Money-Growing: Little Ones Always Suffer

Colliers International reports that there are 47 professional shopping centers in Moscow today, measuring a total of approximately 2.3 million square meters, while the unsatisfied demand, according to Becar Commercial Properties’ estimates, exceeded at the end of the 1st half of 2006 1.5 million square meters, i.e. the sector is still short of retail space.

In their surveys property analysts usually address prime retail centers, without taking into consideration complexes operating on city outskirts or convenience stores. Retail outlets are distributed unevenly across the capital. “While central districts show the signs of glut given high density of placement of retail stores there, most commuter areas remain underdeveloped. In line with the Moscow retail real estate index, the Central Administrative Orkug [district] has already reached the level of Western European cities, with 1,100sqm per 1,000 residents, whereas the development of shops in eastern and southeastern parts of the city (East and Southeast administrative districts) proceeds very slowly,” analysts at NAI Global report. The Moscow committee for architecture reports that the capital has at least 608 problem zones where it is necessary to launch shops and services companies, measuring no fewer than 1.2 million square meters.

Officials Vs. Vendors

The city hall’s target-oriented plan for development of consumer markets and services (Order of the Moscow government No. 647, of August 29, 2006) sets a priority on promoting competitive environment in that field. That goal is to be achieved, first and foremost, by building large retail properties and boosting development of a network of small retail stores – the so-called one-step-away shops or convenience stores, with emphasis being placed on problem zones, i.e. areas short of retail outlets.

The problems of placement of independent non-chain shops and pavilions are closely connected with measures to combat sale of counterfeit merchandise, regulate alcohol turnover and streamline the sale of gene-modified foods. City officials are convinced that such products are distributed mainly through a network of street booths and stalls.

Speaking at a recent session of the city hall the mayor of Moscow Yuri Luzhkov gave a highly negative assessment of chaotic market trade, saying that there was no place in the capital for street vendors in such quantities. The city authorities have long been pondering on measures to streamline small retail trade. More than a hundred of open-air markets were removed from the streets; the government many times called for reducing the number of booths and stalls in the city.

Tatiana Shkunova, deputy head of the consumer markets department in charge of municipal programs and small retail trade, recalls that in the years 1994 to 1995 the number of street booths alone in Moscow exceeded 10,000.

“Then, the mayor issued a special decree ordering to reduce their number by half,” she says. “Orders to the effect were issued to district administrations and many booths were closed. Two years ago, at the request of the Russian Consumer Rights Protection Inspectorate (Rospotrebnadzor, the body overseeing commodity markets is the Russia), the government decided to re-profile or close down stalls selling doner kebabs.”

In April of this year one more decree was issued directly concerning street booths, titled “On measures to streamline placement of small retail outlets on the territory of the city of Moscow” (No. 274, of April 25, 2006). In accordance with that decree, effective Jan. 1, 2007, operators of mobile retail outlets are to be awarded spots across the city at tenders.

To that end, prefectures (or district administrations) and other government bodies are to carry out an inventory of all booths and freestanding pavilions and to decide “on their further operation and extension of leases to plots of land beneath them.” In each case, the authorities are to proceed from “observance of requirements pertaining to the use, placement and outward appearance of facilities.” Shkunova says that the number of such properties must drop by 20% each year. For example, as soon as currently effective leases expire the authorities will remove all booths and pavilions from public transport stations and the 10-meter zone around those, with the exception of booths selling tickets and bus stop shops.

Moscow is not the only Russian city where an offensive against street stalls has been launched. For example, in late 2005, after Rospotrebnadzor had probed approximately 1,500 booths, as many as 250 units were closed down immediately in St. Petersburg over numerous violations detected in their operations, St. Petersburg’s governor Valentina Matviyenko said. Local news agencies reported that St. Petersburgers welcomed the government’s initiative, speaking out against “likening [of St. Petersburg] to provincial towns where you can easily buy a bottle of counterfeit vodka at any booth, drink it on spot and fall asleep dead drunk” (citing Matviyenko).

Authorities in Nizhny Novgorod came up with a plan for development of a marketplace network with a view to streamline operations in the sector and make it more civilized. In early 2006 mayor Vadim Bulavinov signed two decrees regulating placement of retail units across the city. The city government held talks with operators of retail sites on measures to put marketplaces in good order and equip them with modern amenities. Operators of the total of 29 markets and shopping sites where trade was sanctioned by the government were ordered to undergo a certification procedure and observe sanitary and safety provisions. Owners of vending stalls who failed to comply lost their jobs.

Dmitry Zotov, general director at the company Torgovy Kvartal, believes that their incorporation in large shopping centers is possible only provided they meet requirements set by mall developers, their concepts conform to that of the mall, they operate in a chain format, are financially stable and enjoy a good reputation.

Vendors and Business

In Moscow, owners of fixed stalls operate their stores under lease agreements signed for a period of 3 to 5 years. A term of five years is the limit for small vendors. Yulia Yerdyakova, leading expert at the land-use department, says the government has no precise data as to the total size of land currently occupied by small retailers, nor to the volume of budget revenues from leases held by booth operators.

“Earlier, booth operators were charged higher for their plots,” Yerdyakova says. “Spots beneath pavilions and slot machines were let at base rates of 900,000 rubles per 1sqm per year. For comparison: base rates charged for land beneath shopping centers stood at 216,000 per 1sqm in those days.” But since street booths occupy 4 to 6sqm on average those charges were not burdensome. Today, rates are calculated proceeding from the cadastre value of land and a variety of factors, depending on the profile of an enterprise.

Marat Manasyan, general director at F&G capital, notes that booth operators are among the most generous tenants in Moscow. “Their properties are small in size, excellently located and sell fast-moving merchandise stimulating impulse purchases. Most sell mobile phones and various payment cards, tobacco and alcohol, fruit and vegetables, and snacks. Fast-food enterprises account for quite a share of that market, ranging from chain outlets (Kroshka-Kartoshka) to independent stores (various booths selling fried chicken, for example,” the expert explains.

The sale of snacks through a network of cafes on wheels is but one of the formats pursued by the chain of fast-food stores Kroshka-Kartoshka (serving baked potatoes with salad fillings), says Mikhail Kudryavtsev, marketing director of the company. “Kroshka-Kartoshka runs over 100 mobile cafes; the total quantity of outlets has remained practically unchanged since 2005. Most of them are operating at all key metro stations,” Kudryavtsev says. “The chain is expanding by opening units in food courts (the company operates stores practically in all major shopping centers) and freestanding pavilions. With fast-food market growing we seek to establish our presence in all locations where favorable lease opportunities are available.”

Kudryavtsev puts the share of chain operators in small retail industry approximately at 50%. The rest are non-brand retail stores, he says adding that Kroshka-Kartoshka back the government’s offensive against them. “Such booths undermine reputation of outdoor fast-food industry on the whole, it is hard to monitor observance of all sanitary regulations there, sometimes their owners simply cannot afford such checks,” Kudryavtsev notes.

“Elimination of such booths is brought about by development of the market economy and consumer demand. Today the buyer seeks extra benefits in the form of good service, guarantees of quality and cleanness. We may say that the market itself constantly sets new requirements, which only the strongest of the operators are able to meet.”

The new laws governing small retail trade have prompted many operators to examine alternative locations. First and foremost, they focus on neighboring residential and administrative buildings, retail real estate consultants report. “Earlier it was not a problem to find a first-floor property, measuring 20 to 40 square meters, in such buildings, especially those situated next to metro stations. Today, most of them are occupied,” says Manasyan. “Earlier, owners of shop pavilions slated for dismantling were purchasing apartments on first floors of residential blocks near metro stations, had them reclassified as non-residential, obtained permission to build a separate entrance and put in extra power capacity. Given the cost of all those operations (which stands at $300,000 to $500,000), it is possible to assume that their takings are quite high, if the risk of losing them forces operators to make investments that huge.” It is clear that all booths cannot be removed from the city streets in an instant, no matter how hard officials try.

“Upon expiry of a lease [of the plot of land beneath a booth] the government bodies in charge will examine expediency of its extension,” Shkunova explains. “Booths operating with violations will be the first to be closed. Stores selling beer and cigarettes will not be favored, as well as stores operating in localities that abound with shops and retail centers. It is clear that newsstands and ice-cream booths will most likely survive, as Muscovites have got used to making such buys on the run, without entering a shop.”

Where Street Vendors Will Go

Vladlen Maximov, a representative of the union of market retail workers, believes that the main goal of the government’s crackdown on “uncivilized” trade launched years ago is to help major retail chain operators and smaller shops – the so-called convenience stores, establish a foothold on the city market.

According to approximate calculations of the commercial real estate and investment department of the NAI Global company, the total size of small shopping pavilions alone amounts to 750,000 to 800,000sqm in Moscow. “Considering that the majority of such properties are freestanding single-storied buildings,” says the department head Vladimir Zhuravlyov, “dismantling those pavilions will vacate space for at least 1.5 to 2 million square meters of new shops.”

Other experts believe that the volume of such space may be even higher. For example, the company Tashir plans a new shopping center on the site of a chaotic marketplace near the Universitet (University) train station, to be developed in cooperation with Stinkom Group. Booths and covered stalls are to be replaced with a top-end shopping mall that will measure 50,000sqm. The project is undergoes necessary licensing procedures; the developer is preparing the site for construction works.

Construction of an even more ambitious project by Tashir – a 260,000-square-meter mall – has already begun on the site formerly occupied by Dmitrovsky wholesale foodstuffs market, at the intersection of the Moscow outer ring road and Dmitrovskoye Shosse. The complex will occupy a territory of 10 hectares, 5 ha of which were previously covered with over 600 market stalls, Vitaly Efimkin, head of investment projects at Tashir, reports. In the future the retail park will expand to measure 20 hectares.

“Many owners of street pavilions have tried to join the Moscow city hall’s projects for development of convenience stores,” Manasyan says. “For example, in the South District (the first district of Moscow where sites for construction of one-step-away stores were allotted) some investors garnered 10 to 20 plots “per head”.

The expert offers the following explanation to this: “Before launching the program for development of convenience stores, the government announced its plans to pull down pavilions, which created quite a stir on the market and pushed up the demand for building plots assigned for the purpose.”

“In Moscow there are several entrepreneurs who own chains of booths, with the number of outlets ranging from 50 to 400,” Manasyan continues. “Elimination of those outlets will signify a demise of those companies. That is why today some of them pull down their booths on their own to replace them with capital buildings - the so-called mini-markets next to metro stations – which may scarcely be referred to as shopping centers.

“In the essence, those are the same pavilions united under the same roof, operated by the same vendors. Thus, booth owners are minimizing the risk of losing tenants after pavilions are dismantled, granting them a prior right of tenancy in a newly raised building. The development of shopping centers in micro-districts [on city outskirts and in commuter areas] is, undoubtedly, on the rise; there are cases where several owners of stalls and booths operating near metro stations agreed on joint construction of small retail centers and erected new properties at their own expense or with borrowed funds, so as not to stay overboard once their outlets are pulled down.”

When asked whereto booth vendors would move their operations, Ilya Kuznetsov, senior consultant at research and consulting department of the company Magazin Magazinov, suggested that they will seek new spots similar to the sites they occupied before. “Complexes operating in micro-districts and shopping centers in general are not able to substitute booths entirely, as those two sectors differ radically in the type of consumption,” Kuznetsov answers.

“Street vendors will generate demand for properties in capital buildings that meet the following requirements: transit flow, quick purchases and spot locations. Rents for properties, which may appeal to booth operators who re-profile their businesses these days, are quite high already. Busy areas are popular with most retailers, and once a new group of tenants joins in the demand will only intensify. As offers of street outlets are quite scarce it is obvious that the rates will grow.”

Irina Kirsanova, head of marketing at Astera Oncor, assumes that the majority of entrepreneurs, whose booths are to be closed, will simply suspend operations. “Booth vendors occupy small spots, whereas properties of the same size in shopping centers are the most expensive, being placed in the most favorable locations and attracting operators of luxury goods of exquisite quality,” Kirsanova says. “Needless to say that goods sold in metro passages cannot compete with their merchandise. Besides, booth operators themselves realize that even if they agree to pay high rents and move to a retail center their attendance rates will not be as high as in the areas next to metro stations or in underground passages.”

“If a booth is closed that retail outlet will most likely be lost. Small entrepreneurs are unlikely to move anywhere, for example, into a retail center,” Maximov agrees.