Russia Forum Buzz: Russian Retail and Consumer: How to Play the Theme in 2013?

April 21, 2013

 

Companies related to the broader consumer mega-theme generate more than half of Russian GDP and have been a significant growth driver since 2004. Russian retail and consumer-related companies’ growth and profitability are, in turn, good measures of Russian consumers’ “health”, and as such are important indicators of the wider Russian economic growth outlook.

How optimistic is the Russian consumer in 2013, and in the medium term? Is middle-class prosperity expected to continue rising? How will the redistribution of power between the major players impact the retail sector’s evolution? Will the internet and online retail become real competitors in the foreseeable future? What are the pros and cons of organic growth as an alternative strategy to market consolidation in the current environment? Will the potential entrance of new global retail powerhouses change the Russian market landscape and rules of the game in the medium term? Will M&A activity pick up in 2013? What is the more prudent funding strategy given current business needs and available financial resources: debt or equity? What do we know about strategic plans and potential IPO/SPO activity by Russian companies? What are the initial results of Russia’s WTO accession and the related legislative initiatives aimed at protecting food and consumer goods producers? How do investors view the Russian consumer and retail market, including strategic players and direct-investment funds?

Alexei Krivoshapko said his fund’s strategy effectively boils down to picking bright companies operating in attractive industries that are well positioned to expand shareholder value. That said, the most critical factors to consider are the personality of the majority shareholder and the quality of the management team, which can contribute 70% to the success of a company. It is important that the core shareholders keep their feet on the ground and respond adequately to external challenges as their companies grow. After all, they are the ones to take care of the business, while portfolio investors are more concerned about returns.

Alexander Tynkovan continued the discussion along similar lines, arguing that majority shareholders often act as the ultimate decision makers, while management is not always independent enough to resist or offer alternatives. In this light, Mr Tynkovan stressed the importance of M.Video being a public company, with 40% belonging to minority shareholders, creating the right balance. The retailer has therefore avoided repeating mistakes made by private rivals and is now the undisputed market leader and continues to grow. Speaking of the most topical trends on the consumer electronics retail market, he mentioned that the segment is undergoing profound changes that can be described as a ‘third revolution’.
After opening access to food and services and given the rapid development of modern formats, the internet is now becoming the major driving force behind the industry’s transformation. Customers are becoming much more active and have an increasing number of shopping options due to the widening availability of information. Meanwhile, M.Video is finding greater opportunities to market and sell its goods and services. Another theme touched upon related to parallel imports. The share of imports in the consumer electronics segment is now 57%, while the rest is localized in Russia. Most retailers have direct access to suppliers and buy all merchandise using rubles, which excludes forex risks. Competition has reached a level where prices for certain items are lower than in Europe. So it is hard to build a model more efficient than the current one.

Maelle Gavet: This ‘third revolution’ is still at a very early stage. Offline retailers are now trying to complement their store business with internet sales channels. But this is just the first step. The number of people shopping online is still very low. Some 50–60 mln Russians have internet access, and 15 mln have bought something online. That said, Ozon is also investing in an offline network, mostly pickup points: the retailer now boasts over 2,000 outlets. We can see a similar trend in the US, where BestBuy is trying to raise online penetration, Amazon is developing offline retail to get closer to its customers, and Apple is trying to combine both methods. Indeed, at some point these two parts should converge and result in integrated sales platforms.

Sergey Rumyantsev: Competition in non-food is very limited: so far there is just one strong player in sports retail, one in kids’ clothes and three in electronics. Meanwhile, it is even lower in the online version of these segments, and the market is still growing at 25–30% per year. This is much slower than in China, where the online market is growing at 100%+. The key impediments are legislation, taxes and infrastructure. Along with M.Video, Enter has helped create an association of online retailers that aims to protect the interests of market players.

Jan Dunning has been in Russia for nine years and has witnessed the evolution and rationalization of the industry. Having started in St Petersburg, Lenta now operates in 33 cities, but this is just 18% of the targeted coverage. Considering the low level of infrastructure development, Lenta needs to invest in its own logistics, which involves a significantly longer payback than investments in store openings, sometimes exceeding seven years. But these investments are crucial for long-term competitiveness.

Ilya Yakubson: Looking at country level statistics, competition can still appear to be very limited and the market underpenetrated. However, this is not the case when looking at individual cities where the largest retailers are starting to compete with each other. It is unsurprising that of the 4,129 food stores opened in the country in 2012, the majority are concentrated in large cities in European Russia. Each retailer has determined its strategic preferences, and Dixy Group’s focus set two years ago is to offer a proper convenience format to customers. While price is still very important, the retailer is striving to maintain the widest assortment it can and the highest quality in the fresh category. The quality of new stores opened by the largest retailers is already comparable to that in Europe.