Money-Growing: Foreign Invasion

Admittedly, St. Petersburg still has just a handful of projects to offer to prove its investment appeal. Nevertheless, market analysts expect the volume of foreign investment in local retail to reach 25-30% of the total forecasted capital investment in the sector.

Overseas retailers arrived in Russia’s northern capital years after they broke into the Moscow market. For example, Turkish firm Ramenka opened its first hypermarket in Moscow as early as 1997, while the St. Petersburg outlet was only launched in 2004. What deters foreign investors is clear.

“To begin with, the purchasing capacity of local residents is still relatively low. Official statistics show that in the year 2004 retail sales in Moscow reached 1.3 trillion rubles while in St. Petersburg the figure stood at only 202.5 billion rubles,” says Irina Anisimova, executive director at Astera’s St. Petersburg office. “Besides, western chains experience difficulties entering the local market due to the intricate procedure of securing permission, licenses, etc.”

“Foreign developers are warded off by red tape, the lack of trust in obscure Russian partners, the lack of vacant building plots already distributed between land speculators, and problems with logistical support,” adds Boris Yushenkov, general director at Colliers International St. Petersburg.

Lev Pukshansky, board member at OAO PSB-Invest Group, believes that the soaring price of land in St. Petersburg is another obstacle. Moreover, until recently foreign retailers feared a repetition of the 1998 financial crisis that dealt a heavy blow to the retail sector.

Nonetheless, as the Moscow market nears saturation point Western retailers are forced to look into new opportunities outside the capital. “The expansion has not reached a mass scale yet, but in a couple of years we will see a real explosion,” Oleg Spivak, head of retail at Bekar Consulting, predicts.

According to Astera’s estimates, within the next three years foreigners will spend at least 1 billion euros in the St. Petersburg retail sector. Colliers International expects investments to reach $650-700 million over the next two years.

Unlike Moscow where foreign investors discovered a market that still hadn’t been divided up between local businesses, in St. Petersburg they have to put up with local retailers who have grown stronger over the years, launching hypermarket chains such as Lenta, O’Kay, Maksidom, etc., developing large shopping and leisure facilities – Sennaya, Gulliver – and establishing groups of companies active on the market, such as Adamant.

Incidentally, the budgets of such projects are usually considerably smaller than those of their foreign analogues, which create additional competitive advantages for domestic firms. Analysts at PSB-Invest Group believe that foreign investors can count on an annual rate of return of 10-12% up to 15-17% depending on the stage at which they join a specific project.

Bread and Shelter

For the time being international retail operators have focused on food stores and DIY shops. The first foreign retail operator to arrive in the city was Finland’s Tradeka Oy chain, with annual sales of 1.1 billion euros. Tradeka Oy opened its first supermarket, Super Siva, on the premises of a former self-service store at 119, Savushkina Street in the Primorsky District of St. Petersburg, back in 1993.

The Finnish company had planned to open 15 outlets in northwestern Russian by the year 2000, but the 1998 crisis disrupted those plans, says Valdemar Tutti, CEO at ZAO Renlund SPb, Tradeka Oy’s Russian subsidiary. In the April of 2005 the company opened its second Super Siva outlet of 1,300 square meters in the Kosmopolis shopping center on Vyborgskoye Shosse [motorway]. Tradeka Oy plans further development of the chain both in St. Petersburg and Moscow.

Most large international retailers build their facilities in St. Petersburg themselves, though such an approach is at odds with world practice.

“Chains are not supposed to do that by definition,” says Boris Yushenkov. “But the level of development on the local retail real estate market is such that chain operators are forced to assume the role of co-investors and co-developers. As soon as St. Petersburg has at least a dozen professionally developed retail center projects the situation will change dramatically.”

The first foreign giant to enter the local market was Metro. The corporation launched two cash and carry outlets – on Komendantsky Prospekt (Primorsky Distrcict) and Kosygin Prospekt (Krasnogvardeisky) – almost simultaneously in 2003.

Metro invested 25 million euros in each of the two projects. The expected payback period is estimated to be around 8-10 years. Each of the facilities has a total space of 16,000 square meters, including 9,200 square meters of shopping area, and an 800-space parking lot. The stores offer over 11,000 food products and 9,000 non-food items.

Interestingly, as it adjusted to the St. Petersburg consumer environment Metro gradually abandoned its usual retail format, targeting instead businesses and entrepreneurs who run restaurants, cafes, hotels, and cash and carry stores.

At the opening ceremony of Metro’s first outlet Herbert Zlabinger, the head of the company’s Russian subsidiary OOO Metro Cash&Carry, said: “Our buyers must be sure that they will not run into their clients on our premises.”

However, sticking to that policy would have been a setback for the German firm when compared to local cash and carry chains – Lenta and Mosmart. Those chains are involved both in wholesale and retail. At Lenta’s outlets the prices do not vary depending on whether you buy just one item or a whole package.

It did not take long before Metro’s customer cards began changing hands, with the company management turning a blind eye to it. “Metro Cash&Carry centers have turned into ordinary hypermarkets here. That format is most popular with local consumers, and that is what they expected from the German retailer. Technically, the chain is designed for legal entities, but in actual fact virtually every city-dweller has the required card,” says Oleg Spivak.

Metro is to open its third hypermarket this summer on Pulkovskoye Shosse, the motorway that links the city to the airport. At the same time, the company has set about building its own retail chain, Real, in St. Petersburg.

German investors were followed closely by Swedes. In December 2003 Sweden’s giant IKEA opened its first outlet in the village of Kudrovo in the Vsevolzhsky District of Leningrad Region, outside St. Petersburg on the city’s outer ring road (KAD), which is currently under construction. IKEA has invested approximately $45 million in the development of the 31,000-square-meter facility.

Incidentally, the Swedish company had planned to break into the St. Petersburg market back in the mid-1990s but failed to reach agreement with the city government on a building plot.

“We did everything we could to come to an agreement with the authorities of St. Petersburg but it proved impossible,” Lennart Dalgren, IKEA’s Russian CEO, says. “So we focused on the Leningrad Region, instead, close to KAD (the outer ring road).”

In May of 2005 the company is due to begin the development of a 210,000-square-meter shopping mall worth 250 million euros, on a 60-hectare plot adjacent to IKEA-Kudrovo, similar to Moscow’s Mega.

The development is to be completed in October 2006. Initially, IKEA planned to launch the construction last year, but time was required for securing a freehold to part of the building plot owned at that time by a former state-owned farm, AOZT Vyborgskoye.

This summer IKEA is also due to begin the development of a second outlet near the town of Bugry, in Leningrad Region, north of St. Petersburg, near the KAD ring road. The Swedish side hopes to secure a plot of 30-35 hectares. The regional government has already tentatively endorsed the project.

The next to arrive in St. Petersburg – in November 2004 – was Ramenka. It had also faced delays. The Turkish firm had hoped to have at least two shopping malls launched ahead of St. Petersburg’s 300th anniversary celebrations. But even though Smolny (the city administration) had hailed Ramenka’s project the building plots were not duly allotted.

As a result, Ramenka opened its first Ramstore mall on the premises of the Gulliver shopping and leisure center near the Staraya Derevnya metro station. Gulliver is owned by OOO Dubl-2. Though the rental rate is confidential information, analysts at Colliers International estimate the charge to be in the region of $120-180 per square meter per year for anchor tenants.

The hypermarket occupies a total of 5,200 square meters in Gulliver, with over 35,000 food products and non-food items offered to customers in the 4,000-square-meter shopping area. The company invested some $1.5 million in the project. The payback period on the investment is expected to be 3-4 years.

The second outlet opened in March of 2005 within the office and shopping center River House on Aptekarskaya Embankment where Ramenka rents a 5,000-square-meter property.

Ramenka has not abandoned its ambitious plans for St. Petersburg. By the end of this year it hopes to expand its chain in the city to five outlets. This summer the company will open a 35,000-square-meter mall built by Ramenka near Udelny Park in the Primorsky District. In addition to a 6,600-square-meter hypermarket, the mall will feature tenants including Intersport, L’Etoile, and Mexx.

Another mall, of 30,000 square meters, is to emerge in the Moskovsky District, though its precise location remains a secret. In late 2005 Ramenka will launch an 8,000-square-meter hypermarket at the Grand Canyon shopping center at 154, Engelsa Prospekt, currently under construction. Ramenka has secured a tenancy at the property.

The plan for 2006 is to open four more Ramstore malls. Three outlets, 10,000 square meters each, will appear in the Tsentralny (Central) District, on Grazhdansky Prospekt and in Kupchino, as well as a 30,000-square-meter shopping center on Leninsky Prospekt.

In April of this year the British home-improvement giant Kingfisher announced its plans for expansion into Russia. Kingfisher runs 600 hyper- and supermarkets selling home goods in nine countries. It is set to open its first Castorama hypermarket in St. Petersburg, at the intersection of Dalnevostochny Prospekt and Kollontai Street in the Nevsky District, by the end of this year.

The single-story 11,000-square-meter hypermarket, with an 8,000-square-meter shopping area, will require investment to the tune of $20 million. Castorama’s range of goods will include about 40,000 items, which is approximately the same as in the local Maksidom outlets.

Chief executive officer at Castorama Russia Peter Parma believes that competition on the local DIY market is already very stiff.

“This makes the task of establishing a foothold here even more challenging,” he says. “We are adjusting our European format to local consumers and hope to win them over with our prices which will definitely be lower than those of our rivals.”

Kingfisher is the first international retailer to arrive in St. Petersburg with the help of a strong local partner. The company will open its hypermarket near a Lenta shopping center. The Lenta chain received a 10.3 hectare plot on Dalnevostochny Prospekt from the city government in November 2004. Kingfisher and Lenta hope to continue their cooperation, but have not revealed the addresses of future outlets.

Germany’s OBI chain of do-it-yourself stores is also about to enter the St. Petersburg market. So far, OBI has had no intention of assuming the role of developer. The company is currently negotiating tenancy agreements with the owners of several shopping centers that are either being designed or under construction. They include projects by Makromir on Dalnevostochny Prospekt, Dorinda on Pulkovskoye Shosse and Vinci on Prospekt Kosmonavtov.

In March 2005 the Finnish firm Rautakesko of the Kesko Group bought into the St. Petersburg DIY chain Stroimaster (hitherto owned by local group Teks, active on the DIY market since 1994), becoming the first foreign retailer to take over a St. Petersburg chain.

The chain’s capitalization could reach 19.6 million euros if the new owner is satisfied with the first year’s results. The company currently operates four Stroimaster outlets in the densely populated districts of Krasnogvardeisky, Kirovsky, Vyborgsky and Frunzensky. In 2004 the chain’s sales reached 49 million euros. Rautakesko also plans to develop hypermarkets in St. Petersburg and other Russian cities.

Developers’ Debut

In the spring of 2005 foreign development companies launched their first shopping and leisure projects in the Northern capital.

In March the international concern Vinci laid the foundation stone of the shopping and leisure center Piter Raduga, currently under construction on a 24-hectare plot on Prospekt Kosmonavtov in the Moskovsky District, behind the building of the St. Petersburg sports and concert complex. The new mall will have a usable area of 75,000 sq.m., and a 3,500-space outdoor parking lot. Vinci Construction Grands Projeсts is the developer and general contractor. The cost of construction is estimated to be in the region of 70 million euros.

The European Bank for Reconstruction and Development (EBRD) has okayed a 10-year syndicated loan worth 65 million euros, half of which will be extended by the EBRD itself. Other creditors include Raiffeisen Zentralbank Osterreich AG and Raiffeisen Austria (Russia). The concept of the new mall was prepared by French designers at Design Architectural specializing in retail outlets. The St. Petersburg-based SCCK has adjusted the project to local specifics.

It comes as no surprise that Raduga’s main anchor tenants will be leading world retail brands – Metro’s Real (17,000 square meters), and OBI’s DIY store (18,000 square meters). Raduga will also feature large stores selling home appliances, furniture and sports goods. Other outlets will sell fashionable clothes, perfumes, accessories, books, audio and video products, and so on. Entertainment facilities will include a 10-screen movie theater and bowling alleys with 18 lanes. The mall is due to open next summer.

Irina Anisimova of Astera, Raduga’s sole property agent, says that talks with would-be tenants are proceeding quite actively.

In April, Italy’s development company Promoсentro Italia set about building the Northern Mall (Severny Moll), on a plot previously held by the agricultural company Bugry (on the northern outskirts of the city). The mall is to become the first phase of a retail park of the same name, to be developed on a 50-hectare plot. The 500,000-square-meter development featuring retail and leisure facilities will require nearly 200 million euros in investments.

Promocentro Italia is working on the project jointly with the Thesis investment company. The freehold title to the plot of land situated between Prospekt Kultury, a rail link and the future KAD ring road was purchased from Bugry, says Lino Guatteo, Thesis’s chief executive director.

The 9.78-hectare area of previously arable land has already been reclassified. It will be used for the construction of a single-story 35,000-square-meter shopping center. Its key anchor tenant will be a 17,000-square-meter Real hypermarket, with a shopping area of 11,000 sq.m. The mall will also house three or four smaller anchors of 3,000 sq.m. each, selling home appliances, furniture, etc., and 75 shops and restaurants.

The first phase of the project is estimated to be worth 50 million euros, of which 30 million will be invested by Real. Thesis’ projects are usually 80% financed at the expense of borrowed funds, says Lino Guatteo.

Boris Yushenkov is convinced that St. Petersburg will soon see the arrival of other foreign developers: “These are companies that have already developed Eastern European markets, such as ECE, Apsys, Rodamco, IGN, TriGranit.”

Irina Anisimova believes the first to arrive will be the developers who have already completed at least one project in Moscow: “France’s Bouygues Construction, for example. Rumor has it that this company plans to build a shopping center on the premises of the St. Petersburg company Russkie Samotsvety.”

Second Coming

The general director of Stanley Estate, Maria Tinika, believes that foreign retail operators will pour into the St. Petersburg market in late 2006 and early 2007. New players are expected in sectors that have already been explored by foreigners, such as foodstuffs and DIY goods. Market analysts name Carrefour, Auсhan, Spar International, Aldi, Leroy Merlin, Marktkauf among the possible newcomers.

St. Petersburg has virtually no department stores matching western standards. The only exception is Stockmann at 25, Nevsky Prospekt. Colliers anticipates the arrival of similar stores saying they would claim properties of 1,000-10,000 square meters. These include brands like Boyner, Bestseller, H&M, GAP, C&A, and Marks & Spencer.

Foreigners express a keen interest in brand clothes and sports goods retail. For the time being, franchising dominates those segments.

“Unlike in the West we have very few large specialized stores. Foreign retailers could fill up the vacant niches. For example, in St. Petersburg there are no drug super- or hypermarkets, selling personal hygiene and beauty products, perfumes, as well as medicines. There are no large – by western standards – shops for office stationery, car parts and accessories, toys, etc. All those businesses have good prospects,” Lev Pukshansky believes.

Analysts expect foreigners to continue buying into St. Petersburg’s retail chains. “I think local operators will fail to preserve their ethnic ‘purity’. Large companies themselves will seek to enter the securities market where money has no national affiliation,” says Alexei Shaskolsky, of the St. Petersburg Entrepreneurship Problems Institute. “After all, if even Poles, with their natural talent for commerce have been forced to give way to western chains, our retailers have no chance of keeping a balance. But I do not think it is a disaster, because jingoism has no room in retail.”