Guiding Lines: Period of Puberty

At the end of November at the Retail in Russia - 2007 conference, organized by Vedomosti, participants discussed the rapid development of chains, especially grocery retail. And in September of this year market participants were already talking about the problem of the serious shortage of staff in the field.

Grocery retail

Sellers of groceries say that their segment of the market is the most attractive for investment. Free shopping premises in Moscow, St. Petersburg and other million population cities are in great demand. Market players are trying to develop “on foreign land.” But in trying to develop distant land they come across a whole series of problems. Representatives of chains, on the one hand, report success and growing profits, and on the other say that it is only easy to work in their own region. Unfortunately, cities are not plastercine. In the largest cities of the country the further the free land for construction, the bigger the deficit. In connection to this the road to the regions looks the most logical. A large national player comes, constructs a building for itself and provides local residents with jobs and consumer goods. But, as practice shows, aliens are not always welcome in the regions. Vice president and director for development at Vester group Mikhail Romanenko, speaking at the conference, approves that each region is a separate state. And chairman of the board and general director of Lenta Sergei Yushchenko says that the concept of a "region" does not mean an agricultural province. The regions, in his opinion, represent huge megapolis’ divided by distance. When Englishmen started to develop the New World they were sure there was nobody else. But there were Indians who appeared to be not happy at all about the intrusion, the speaker told as a parallel. For example, according to him, when a large national chain started to expand in Siberia its representatives were sure that the market was not taken up. But it turned out that local players who were against the new competitors operated there.

The situation with the influence of the authorities in the regions, in the opinion of the conference participants, is reminiscent of a communal apartment: there are several proprietors, but they are not friends with each other. And although mayors and governors love retail, all the represented retailers unanimously said that this love spreads mainly to local chains. And the first obstacle a national chain will meet, having decided to develop in any new region, is the opposition of local players with the active support of officials.

Regional players also have many problems. It is especially hard for small market participants. And they openly ask for help. They still actively create public associations based on the principles of equal partnership to survive in the market and protect themselves from unfriendly takeovers. For example, the System of United Purchases (Trade-Purchasing System). Or the recently created Union of Independent Chains of Russia, a noncommercial organization uniting regional grocery chains with a turnover of up to $200 million a year and setting as its goal the development of independent retail chains across the whole territory of Russia.

Among the main tasks of the union are representing the interests of chains in authority bodies, maintaining the growth of profit and capitalization of its participants, banning price discrimination, and realizing a uniform policy in the field of purchases and management. Members of the union are assured that only together can they stand against larger and more aggressive players, and also raider attacks and unfriendly acquisition.

But nevertheless retail is growing. Under some forecasts, in the next five years it will grow 21 per cent. However, even the multimillion annual turnover of the five largest players (Metro, X5 Retail Group, etc.) has only about 6 per cent of the market. According to Deutsche UFG and Renaissance Capital, in 2006 the total turnover from grocery retail in Russia totaled approximately $300 billion. According to the same sources, no more than $20 billion came from the large retailers. So how and through who does the rest of the money come from?

The participants of the conference concur in opinion: the problem of regional players is obvious - they simply are not able to work outside the regions. Therefore, they grow within their limits and then stop. Some retailers need serious money for development, but they don’t have it. Theoretically, of course, it is possible to attract extra funds, but this is fraught with unpleasant consequences if it is unsuccessful.

You want to eat, but there is nothing.

Commercial real estate consultants say that the growing Russian retail market obviously does not have the areas, and appetites of businessmen, grow. But direct investment funds do not hasten to distribute money. Oleg Tsarkov, managing partner of direct investment fund Renova Capital, explains that investors are guided by the quality of the companies-borrowers. For example, having calculated the risks, the fund has made an investment in a grocery chain in Novosibirsk. And Renova Capital is quite happy with these investments. However, many announced projects in general seem like a bubble – they don’t get realized for different reasons, Maxim Gasiev, regional director of the trade real estate department at Colliers International, says. And only Tom Blackwell, senior vice president and managing director of PBN Moscow, explained how to enter the international market and get money for development from investors. According to him, if you correctly build a communication strategy, everything will turn out ok. "You should not underestimate publications in the press, it is a powerful tool," admonished Blackwell. Foreign investors will undoubtedly read articles and give money, he said confidently. However, listeners reacted to his speech rather languidly and did not ask any questions at the end of the presentation. Despite the positive statements of the foreign expert that "everything is fine and will be even better," apparently, those present did not believe him.