Faster and faster

Absorbing, investing, borrowing, inventing new formats - retail networks keep on their aggressive movement all over the country.

By Anastasia Matveeva

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In 2005 large retail networks actively continued to develop in keeping with the trend of recent years. Networks opened new shops and conquered new regions with steady advancement. For instance, according to Renaissance Capital analysts, average increment of the largest retailers in food sector amounted to 47%, but the sector itself grew up only by 28%.

A period of relatively organic development was substituted by a period of active acquisitions of small nets by the market leaders. However, the idea of merging the market giants was also in the air: experts seriously discussed the possibility of Sedmoi Kontinent and Perekrestok joining forces. In this particular combination something did not click, but the idea was implemented in 2006: Perekrestok supermarkets united with soft discounters of Piaterochka. And Sedmoi Kontinent was for a while satisfied with absorbing several small players (part of Samokhval network, Petrovsky, Altyn).

Sometimes acquisitions were accompanied by head-on encounters of competing parties. Thus, Piaterochka integrated 25 shops of SRT company, formerly operating on Kopeika franchise. Pretty often acquisitions proved to be the shortest route to regions and neighboring states. Marta holding purchased Apelsin network in Kursk. Perekrestok bought five supermarkets Spar Ukraina at the Ukraine. Sedmoi Kontinent having distinctly developed only within Moscow-city limits, moved to Kaliningrad by buying Altyn. Lenta, for a long time loyal only to one territory (same as Kontinent) – St.Petersburg and Leningrad region – started expanding to other regions, too. True, no development is possible without regional expansion. Competition in capitals is getting tenser: according to expert opinion, market saturation with network formats brought about reduced attendance of the largest retail shops. In St.Petersburg the share of "civilized" trade reached 60%, but as a result attendance of Piaterochka shops within nine months of 2005 went down by 11% comparing with the similar period in 2004 (according to UFG).

Consolidation of Russian retail trade is not finished

Next to moving to regions, big retailers also expanded to "neighboring" formats, trying to enlarge their coverage of consumers. Sedmoi Kontinent has already distributed some of its shops to premium-level Piat Zvezd (Five Stars), average level – Universam, neighborhood shops Sem Shagov (Seven Steps), and actively started building hypermarkets Nash (Ours). Piaterochka owners and their namesake discounters made intense efforts to develop Karusel (Merry-Bo-Round) hypermarkets, rejecting their own former policy. One of the owners had once said: hypermarket format is too complicated for a Russian company; you’d rather avoid competing with foreigners, who brought the mechanism to perfection. Metro, next to cash&carry format, introduced Real hypermarket – in Moscow and Togliatti. Eldorado household appliances network from the very beginning planned to cover the lower price segment – but recently it started experimenting with a premium niche and opened Electroplaza showroom.

Entering regions and investing into new shops and infrastructure (several retailers declared their intention to build distribution centers to optimize logistics) result in serious investment programs. Piaterochka network spent for development over 200 million dollars, Perekrestok – over 150 million dollars, Sedmoi Kontinent - over 30 million dollars. 2006 plans are even more impressive. Thus, Sedmoi Kontinent is to build in 2006 four hypermarkets Nash, each costing no less than 20 million dollars.

As a result big retailers turned into serious players at the loan market. In may 2005 Piaterochka made IPO and gained 598 million dollars. Following the placement of shares the network issued a bonded loan for 1.5 billion rubles, and by the end of the year it started preparations to issue a 3 billion dollars loan. Viktoria made an inaugural bond issue for 1.5 billion rubles, Magnit – for 2 billion rubles, Kopeika – for 1.2 billion rubles. Perekrestok received a 125 million euro syndicated credit from Western banks.

For several networks (Magnit, Kopeika, Diksi) 2005 proved to be the year of preparation to enter the stock market. So far only Magnit implemented the plans into practice. Due to unfavorable market situation the others postponed the stock market placement – until the weather changes for the better.

Investors were mostly positive about securities of trade retailers. But according to certain analysts, aggressive expansion increases financial risks and brings potential rating of retailers down. But the nets can not slow down. The stakes in the race are too high: you may be easily driven out of the market within the next five years. At present foreign corporations are not broadly represented in Russia (only three grand companies: Metro, REWE, Auchan), one of the foreign arrivals (German AVA) already left the market being unable to hold the ground, Turkish Ramstor after quick start is already lagging behind the Russian competitors, but sooner or later other companies would join in: Tesco, Carrefour, Intermarche. Besides, Russia has well developed networks of the second level, which may be of interest for foreigners as subjects for absorption. Russian players may bring surprises, too. For instance, in 2005 household appliances market with four leading networks was attacked (massive TV promotion campaign) by another player, Expert network. The industry consolidation is far from being completed (see diagram). Under such circumstances even to stay put you have to run very fast, like the black queen in "Through the Looking Glass", and to pass by the others you have to run even faster.