by John Helmer, Moscow
Vkusville sounds half Russian, half French. Piquant, you might say – пикантный.
The name can be translated into English as Taste Town. But for the name of a new chain of food stores this sounds so hackneyed that in your average American or British town you would expect to find there all the sugarised, carbohydratised, and preservatised foodstuffs in the brand-name packages you can find everywhere else in the civilised, genetomodified world. So if you have the money to indulge your appetite, you would leave the cliché store to the plebs to patronise. Not you, nor the bourgeoisie in general.
Moscow is quite different; but not because it doesn’t have an unequal distribution of income, a class of plebians below, a bourgeois class above, and a power elite above them, each with their distinguishing consumer and shopping ideology. That hierarchy of class taste has been the most enduring import from the US, and the most effective NATO strike across the Russian frontier, since Mikhail Gorbachev first invited it; Boris Yeltsin accelerated it; and Vladimir Putin – well, that’s another story.
Not because of him, however, but because of the economic and propaganda warfare waged against all Russians by the US, UK, German and French governments since 2014, Vkusville stands for the taste for Russian independence; for the revival of national (Soviet) foods; and for the rejection of everything the globalised food industry has been selling to Russia. The outcome in Moscow – also growing in St Petersburg, Nizhny Novgorod, Kaluga, Bryansk, Tula and Voronezh — is the chain of specialty food shops calling themselves Vkusville. Since 2012, they have multiplied in just eight years to more than one thousand two hundred, with a revenue in 2019 of Rb82.5 billion ($1.3 billion). That’s an annual growth rate of 51%. Profit for last year came to Rb3 billion ($47 million) – that was an increase over 2018 of 163%.
A year ago, Vkusville advertised these numbers to New York investment banks in the hope of selling part of the Russian shareholder’s stake in the business to the Nasdaq stock market – for a healthy number of dollars.
Andrei Krivenko, the creator and control shareholder of Vkusville – through a Moscow-registered entity called Vkusville Limited Liability Company – started the chain of shops in 2012. It followed a more limited food retail network he called Izbyonka (“little old village cottage”), which specialised in fresh dairy products.
Krivenko has produced a book explaining how he succeeded. The book, written by Yevgeny Shchepin, is called “Vkusville: how to stage a retail revolution by doing everything wrong – 37 Rules”.
Left: Andrei Krivenko. Right, “Vkusville, How to stage a retail revolution by doing everything wrong – 37 Rules” by Yevgeny Shchepin. Download the book here.
Krivenko started in 2009 with his idea for selling fresh and perishable dairy foods. His business calculation was that this niche in the market drew dedicated if small numbers shopping several times a week for the traditional range of Russian products – milk, maslo (butter), kefir (fermented milk), smetana (sour cream), yoghurt, tvarog (cottage cheese), hard cheese. Krivenko figured that conventional grocery retailers were cutting into the market share of the fresh produce market stalls; and that consumers who wanted the freshness and taste quality of the farmers’ markets were worried about the safety of the food chain, especially for their children. He wagered they would pay a premium if he contracted with the farmers, organized the logistics of transportation and storage himself, put his brand-name on everything, and offered them his protection for sale. They did.
As successful as this Izbyonka idea was, it ran into a ceiling on growth. By the end of 2012, three years after Krivenko began with Izbyonka, the chain had expanded to more than 300 shops generating more than Rb4 billion ($154 million) in annual revenue. But it was too specialised, he thought. He needed a new market concept to combine his lines of dairy products with bread and pastry, piroshki and pelmeni, fresh fish and meat, fresh vegetables, desserts and confectionery (halva, pryaniki, varenniki) in ready-to-eat forms, all with a proprietary label declaring that everything was made exclusively for Vkusville and by that name guaranteed by for safety and quality.
The autumn of 2014 was the turning point. The NATO sanctions and Russia’s counter-sanctions disrupted the food market, but gave a big impetus to Krivenko’s enterprise.
Compared to imports, Vkusville’s products, domestically sourced and priced in devaluing roubles, grew cheaper. The cost of rents for multiplying the spread of his outlets around Moscow also fell. The response from consumers was a sharp increase in their patronage – and the press amplified the trend as a symbol of national resistance. While the leading grocery stores were raising their prices to adjust to the new rouble exchange rate, Vkusville reduced prices for seventeen socially important products, including kefir, milk, sour cream, bread, and eggs. The original word of mouth, which characterised Vkusville as an affluent, bourgeois store, disappeared. The pricing strategy of the large-scale supermarkets was slower to respond. Their prices didn’t begin to decline until the spring of 2015.
In his book Krivenko explains the late-Soviet era cooperative ethos he introduced, with none of the top-down management business model taught abroad and enforced in the Russian large grocery chains. For the archive of reports on those, start with the failure of Magnit here; and of Dixy here. Lenta has done better; Mikhail Fridman’s X5 group (listed on the Moscow Exchange as FIVE) has done best of all.
The pattern, however, has been for the larger Russian food retailers to decline in value and market assessment since 2014 until the start of this year.
5-YEAR MOSCOW STOCK EXCHANGE TRAJECTORY FOR THE RUSSIAN SUPERMARKET MAJORS
Key: grey=Magnit; yellow=Lenta; green=X5. Source: https://markets.ft.com The market capitalisations are: Magnit, $7.5 billion; X5, $10 billion; Lenta, $1.4 billion.
In devising the transition between his dairy product and all-food shops Krivenko says he sent his people to study the food departments of the London supermarket chains – Tesco, Waitrose and Asda. The Vkusville brand name was chosen for its double meaning – not only the place to buy fresh and healthy food to eat, but a village with taste in the sense of discernment. This was a deliberate pitch at a middle-class clientele. It was reinforced by a cleverly designed smart-phone app which enabled constant feedback between the management, its suppliers, and the store customers.
Loyalty programmes attached to customer cards were introduced to offer special discounting for clients to identify their favourite products, and continue buying them; novel daily or weekly menus were introduced for children and gourmands. In short, a revival of the culture of taste for food prepared the Russian way. An estimated 90% of Vkusville’s customers are loyal card-carriers.
In the second half of 2018, a market survey found that 82% of Russians considered health and physical vigour to be a primary personal value; in other countries around the world, just 64% say the same. A measured 58% of Russians said they followed the rules of a healthy lifestyle when they were shopping. The share of such people in the market will continue to grow, the survey predicted, because Russian retailers are differentiating themselves from their competitors by offering natural farm and eco-friendly products. Vkusville was identified in the survey as the front-runner, then the epitome of this trend.
The initial spread of the chain was dictated by the logistics of farm delivery, warehousing and redistribution. The continued multiplication of Vkusville shops depends on the level of consumer income in regions at greater distances from the big cities and Krivenko’s warehouses.
With the expansion of the network, the format of the stores has also changed. The product range of the first Vkusville shops was about 200 items. By 2018 this had jumped to 2,000. Krivenko’s concept had turned into a small-scale supermarket; the floor space of the shops expanded; the customer basket grew, along with his checkout bill. In parallel, the big chains found their smaller format shops unprofitable and closed them. The higher priced chains with small formats have been unable to open more shops as the pockets of their customer base have emptied. Vkusville has been able to expand its market share as a consequence.
The average markup for Vkusville’s product range is reported to be around 55%. This is larger than Magnit’s reported markup average of 40%. This pricing is necessary, Vkusville managers and market analysts agree, because almost 70% of their product range is perishable and must be monitored intensively and changed very often. The comparable proportion of perishables and short-life products on the shelves of the large-format supermarkets is less than 10%.
Rivals at the higher price end of the market like Azbuka Vkusa (“Alphabet of Taste”) stock only about 40% of their shelves with perishables. But when this year’s pandemic struck, the competition for Vkusville also increased online. This is where overhead costs can be much lower, and home delivery an advantage to locked-in consumers. “Eat Village Style” (Ешь Деревенское) is an attractive example of how the supply chain from farmer to dining table can be shortened at a profitable price for the producing and retailing chain and also for consumers. The ingenuity of the Russian entrepreneurship, and also the variety of foodstuffs for sale, are unmatched in Europe or the US. The rest of that world, having isolated and attacked Russia, has opened its mouth on hostile propaganda. It can’t eat it.
By the end of 2018, Vkusville had accumulated Rb 3.1 billion ($50 million) of retained profits; it carried no bank debt; the shareholder had not diverted his proceeds into offshore tax havens, like many well-known Russian consumer product brand owners.
With the growth of revenue and of bottom-line profit, the prospect of large dividend payouts dawned on the investment market. In September 2019, Krivenko advertised to Reuters that he was thinking of selling his shares on the New York Nasdaq exchange. In March of this year, Krivenko told Reuters he was going to open shops in The Netherlands and France.
Krivenko didn’t need to advertise his success to the capital markets. Baring Vostok had already moved in 2016, buying a 6.8% stake through a Cyprus offshore entity, and then increasing that to 12% in September 2017. Baring Vostok reported these transactions without revealing the company’s valuation or the price Krivenko took for his shares. Krivenko also sold shares in a start-up online grocery retailer he called Tealsy to Baring Vostok in March 2019. Krivenko and his spokesmen claim he has not been taking personal dividends from Vkusville’s annual profits but reinvesting in the expansion of the company. His cash reward has come from share sales to Baring Vostok.
Nominally and officially, Krivenko owns just 1.8% of Vkusville. The remaining 86% is held by a Krivenko entity called Project Izbyonka LLC and a company called Evolutionary Target JSC which belongs to Evgeny Lisitsyn. Together with Baring Vostok, they have been telling Moscow and international brokerages and investment banks that they want to make an initial public offering to strike a target market cap and share price. In Moscow this has been promoted since the beginning of last year by the Aton brokerage and an analyst, Victor Dima. This week Dima refused to answer questions on what has happened to the IPO plan.
Krivenko’s share market tactics have been bourgeois, though not in quite the same sense as his food retailing strategy. He hired a public relations agency in the US to conduct informal presentations to American investment banks in the hope of drawing IPO mandate proposals; that was in the last quarter of 2019. Krivenko then claimed this past March, at the beginning of Russia’s first coronavirus wave, that the pandemic had not impacted his business “as the company sells a negligibly small amount of products from China… adding that he was also studying the possibility of selling products with a longer shelf life in China.” Krivenko said then he would not provide a projection for this year’s revenue and profit figures.
This week he and his press office were asked to comment on the impact of the pandemic after nine months on his clientele’s consumer food preferences; their basket size and value; revenue and profit for the company; and Vkusville’s competitiveness, especially in relation to the online market. They were asked by telephone and email several times. They refuse to answer.