The surprise announcement that French retail giant Carrefour will exit Russia throws into sharp relief the number of challenges facing retailers in the market. While growing disposable local income had fostered the development of modern retailing, the dramatic impact of the economic downturn has put the spending power of Russian consumers under pressure. Retailers operating in the market have come in for a bumpy landing. Nevertheless, Russia still offers the greatest long-term growth prospects in Europe. Katy Humphries reports.
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After years of will-they-won’t-they speculation and just four months of operating in the market, French retail giant Carrefour has said that it will sell its Russian hypermarkets and exit the country.
Carrefour has opened two hypermarkets in Russia since June. The French group has also been linked to takeover discussions with Russian retailers, including Seventh Continent.
However, with no deal on the horizon and slow progress being made in opening its own outlets, Carrefour management said that it was unable to attain a “leadership position” in the country and that it would therefore beat a tactical retreat.
“In any market in which they operate, they want to be the market leader, or at least in the top two. Given that they don’t view this as achievable in Russia, the decision to pull out sooner rather than later – when you have invested more – makes good strategic sense,” Verdict Research’s Simon Chin tells just-food.
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By GlobalDataHowever, Chin adds that various “other reasons” also likely played a role in Carrefour’s decision to quit Russia. These, he suggests, include the perpetual problems that corruption and bureaucracy present to Western retailers in the market.
With corruption and bribery a regular part of back-end operations for retailers in Russia, this can certainly present quite a “culture shock” for those used to operating in more orderly western markets.
As one UK advisor to a Russian retail firm tells just-food: “It is a different world – even delivery drivers expect their cut. Corruption is part of retailing in Russia – from state authorities to all levels of the supply chain.”
Another obstacle in the Russian market is the reams of red tape that international retailers are faced with. This could well have been one of the factors Carrefour alluded to as limiting its potential for organic growth.
However, Carrefour was undoubtedly aware of these issues before it decided to set up shop in Russia. So what prompted the company to revise its assessment of the market’s “short- to mid-term” prospects?
The global economic crash has had a profound impact on consumption patterns all over the world and Russia was one of the nations at the sharp end. Almost overnight, one of the longest consumer booms in Russian history was replaced by economic crisis.
According to the latest World Bank figures, unemployment is expected to rise to 13% by the end of the year, with manufacturing jobs in the automotive industry among the hardest hit. Russian consumers are getting poorer – with the number of those living under the official poverty line expected to increase to 17.4%. Significantly for retailers, Russia’s middle class is likely to shrink by about 10%, to 51.2%. In real terms, this means 6.2m people will have dropped out the higher-spending “middle class” social bracket.
Last week, the European Bank for Reconstruction and Development cut its forecast for Russia’s gross domestic product this year to a contraction of 8.5%, down from an earlier forecast of a 7.5% contraction.
“It is clear that the social costs of the global economic crisis are only likely to be felt in earnest next year, when corporate bankruptcies and unemployment will continue to rise,” EBRD chief economist Erik Berglo warns.
Bleak though the economic picture is in Russia at present, with the well-being of the Russian economy fundamentally tied to oil prices, when energy prices rise the economy will rebound. Indeed, the World Bank predicts that the Russian economy could return to “modest growth” as early as 2010.
However, until the Russian economy diversifies, it will remain at the mercy of the volatility that marks global commodity markets. This creates an atmosphere of uncertainty that could well make any number of international retailers ill at ease.
Nevertheless, where there are challenges there are also opportunities.
While lower oil prices and a weaker rouble could make some international retailers think twice about plans to expand in the Russian market, the crisis also provides an opportunity to capitalise on lower valuations for M&A targets and lower costs of land acquisition.
The credit squeeze that has been triggered by the global recession could also accelerate consolidation in the fragmented grocery retail industry.
X5 Retail, Russia’s largest food retailer by sales, is widely expected to buy up smaller chains threatened with bankruptcy and the company is reportedly currently engaged in talks to acquire smaller peer Paterson Retail Chain.
Meanwhile, Magnit – Russia’s largest retailer by number of stores – has forged ahead with its own expansion plan. In the first nine months of the year to the end of September, Magnit had opened a net total of 399 stores.
The retailers who have reaped the greatest benefits during the downturn are those who operate discount formats. Dixy Group, X5 Retail and Magnit have prospered as consumers have tightened their purse strings, posting sales gains in spite of the general downward trend in consumer spending.
In a bid to woo consumers – as well as in response to growing political pressure – Russia’s low-price retailers have engaged in a campaign of deep discounting that has seen them slash the price of “socially important” staples.
Last month, French retailer Auchan confirmed its intention to enter the fray with the launch of its own hard discount retail chain in Russia under the Raduga banner.
The first store is located in Moscow and two others are planned for the cities of Kaluga and Penza, a spokesperson for Auchan-Russia tells just-food.
The move is part of Auchan’s attempt to diversify in Russia. In particular, the company intends to focus on its Atac supermarkets. It currently operates about 50 Atac outlets in Moscow.
“An increasingly diverse footprint will allow us to more effectively meet and respond to the changing needs of Russian consumers,” the spokesperson reveals.
This “broader footprint” will also provide Auchan with a degree of earnings stability in the face of the swings of the Russian economy.
While the growth of the grocery retail sector in crisis struck Russia has been hit, its size and potential remains undeniably huge and it is still expected to become the largest single market in Europe.
As domestic players extend their reach, multinationals who continue to eye expansion in the country – the likes of Auchan, Metro Group and, possibly, Wal-Mart – should act with haste as consolidation intensifies in the market in the months and years ahead.
