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13 Января 2011, 7:19
Go East, Young Man!
Western retailers marching towards Russia’s borders fully understand that a crisis is a time of opportunity. They understand that such an opportunity only surfaces once in a lifetime. And when it does it should be taken advantage of, as it allows entering a market on highly profitable terms and with much less effort.
The Invasion
The domestic market is a Klondike Gold Rush that many Western operators have been dreaming of for more than just a year. “Russia has always been and remains a major priority for international retailers. With a population of some 150 million, it’s a huge consumer market,” says Maxim Karbasnikoff, Head of the Retail, Jones Lang LaSalle Russia & CIS. “The Russian market isn’t saturated. There are some 27 hypermarkets in Warsaw for half a million people. This would equate to some 270 hypermarkets in Moscow.” According to the latest surveys conducted by CB Richard Ellis with regard to Russia’s potential on a global perspective, it was rated seventh (42% of international retailers are already represented in Russia), attracting international operators with high revenues. “There is whole slew of companies that consider the Russian market as a high priority for their future expansion, and investing additional resources in the present complex macroeconomic environment,” notes Evgeny Kovrov, Head of Research, Magazin Magazinov in association with CB Richard Ellis. “For instance, Metro Group is so interested in Russia’s potential that it in order to supplement the company’s Russian expansion budget for 2009 decided to sell part of its stores in Western Europe, and reinvest the raised resources into the Russian market. On the other hand, the administrative aspect of the domestic infrastructure has a most negative impact on the attractiveness of the market. Undoubtedly, even the strongest European companies take a very long time evaluating the possible risks of entering the Russian market, and the last announcement by IKEA about a temporary freeze on its investment program due to bureaucratic barriers is a very clear sign.”
International operators are weary not only of the bureaucratic barriers but until lately of the high cost of entering the Russian market. The financial crisis has lowered this cost and has served as a loud sign to the outsiders to finally invade. Last March, H&M installed itself in the Metropolis Mall and MEGA Khimki. In April, the Novorizhkoe Shosse was taken over by Kika, a furniture and homeware hypermarket. River Island, Ipekyol, New look, Bebe and Gap have also moved in. Invasions are also planned by Debenhams and Harvey Nichols, Habitat, the British supermarket Sainsbury’s and the supermarket Hamleys.
Second Try
Some Western brands have already attempted entering the Russian market some years back and are trying once again to take up their place on this most interesting marketplace. In 2006, Debenhams opened its first franchised supermarket on Krasnaya Presna. But consumers weren’t attracted and the supermarket was closed within a year. Debenhams has found another partner, AS Capital Department Store, and plans on opening two supermarkets simultaneously, each with a surface of about 3,000 sqm – one in the Mall of Russia in Moscow City and another one in the reconstructed building of the Minsk Hotel on Tverskaya.
Besides these two stores, the company plans on opening a store in St. Petersburg and Riga. “Debenhams already has the experience of entering the Russian market via franchising, but now it has found another partner and is trying again,” says Tatiana Klyuchinskaya, Director, Retail Real Estate, Colliers International. “How the new partner will do and what success the brand will have in Russia is unclear. And Debenhams, which already once decided to pull out of the Russian market, is taking a big risk, just as AS Capital Department Store, which is investing its own resources in the development of the brand.”
Nice Try, But Maybe Next Time
June 18, Moscow, Russia, the first Carrefour hypermarket opened at Filion shopping mall. Although the retail company considered the Russian market in the middle of 1998 crisis, back than it all seemed too risky. This year Carrefour made up its mind about Russia. But don’t hold your breath! After a year and a half the retailer decided enough was enough and is leaving the Russian market. Why? Carrefour stands no chances of becoming a leader of the Russian market in the nearest future, says the company's report.
Direct Contracts
According to market specialists, the new expansionary wave by Western retailers onto the Russian market differs from the previous ones as they seem to have switched from a franchising approach to direct contracts.
“Certain chains have sufficient resources for expansion and are aware of the high profitability of the Russian market for their own brands, know the risks and in order to heighten their presence and to maximize the profits are ready to affront the Russian market directly without relying on their former partners and master franchisers,” says Evgeny Kovrov. “Among the major international chains that took such an approach we can mention New Yorker and Inditex. Some of their competitors such as H&M decided to enter the Russian market directly without any franchising agreements. It is very possible that H&M is aware of a badly needed aggressive expansion and isn’t ready to rely on a Russian partner: the company has sufficient capital and experience for expanding without the assistance of anybody.” However, according to Mr. Kovrov, franchising also remains timely: such world renowned brands as GAP or Marks & Spencer work in Russia through franchising. Working directly or through franchising is a personal question (even for major enterprises) and depends on the financial situation, readiness to accept all the risks, and the level of interest in the Russian market.
Normal Heroes Are Wary
“Prior to entering the Russian market, western companies carefully review the market situation, the competition in their segment and price category. There is an exception with companies that choose a different expansionary strategy,” says Tatiana Klyuchinskaya. “The German company Globus, for instance, understood that it is useless even thinking about entering the markets of Moscow and other major cities which have been practically taken up by Auchan and other local chains, and decided to open stores in small cities around Moscow and neighboring regions. Globus is inaugurating facilities in Schelkovo and Vladimir, and takes over practically the whole city leaving no room for the competition. The sales volume is huge and the target audience is already accustomed to them.” Globus has already five hypermarkets: in the Moscow suburbs in Klimovsk and Schelkovo, and also in Vladimir, Ryazan and Yaroslavl, and uses every possible means to spread its presence throughout the territory.
They have plans to open two new hypermarkets in Yaroslavl (the retailer is planning on opening an overall three hypermarkets with an overall surface of 72,000 sqm. The investment represents 22.5 billion rubles), and another one in Smolensk and Tula. By 2010 it plans on opening one in Kaluga as well.
The strategy comprises the opening in Russia’s European part of some three-four stores every year, and according to the press secretary, it will not bulge from this position. It should be noted that the retailer prefers building with his own resources. The company’s turnover allows it to invest considerable sums in the construction of new stores.
“Globus’ example clearly shows how important it is to fully review one’s expansionary strategy in order to end up in the right place at the right time,” says Tatiana Klyuchinskaya. “International operators entering the Russian market will undoubtedly represent a serious threat to Russian chains. “The volume of their financial resources, experience and technologies is just part of the advantage of westerners,” says Evgeny Kovrov. “The Russians on the other hand have the advantage of better understanding the local market and the existence of relatively well integrated retail chains. This however is weakened somewhat through the headhunting for local managers, or by straightforward M&A which are traditional expansionary mechanisms of such monsters like Wal-Mart.” According Maxim Karbasnikoff, the competition between local and western retailers will only serve the consumer: it will lower the prices and provide a better service.
With regard to the activities of Western retailers in Russia, we can assuredly say that the international operators that will be celebrating their success with champagne are those that will choose the best possible expansionary strategy, work out every single penny and take the risk of entering the market right now in order to win over the niches that are still available.
The domestic market is a Klondike Gold Rush that many Western operators have been dreaming of for more than just a year. “Russia has always been and remains a major priority for international retailers. With a population of some 150 million, it’s a huge consumer market,” says Maxim Karbasnikoff, Head of the Retail, Jones Lang LaSalle Russia & CIS. “The Russian market isn’t saturated. There are some 27 hypermarkets in Warsaw for half a million people. This would equate to some 270 hypermarkets in Moscow.” According to the latest surveys conducted by CB Richard Ellis with regard to Russia’s potential on a global perspective, it was rated seventh (42% of international retailers are already represented in Russia), attracting international operators with high revenues. “There is whole slew of companies that consider the Russian market as a high priority for their future expansion, and investing additional resources in the present complex macroeconomic environment,” notes Evgeny Kovrov, Head of Research, Magazin Magazinov in association with CB Richard Ellis. “For instance, Metro Group is so interested in Russia’s potential that it in order to supplement the company’s Russian expansion budget for 2009 decided to sell part of its stores in Western Europe, and reinvest the raised resources into the Russian market. On the other hand, the administrative aspect of the domestic infrastructure has a most negative impact on the attractiveness of the market. Undoubtedly, even the strongest European companies take a very long time evaluating the possible risks of entering the Russian market, and the last announcement by IKEA about a temporary freeze on its investment program due to bureaucratic barriers is a very clear sign.”
International operators are weary not only of the bureaucratic barriers but until lately of the high cost of entering the Russian market. The financial crisis has lowered this cost and has served as a loud sign to the outsiders to finally invade. Last March, H&M installed itself in the Metropolis Mall and MEGA Khimki. In April, the Novorizhkoe Shosse was taken over by Kika, a furniture and homeware hypermarket. River Island, Ipekyol, New look, Bebe and Gap have also moved in. Invasions are also planned by Debenhams and Harvey Nichols, Habitat, the British supermarket Sainsbury’s and the supermarket Hamleys.
Second Try
Some Western brands have already attempted entering the Russian market some years back and are trying once again to take up their place on this most interesting marketplace. In 2006, Debenhams opened its first franchised supermarket on Krasnaya Presna. But consumers weren’t attracted and the supermarket was closed within a year. Debenhams has found another partner, AS Capital Department Store, and plans on opening two supermarkets simultaneously, each with a surface of about 3,000 sqm – one in the Mall of Russia in Moscow City and another one in the reconstructed building of the Minsk Hotel on Tverskaya.
Besides these two stores, the company plans on opening a store in St. Petersburg and Riga. “Debenhams already has the experience of entering the Russian market via franchising, but now it has found another partner and is trying again,” says Tatiana Klyuchinskaya, Director, Retail Real Estate, Colliers International. “How the new partner will do and what success the brand will have in Russia is unclear. And Debenhams, which already once decided to pull out of the Russian market, is taking a big risk, just as AS Capital Department Store, which is investing its own resources in the development of the brand.”
Nice Try, But Maybe Next Time
June 18, Moscow, Russia, the first Carrefour hypermarket opened at Filion shopping mall. Although the retail company considered the Russian market in the middle of 1998 crisis, back than it all seemed too risky. This year Carrefour made up its mind about Russia. But don’t hold your breath! After a year and a half the retailer decided enough was enough and is leaving the Russian market. Why? Carrefour stands no chances of becoming a leader of the Russian market in the nearest future, says the company's report.
Direct Contracts
According to market specialists, the new expansionary wave by Western retailers onto the Russian market differs from the previous ones as they seem to have switched from a franchising approach to direct contracts.
“Certain chains have sufficient resources for expansion and are aware of the high profitability of the Russian market for their own brands, know the risks and in order to heighten their presence and to maximize the profits are ready to affront the Russian market directly without relying on their former partners and master franchisers,” says Evgeny Kovrov. “Among the major international chains that took such an approach we can mention New Yorker and Inditex. Some of their competitors such as H&M decided to enter the Russian market directly without any franchising agreements. It is very possible that H&M is aware of a badly needed aggressive expansion and isn’t ready to rely on a Russian partner: the company has sufficient capital and experience for expanding without the assistance of anybody.” However, according to Mr. Kovrov, franchising also remains timely: such world renowned brands as GAP or Marks & Spencer work in Russia through franchising. Working directly or through franchising is a personal question (even for major enterprises) and depends on the financial situation, readiness to accept all the risks, and the level of interest in the Russian market.
Normal Heroes Are Wary
“Prior to entering the Russian market, western companies carefully review the market situation, the competition in their segment and price category. There is an exception with companies that choose a different expansionary strategy,” says Tatiana Klyuchinskaya. “The German company Globus, for instance, understood that it is useless even thinking about entering the markets of Moscow and other major cities which have been practically taken up by Auchan and other local chains, and decided to open stores in small cities around Moscow and neighboring regions. Globus is inaugurating facilities in Schelkovo and Vladimir, and takes over practically the whole city leaving no room for the competition. The sales volume is huge and the target audience is already accustomed to them.” Globus has already five hypermarkets: in the Moscow suburbs in Klimovsk and Schelkovo, and also in Vladimir, Ryazan and Yaroslavl, and uses every possible means to spread its presence throughout the territory.
They have plans to open two new hypermarkets in Yaroslavl (the retailer is planning on opening an overall three hypermarkets with an overall surface of 72,000 sqm. The investment represents 22.5 billion rubles), and another one in Smolensk and Tula. By 2010 it plans on opening one in Kaluga as well.
The strategy comprises the opening in Russia’s European part of some three-four stores every year, and according to the press secretary, it will not bulge from this position. It should be noted that the retailer prefers building with his own resources. The company’s turnover allows it to invest considerable sums in the construction of new stores.
“Globus’ example clearly shows how important it is to fully review one’s expansionary strategy in order to end up in the right place at the right time,” says Tatiana Klyuchinskaya. “International operators entering the Russian market will undoubtedly represent a serious threat to Russian chains. “The volume of their financial resources, experience and technologies is just part of the advantage of westerners,” says Evgeny Kovrov. “The Russians on the other hand have the advantage of better understanding the local market and the existence of relatively well integrated retail chains. This however is weakened somewhat through the headhunting for local managers, or by straightforward M&A which are traditional expansionary mechanisms of such monsters like Wal-Mart.” According Maxim Karbasnikoff, the competition between local and western retailers will only serve the consumer: it will lower the prices and provide a better service.
With regard to the activities of Western retailers in Russia, we can assuredly say that the international operators that will be celebrating their success with champagne are those that will choose the best possible expansionary strategy, work out every single penny and take the risk of entering the market right now in order to win over the niches that are still available.
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