Guiding Lines: Retailers Turned Developers

In the summer of 2007 X5 is to launch construction of a new retail center in Samara, the working title of the new project is Ippodrom (“Hippodrome”). The choice of name is easy to explain. The company has secured a lease for a 3-ha plot near a local racecourse. The mall measuring a total of 30,000sqm will comprise 22,000sqm of shops. The chain Perekryostok, an anchor, is expected to take up 4,000 to 7,000sqm. The rest will be let to other retail companies. Design works are in full swing already; the project is estimated at $30 million. The center is slated to be finalized in 2008, whereupon X5 plans to launch 10 similar complexes in Moscow, Tver, Voronezh and Nizhny Novgorod. Also in 2008 the company plans to open a retail center is Zhulebino. The company explains its decision to launch construction by the lack of vacant retail space in those regions. But experts believe that one of the reasons developers take up development projects is their failures in franchising.

X Retail Group has failed to come to terms with its regional franchisees. For a long time the company had tried in vain to buy out all of the 46 Perekryostok outlets from its partner in Samara, the company Agrotorg-Samary. Moreover, the owner of Pyaterochka stores in Krasnodar, Vladimir Izmailov, plans to give up the costly license. All those factors have prompted the company to take up development projects, experts are convinced. Strictly speaking, other retail chains have already announced analogous plans before. For example, the chain of supermarkets Paterson said as early as in late 2005 that it planned to build 20 hypermarkets. But the planned properties, measuring less than 9,000sqm, were to be raised for the company's own use. The company explained its interest in the format by the need to speed up its regional expansion. But for some reason – either because it has failed to find suitable plots or it has given up the idea - the hypermarket chain was never launched and today Paterson continues to build self-service stores.

Experts believe that X5 Retail Group’s interest in development, on the other hand, agrees with the company's general strategy aimed at giving up franchise deals and launching own stores across the country. On the other hand, it reflects a new tendency as retail chains are becoming full-fledged participants of the real estate development market. Another fact that confirms that assumption is that the chain Perekryostok presented its plan to develop hypermarkets precisely a year ago. Then the company decided to establish a separate unit that would oversee property development projects. A merger with Pyaterochka that had been experiencing problems with its large-scale chain of franchise shops, only further fueled the company’s resolve to engage in construction. Now X 5 may solve the problems for both chains and to enhance its own capitalization. Apparently, this is exactly the reason why the company has decided not to confine itself to construction of hypermarkets alone and is also planning logistics projects in Nizhny Novgorod and Samara.