Today Western retailers operating in Russia are most widely represented in the segments of home improvement and construction materials (DIY), grocery hypermarkets, clothing and shoes. Experts agree that the Russian market is far from saturation and open for further expansion. The only exception is grocery hypermarkets, where the positions of local players and the French Auchan are rather strong. The challenge of entering this segment proved too awesome even for Carrefour, which did not seem to be ready for bulky investments in expansion into Russia and was forced to abandon the market. On a global scale, however, the international chains increasingly prefer the markets of Eastern Europe and Southeast Asia because of their higher transparency and absorption capacity, and so in the mid-term outlook no feverish demand for the Russian market, which was the case 3-5 years ago, should be anticipated.

Crisis comes to the rescue However strange it may sound, the financial crisis became a very convenient time for the foreigners to enter the Russian market. The attractiveness of the Russian retail trade market greatly increased: “Many domestic chains ‘froze’ their business expansion and some of the players left the market, thus easing the competitive environment,” points out Evgeny Kovrov, head of foreign client representation at Magazin Magazinov in association with CB Richard Ellis. “Having experienced a steep fall in demand and an outflow of tenants, the owners of shop floors became much more amenable, offering reduced rates, long-term contracts and adequate rental vacations.” Many Western retailers found vacant areas at best shopping malls and the price of an entry ticked also dropped.

During previous years Western retailers tended to enter the market directly and vigorously, but finding local partners in Russia was more difficult.

Thanks to these circumstances, the international chains which were getting ready for expansion as early as in 2005-2006 could open their first representative offices in Russia in early 2009. “In spring of last year the prominent international brand H&M opened its stores in the Metropolis and Mega retail centers, in November of 2009 – in Golden Babylon and in April of 2010 – in Atrium, where the Japanese mono-brand store Uniqlo also opened its doors. For both retail chains the chosen approach proved most successful in the post-crisis market realities. A stake on inexpensive clothes and shoes with an optimal price-quality ratio, in line with the latest vogue, ensured a high rating and popularity to the new market players. In addition, such chains as River Island, Ipekyol, New look, Bebe and Gap gained a firm foothold in this segment last year,” says Denis Kolokolnikov, General Director of RRG Consultancy. The year 2009 saw Western players entering the Russian market in other segments as well, apart from clothing retail. At the turn of the year the first grocery hypermarket Selgros operating in the cash&carry format opened its doors in Kotelniki; in April the first furniture and home improvement hypermarket Kika opened on Novorizhskoe Motoway; in June a Carrefour hypermarket started its operations in the Filion shopping mall; and at the end of the year the first housekeeping goods store Habitat opened in Mega. Regrettably, the French Carrefour was forced to abandon the market after less than six months of operating on the Russian market. Conceptual miscalculations and difficulties with formalization of licenses led to the low profitability of the chain; hence its sad move,” says Mr. Kolokolnikov.

Another market event, in experts’ opinion, was the decision of New Yorker to enter the Russian market directly with two concepts – New Yorker and Ann Christine. Also noteworthy is the opening of the first Saturn store by the German retail chain MediaMarkt. In the opinion of Galina Maliborskaya, Director of Retail Real Estate, Colliers International, “the recent year was rather meager as far as the emergence of new brands is concerned. The decision of S’Oliver to develop independently and a return of KIABI, which will be represented by a Russian partner, are worthy of mention. Turkish retailers also raised their level of activity – retail venues are sought by such companies as Koton, Network, LCWaikiki (in the format of a 1,500-sqm department store), while Fiba Group plans to bring Banana Republic to the market.” Victor Rosenberg, leading consultant with Retail Real Estate Department, Cushman & Wakefield, mentions the opening of Payless Shoes by Monex Trading and also the entry of well-known Western brands – Spanish Desigual and British REISS – to the Russian market. Keeping pace with the times While prior to the crisis franchising was the most widespread scheme of foreign expansion to the Russian market, now new players prefer to enter the market directly, as we already mentioned. “This is a typical strategy for the global companies aimed at self-contained expansionary development and winning over a sizeable market share in their segments. This strategy implies the acquisition of a large Russian chain and its subsequent rebranding (thus Wal-Mart is going to take over a local player and contemplates the Kopeyka chain), or the purchase of a large stake in a Russian company and investing in its development (PPF bought a stake in Eldorado), or a direct entry into the market by establishing their own subsidiaries and developing their own brands in Russia (Uniqlo, H&M and others),” notes Mr. Kovrov. This expansion pattern was chosen in Russia by Louis Vuitton, Chanel and McDonalds. Not all retailers are ready to run the risk, however. Many overseas brands prefer to use franchisees first to test their entry into the Russian market. Not only is it a cheaper way than doing everything on their own; using this strategy, they can gain a considerable market share within a rather short time.

The classical franchising scheme implies a handover of the master franchise to a Russian partner, i.e. the right to open stores under a given trademark and to issue franchises within the territory stipulated in the contract. Yet in some cases a franchisee can be deprived of the latter right. “The master franchise as a way of expansion to the Russian market is used by such companies as MEXX, Naf-Naf, Springfield, Rosinter (Planeta Sushi, Il Patio), Gloria Jeans cafe and others. This is how S’Oliver initially planned to expand, but because the company ran into the problem of finding a master franchiser, it opened its stores only in those cities where it had partners, as a temporary solution. Next year, however, S’Oliver intends to embark upon the path of independent strategic development,” says Galina Maliborskaya.

Another popular way of entering the market is coexistence of stores directly run by a Western retailer and those run by its franchising partners. “But such an approach is rather aggressive in its nature,” emphasizes Evgeny Kovrov. “For it implies that a foreign retailer either buys a chain of stores from a Russian partner, consolidating them into an integrated Russian business (which was done by Inditex with respect to the Zara brand), or terminates the franchising agreement and starts independent development of its own chain (Prada).”

Another possible format is dividing the spheres of influence using a geographical approach, when the head company is focused on chain expansion to the key markets in Moscow and St. Petersburg, farming out the regions to franchisees. “This approach is exemplified in such companies as Savage, People, SELA and Finn Flair. Colin’s prefers direct expansion to the markets of Moscow, Moscow region, and some other Russian regions, while in other cities the company trusts this business to proxies. This approach enables a retail operator to develop its own chain fast enough and at the lowest financial risk,” says Ms. Maliborskaya. According to Evgeny Kovrov, “this division of responsibilities is practiced by those companies which have had franchising partners for a long time and/or do not consider the Russian market as their top priority, or do not have ample financial resources for the desired market coverage.”

Well-known brands Mango and Terranova opted for a different strategy. Business expansion in Russia is coordinated by a company representative who is also in charge of looking for potential partners. However, all decisions are made at the head office.

Getting ready to start their business in Russia, Western firms carefully study the situation on the market and competition in their segment and price range. In the opinion of Denis Kolokolnikov, “some retailers are correcting their plans of expansion to Russia in favor of the regions. For instance, the German hypermarket Globus decided to open its new retail properties mainly in the small cities and towns of Central Russia in view of stiff competition in the grocery segment in Moscow and other cities with one-million-plus population, where other Western food networks and local operators are already represented.”

Promise in the regions Western realtors increasingly often turn their eyes towards the virtually vacant regional markets. “While the food and home appliances segments are rather competitive in the regions, the clothes and shoes segment has almost dropped out of the sight of local operators,” believes Mr. Kolokolnikov. Julia Kachur, senior consultant for Retail Real Estate at Cushman & Wakefield, agrees: “The regions lack big fashion anchors as well as small interesting clothing and footwear shops. The entertainment function is also underdeveloped in local shopping centers.”

“There are relatively vacant niches in such segments as children’s and sporting goods, housekeeping goods, accessories, lingerie, jewelry, watches, leather goods, cosmetics, books and multimedia,” adds Kolokolnikov. The average income level, competitive environment, market advancement, investment potential and other factors serve as the key indicators for Western and Russian retailers deciding on entering this or that region. “The loyalty of city authorities to overseas investors is another important parameter,” adds Dmitry Zolin, Managing Partner of LCMC.

Western retailers are now willing to enter not only the cities with onemillionplus population, but smaller ones as well with population below half a million residents. Thus Inditex considers cities with 300,000 plus population, but only provided a high personal income level and availability of a professional project. “In recent years the key decisionmaking criterion for many retailers has been the region as such, rather than the density of its population,” points out Ms. Kachur. “For example, a large number of people with a high level of personal income reside in Siberia in general and in Tyumen in particular; hence a high purchasing power attracting retailers to this region.”

“The size and location of the shopping center itself are also an important factor of making a positive decision about entering a given region: preference is given to large ambitious projects with GLA in excess of 30,000 sqm,” notes Denis Kolokolnikov.

In experts’ opinion, the main difficulties for retailers who enter the regional markets include the lack of quality retail areas, undeveloped local infrastructure, and the search of a reliable partner on the local market, since franchising remains the main scheme of expansion in remote areas for Western retailers.

Challenging market For most foreigners doing business in Russia is still coupled with high risks. This is the main reason for the refusal to enter the Russian market cited by Western retailers. “Such well-known players as clothing department stores Debenhams and Harvey Nichols; grocery supermarkets and hypermarkets Sainsbury’s, Wal-mart, Tesco and Casino; children’s goods operators Hamley’s and Mamas&Papas (the latter gave up its initial intention to open its store in Atrium) are brooding over the plans to occupy the vast Russian expanses,” says Kolokolnikov. “For now these retailers are only negotiating their entry into the Russian market through mediators (franchisees). Such cautiousness can be attributed to the unsuccessful experience of their Western colleagues in the food segment and in children’s goods, whose bold expectations proved unjustified.”

Besides the differences in the trade, customs and tax legislation, foreign retailers often lament logistic and bureaucratic hurdles, which are absent in the more advanced markets. According to Evgeny Kovrov, “you may often hear complaints about the quality of retail properties, overstated rental rates, high indexation rates (which make long-term financial models futile), short terms of lease and the dearth of skilled personnel at almost all levels – from shopping assistant to commercial directors.”

Dmitry Zolin also points to “problems with finding good plots of land and the Russian specifics in obtaining approvals for construction projects.”

Still in the top ten The latest survey by A.T. Kearney reveals that global retailers consider Russia a less attractive place for investments than in 2009 in view of slack consumer spending, though they still include the country in the top ten best European countries for expansion. During the past year Russia went down from the second to the tenth position in the ranking of A.T. Kearney called Global Index of Retail Market Development, which highlights the appeal of different markets to foreign retailers. On a global scale Russia now lags behind other BRIC countries – China, India and Brazil – which rank first, third and fifth, respectively. In the opinion of Russian experts, the potential of the Russian market will be growing. In the opinion of Galina Maliborskaya,“clothes and shoes, public catering and fast food will remain the key sectors for foreign expansion. The entry can be most challenging for hypermarkets, given a number of large local players on the market and strong positions of the French chain Auchan. The challenge of entering this segment was showcased by Carrefour, which proved not ready for bulky investments in aggressive expansion into Russia.” Competition will keep stiffening. “Already now we see such brands as Saturn entering the Russian market. Robust expansion of this brand may weaken the position of Russian traders in home appliances and electronics,” comments Mr. Zolin. “Furthermore the Russian regional market is relatively vacant, since the main competition is concentrated in Moscow and St. Petersburg as the key money-growing cities of Russia.” The retailers launching an aggressive regional expansion now may claim leadership in the future, given that the cost of entering the market is low in times of stagnation and it is possible to grab a larger chunk of the market at a lower cost.

Спецвыпуск: инвестиции