The news that Carrefour may soon be joining the growing ranks of international retailers in Russia will have come as little surprise to observers of a rapidly-developing retail market. According to a just-food report, packaged food growth in Russia has outstripped that in any of the other BRICM markets over the past five years, while the food retailing landscape continues along a path of dramatic transformation. Ben Cooper reports.
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Carrefour may be playing its cards close to its chest about whether it is eyeing an imminent move into the Russian market, but few would expect an ambitious global retailer to be doing anything else.
The French retail giant was rumoured this week to be planning to open its first two Russian stores, in Moscow and Krasnodar, between November and January. If the rumour is true, Carrefour would be following a lead set by other international retailers. Auchan, Metro Group, Spar and Rewe are already present in Russia, while Wal-Mart appointed former Rewe executive Stephan Fanderl to research the market in April.
The interest from international retailers complements significant investment by domestically-owned retail groups, such as X5 and Magnit, all keen to tap into the growth potential Russia has to offer. According to a new report from just-food, the value of the Russian grocery retail sector is set to rise by 80.1% in the period from 2006 to 2013 to US$273.9bn.
Specifically, the packaged food market is growing steadily. The report, Branded foods in Russia – forecasts to 2013, states that, by 2013, the Russian packaged food market will be worth around $177.6bn.
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By GlobalDataMoreover, significant changes are being seen in how food is advertised. “While the packaging and branding for some domestic brands may appear to be stuck in a time-warp, awareness and an understanding of the importance of advertising and marketing to a more brand-savvy audience are priorities for all companies seeking longevity in a growing market,” the report states. “In the face of foreign brands with experience of marketing and advertising on a global scale, domestic players are spending more on advertising than ever before.”
Even in rural areas, shoppers are buying more packaged food than ever before, the report states, though this tends to be bulk buys on promotion, often private labels or economy ranges. However, the report concludes that “overall, the Russian packaged food market is set for massive changes over the next five years”.
Indeed, while Russia generally fares less well in comparison with the other BRICM (Brazil, Russia, India, China, Mexico) markets in key economic indicators such as GDP growth, just-food research indicates that it takes first place among these markets with respect to packaged food market value growth between 2002 and 2007. “At 109.1% this is outstanding compared to the 40.4% recorded in Brazil and Mexico,” the report states. “However, the overall value in 2007 of $70.3bn falls behind the huge values recorded in China and Brazil.”
Russia saw strong real GDP growth of 70.2% between 2002 and 2007, but this is well below the huge growth witnessed in India and Mexico. Russian real GDP growth was 8% in 2007, and this was driven by sales of goods and services in the domestic market rather than exports, the report states.
However, the report suggests growth in the packaged food market will slow over the period from 2008 to 2013 (a CAGR of 13.3%) in comparison with the CAGR of 18.2% seen between 2002 and 2007. But one of the reasons for the slower growth in value terms is the expansion of organised retail. “Growth will be constrained by pressures from the retail market, as mass grocery retailers will increasingly put price pressure on manufacturers and suppliers to enable them to enhance their promotional offering to appeal to consumers shopping on a tight budget.”
Contributing further to downward price pressure, the discount sector is set for significant growth in Russia. The report forecasts that the Russian discount sector will represent just under one-fifth of the total grocery retailing market, up from 10% in 2006. This growth will be primarily driven by investment from the three leading players in new stores across the country, although companies such as Aldi are likely to enter the market in the coming few years, contributing to the growth.
The changing retail landscape is further confirmed by figures from Verdict Research. According to Verdict, the share of the market represented by organised retail chains (supermarkets, hypermarkets and discount stores) grew from 9.5% in 2005 to an estimated 12% in 2006 and 15.6% in 2007.
Traditional formats have suffered as a result of this rise with the independent retailers’ market share falling from 66.5% in 2005 to an estimated 65% in 2006 and 62.4% in 2007.
At the same time, the share of sales represented by traditional open-air markets has fallen from 24% to 23% in 2006, and was estimated at around 22% in 2007.
Citigroup forecasts that modern retail formats will grow twice as fast as the more traditional formats over the next ten years. By 2015, Citigroup predicts supermarkets alone will account for one-fifth of all grocery sales in Russia, with discounters accounting for 20% and hypermarkets 15%.
But the retail expansion over the next five years or so will not be driven just by the arrival and expansion of international groups. As the just-food report states: “Domestic retailers are expanding their operations, building strength in their supply and distribution chains, and working on customer relations to capture a larger and more robust share of the market. However, the Russian retail market is fragmented and there is still potential to grow organically and through the expansion of the portfolio in terms of store formats and locations, as well as offering customers new products imported from around the world.”
The report states that there are “numerous examples” of domestic retailers investing in new formats in the Russian market to widen their market share and coverage. In March 2008, Russia’s third-largest food retailer, Magnit, began the process of obtaining a listing on the London Stock Exchange. According to reports, the retailer is looking to raise money to invest into store expansion in its home market. If and when Carrefour moves into Russia, it will find competition doesn’t come just from Auchan, Rewe and other members of the international retail elite.
For more information or to download the just-food report, Branded foods in Russia – forecasts to 2013, go to www.just-food.com/store
