Retail chains are already more than just hearsay for the majority of Russia’s cities. Initially, chain developers took their first steps very carefully, but the pace quickened with each new successful center. As a result, there are a record number of projects announced this year. Moreover if even half of the announced projects come to fruition, competition in the regions will be on par with Moscow in several years, the experts assure. Thus far, however, qualitative and quantitative indices substantially differentiate, and retail formats do not welcome such differences.

Western shoppers have long been familiar with chain shopping centers united under one general concept and single brand. For example, nearly the entire market in Germany is controlled by around ten companies. Moreover, in Russia they have for a long time been building citywide chains, with Moscow overshadowing a large portion of the regional market. All the same, the largest players decided several years ago to enter the regions, which they did not regret. Indeed, it became clear that it was possible to realize a significant profit well beyond the confines of the MKAD and Moscow. Moreover not only large Russian cities with populations of one million plus factor into this equation.
At this time, developers are intensively encompassing cities with populations starting from 500,000 to one million, such as Togliatti and Izhevsk. Also, developed cities with populations starting from 300,000, such as Yaroslavl, Ryazan, Vladimir and Vologda are generating interest; however, it is true that new shopping centers are not opening everywhere. “The market is filling up unevenly. Indeed, no major changes have taken place in Volgograd since 2002 while the Yekaterinburg market is already nearing full scale, where all the main players are present and are planning to enter, so the market will increase one-and-a-half-fold,” says Alexei Vanchugov, general director of Mall Marketing, the official agent of the Russia-wide Park House chain of malls.
The director of the retail real estate department at DTZ, Dmitry Khechumov, shares this opinion. “The best situations are in Kazan, Yekaterinburg and Samara. In Kazan, for example, the shopping center market is already quite saturated. Indeed, there are many retail chains and brands present here, such as Metro, Real, Mega and Park House. It is indicative that specifically in Samara the first Castorama hyper-center (part of the Кingfisher group, Europe’s number one and the world’s number three home and self-repair hypermarket.) opened in Russia. Then there are opposite examples, such as Irkutsk, Orenburg, Chelyabinsk and Novosibirsk, where ambitious plans are being hatched but, so far very few projects have been completed,” says Khechumov.

Chains Are Branching Out
IKEA, Park House and Torgovy Kvartal have become the pioneers in developing retail chains. The successful experience of the first malls has shown that it is quicker and simpler to enter the regions, the expenses on construction and operation and taxes are lower while lease rates may not greatly vary from those in Moscow and St. Petersburg. Of course, there is much more competition in Moscow; therefore, the palette of national chains is slated to significantly expand this year. Naturally, the majority of companies are still at the starting blocks. “It is very difficult to discern information, and there is a big difference between what has been announced and what has been completed. As before, there are many announcements far and wide, but very few completed projects. Indeed, development is quite a complicated business in Russia, and remarkable will is required from all those involved to see the job through to completion, even using all necessary resources. Very often a company has money and land, but does not have any real projects,” says Vanchugov.
Speaking about national chains already operating, the majority of experts cite the previously known threesome of Mega, Park House and Torgovy Kvartal. Meanwhile the veterans of chain development have suddenly discovered prospective newcomers breathing down their necks. Region Development entered the market with its June shopping centers (in December last year, a regional center opened in St. Petersburg, and now construction is underway in Saratov, Ufa, Krasnoyarsk and Volgograd). Moreover Multifunctional Centers is planning to open around ten shopping centers on the regional markets by 2010. The first three companies began construction this year in Novosibirsk, Taganrog and Kemerovo. RosEuroDevelopment is building the Planeta chain of shopping and entertainment centers in 13 large cities, such as Krasnoyarsk, Novosibirsk, Omsk and Samara. RIGroup has projects in St. Petersburg, Leningrad Region, Sochi, Tula, Kimry and Tver, and shopping centers are also expected from Ramenka, the operator of the Ramstore retail chain.

A Brand as an Anchor
To date, according to different estimates, five to seven large players are active in the regions, while not all of them are ready to develop chains in the traditional sense of the word, joined as one brand and familiar format. For example, DVI Group is setting up a shopping center with a new name and individual concept in every city. Companies which preferred to open centers as part of an integrated network, determine the boundaries of their identities differently. Indeed, IKEA takes the hardest line, as its Mega shopping centers are duplicates of each other. Accordingly, the company strives to be recognized and maintain its unique brand. Mega is one of a kind in Russia, and it has its own target audience, as determined by its location. The majority of shopping centers are located within a city, oftentimes in the center. Naturally, people will always go for strolls in a city and occasionally drop by the stores. However, when it is raining, most people lose any desire to go for a walk.
“Mega malls are often built outside of a city, occasionally far from a subway station or other public transport; therefore, they have an entirely different concept. Indeed, Mega does not have happenstance shoppers from the street, given that people go there for the entire day, having made the decision ahead of time, and they do not change their plans without a serious reason,” says Hermann Gevert, vice president of IKEA MOS.
Moreover Mega in the regions differs from the Moscow projects. The new standard was born in Kazan, where the first regional shopping center was built.
“The start in Kazan was quite slow, but it was inevitable. Kazan for us became a sort of testing ground, where we have learned a lot and determined what strategy we will use in the regions. Now we can quickly develop our chain, as, indeed, we already have eight shopping centers. In addition to Moscow and Kazan, we are operating in Nizhny Novgorod, Yekaterinburg and St. Petersburg. In November of this year, we plan to open new centers in Samara, Novosibirsk and Rostov-on-Don. Additionally, we are certain that every year two to three new facilities will appear. We have decided that the regions do not require shopping centers of the same size as in Moscow. Overall, we have maintained the format, but our regional centers are smaller, although they are the largest projects in any given region. In fact, building large centers like Mega and Belaya Dacha on the outskirts of Moscow is inadvisable,” says Gevert.
The other companies are set to be very flexible, adapting to the market needs in each city. “Chain projects developing under one brand can be identical and unique at the same time. Indeed, every shopping center, regardless of whether it is positioned as part of a chain or separately, must be adapted to the unique demands of a region and specific area. Thus the premises and architecture of the Planeta shopping and entertainment center in Krasnoyarsk differs from those in Novosibirsk. This is a result of the specifics of the plot, for example; the center in Novosibirsk is located on the Ob River quayside; therefore, the project was created with proper regard for the unique altitude changes. Also taken into consideration are the various requirements of the regions for retail areas. Naturally, all shopping centers are built in accordance with a single concept and quality standards and are managed by one company. Indeed, all of the Planeta projects lie in the center of the city (Krasnoyarsk, Novosibirsk and Omsk) or at major highway intersections (Samara, Tyumen and Ufa). In all of the projects, a significant percentage of the space is dedicated to entertainment,” says Maria Voronova, director of the marketing department at RosEuroDevelopment.
Torgovy Kvartal is even set to name each center individually. This is what happened in Nizhny Novgorod, for example, when the owner decided to change the logotype from Torgovy Kvartal to Shokolad. “Torgovy Kvartal is prepared to change its concept and name given that everything flows, everything changes and life moves on. If it is profitable in every respect, if it builds up profits, then why not,” says Anatoly Vasilev, vice president at Torgovy Kvartal. Moreover, he does not deny that a recognized brand is a significant advantage. “It is all fine that a chain of hotels is under the same brand. Perhaps the architecture differs slightly, but the brand, the management company and the services remain the same. This is specifically what draws guests there. A recognized brand is a unique anchor in and of itself.”

Who’s Slowing Down the Market?
Regional shopping centers are often said to be created identically, with similar plans and standard tenants, differing only in name and size. However, experts are assuaged by the fact that this situation is temporary, as, given the filling up of the market, developers must seek original ways and niches.
“At this time, there is a situation where there are many similar shopping centers in terms of tenants, structure and planning solutions. In Moscow there is already a selection, although the situation is far from ideal. So far the regions have not seen any attack of the clones, as mainly classic shopping centers are being built there. If we look at the experience in the U.S., we see that there already is a large selection. There are centers where the anchor tenant is a discount store, centers with middle class operators, with an emphasis on entertainments or on the retail area. Russia has so far had only malls. The only difference is in the size, although this is not a big problem, given that segmentation, redefining of the tenant pool and repositioning are inevitable once the market has filled up,” says Vanchugov.
Moreover, Pavel Lebedev, vice president of RIGroup, is certain that as competition toughens, non-quality facilities will drop by the wayside. “Under stiff competition, the price of mistakes grows. Look at Eastern Europe, for example, where a large number of shopping centers were built by amateur entrepreneurs. As a result the centers became unattractive to investors and consumers and had to be phased out. Thus only professional facilities with clearly designed concepts have a chance to survive on the market.”
Also, Khechumov is certain that the preparedness of tenants will be the first factor to slow down the market. “If we are talking about large chains, such as grocery and electronics stores, they are actively operating not only in cities with populations of one million, but also in cities with populations of 200,000-300,000. And attracting international chains or national retail operators to a shopping mall is already more difficult.”
Moreover the lessors do not wish for a shortage of tenants. “We sense a keen interest in regional centers on the part of the tenants. If we are talking about large tenants, IKEA has no peers, and the same is true only for large DIY retailers with whom we work, Leroy Merlin and OBI. In terms of electronics, these are M.video and Media Markt; however, we are always ready to work with new tenants. When entering a region, we first see what the local market could offer Mega. Now we have around 20%-30% of local tenants, and we are actively working with strong Russian brands. At this time, for example, we collaborate with companies manufacturing clothes and shoes. Yes, these are not always local brands, and, moreover, we often offer space to local franchises of Western companies,” says Gevert.
In theory, nobody is excluding the possibility of local players being anchor tenants. “If a local tenant has an interesting concept and is ready to work in accordance with European standards, we will look at the possibility of including said tenant in a project. The pool of tenants, without a doubt, changes depnding on a specific region given that the pool must meet the needs of the target audience, the specifics of perception and the habits of local consumers,” says Voronova. “According to our experience I can refer to, there is more than high demand on the part of all types of tenants (clothes, shoes, accessories, etc.), as, indeed, in our Krasnoyarsk project, despite the 140,000-sqm size of the complex, there is already a shortage of retail space.”

Things Have Cooled Off a Bit
However, in Russia the major problem is building relations with the local administrations and the lobby of the local players who, naturally, try to defend there territory. In addition, the investment climate has significantly cooled in many regions.
“Previously, it was impossible to explain to a director of a municipal administration why such and such amount of electricity was needed. A governor simply did not understand, turning to his own experience and saying, “I have a factory which does not need as much energy as your store.” Now, governors and mayors already understand that a new center means thousands of new jobs and growth of the city’s prosperity. The development of infrastructure takes place when the money remains in the region, and it is a secret to nobody that Togliatti residents traveled to Samara to shop, while well-off people in Samara went to Moscow or Europe. The battle for the best spaces will naturally never subside, but, overall, the climate has cooled,” says Vanchugov.
A more captivating scenario with elements of a detective novel is connected with the entrance of Mega to the regions. Indeed, in Yekaterinburg, the company was taken to court by the Sverdlovsk fire inspector. In Nizhny Novgorod the shopping center was closed for 30 days as per court order. At this time, 995 violations of fire safety have been found, and, in addition to this, there was a violation of the urban planning legislation. It is noteworthy that deputy Alexander Khinstein joined the demands of the Emergency Ministry and the state fire inspector, and actively sought to close down the shopping center. All violations have been rectified in short order, and the company has appealed the court’s decision. It seems that IKEA’s optimism has remained thanks to the “happy land.”
“The attitude of the local authorities have improved dramatically. Previously, the bureaucrats simply could not imagine a shopping center of our formant, as it seemed very new to everyone. Now the same authorities see what a city receives from the appearance of a large shopping center. We create new jobs, and bring such large retailers as IKEA, Auchan, Leroy Merlin and OBI which offer goods at significantly lower prices than previously on offer in a city. Thus the authorities have opened their eyes, and, overall, we have a very good relationship with them,” says Gevert. According to him, the problems faced by IKEA in a new city are mostly of a technical nature. “Finding an appropriate plot is not easy. Serious problems are often caused by a hook-up to the networks. For example, in St. Petersburg, we had to build an additional electricity station, while, in Samara, we had problems with the water supply.”
RosEuroDevelopment is certain that, although there is quite a bit of space for developers in the country, generally speaking, some regions remain closed. “It all depends on the region. There are some regions where it is rather easy to operate. Indeed, the administration is prepared for the arrival of new large players and sets up system of favorable administrative conditions, but there are also regions that are absolutely closed. However, it is unfair to say singularly that the administrative barriers in Russia are great,” believes Voronova.

What’s to Come?
Most players believe that it is still too soon to speak about the market saturation. Indeed, according to Gevert, “Another two to four large players will still appear on the regional market, and, moreover, there is always a niche for local investors.” Mr. Vasilev also does not doubt that the market is far from the glut.
In conclusion, it is clear that international companies (not only chain developers, but also investment funds, which are also actively looking at the retail real estate market) are raising the quality of the market. However, higher quality does not always mean greater diversity, and, indeed, the customers always have the last word. As noted by experts, changing the format of shopping centers is only seriously considered when the number of similar projects within walking distance reaches critical mass.