Money-Growing: No More Outdoors

Communicating With Gestures

The motives behind city hall’s campaign to purge the capital of trading stalls are perfectly clear. To begin with, those “uncivilized” markets, to put it mildly, do not pay their taxes in full. Back in 2002, Vladimir Malyshkov reported that the volume of shady dealings at Moscow’s markets exceeded $3.5 billion per year, while the taxes paid to the city budget by the markets did not exceed 2.5 to 2.7 billion rubles.

The Moscow government has long been considering the introduction of an imputed tax for market vendors, hoping that the move would improve tax collection without forcing vendors to use cash registers. Some of the businessmen asked the government to let them pay imputed tax and spare them regular checks but “the majority opposed the tax”, the League of Trade Entrepreneurs reported. Violations of money rules in Moscow’s markets are ubiquitous.

The second reason is the dire shortage of land in the capital. “Markets are usually situated at favorable locations,” says Yulia Nikulicheva, deputy head of strategic consulting and research at Jones Lang LaSalle. “Moscow authorities are interested in closing down the marketplaces and re-selling the plots of land they occupy.”

Thirdly, as personal incomes grow marketplaces lose their significance. These days, market analysts note an ever-increasing interest in modern retail centers and civilized trade on the part of consumers. “People like visiting large stores,” a spokesperson for the Sedmoi Kontinent retail chain said.

The government finds it difficult to control the observance of trade rules and consumer protection laws. Another headache is the vast quantities of falsified and counterfeit goods at street stalls.

Spot checks have revealed that nearly one-half of all goods are counterfeit, Malyshkov says. Almost all beauty products for sale under famous brand names have proved to be hazardous fakes. Furthermore, while Moscow aspires to secure the status of a world capital, street vendors hardly contribute to the enhancement of its image.

The authorities are set to impose the rules of civilized trade on street markets. But the arguments put forward by officials are as touching as they are untenable: “Today, as the range of goods widens and modern shopping centers are being developed it is necessary to get rid of that ‘uncivilized’ trade.”

While Moscow has 520 square meters of retail space per 1,000 residents, in Europe that figure stands at 600 square meters (that is to say, the difference is not that large), Malyshkov says.

“The comparison is irrelevant, first and foremost, given the enormous difference in the quality of properties,” objects Anna Shiryayeva, general director of Magazin Magazinov realty. “Only 30% of retail properties in Moscow meet international retail standards and can be compared to European properties.”

The government assumes that it is being generous by allowing market owners to dismantle shopping booths and develop retail centers instead. Considering that the owners of trading stalls hold long-term – 25 to 49 years – leaseholds of their plots, the gesture is clearly superfluous.

Getting Rid of Dead Wood

The capital launched the campaign to get rid of open-air markets in late 1999 by issuing a mayoral decree on measures to streamline market operations in the city of Moscow. In 2001, the government passed resolution No. 1138 “On additional measures for the regulation of market trade in Moscow”.

The onset began with high-profile closures of markets operating on the premises of famous sports facilities. The markets at Luzhniki, Dynamo and CSKA were shut down on December 31, 2002.

Over the past three years 118 of the city’s 240 markets were closed, according to the Consumer Market and Services Department.

Formally, the closed markets had lost their licenses either for a failure to comply with sanitary regulations or the expiry of a lease. When deciding the fate of each market, the government used a case-by-case approach with all the interested parties taking part in the discussion, Vladimir Malyshkov told the news conference.

Malyshkov cited the example of Izmailovo as a case where the government has managed to establish a normal working dialogue with market owners. One of the markets in the area has already been closed and now city hall is in talks with the owners on the development of a shopping mall and a parking lot on the vacated site.

Nevertheless, the individual approach in such cases raises many questions. Why, for example, are some markets provided with new sites for relocation while others are not? Why are some forced to close down for good, while others are allowed to develop new shopping centers?

A vivid example is the situation surrounding the withdrawal of markets from the premises of sports complexes.

Before the market in Luzhniki was closed down in 2002 its owners were provided with a site in the vicinity where they were allowed to build new booths. The CSKA market was offered a vacant property occupied earlier by an Aeroflot booking office while Dynamo was moved to a 6,000-square-meter property on Teatralnaya Alley, where several companies already had 49-year tenancies.

In 2003, Felix Organov, commercial director with the firm Petrovsky Park 21st Century – the management company in charge of the Dynamo market, said: “We are in complete ruin. We had too much faith in city hall’s promises to allot land for the development of a shopping mall.”

More often than not, the authorities close down smaller markets while large ones can count on redevelopment. For example, the site earlier occupied by the Petrovsko-Razumovsky market has been used for the development of the TIAS mall, a market in Biberevo has given way to the Million Melochei shopping center, and the Kashirsky building materials market has been redeveloped as Kashirsky Dvor.

Some of them, as was the case with Gorbushkin Dvor or the above-mentioned Luzhniki and CSKA markets, had to be provided with a new location first.

Each month, 2-3 new large shopping malls with a space of 15,000 to 70,000 square meters open in the city, according to the city’s Consumer Market and Services Department.

Personae Non Grata

Moscow city hall’s policy towards open-air markets has not always been so tough. Only last year Malyshkov said: “For a considerable amount of Muscovites procuring products at those markets is an essential necessity.” It should be noted here that the Moscow government has always showed special concern about farm markets. Over the past 24 months Vladimir Malyshkov has reiterated his pledge to preserve all such sites in the city.

The city has plans to privatize some of them but, as the head of the Consumer Market and Services Department has promised, the new owners will be obliged to use the acquired sites for selling agricultural produce for the following 49 years.

City hall is also considering further development of what it calls inter-regional markets, operated jointly by the capital and the administration of the province that will supply the farm produce. An example is the Kaluzhsky shopping center.

Specialized markets – like those selling construction materials, spare car parts, gardening utensils, etc. – will most likely be preserved, as well. “What is the point of bringing construction materials or used cars under the roof of a shopping mall,” the official said. The landmark Izmailovo open-air art market, which recently reopened after a fire, will also continue its work.

The fate of some markets still remains undecided. It is unclear what will befall the Cherkizovo market. In 1999, the Moscow government ordered the market to vacate its territory. The city planned to cancel the tenancy and to use the vacated site to build a section of the Fourth Ring Road.

As Malls Rise

The development of shopping malls on the sites of former marketplaces brings about many changes for the buyers and tenants, as well as the landlords.

Buyers have to put up with higher prices. “No matter how eager we are to eradicate ‘uncivilized’ trade, prices there are lower and people go there,” Vladimir Malyshkov said, admitting that once markets are moved into malls prices will inevitably grow.

“At the same time, there will be no shortage of shopping space because while markets close down we see an increase in retail properties in modern stores of all formats – hypermarkets, supermarkets, discounters, etc.,” says Pavel Mikhailov, senior marketing manager at Sedmoi Kontinent retail chain. The growing supply creates favorable conditions for the development, first and foremost, of economy class chains, such as Pyaterochka, Kopeika, Deshevo, etc.

Liquidation of about 100 “uncivilized” markets will result in emergence of a large number of homeless retail operators, says Yulia Nikulicheva. “Retail centers do not have enough space to take them in,” she adds. “Besides, most malls would not welcome non-professional tenants who are unable to live up to the image.”

Rental rates at shopping malls do not scare off small market operators because usually the rents there are lower than at marketplaces. “We have compared rates at Atrium, Mega and other retail centers with those at marketplaces where they have proved to be much higher than in professional centers,” Nikulicheva says.

Mikhail Gets, head of the commercial real estate department at Blackwood, says that about 10% of the space vacated after the closure of 100 markets can be used for the development of retail centers. As a result, in several years from now the supply may increase by more than 500,000 square meters.

Shopping centers raised on the sites of marketplaces are likely to face a drop in sales. Markets are popular destinations where people go regularly, while a retail center represents a new format, sometimes at a new location. Besides, few market operators have enough knowledge and expertise to transform a market into a state-of-the-art shopping mall.

“A development cycle in Russia takes at least two to three years and requires professionalism, which is extremely rare,” Anna Shiryayeva says. “That is why city hall’s idea may result in a considerable number of uncompleted developments, or completed but unprofessional, ineffective and even loss-making retail properties. The properties that now emerge instead of markets, such as, for example, the Cherkizovo retail center or Almiral, are of dubious quality.”

Market owners, according to Jones Lang LaSalle, will have to splash out on liquidation and new development, at $800-1,500 per square meter in the case of a modern quality mall. In most cases, however, the new developments are the same old markets, but with a roof.

Retail operators are taking notice of the ever-growing number of shopping centers. They will have to step up their efforts to retain their customers. On the other hand, it is quite likely that the new centers will attract retail chains.