Wal-Mart expansion should focus on Russia - report

- Last updated on GMT

Related tags: Igd, Wal-mart, Hypermarket, Russia

Wal-Mart is the world's largest retail group, more than twice the
size of its nearest rival Carrefour, but until recently it was
virtually unknown outside North America. Recent moves into Latin
America and Europe, however, have been widely seen as the start of
a major expansion strategy - and Russia should feature prominently
on the list, suggests a new report.

Russia is becoming an increasingly attractive market for western retail groups, but the pace of development has been dramatically slower than in other parts of eastern Europe, with just a handful of established players already active there, notably Germany's Metro, Turkey's Ramstore and France's Auchan.

But as the Russian consumer market continues to grow, helped by decreasing inflation and consistent growth in GDP, as well as rising personal and disposable income levels, declining unemployment and developing western lifestyles, more companies are expected to take an interest, making market entry within the next year vital for Wal-Mart if it is to stay ahead of the competition, suggests a new report from British grocery think-tank, IGD.

"IGD estimates that the Russian market is worth around €108.8 billion, making it the fifth largest market in Europe, behind Germany, France, the UK and Italy,"​ said the IGD chief executive Joanne Denney-Finch, "It is a developing market that offers large-scale growth opportunities, and as such fits with one of Wal-Mart's aims in its international expansion strategy - to target the largest markets."

According to IGD estimates, there are around 1,700 modern food retail outlets in Russia, accounting for just 8.3 per cent of total grocery sales, and the question, then, is perhaps not whether Wal-Mart will enter the Russian market but rather how.

Hypermarkets such as those operated by Wal-Mart were originally limited to Moscow and St Petersburg, the only cities where the population was considered high enough to justify investment, but with land prices rising rapidly there, other major regional cities are now also becoming popular, and companies seeking to invest there are likely to want to do so quickly before land costs go the same way.

Land in Russia is also taxed by the local authorities, and prices have risen dramatically over the last few years. Duties in central Moscow are as high as $2,000 a month per square metre, and as a result, some companies (such as Auchan) have positioned their stores outside the city limits. Here it is the Moscow regional (rather than municipal) authorities which levy duties, and the rates are a far more reasonable $880 per square metre.

With such a scarcity of cheap land, local companies have been particularly keen to snap up sites in anticipation of interest from foreign players. In the discount sector, for example, companies such as Pyaterochka and Kopeika have expanded rapidly in anticipation of the potential entry of German discounter Lidl, expanding from its base in Scandinavia.

This phenomenon is not limited to the discount sector, however, and Wal-Mart needs to act quickly to head off competition from other local players such as Magnit, Perekriostok, and Sedmoy Continent, let alone from Auchan, Metro or Ramstore.

Wal-Mart's options include the acquisition of a local player - IGD suggests Okay or Lenta as possible targets, though both are present predominantly in St Petersburg - or joining forces with a consortium of local investors or retailers to develop its own chain of stores there.

Given the complexity of the Russian bureaucratic system, the latter option might help the US group navigate its way more effectively. However, the situation is changing rapidly as the legislators realise that facilitating retail expansion through simpler rules is likely to lead to greater revenues in the future: in short, more stores pay more taxes.

Another option for Wal-Mart suggested by IGD is the takeover of an international group already present in Russia, with Auchan the most likely target, not least because that would give the US giant a solid footing in three other core European markets (France, Spain and Italy) as well as in other central and eastern European countries such as Poland and Hungary.

However it decides to enter Russia - should it decide that at all - the going will not be easy, not even for a company the size of Wal-Mart. IGD points out that the retail market has developed faster than the infrastructure needed to support it, meaning that delivery reliability is poor.

Furthermore, the report suggests, productivity levels remain low - the concept of pay being related to performance remains alien to many Russian workers, IGD suggests - although this is expected to change rapidly as more players enter the market and employees understand what is expected of them.

Related topics: Market Trends

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