Logistics Services in Russia

According to Ruslan Suvorov, head of the industrial real estate department at Praedium, virtually all large manufacturers in the FMCG (Fast Moving Consumer Goods) sector outsource. “In Russia as in the West the warehousing and processing of goods is entrusted to external logistics providers,” says Pyotr Zaritsky, deputy director of the industrial real estate department at Jones Lang LaSalle. According to Mr Suvorov, the overwhelming majority of grocery retailers also use logistics operators. A good example is Metro which is serviced by Schenker renting warehouse areas in the Lvov terminal. However firms do not always outsource their logistics. “Companies like Auchan, Ramstore and Metro can only outsource logistics in Moscow. In the province they either have to create their own logistics networks or rent several warehouse complexes,” says Vadim Prozorov, head of the land and industrial real estate department at Knight Frank. An example of a company that rents several warehouse complexes for its products is the grocery chain Kopeika. X5 Retail Group, Russia’s largest retail chain, also processes the bulk of its products independently. The majority of consumer and electronics goods chains prefer outsourcing. For example, Media Markt is serviced by Kuehne + Nagel renting areas in the Sholokhovo warehouse complex. “When its comes to large household goods retailers, only IKEA has its own warehouses, the overall trend is outsourcing,” says Mr Suvorov. Notable examples of companies which have opted to go alone and create their own logistics networks are Nestle and Pepsi.
There are a number of logistics strategies available to companies. Besides outsourcing, they can also decide on a combination of in-house and outsourced logistics. Some market experts believe that outsourcing is becoming more popular but not everyone agrees with this view. Mr Zartisky does not believe that there is a clear preference for outsourcing. “In each case the decision to outsource or not is taken with reference to a number of factors, not just turnover and profile. These include the specifics of the goods themselves, the type of processing requirements, geographical considerations and the degree of overall supervision required,” comment experts from UniTrans Logistic.

Choosing Outsourcing
In the West outsourcing has long been regarded as standard. It offers a number of advantages, for example firms do not have to develop their own logistics networks, and they can concentrate on investing and developing their main business. But that is not all, “By outsourcing retailers and manufacturers can minimize financial risks and liabilities are transferred to the logistics provider which in turn transfers them onto the insurance company,” says Polina Vinokurova, PR and advertising specialist at the National Logistics Company. According to Vladimir Yelin, chairman of Smart Logistic Group which is a subsidiary of EMCTC, in the West it is rare for a retailer or manufacturer to develop its own logistics services and this only occurs for very specific types of products. When it comes to Russia, however, standard theory does not always apply. It is well known that many companies would like to outsource their logistics but simply cannot. “They are forced to develop their own warehouses for complex types of goods because they cannot find outsourced services for a reasonable price. A good example is firms retailing stationary products,” says Mr Suvorov.
An interesting trend noted by Mr Zaritsky is the way in which dissatisfaction with the quality of logistics services is leading many companies including FMCG manufacturers who previously only outsourced, to start creating their logistics services. They are now renting warehouses, hiring personnel and buying or leasing equipment. This new trend particularly applies to retailers. “Today the majority are now opting for creating their own logistics services. Companies like Auchan and Metro have huge product ranges and complex procurement systems and not all logistics operators are up to the task. In the Russian market there are very few firms which can provide logistics services conforming to the standards of Western manufacturers and retailers. This is why they are increasingly opting to go alone. However it should be said that so far the results have not been very successful. The product streams of many retailers are not concentrated in one location but spread out over several warehouses, as is the case with X5

Retail Group.
One firm which is opting for a combination of in-house and outsourcing is consumer and electronics goods chain, MIR. It outsources its transportation requirements and some warehouse processing. “Currently we are looking at the possibility of building our own terminal,” says Alexei Kurushin, director of logistics at MIR. Commenting on the problems associated with outsourcing he adds, “When you outsource the working process is slower. It takes more time for an outside provider to incorporate any changes, and all new services not included in the initial contract must be paid for additionally. But the main problem is that far from all logistics firms operating in Russia can work with our product range. They can service firms with simple product ranges but large ranges which require complex pre-sale processing are beyond their abilities. Put simply, they can warehouse beer or lids but meeting our requirements is far more difficult.” When it comes to the advantages of outsourcing, Mr Kurushin comments, “The main advantage of outsourcing is that firms are freed up to focus on the main business. You don’t have to spend time and resources on the selection and training of personnel; all you need is one employee to oversee the outsourcing process,”
“Overall the trend is that the simpler the product range, the more attractive it is to outsource. For example tobacco firms outsource virtually 100% of their logistics requirement, adds Mr Suvorov.

Going Alone
When firms operating in Russia decide to develop their own logistics services, the rewards can be considerable. For a start they gain more control over the processing and storing of complex products which logistics providers are not always capable of handling. They can also cut costs which does seem to contradict the principle of outsourcing. Many retailers and manufacturers believe that the cost of outsourced logistics in Russia is often overstated. “Ideally the cost of creating your own logistics network should compare favorably with the cost of outsourcing. There are well-known examples of consumer goods chains using only their own distribution centers;– not just because of poor service levels but because they believe that outsourcing is not as cost-efficient,” comments UniTrans Logistic.
However this type of logistics strategy does not come cheap. The construction of a 10,000-sq, modern logistics complex costs from $5-10 million depending on location and the type of equipment required. Then you need to factor in the hiring and training of personnel, salary increases, etc. According to Mr Prozorov outsourcing still makes sense for the majority of firms, particularly small and medium-sized firms which rent areas of from 3 to 20,000 sqm. But when it comes to the retail giants, he believes it makes better financial sense for them to create their logistics divisions. This also applies to small and large firms dealing in retail products which are inherently unsuitable for outsourcing.
Another factor prompting firms to go alone is a shortage of warehousing areas. “As turnover increases any firm will need a way to store all its stock in one location – in one big warehouse (say for distributing products in one region like Moscow and Moscow region). Firms like Evroset (digital equipment) and X5 Retail Group own land lots and Evroset is already building its own warehouse complex. It makes more sense to talk not in terms of factors forcing firms to choose a particular development path but in terms of overall patterns. So far there is no clear distinction. But it is clear that the trend is for retailers to move away from renting warehouse areas and to start building their own logistics complexes for all their products,” says Mr Zaritsky. He goes on to add that there is another logistics option which with time will become a serious option for large FMCG manufacturers. Manufacturers will rent warehouse areas occupied by 3PL (third party logistics) operators. In other words logistics operators will become the clients of FMCG manufacturers. “This option gives firms more control over the actions of the logistics provider. They can even change providers without having to relocate their goods. They will also gain more control over the process itself, something which was not possible previously. There are precedents, for example, Oriflame which owns a warehouse on Novorizhskoye shosse operated by Tablogix.

Growing Pains
All the experts we questioned agreed that the logistics services market in Russia is undeveloped. More and more firms are entering the market but this has not yet translated into higher quality levels. “Providers capable of rendering high quality services are few and far between and there simply aren’t enough to go around. Today there are two development routes for logistics operators – quality or quantity (scale). In a growing market the temptation to gain market share at the expense of quality is very strong,” says Mr Suvorov.
Any firm, especially a large manufacturer, will be interested in working with logistics operators offering a wide range of services, including importing, customs clearance, supply chain distribution and store distribution, etc. But today there are no firms in Russia capable of providing a complete range of services. “Management logistics (managing various suppliers and partners) is currently very difficult to outsource. Firms have to work with a number of providers – one for warehousing, another for processing and a third for customs processing and transportation, etc. This is not an optimal solution,” comments UniTrans Logistic.
Ms Vinokurova thinks the view that 3PL will be offered by the bulk of logistics operators is unfounded. “A full range of logistics management services is still offered only by one or two firms servicing Western companies who they are already dealing with in the West. When it comes to independent logistics management, so far only very large providers are capable of offering a level of service which corresponds to the cost of these services.”

Regions
The regional logistics market is harrassed by two factors. Firstly there is a shortage of warehouse areas. For example while in Samara local developers have realized several large warehouse complex projects, in Novosibirsk and Rostov-on-Don there have been none. “Retail projects in the regions are being quagmired by an absence of modern logistics centers. A number of firms are being forced to use distribution bases built in the 60’s and 70’s. Large retailers, like X5 Retail Group, Ramstore and Metro are being forced to build their own distribution centers which is taking investment away from business development,” comments Mr Yelin.
The second problem is that in the regions there is only a handful of large-scale logistics providers i.e. firms providing services not only in Moscow but in cities like Novosibirsk, Samara, Kazan and Yekaterinburg. This means that many retailers and manufacturers, operating in Moscow and using outsourced logistics providers, are either creating their own regional logistics networks or using a number of regional providers. According to UniTrans Logistic there are only two options in the regions, “Building your own distribution center or using a number of different logistics providers. Ideally firms should use the same provider in Moscow and in the regions; however logistics providers offering this scale of service can be counted on the fingers of one hand.”
Mr Suvorov comments that when there are no logistics operators providing high quality services in a particular region, retailers and manufacturers reach agreements with Moscow or federal logistics providers who then enter the region for them. “So far large players have not entered the regions but I believe that in the future they will either build or lease warehouse complexes for their own logistics divisions. Today retailers who want to outsource have to work with 5-6 different providers. This means higher risks and expenditure associated with overseeing them all. Today many retailers would probably like to outsource logistics but the opportunity does not exist,” concludes Mr Zaritsky.;