Growth instead of profit

Stephen A. Jouline

Miniscule profit, public borrowings, access for minority shareholders – traders are ready to do anything to achieve average market growth of 40%.

According to Expert-400 list, retailers’ profitability is ten times as little as their rate of growth. It is quite a peculiar situation, as distinct from other dynamic well-off sectors of industry (for instance, profitability in non-ferrous metals is comparable with rates of growth — 41% against 51%). Low profitability of retailers is compensated with a vengeance (see diagram 1): network owners are aware that, in keeping with the world’s practices, sooner or later their leader would find itself in the top ten of the most expensive Russian companies; Wal-Mart Stores occupies fourteenth line in the FT Global 500 list (capitalization) and second in revenues. So far the Russian retail revenue leader Eldorado holds position 30, and the capitalization leader Magnet – position 48.

Cold stock market

Retailers’ relations with the stock market are quite moderate. The three retailers in Capitalization-200 list had to move down, and a novice Diksi group in time of placement of their shares had to reconsider their price range and bring them down. Netherlands-registered Х5 Retail Group is traded in London, to the utmost irritation of FSFI. Х5 plans for SPO were reconsidered and put off till next year. X5 is fine to have Alfa-Group as a strategic investor, but networks with less renowned owners may face dramatic lack of investments. Net aggressive expansion can not happen without generous financial support. Trying to level with their own speedy rates of growth, large-scale retailers move to poorer regions — rigorous competition in capital cities makes federal and foreign players to absorb their regional colleagues and open their outlets all over Russia.

Times of debut bond credits are over (see diagram 2), and retailers enter the market with much larger borrowings. Bond holders look with suspicion at growing appetites of nets and are willing to give low interest credits only to those with reliable strategic investors or highly probable strong patrons in future. Analysts are unanimously convinced: investors would be highly pressed by foreign colleagues.

Tobacco road

Expert-400 retailers’ list was literally invaded by “daughters” of transnational corporations. Traditionally main apprehensions with regard to foreign influence in Russia were always related to financial sector, but threats were implemented in the area of consumption. The largest Russian foreign-owned bank, MMB, holds position 147 and is a long way behind the leader (Sberbank) — but the “daughter” of the German giant Metro Cash and Carry has already been in the lead. Certain analysts predict a “tobacco road” for Russian retailers (we have to remind you that all tobacco industry in Russia has been shifted under control of transnational corporations). Food industry has also been subjected to foreign “daughters” attention: Baltica (position 54 in Expert-4000) belongs to BBH, SUN Interbrew (73) — to InBev, Nestle Food (94) — to Nestle, Coca-Cola HBC Eurasia (116) — to Coca-Cola HBC, Mars (117) — to Mars. Foreigners presently control over half of the sector revenues, and expected deals to buy local players would increase the share to three quarters. Obviously, it is easier for a global retailer to find common ground with a global manufacturer of consumer goods.

Still, another option is also possible — moderate presence of foreign investors, like in cell communications, with three largest players controlled by the Russian shareholders. Recently Russian retailers have been successfully following Western good practices: they pay special attention to reduction of losses, care about loyalty of their clients, and develop franchising. But local networks may hardly expect anything more than special areas in certain niches (like Euroset) — all other chances get slimmer.

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