Grocery Chains a Safe Port in Rough Seas
- By Yekaterina Yezhova
- Dec. 10 2014 00:00
The retail trade is one of the largest economic sectors in Russia and the food business dominates. Grocers represent four of the five biggest retailers.
The Russian retail market is one of the largest in Europe with turnover of almost 24 trillion rubles in 2013. Observers predict that its growth, however, will slow down to 2 per cent by 2017 from 16 per cent in 2007. Several waves of sanctions, which hit the local market earlier this year, are forcing consumers to adapt their expenses to galloping prices with the inflation level seen to exceed 7 per cent by the end of the year.
The retail trade is one of the largest spheres in Russia: it is by six times larger than agriculture and by 13 times than the telecommunications industry, according to Retail.ru. By market volume, Russian retail ranks in fifth position globally, with $651 billion of turnover. That places it after Germany with $678 billion, Japan with $1.2 trillion, China with $2.1, and the U.S. with $2.8 trillion, Retail.ru said.
Foodstuffs occupy almost half on the Russian retail market, while home and garden products occupy 8 per cent, and clothes and footwear, 6 per cent. On the world scale, the Russian market for foodstuffs was in fifth position in 2013 with a volume of $315 billion. That ranks behind only India with $316 billion, Japan with $365 billion, China with $1.1 trillion and the U.S. with $1.4 trillion, Retail.ru said, referring to Sergei Piven, CFO of X5 Retail Group, a leading retailer on the country's market.
Piven said the Russian grocery retail has a huge potential for organic growth as compared to countries of West and East Europe.
In 2015, analysts expect the Russian economy to slip into recession with a fall of in gross domestic product (GDP) to minus 0.5 per cent from a 0.5 per cent growth seen for the current year, said Mikhail Pershin, head of the retail trade practice at consulting company Accenture Russia. In January to June, the country's GDP grew 0.8 per cent on the year. Consumer price inflation was at 7.6 per cent in August in annual terms and is seen at 7.2 per cent by the end of the current year.
Despite the country's leading position in terms of the volume and turnover of retail, the country lags by sales areas. Russia has 680 square meters of trading floor per 1,000 citizens with a population of 143.6 million. Germany boasts 1,460 square meters per 1,000 citizens with the population of 80.8 million, and France has 1,230 square meters with the population of 66.2 million, Pershin from Accenture said in a 2014 analytical report on the economy and retail.
"At the moment large retail chains have already covered the main territories of the European part of Russia. Further expansion will be possible only toward eastern borders of the country," Pershin said. Chains will come to regions and cities with a high level of social and economic development and more convenient transport availability, close to large thoroughfares, like the Trans-Siberian Railway and the Baikal-Amur Mainline.
Otkritie Capital's analysts say they are positive on the stock market share prices of many Russian food retailers, such as DIXY and Magnit, and that big players will continue to take market share from the second tier competitors. This will compensate for global economic difficulties, they said in an investor note.
Retailers face risks, however. These include a weaker-than-expected economy, falling currency and the rising cost of credit; regulatory risks such as price controls or changes in taxation; pressures on margins resulting from a changing supplier base and likely lower rebates; and finally the risk of volatility in inflation that may depress the sector's revenue growth.
Russian consumers have contributed strongly to growth in recent years, but those consumers are now under pressure. The average Russian shopper monthly earns 31,500 rubles ($690), and an average cheque per a store visit was at 540 rubles ($11) in July. Citizens call at stores for purchases three times a week. Sixty-nine per cent of people prefer neighboring stores and most of them say they are willing to pay higher prices for fresh products, according to research company Romir.
One third of Russian shoppers are cautious, according to Romir, buying products only if they are sure they will consume them. One fifth retains the hoarding instinct and buys products with a longer shelf life in order to have reserves and save money in case of a price hike.
While consumers tend to sample many different brands, they are paying more attention to brand promotions and retailers' loyalty programs which are expected to see increasing acceptance.
In mid-September, Russian trade chains, grocery suppliers and producers signed a memorandum seeking to limit the growth in retail prices of foodstuff in response to sanctions. The document was agreed by representatives of the Retail Companies Association (ACORT), comprising such major retailers as Magnit, X5 Retail Group and DIXY, among others, as well as by representatives of industry associations, like RusBrand.
Apart from the growth in prices, suppliers and producers pledged not to allow an artificial decrease in grocery procurements and promised to contribute towards the increase of domestic production. Trade chains promised not to reduce sales, to maintain the quality of products and to facilitate access to their shelves for Russian-produced goods.