When it comes to the Russian food retail market, what seems clear is that an increasing number of the country’s consumers have more money to spend. As of 1 December 2007, the number of individual, high street investors on the Moscow stock exchange MICEX had reached 400,000 for the first time – double the figure less than 12 months before – while a recent poll commissioned by the exchange suggests there is a potential investor pool of some 5.9m among the Russian general public. “In a few years, the number of individual investors will be in the millions,” commented MICEX chief executive Alexe Rybnikov.
According to a study into the Russian retail market by Alexander Aginsky of Aginsky Consulting Group, Russia’s booming economy has changed the face of its retail sector during the past decade. “Citizen’s real incomes have doubled over the past six years and consumer demand is thriving,” says Mr Aginsky. “The flourishing Russian economy has given rise to a growing middle and upper class that has caused an explosion in all types of consumption.”
Compared with other major developing markets around the world, Russia remains far ahead in terms of its key economic indicators. At around US$14,700, the country’s per-capita income, estimated at purchasing power parity by the World Bank, is far above that of the world’s other big movers like Brazil (US$9,700), China (US$5,300) and India (US$2,700). In fact, its GDP is even higher than that of Turkey (US$12,900) and Mexico (US$12,800), Romania (US$11,400) and Bulgaria (US$11,300). Having rebuilt its wealth in the post-Yeltsin era largely from fuel and energy revenues, the focus is now on rebuilding infrastructure and generating a modern trading environment for the country’s economy to develop further.
The country’s economic growth since the financial crisis of 1998 has been consistent, averaging 7 per cent per annum, with GDP reaching US$2.076 trillion in 2007, up 8.1 per cent on the previous year. Despite a shrinking population, which is predicted to fall below 140m in the next couple of years, Russia has 12 cities with more than a million inhabitants. Average monthly salaries have grown too, from US$80 at the turn of the millennium to US$640 at the start of this year. Unemployment now stands at 6 per cent,
down from about 12.4 per cent in 1999.
As a result, Russia’s market for fast-moving consumer goods, including fresh fruits and vegetables, has been growing rapidly over the past few years, attracting new investment in retail chains and making the market far more evident on the radars of European suppliers. Many have been supplying the market for some time, often as a convenient ‘overflow’ alternative for product that didn’t quite meet the specifications of retailers in western Europe.
But as the opinions expressed in this month’s special feature on Russia (Eurofruit Magazine, September) appear to confirm, Russia is no longer a market that will readily accept second-class product. As a number of European exporters explain, Russian consumers are no longer willing to put up with the European Union’s leftovers. What’s more, the Russian authorities are becoming increasingly concerned about food safety and the quality of fruit and vegetables entering the country. Add political dynamics into the mix, and you have a market which is becoming harder and harder to enter, but more and more lucrative for those that tick all the right boxes.
Mehmet Ozler of ASM Fruit, which markets Turkish products including citrus to a number of Russian supermarket and hypermarket clients, says he has witnessed dramatic changes to the country’s retail landscape. “Living in Russia makes it easier to see the changes taking place here,” he says. “In Moscow, new retail chains are opening up constantly, and in smaller cities new marketplaces are opening as well as big retail chains. We can see that
people are consuming more as the wealth of the country is growing.”
Despite a noticeable cooling in relations between Russia and the west over the past couple of years, the market for investment in the Russian retail market continues to show a certain amount of positive development for foreign operators. Last month, Walmart, Carrefour, Finland’s Kesko and Croatia’s Agrokor Group were reported to be among the leading candidates vying to buy a controlling stake in Lenta, the largest hypermarket chain in Russia. According to Russian daily Vedomosti, the companies are competing to acquire 89 per cent of Lenta’s shares, in a potential sale which has been estimated to be worth €1.2bn, including €323m in debt.
Lenta currently operates a chain of some 31 hypermarkets in the country, 14 of which are located in the city of St Petersburg. The retailer recorded sales of €970m last year. Of the four companies said to be interested in acquiring Lenta, only Kesko already has a retail presence in the country in the shape of a St Petersburg-based chain of do-it-yourself stores, which it bought in 2004.
But entering the Russian market by no means straight-forward, particularly as Russia does red tape like no other country. “For investors moving into Russia, bureaucracy and corruption are amongst the most obvious problems,” says Milos Ryba, retail analyst for central and eastern Europe at Planet Retail, who also feels many foreign investors missed a valuable opportunity to develop their presence in Russia ten years ago. “After the economic crisis in 1998, many international players in the food sector left the country or filed plans to expand there. Domestic players used the absence of global companies during the following years to develop a strong position.”
German’s Metro Group and French retailer Auchan are currently the only two foreign companies in Russia’s top five food retailers, in stark contrast with other central and eastern European markets where western investment has been more evident. However, Mr Ryba believes this may be changing. “Foreign interest has increased again strongly in the last couple of years, forcing local players to react proactively,” he explains. “As a result, Moscow, St Petersburg and other cities are in the middle of an unprecedented investment
boom.”
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