggest challenge is the nature of the market itself. So far, the main focus of activity has been Moscow and St Petersburg. They are now highly competitive markets, making entry tricky for new players. The other dilemma is format. There is no consensus as to which is the best. The top
chains operate different models, Pyaterochka putting its money on neighbourhood soft discount, Perekriostok going multi-format and other retailers, such as Metro, plumping for hypermarkets and cash and carries.
They may not look much compared with their slick counterparts in the UK. But Russian supermarket chains such as Pyaterochka and Perekriostok could be the future of European retail. Most Russians still buy their groceries from open markets, street kiosks and small independents. That spells the largest single growth opportunity for grocery retailers - domestic and foreign - in Europe, according to IGD’s latest European Grocery Retailing report, which predicts the market will be worth 1375bn by 2020, making it Europe’s biggest grocery market.
Steve Barnes, IGD business director, says: “In a market where the leader has less than a 1% share, there are clearly huge opportunities. I suspect a number of international players are circling.”
The two leading domestic chains - Pyaterochka and Perekriostok - have been quick to make the most of their first mover advantage (see over) ahead of the anticipated influx of foreign players.
But so far, only the vanguard appears to have arrived. Auchan, Metro and Spar International are in and expanding their presence, while German co-operative Rewe entered a joint venture with Marta Holding last year and M&S is to open two non-food franchise stores in Moscow this autumn.
Wal-Mart, Tesco, Intermarché, Carrefour, Aldi and Lidl, meanwhile, hover on the sidelines. There are a number of reasons for their caution: red tape, poor distribution infrastructure and sky-high property costs in Greater Moscow, to name a few.
For the international players such as Wal-Mart that favour the hypermarket format, there may only be limited opportunities in a country where most people do not have cars and do small but regular shops near home.
Wal-Mart chief executive Lee Scott is said to have admitted that at the moment either the market isn’t right for Wal-Mart or Wal-Mart isn’t right for Russia, while Tesco chief executive Sir Terry Leahy has likened Russian retail to London Zoo, a place that is worth a visit, but you wouldn’t want to live there.
What is clear is that competition is beginning to really heat up. Indeed, in Kearney’s 2005 Global Retail Development Index of the top 30 emerging markets, Russia slipped off the top spot - India taking its place - because of the level of competition.
In other words, those eyeing the market had better finalise their market entry strategies quickly. The domestic players are no pushovers, warns Barnes: “I’ve been impressed by the quality of management in place. They’re not afraid to look around and that’s laudable. But I wouldn’t rule out the likes of Lidl, which has an aggressive expansion plan in Europe.”
Soft discounter Pyaterochka expands into regional Russia
It has been a watershed year for Pyaterochka, Russia’s biggest grocery chain. In May, it floated on the London Stock Exchange at $13 a share.Within weeks, the share price had risen to $16 and and analysts were initiating coverage with outperform ratings. Not bad for a chain that started life in 1999.
The chain specialises in the neighbourhood soft discount format, often located at the base of apartment blocks. The stores tend to be small - 700 to 1,000 sq m - and the range is limited, though it has grown rapidly since launching with 600 to 700 lines, and now boasts 3,600 lines.
While on the face of it, there seem to be several competing formats in the Russian market, consumers don’t see it that way, according to the chain’s corporate strategy director, Victor Beliakov. “In Russia, people don’t differentiate food outlets by format. They just expect to find more or less what they need. We have 3,600 products and that covers 95% of what the everyday customer needs.
“Being a discounter doesn’t mean we sell poor quality food. We sell what the customer wants but a bit cheaper.”
Chairman and former Somerfield director, David Noble, stresses the importance of keen prices in such a young, rapidly evolving market. “Over 70% of the population is low to mid income. As we squeeze our suppliers, we’ll put it back into low prices.”
The proof is in the footfall: Pyaterochka stores attract 2,800 shoppers a day on average compared with 700 to 800 at similar sized rival stores. Although on average Pyaterochka shoppers spend just $6 a visit, compared to Perekriostok’s $10 to $12, they visit more frequently.
The discount format stands at 10% of Russian’s retail market. Beliakov says: “In the fullness of time, I think they can capture 30% to 35% - at the moment, there is only one discounter for every 80,000 people.”
Private label is a key focus. Pyaterochka will have increased its offer from 9% to 15% by December and wants to push it to 50% by 2008. Noble says: “Our cola outsells Coke in our stores. The success of private label is not in focusing on undercutting brand prices, but developing brand substitutions that can become brand leaders. On average, our own-label goods are 15% cheaper than brands.”
Improving sourcing is another priority. When the first stores opened, the chain was sourcing 50% of products from Western Europe. Now almost everything is bought in Russia.
“What’s also important is to have good distribution facilities,”adds Beliakov. A warehouse is being built in Moscow to add to its existing one in St Petersburg, so that 80% of deliveries can be made from its own facilities.
Pyaterochka will drive expansion through regional franchises, says Noble. There are 263 self-operated stores, most of which are in St Petersburg and Moscow, and 292 franchise stores in 10 Russian regions and two neighbouring countries: Ukraine and Kazakhstan. “We knew we had so much to do in Moscow and St Petersburg. But suddenly we had an opportunity to look at the regions. It is a way of getting your name and brand out there and helps us negotiate with suppliers.”
The chain is ambitious: it has set a target of 1,000 company-run stores by 2012. It is also pondering whether to diversify into larger stores.
Meanwhile, Noble believes foreign competition has been overplayed. He points out that Pyaterochka has one of the strongest land banks, adding: “We sit very happily next to hypermarkets - there’s plenty of room for growth for everyone. At the moment, we’ve got just under 1% of the market share. We’d like to see that grow to 15% in the long term.”
Multi-format Perekriostok is not afraid of foreign competition
Russian grocery shoppers are not so different from their counterparts elsewhere in Europe, says Alexander Kosianenko, Perekriostok’s chief executive. “The typical shopper is a global shopper,” he quips. “They eat three times a day and like Pepsi and Coca-Cola.”
What is different is where they shop, which has presented a huge opportunity for the new modern format retailers such as Perekriostok.
Since its launch in 1995, it has carved a 0.4% niche of the grocery market [IGD]. It doesn’t sound much, but it has done so totally from scratch and despite highly volatile economic conditions. “It was complete chaos in Russia,” says Kosianenko. “It is very important to understand this.”
Most of the top managers who initially joined the company were from the worlds of banking and real estate. Despite the challenging environment, he says: “We don’t think it is too much of a risk. Vice versa: I think it is one of the most stable businesses in Russia.”
Perekriostok has grown 60% a year in the past three years and this year expects to generate a turnover of $1.2bn, compared with $766m last year. Apart from German retailer Metro, Pyaterochka is the only chain that is bigger.
However, Kosianenko does not see its Russian rival as true competition. “By the end of 2004, Perekriostok had 95 stores, Pyaterochka 444. There is only a 10% overlap in our customer base. And our businesses are based on different principles. We do not have so many stores operating on a franchise basis, for instance.”
Perekriostok operates three main formats - supermarket mini, a traditional supermarket and supermarket plus (a city hypermarket). The hypermarkets stock 35,000 lines, but Kosianenko insists that there is virtually no price differential between Perekriostok and the discounters. He adds: “In Russia there is no uniform understanding of what a “nearby” store should be. We were the first chain to open a discounter in Moscow, in June 1996. Later, the management seriously discussed a strategy related to the development of “hard” discounter.
But the idea was discarded. “The mission of Perekriostok is to offer quality goods at affordable prices.We think our success will be in forming of a multi-format chain. In the near future, we will have something to say.”
So far, most of the group’s expansion has focused on Moscow and St Petersburg, but by the end of July, it was in 14 regions. This year, it entered the Ukraine with the purchase of Spar Ukraine and by the end of this year it is expected to have 122 stores. In the next three years it plans to expand into the regions, including the Urals, one of the fastest-growing Russian consumer markets.
With modern supermarkets making up just 9% of the current market, there are huge growth opportunities, says Kosianenko. Household incomes are rising rapidly, and consumer demand is changing to reflect that. In 2003, for instance, there were only two fresh products in Perekriostok’s top 10 selling items - tomatoes and bananas. Last year, however, apples, grapes, fresh chicken and pears joined the list.
Kosianenko also says there is potential to develop non-food, 20% of the supermarket offer and up to 40% of its supermarket plus.
As for the influx of foreign players, in the short term he is not worried. “We are going to compete with them and we’ve gained experience working with chains that are already here.”
Western retailers will struggle to negotiate the red tape and shortage of sites, he adds. “Problems relating to the lack of real estate and bureaucracy will restrain their advance.”
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