Money Growing: One Step Forward, Two Steps Back

Rapid development of retail trade has begun. An active phase of development of the market started at the beginning of 2000. In parallel with the development of large chains, hypermarkets and supermarkets in Moscow and other cities, small shops occupying areas from 100-500 sq.m with counter type trade and a Produkty signboard have existed and continue to exist. Such shops are still tenderly called "our" or "next door", and local residents know all the cashiers by sight and chat about local news, criticize the careless government or share family problems.

- The army will take my son away in a week...

- My back has been hurting all day...

- Did you know Lydia Petrovny’s grandson was born?...

- Oh, again prices have gone up - how can I live?...

The cashiers have to have such chit chat every day, but it is precisely because of this that the format is so popular. In fact often people tired of the impersonality and indifference of cashiers at supermarkets, come into a local shop in search of dialogue. With local shops, regular customers can always ask for the best products be put aside for them or to put some products “on a tab”. They know they will get it back. In Moscow such shops don’t occupy a dominating share of the market in terms of sales volumes due to the rapid development of chains, but in some regions the share of “local” shops in the structure of sales of so-called civilized retail trade reaches up to 80 per cent. As a whole the Russian retail market is not very consolidated: unlike the markets of developed countries the share of civilized retail trade is no more than 20 per cent of the market and 10 leading chains occupy only 13 per cent of the market. All this together creates ground for the prosperity of small formats. But can they survive in the tough competitive struggle that will occur in the retail trade segment? Especially as large chains with enormous experience and financial resources are encroaching upon the segment of local shops.

Shop every day

As a rule, local shops are located in apartment buildings or separately standing buildings in the center of residential areas, to be as close as possible to the consumer. "Local shops are called upon to satisfy the daily needs of the population for goods of prime demand (bread, milk, etc),” says Andrei Dmitriyev, deputy director of the consulting department at Penny Lane Realty. “In some areas of the city there is such a situation where there is a hypermarket in a “local” place. This, in turn, incurs the function of satisfying consumers. But there are places where large shops are quite a significant distance from housing. In such situations small shops, capable of occupying areas up to 300-500 sq.m in non-residential premises of an apartment building or separately standing building among a housing area, from the point of view of consumers are more attractive. And Kira Butba, head of the commercial real estate department at Vesco Consulting notes that the specificity of the format of local shops is that they offer a much smaller range of goods than in a hypermarket or supermarket: "Their range rarely exceeds 1,000 products, and the area of shop, accordingly, is small – on average from 300 to 500 sq.m." And local shops do not need to strive to have a wide assortment – it is more likely to be the contrary, to concentrate on the originality of products and their daily demand. "For local shops a significant share of fresh products, including fresh meat is characteristic, and a quite wide range of product categories although within each category the goods may be limited to the most popular and demanded products," explains Denis Shirikov, head of the division on work with retail trade enterprises at Nielsen Russia. For local shops a good way of maintaining profitability can become the development of additional services for customers, for example mobile phone and internet top-up payment service. "Logical development would be to try to provide customers the maximum convenience while in such shops of a wide spectrum of household services (dry-cleaning, photo development, and sometimes – a cafeteria),” continues Shirikov. One example of overlapping local shops with additional services is the project of ShagMag headed by Metso Igityan. His company has concentrated on the construction of shopping-household complexes that can be considered “local” under the ShagMag brand. The first complex of the chain appeared in 2004 near Kolomenskaya metro station, and the owner of the company has promised to construct about 30 such premises in the South Administrative District. The project has obtained the support of the government of Moscow, and Mayor Yury Luzhkov even came to the opening of the first ShagMag store. A feature of Igityan’s concept is that on the 2,000 sq.m territory of the complex there is not only a “local” shop, but also a beauty salon, a cobblers, a cafe, a photographic studio, a dry-cleaners and other necessary household enterprises. While the construction of new premises has stopped (Igityan does not explained the reasons for this decision), the format has received heightened interest from experts, as such complexes would allow inhabitants of specific areas to make purchases in one place and solve all daily household problems.

Beyond the competition

The successful development of local shops is also connected with the fact that they do not yet feel competition from large chains. “Local shops to create serious competition for large shopping premises because of the distinctions of the concept,” says Vladimir Zhuravlyov, sales manager at NAI Russia. “The purpose of a trip to a supermarket or a hypermarket is to buy products for a week. Therefore you usually go there by car. In connection with this large shops are located n places that have good transport accessibility and the presence of housing estates in the district is not an obligatory factor for their successful development." Local shops, according to him, on the contrary, assume that the buyer will come on foot and will buy a small amount of goods which he or she can carry. "A difference is also that local shops are usually visited daily by the same people. Not everyone is prepared to travel far in the car to do their shopping. Some people in general prefer to make purchases only in local shops so that they don’t spend a lot of time wandering around difficultly organized and extensive shopping areas," Zhuravlyov adds. "Though often the audience of local shops and supermarkets cross, there is no serious competition between them,” agrees Olga Shirokova, head of the consulting and analytics department at Blackwood. “Large supermarkets and hypermarkets as a rule are located within the structure of a shopping center, and are directed at buyers who are making many purchases for a certain period of time (often for a week) in parallel with shopping and entertainment. At the same time local shops are aimed at satisfying the needs of inhabitants of nearby residential complexes for goods of daily demand, with high turnover - bread, milk, etc. The share of non-food products in such shops is significantly lower in comparison with larger formats." "Local shops act as an addition to large shopping complexes, occupying a certain niche in the market of the Moscow region, although competition does exist in this case," concludes Aydar Galeyev, director of the consulting and research department at Miel Commercial Real Estate.

Chain invasion

Nevertheless the segment of local shops has recently attracted not only small businessmen, but also large operators managing huge federal chains. In this segment already such chains as Mosmart (Mosmartik), Perekryostok (Mini-Perekryostok which is developing a franchise of X5 Retail Group), Magnet, Viktoriya (the Kvartal brand) and others have already come. The development of this format allows retailers to enter new highly competitive markets. For example, Viktoriya, controlled by Nikolai Vlasenko, entered the Moscow market through the opening of Kvartal shops and only after successfully mastering this concept has it started to build supermarkets. Oleg Bolychev’s Vester chain has taken a similar route, having opened in the capital several small supermarkets, and then constructed in the Moscow region two hypermarkets. With the help of the local shop format Sergey Galitskogo's Magnet chain has got a feel for the Moscow market and until recent times only developed in the regions. "Now local shops occupy a certain niche in the capital market, and for chain operators entering this segment acts as an opportunity to additionally expand and increase the number of buyers," says Galeyev. Besides the prices in local shops, as a rule are slightly higher than in discounters and hypermarkets allowing retailers to earn more. And although the profit of such shops is low, the expenditures of opening a local shop are also insignificant.

"With rather low expenditures required to open such a shop, the profit it makes is slightly less than the majority of other formats. Business here is done not on turnover, as with hypermarkets, but on the trading margin. Usually prices in local shops are a little higher," says Zhuravlyov. "In many respects this segment is attractive because of the low expenses to open a shop. And retailers, having to face a growth in competition in the supermarket and hypermarket sectors, are starting to look narrowly at local shops as here the level of competition is lower and this market looks quite promising,” agrees Butba.

According to Dmitriyev, the interest in this format is increasing due to the policy of administrations of cities which is directed at satisfying the population in terms of food and non-food sectors, protection of people in need and those unprotected in society. Thus, in Moscow and St. Petersburg local authorities have allocated considerable financial resources for the development of local and social shops. In Moscow this program is developing, while in St. Petersburg local operators complain that money is going nowhere: in the three years that the program has been carried out no more than five local shops have opened.

However, there are chains that are not connected with large retail operators that have entered the local shop segment. The largest player is the Magnolia chain which has more than 140 shops. Then there are such operators as Avoska, Samokhval, ABK, and also a special project – so-called remote retail chain Utkonos - that is connected with the government of Moscow and uses lots of preferences. A hit of this format is that customers do their shopping in the morning on their way to work, but pick up the purchases and pay for them on their way home (by the way, the chain is called Utkonos (duck-bill) not in honour of the rare Australian mammal, but because to process an order a device called UTK is used).

"At the moment none of these chains have reached the size that would allow them to declare themselves serious competition to their "senior" counterparts in the business, but this does not mean that it won’t happen in the near future, especially with the construction of a centralized system of delivery," Shirikov believes. It is still difficult to say who will be the winner in the fight in the local shop format - large federal chains or specialized chain projects. Both have advantages and disadvantages. However, large retailers may quickly tire of dealing with small formats and leave the market, while specialized chains and private enterprises will remain. There are successful examples of the construction of local shop chains. The most well known player of this market is American chain 7-Eleven, founded in 1927 in Dallas, which has 30,000 shops worldwide. The chain has no supermarkets or hypermarkets; only small local shops with an area of no more than 500 sq.m. A couple of years ago there was a rumour that this chain was going to expand its presence and enter the Russian market. While these rumours have not proved to be true, the ground for the development of such a format in Russia is most favorable.

Therefore if Moscow local shop chains do not want to lose business after the arrival of the powerful American competitor, they should now start thinking about more dynamic development. But even if 7-Eleven does come to Russia, it will be good for everyone - consumers will have a choice, and retailers will be able to adopt the western competitor’s technology of building a global chain.