Studies Eastern European Markets
Eastern European Markets
Harri Lorentz
THE Q4/03 STATE OF FOOD RETAIL INDUSTRY IN RUSSIA
An industry review utilizing open systems approach with content analysis
Turku School of Economics and Business Administration

System elements in Russian food retailing
(Edit: a selected chapter, a short-cut version)

Structure

The system element of industry structure refers to such themes as company and retail format market shares, company sizes in relation to other competitors, and firm numbers in the industry. Understanding industry structure may contribute to our understanding of the degree of rivalry in the industry together with other variables.

According to the relevant sample articles it is clear that the food retail industry is di-vided into several segments, or strategic groups. Rinoks with kiosks and pavilions have a major share of the market, while various formats of stores also have a significant share. Chains’ share of the total is still minor but growing. Currently the competition is mainly felt between the strategic groups of civilized and the uncivilized retailing.

This study focuses on the modern retail chains and the structure in that particular strategic group. Later the strategies inside the strategic group of civilized retailing will be examined. The prominent themes in the sample articles were perceived to include the following: (1) considerations on the degree of competition, (2) market saturation/expansion possibilities, and (3) companies current and planned market shares.

Generally there seems to be great variation in the degree of competition depending on location and store type segment/strategic group. The common perception about the market is that there is still plenty of room in the market, i.e. expansion of industry incumbents and the entries of new companies will hardly cause any major collusions or destructive competitive moves. For example Auchan representatives say that competitors will start noticing each other, and feeling the impacts of each others’ moves when chains’ share of the market will reach 40 percent.

In December 2003 analysts considered the Moscow retail market open for expan-sion for at least for two more years. The hypermarket segment was only recently created with the entry of Auchan, and has great potential for growth and no serious competition. The other undeveloped store type segment is the convenience store business, which has received a lot of attention lately.

Discount stores have been in the market for some time now, and the St. Petersburg segment of the type is considered full and competed. Still it must be said that the competition is definitely increasing, especially for favorable locations as the chains strive to expand and fulfill their ambitious plans for getting a major share of the market.

Some articles referred to companies’ market shares and market leadership positions. It probably is reasonable to say that currently the market is some-what fragmented with many firms competing for the consumers’ ruble on more or less equal terms. Depending on location (city, suburb), a particular chain may enjoy strong leadership position; for example Pjaterotska enjoys a strong position in St. Petersburg discount store market.

According to market research company Roland Berger, the total revenue of leading Russian retail chains was divided as follows (August 2002): Perekrestok 20%, Ramstor 17%, Sedmoi kontinent 16%, Megamart 13%, Pjaterot-ska 12%, Kopeika 8%, Prodmak 7%, Lenta 4%, and Diksi 3% share.

In Moscow the leading pair was considered to be Perekrestok and Ramstor, while runner ups Pjaterotska and Sedmoi kontinent are coming close. The situation has been developing since then and still no company has a clear upper hand in the game.

The system element of strategic groups refers to the themes that elaborate on various company strategies detected in the focus industry. The identification of strategies helps us to define industry strategic groups and understand inside industry rivalry.

In general, a good indication of the retail company’s employed strategy is the firms dominant store format. There is a clear connection of store type (discount store, conven-ience store, supermarket, hypermarket etc.) and various retail mix strategies, namely location strategy, merchandise strategy, pricing strategy, communication strategy.

The successful development of the chain in the environment of ever increasing competition requires minimization of costs, quality maintenance, low price level, and wide assortment. Successful strategy also includes effective logistics with properly functioning distribution centers. While this generic strategy may really prove successful, many employ specialization strategies targeting for example affluent people with above average income.

In fact one of the major discernible trends in the focus period was diversification, as chains introduced new store formats and targeted various consumer segments especially during 2003. It is admitted that in order to get a large share of the market, one has to employ many store types and formats in order to attract a large segment of the population, and consequently achieve sufficient volumes.

As incomes increase, discount stores are becoming increasingly unattractive, as people seek to satisfy needs with products and services that are more rich in characteristics (implicit product), forcing for example Pjaterotska to diversify into hypermarkets. Sedmoi kontinent (7th continent), as an active supermarket operator, is planning to launch new brands and store formats to attract different consumer segments. For example the new convenience store chain will be named “7 Shagov” (7 steps). Further, Perekrestok’s (originally supermarket operator) new convenience store project will be named “Rjadom” (nearby).

As has been laid out earlier, the threat of increasing foreign entry is imminent. In order to prepare for the increasing competition, the chains have been implementing strategies designed to strengthen market position. These include such measures as extensive growth, market segmentation, and service improvement. In the sample articles, the companies desire to grow was clearly discernible, and various growth strategies were actively implemented.

Companies’ growth goals and plans were openly discussed in the media. In order to expand geographically some entered alliances with developers operating around the country, some concentrated on attracting investors in order to finance growth, and some relied on franchising as the driver to expand brand locally and into the regions.

In conclusion it can be said that the major strategic trends among the Russian food retail chains are (1) focused implementation of store format through retail mix, (2) diversification in to many store formats, and (3) growth locally and regionally to gain market share in the face of increasing competition. As the theory implies the level of competition increases as strategies vary in the industry. Russian chains employ different strategies in attracting customers and generating revenue, which heats up the competition, while the unsaturated market decreases the collision of interests.

More information
Turku School of Economics and Business Administration
Pan-European Institute
Pan-Eurooppa Instituutti
Turku, Finland
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