Studies Eastern European Markets
Eastern European Markets
November 2007

Tauno Tiusanen
FOREIGN RETAILERS IN RUSSIA
LAPPEENRANTA UNIVERSITY OF TECHNOLOGY
Northern Dimension Research Centre
Publication 34

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Conclusions

In the second half of the 20th century, Western Europe experienced a long and strong boom. Especially in West Germany, the period of the reconstruction was called “economic miracle”. A very complicated process of economic integration took place in Western Europe at the same time. Increasing living standard and welfare attracted massive scale immigration in several countries of present-day EU area.

In the early days of the post-war period, supply of consumer goods was a problem in West European economies. Rationing of foodstuffs took place in many corners of the Old Continent. Thus, there was something, which is called “sellers’ market”. Whatever retailers had on their shelves was in high demand.

In the last quarter of the 20th century, the situation changed radically. Amid the economic boom, labour force became increasingly expensive in Western Europe. Manufacturing companies started looking for cheap production opportunities outside Europe, while retailers started restructuring the branch by erecting big shopping centres and supermarkets in outskirts of urban areas. “Buyers’ market” was established with mobile and wealthy clientele. “Big box” or “one-stop” shops became predominant in Western Europe, which basically copied the retailing model from the USA. In the 1990s, all markets in the rich part of the world were mature and became increasingly concentrated. Expenditure on food forms a decreasing proportion of total consumption squeezing food prices in a deflationary stage. Modern retailers thus offer a wide selection of food and non-food items in their one-stop big boxes.

In the consolidation process of retailing, price has become a crucial factor of competition. Big retailers can ask for volume discounts when buying from vendors. Fast moving consumer goods (FMCG) producers feel the pressure in price negotiations exercised by big supermarket chains.

In the saturated Western markets, there is rather little leeway for growth in the retail sector.

Therefore, big retail chains are, so to speak, forced to become international, when manufacturers have been doing it for decades. Retailers really must keep growing, in order to maintain and improve the volume discount weapon. The bigger the order from FMCG industry, the higher is the discount, at least potentially. At the same time, big retailers are Foreign Retailers in Russia forced to develop own (private) label products (offer cheap alternatives for branded goods).

No internationally active retailer can ignore price competition. In the Cold War era, the communist side of the Iron Curtain promised unique welfare for its citizens in the former Eastern Bloc and the former Soviet Union. At the same time, supply of consumer goods was neglected in central planning. State owned retailing outlets had empty shelves and dissatisfied clients. Disillusioned citizens caused the collapse of the communist system, which took place in remarkably peaceful manner in the turn of 1980s and 1990s.

In the early period of post-communism, there was a proliferation of small-scale retail outlets in each of the countries of the TE-region. Small retailers lacked the capital and expertise to modernise shops into western-style businesses.

Thus, transitional economies offered enormous opportunities for western retailers suffering from saturated traditional markets in the 1990s. The invasion of Western retail chains in TEs of Central Eastern Europe started as a trickle, but soon begun to resemble a flood with major companies from Western Europe entering the post-communist scene. Already in the turn of the century, many transitional economies were full of Western labels and modern shops run by international companies. The former Eastern Bloc changed visually in a very short period of time.

General instability in the post-Soviet Russia made Western companies reluctant to invest in retailing. Many foreign investors burnt their fingers in the financial crisis of 1998 in Russia.

Therefore, capitalist retailing revolution in Russia has taken more time, than in Central Eastern Europe.

In the early period of Russian transition local entrepreneurs started emulating western retailing models. Obviously, it was essential to acquire advantageous trading places to start with. The “two capital cities”, Moscow and St. Petersburg, were the most desired locations.

Concentration of purchasing power in these two metropolitan areas was obvious in the early period of transition. Modern formats of retailing started to appear in Russia – mainly owned by local capitalists. Early starters were able to skim the cream from the emerging market and accumulate capital for further expansion.

In 2005, only four retail chains had a turnover of over USD 1 billion in the Russian market of 144 million inhabitants. More than one third of Russian food retail is done in open markets, kiosks and pavilions. Over 40% of food is sold in traditional grocery shops. Modern Northern Dimension Research Centre – Tauno Tiusanen, Niina Malinen supermarkets and discounters have a market share of 10% each. Hypermarkets have a slice of 3% only of the food retailing.

These details show clearly that the post-Soviet retail revolution in Russia is far from complete. There are some 6 hypermarkets per one million inhabitants in Poland. The equivalent figure in Russia is 0,6. Therefore, the Russian retail sector still has enormous growth potential.

Metro is far the largest foreign player in the Russian retail game with an annual turnover of USD 1,8 billion. Auchan is far behind the German giant with an equivalent figure of USD 750 million. Ramstore (Turkey) is the third foreign competitor with USD 600 million sales in 2005.

In average, large retail chains in Russia increased their turnover by almost 50% in 2005. This high dynamism ought to attract newcomers into the branch, in which the estimated profit rate is somewhere between 15% and 30%. At the same time, it is maintained that risks in doing business in Russia are still high. However, expected strong growth of purchasing power combined with high profit margins in the Russian retail trade is likely to enhance international interest in the branch in the near future.

From the point of view of Russian consumers, it is advantageous to have more competition in retail trade. Prices will be affected by the maturing process of the retail sector. Really “hard discounters” are still missing in the Russian market.

It is said that IKEA is an icon of modern lifestyle. The basic business idea of the company is to offer nice and comfortable house interior decoration for everybody at affordable prices.

The core of IKEA’s international operations is retailing: own design is used in furniture and other items on sale, while supplies mainly come from contractees. IKEA has a global network of contract manufacturers, but a marginal amount of the merchandise comes from companyowned outlets.

Obviously, the big bulk of IKEA’s products are rather labour-intensive, and thus, suppliers are mainly located on emerging markets, TEs included. Cheap labour must be combined with advantageous retail prices, which are the most important marketing slogans in IKEA’s business strategy.

IKEA’s concept is ideal for the post-communist era with gloomy atmosphere and murky decoration of living environment; it is a delight for consumers to get access to modern house decoration items with rational design and at reasonable prices. IKEA is obviously one the best-known brands in the TE-region.

IKEA entered the Russian market relatively late. Therefore, it is understandable that the company is now conquering the Russian market with high inputs. From the Russian point of view it is important that IKEA’s local investment has a cumulative effect: not only retail should takes place, but also extensive orders of supplies from local manufacturers. Obviously, a considerable amount of IKEA-designed products manufactured in Russia is exported to IKEA’s international network of furniture shops.

The timing of IKEA’s entry into the Russian market seems to be optimal. In the first years of the 21st century, a broad middle class is emerging in Russia eager to improve its every-day living environment. It can be assumed that IKEA will expand its Russian operations rapidly.

According to the newspaper Helsingin Sanomat (June 7th, 2006), Wal-Mart is seriously interested in acquiring Lenta hypermarkets in Russia. In addition, it was announced that this biggest global retailer sold its outlets in Germany (to Metro) and in South Korea. Thus, there is a rather high likelihood that Wal-Mart with her deep pockets will enter the Russian market soon. Retailing in Russia will offer plenty of excitement for several years to come.

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