Russia: A hard market to crack
on the continent, it will be a tough market for western European
food processors to crack.
The industry is still evolving very rapidly making it difficult for food processors to assess the trends, according to an online report published today (29 July) by Standard & Poors.
The market is also still very fragmented, non-competitive and Russia's laws make it difficult for foreign firms to get real estate space and land titles, S&P stated.
But the potential is evident as Russians increase their spending on food and groceries.
By 2020, Russia will take over from France and Germany by becoming the largest food and grocery market in Europe.
The Russia market will be worth €375bn by that time, rising from the current €134bn, IGD Research estimates (see the separate story on the European retail market in today's edition of FoodProductionDaily.com).
Overall the top five food retailers are responsible for just five per cent of sales volumes, S&P stated in its report.
The country's food retail market is divided between locally-owned discounters and mainly foreign-owned supermarkets and hypermarkets according to figures provided by S&P.
International firms face high entry barriers due to complicated title registration procedures in Russia.
Discounters rule the market keeping margins low for their suppliers who must follow the trend.
The top three retailers in the country, Pyaterochka, Metro and Tander are discounters.
Pyaterochka is experiencing 50 per cent sales growth year-on-year, while Metro is growing by 61 per cent.
Tander had 45 per cent sales growth, according to S&P.
Although prominent international retail groups like Groupe Auchan have a strong presence in hypermarket format, they are weak in discounter format because there are barriers to entry resulting from cumbersome regulations in the real-estate market.
A significant part of Russia's overall retail food market is still dominated by street markets, more so in the regions than in Moscow.
"The discounter segment is the most promising in terms of growth potential because the average income in the country, particularly in the regions, remains fairly modest overall," S&P stated.
"Relatively few people own a car the rest rely more on frequent shopping 'round the corner'.
Unlike many European countries, Russia has no regulations limiting retail operating hours--only the number of hours worked by a particular employee is limited."
Discounters such as OOO Torgovy Dom Kopeyka, number 10 in the country, are therefore set to benefit from the ongoing increase in organised retail.
Customers, particularly budget-conscious ones, will increasingly switch from street markets, kiosks, and old-style groceries to discount retailers close to their homes, S&P stated.
Instead of battling for customers, retailers in Moscow instead vie against each other more for suitable real estate to open their stores than for customers.
Large shopping malls have begun to emerge in the city, but they mainly target people who own a car and would be willing to use a significant part of their weekend time for shopping.
Currently average lease terms are advantageous, with a flat price fixed for terms as long as six to seven years.
However the price for each new square meter is increasing, which could help put a squeeze on margins.
The average price per square meter in the Moscow city is $1,500, while in the surrounding Moscow Oblast $1,300 and in the regions about $1,000.
The lease cost per square meter is about $450 in Moscow, $250-$300 in the Moscow Oblast, and $200 in the regions.
The overall average total cost per square meter is about $2,130, S&P stated.
"Another operational challenge is the limited availability of competent management and personnel in the regions combined with the challenge of negotiations with regional administrations," S&P stated.
Breakdown Of Top-Ten Leading Russian Retailers Ranking Food retailer Revenues (mil. $) Year-on-year growth (%) Format Regions 1 Pyaterochka 1,425 50 Discounter National 2 Metro 1,059 61 Cash and carry National 3
Tander 894 45 Discounter Southern 4 Perekrestok 771 72
Supermarket National 5 Auchan 640 61 Hypermarket Central 6 Seventh Continent 600 46 Supermarket Central 7 Ramstore 550 22
Supermarket Central 8 Diksi 490 60 Discounter North west 9 Lenta 476 55 Hypermarket North-west 10 Kopeyka 415 70 Discounter Central Table provided by Standard & Poors.