A vision of the future of Russian retail has unveiled itself in the form of giant superstores and hypermarkets. However, the old kiosks could be slow to fade into the past.

The road leading to Moscow’s Sheremetyevo airport has never been an easy one to travel. But the traffic seems to have tripled ever since Ramstore, the leading hypermarket chain in Russia, opened a mega-sized mall situated on the outskirts of Moscow. Things are even worse near the Tyoply Stan metro station where Ikea’s mega-mall is situated. That mall offers over 210,000 sq. meters of shopping and entertainment facilities and a parking lot for 10,000 vehicles.

The planners of Moscow’s outer Ring Road could not have foreseen that so many people would be ready to make the one-hour drive regularly from Moscow to visit these malls on the city’s outskirts, said Nina Davidenko, a shopper stranded in her car in a traffic jam on her way to Ikea’s store in the district of Khimky last week. "It comes as no surprise that traffic can remain jammed for up to 30 minutes on the exits and ramps leading to these stores, especially on weekends," she said.

With many people like Davidenko ready to weather traffic problems and other inconveniences to shop in these facilities, the stream of consumers seems to be increasing with each new store, and it seems the end of the boom in super- and hypermarket development is still far from reaching its climax in Moscow.

Russians are smitten with malls the size of small European villages. Also, tiny kiosks selling various goods on street corners are everywhere. However, this form of shopping seems to be becoming less popular as shoppers flock to the new malls. Experts say that this trend is evident when you look at all the carts loaded with groceries and other household goods in the huge parking lot at the Ikea mega-mall.

The Soviet retail sector — if it could be called by that name — was a massive rationing system. However, things changed after the demise of communism and the liberalization of the economy in the early ‘90s.

The new economic order brought a boom to retail in the ‘90s. Open-air markets and kiosks sprang up as Russians embraced a new shopping concept. When the first supermarkets were opened in Moscow by Sadko, a Russian–Swiss joint venture, and then by Stockmann, a Finnish chain, it was a startling thing for many Russians. And, today, Russian stores have greater variety and quantity, as well as more eager buyers, than European or American stores.

Maxim Karbasnikoff, head of the retail department at the Moscow office of Jones Lang LaSalle, said the new shopping facilities, which include refurbished Soviet-era shops and open-air markets, helped Muscovites by giving them the opportunity to buy more goods in one location.

Maria Ivanova, a 30-year-old manager in a Moscow firm, told The Russia Journal that she still remembered vividly her first experience in a modern retail outlet in 1994. "Everything was in abundance, and all the goods were neatly packed and laid out tidily on the shelves. It was something we had seen only in foreign movies," she noted.

Gradually, across Russia, the number of modern shopping facilities grew. Retailers refurbished existing facilities and built new ones as they moved from chaotic street-intersection- and stadium-shopping to modern shopping malls. However, "in Moscow, open-air markets still control about 44 percent of the retail market," Karbasnikoff noted.

With the notable exceptions of the top five global retailers, Russia has become home to many international brands — from haute-couture designers Giorgio Armani, Christian Dior to Swiss watch brands on the top-market end — to thousands of consumer-good brands from China, Turkey and domestically produced ones.

However, the actual size of this fast-growing industry has so far eluded computation by experts, partly because of the giant proportions of black and gray segments of the local economy, which reportedly account for at least 25-30 percent of the country’s GDP, experts noted.

This leads to a disparity in the experts’ estimates. For instance, Interactive Research Group (IRG), a U.S.-based research firm’s Moscow office, put the sector’s turnover in 2002 at $117.02 billion, a 9.1 percent growth over 2001’s data, while Goskomstat, the federal agency in charge of statistics, put the size at about $175 billion. According to Business-to-Business Production Group (BBPG), a Moscow-based retail consulting-services provider, $200 billion would be closer to the mark, of which the non-food sector constituted $60 billion to $100 billion.

Large chains accounted for about $72.5 billion in the turnover. The sector’s average national growth rate in 2002 was 10-15 percent. Some consolidated chains posted about a 100 percent growth rate, bankrolled mainly from locally sourced investments, experts noted.

Altogether, there are 211,900 retail firms in Russia, of which large retail outlets constitute 25,200, and a gross workforce of about 2.6 million people, according to Goskomstat.

But to retailers, Moscow — with roughly 12 million residents and a propensity for spending unparalleled in the rest of the country as — is the creme de la creme of the Russian retail sector. Muscovites reportedly pumped about $30 billion into retail in 2002. St. Petersburg was second, with about $8 billion, while other regional retail havens include Yekaterinburg, Nizhny Novgorod, Rostov-na-Donu, Volgograd, Samara and Krasnodar as well as Krasnoyarsk in Siberia and Vladivostok in the Far East.

Admittedly, average Russian consumers — with an annual official salary hovering between $1,500 and $2,000, except for Moscow and St. Petersburg, where wages are significantly higher — are not affluent. However, they are also not heavily weighed down by mortgages, loans and other long-term financial commitments like their colleagues are in the West.

"However, Moscow consumption trends generally compare favorably well with those of other Central and Eastern European (CEE) capital cities. But it has yet to reach Western standards, where less money from disposable income is spent on food items," said Alexei Tikhomirov, BBPG’s director.

Apart from groceries, the most attractive retail segments are clothing and jewelry. Local chains M-Video, Tekhnosila, Partiya and Mir hold sway in the electronic- and household-appliances segments, while the Stary Khottabych chain controls the lion’s share of the construction-materials market.

New malls seem to sprout up every month. Ramstore, the Russian retail chain owned by Ramenka, a Turkish firm, and a pioneer among foreign retailers in the grocery segment, opened three more shops in March to bring its Russian network of shops to 19 — one in Krasnoyarsk and 18 in Moscow.

Ramenka CEO Mustafa Saglam, who oversees the company’s growing business in Moscow, said that, after building a strong foundation in Moscow, the company is expanding its operations into other major Russian cities.

In the furniture segment, which posted a gross turnover of $1.67 billion in 2002, Swedish furniture giant Ikea leads with over $400 million in direct investments, excluding those spent on goods for sale and parts going into building a hypermarket and a mega-mall — both reputedly the largest in their categories in the CEE countries. It also plans to invest about $400 million more in expanding its operations over the next three years, including building a furniture factory either in Karelia or Moscow Oblast, in addition to a functioning wood-processing factory in Leningrad Oblast.

"We have plans to open two stores every year in Russian regions in the foreseeable future," Lennart Dahlgren, Ikea’s CEO for Russian operations, told The Russia Journal during festivities marking the company’s third year in Russia in March. "However, huge import tariffs slapped on our imported goods for sale in Russia, which are sometimes about 120-130 percent of the goods’ nominal values, and the local furniture makers’ proposals to increase them to 150 percent are issues of serious concern that could hamstring our ambitious plans for Russia," he added.

Experts have named macroeconomic factors, space-acquisition problems, bureaucracy and the country’s vastness coupled with its poor transportation system and distribution logistics as some of the problems keeping global-retail behemoths out of the Russian retail market. Other reasons for this include an underdeveloped franchising system and inadequate numbers of qualified retail-management personnel to man these companies’ outlets, especially in the regions.

Despite these hurdles, the accelerating retail-migration pace is expected to continue shaping the retail industry in the CEE’s emerging markets, including Russia. This is because most global retail behemoths have no alternative but to shift some of their operations from their saturated home markets to untapped ones elsewhere in order to remain competitive globally, experts noted.

The quest for growth remains a key strategic issue for multinational chains in the CEE, which very often focus on mergers and acquisitions to sustain development. The ongoing internationalization of retail in the CEE countries is part of a trend toward global convergence that has similarly affected Latin America and Asia," said Jean Jacques Vandenheede, a VP marketing director for retailer services in Europe.

This trend has already changed the CEE retail landscape dramatically, as an element of novelty around hypermarket shopping has drawn even those who cannot afford to shop at these ultramodern facilities. Such people are often seen basking in the atmosphere and enjoying the hive of activity that is synonymous with modern shopping complexes. The CEE countries readily fell in line as top global retailers poured into the region. Currently, Poland leads with 12 of the top 15 global retailers, nine in the Czech Republic and seven in Hungary, ACNielsen noted.

However, Moscow-based experts cautioned that Russia might not gain much in the expansion of the top global retailers into Eastern Europe, as it differs from other CEE countries, although they were all once in the same economic bloc

Russia, traditionally, is not as open to foreigners as other CEE countries. Besides, it is much larger, and its strong local retailers are unlikely to give up their positions very easily, said Yana Zinaidova, a senior researcher at IRG. "I’ve been to several business conferences where Russian retailers had announced plans to ask the government to make laws to prevent foreign retailers from entering the market, or making it difficult for them to do so. A similar situation exists for Moscow-based retailers when they try to bring their operations to Russian regions," she noted.

This is exactly opposite to the situation in other CEE countries where local retailers lay more emphasis on attracting foreigners to their markets, she added.

Despite the size of the Russian retail market and a population of about 147 million, the largest in the CEE countries, global retailers are still on the lookout for more sustainable macroeconomic stability in the country and the maturation of the retail market in particular, experts said.

"That is why only Metro, out of the top five global retailers already operating in most of the CEE countries [the others being Wal-Mart, Carrefour, Ahold and Kroger] has come to Russia," said Zinaidova.

Number of food chain stores in Moscow May 2002 297 Dec 2002 373 May 2003 440 Dec 2003 530

Traditionally, only companies that are not scared of huge risks come to Russia first, while more conservative investors are always waiting for the right time, said Alexei Tikhomirov, BBPG director. "And, unlike the [other] CEE countries, the Russian retail sector can entertain more investors — irrespective of when they finally move over, as the retail market is still highly unsaturated. Therefore, there is no fear that everything will soon be bought off, or [that there will be] no space to occupy like in smaller countries," he added.

Tikhomirov noted that only international retail companies with flexible management and market-expansion policies can fully tap the inherent potential of the country as the area west of the Urals — commonly referred to as European Russia — differs drastically from the area to the east of the Urals — or in the Far East — in terms of retail development, people’s disposable incomes, social infrastructure and distribution logistics.

"The generally underdeveloped nature of the sector also partly explains the lukewarm attitude of the top global retailers. For instance, Wal-Mart’s traditional policy in new markets is to acquire local chains. At the moment, it seems most of the existing local chains fall short of its standards," he added.

With the exception of Ramstore and Stockmann, foreign chains have been in Russia for less than one or two years, and it is, therefore, too early for some of them to compile comprehensive financial reports on their performances, Zinaidova said. "This is why it’s difficult to calculate their actual market share, which is quite small at the moment," she noted

Tikhomirov said the arrival of few foreign retailers, which bring their wealth of retail experience to the global scene, huge financial bases and professional retail-management squads, along with the rumor that cross-border retailing behemoths such as Wal-Mart, Carrefour and others are contemplating entering the sector, have given a positive impetus to the market, and jostled local retailers into action.

And, there are noticeable signs that the beefed up activity has already started yielding profits as local chains posted highly positive results in 2002.

Leading the pack in turnover is Perekryostok, an affiliate of Alfa-Group, an industrial-financial holding, which has 46 shops, and reported a turnover of $325 million in 2002. It plans to build eight more shops in Moscow, two more in St. Petersburg and a first store in central or southern Russia.

Its rival, Sedmoi Kontinent, posted a turnover of $300.5 million last year, up by 49 percent from 2001’s data with plans to increase it to $420 million and its network from 31 to 50 shops in 2003. Another key player, Pyatyorochka, a St. Petersburg-based chain, which is partly funded by the European Bank for Reconstruction and Development, has announced an ambitious plan to boost its retail chain to 200 shops countrywide and create a turnover of over $700 million in 2003.

Barbara van de Kerke, an ACNielsen retail-services manager, said strong domestic chains will continue their quest for growth and are not likely to become engaged, in their majority, in a market-sweeping wave of mergers and acquisitions in the near future. "They are more likely to concentrate on building brand awareness and strengthen their presence in the market, since this will give them the ability to sell or merge at a more favorable moment in time to an international party," she noted.

However, experts say Russian retailers have two development options to follow as shown by other countries’ experiences.

It can follow the route taken by Hungary and the Czech Republic, where super- and hypermarket shares have risen almost to 50 percent — a retail route similar to some countries in Southern Europe like Greece, Italy and Spain, where the share of super- and hypermarkets is not likely to ever exceed 50-60 percent. In this scenario, a large number of small, traditional food and specialized stores can survive pressure to keep a wide presence in the market. Alternatively, there is the route taken by Northern European countries such as the Netherlands, Great Britain and Belgium, where shares of super- and hypermarkets constitute almost 90 percent of the market.

"It is still too early to speculate which of the two models of purchasing behavior large population centers in Russia will adopt in order to shape their future, as far as the retail business is concerned," van de Kerke said.

But experts said that, for several reasons, small-sized Russian chains will not go into extinction after the arrival of cross-border retail giants, as was the case in other CEE countries. "First off, the market is still very much unsaturated. Also because these foreigners are mainly interested in large-shopping formats in the hypermarket sector. Also, Russians’ shopping habits — daily shopping in small quantities, [plus] most people don’t have private cars and the relatively low incomes [that exist in Russia] — will still require the existence of smaller shops," Zinaidova noted.

Van de Kerke agreed, noting that the number of such convenience stores in the United Kingdom France and the United States is under 500 per million inhabitants, but up to about 2,300 per million in Portugal and 5,000 per million in Poland — figures which give insight into what the picture might look like in Russia in the future.

Van de Kerke pointed out another distinguishing feature. "By nature, habit and need, most Muscovites still remain strong bargain hunters, especially the pensioners, who are prepared to stand in lines many times a day at different traditional stores to fill their shopping baskets," she noted.

This is understandable, as pensioners live on an average of $50 a month and have free public transportation at their disposal. They spend a great deal of time looking for the best bargains in town in order to save just a handful of rubles, she added.