Ekaterinburg Shopping Hubs Tying Connections

13.08.2009 — Analysis

Notwithstanding the crisis, people living in and visiting Ekaterinburg have spent 182 billion roubles shopping in January-June 2009. An average Ekaterinburg citizen has spent 77,500 roubles in shops. Judging by this indicator, the capital city of the Sverdlovsk Oblast is way ahead of all Russian cities including Moscow and St.Petersburg. Viktor Konteyev, Ekaterinburg's Deputy Mayor, gave RusBusinessNews an exclusive interview on the Urals shopping habits.

- Mr. Konteyev, the statement of IKEA management on bureaucratic barriers in some regions of our country hindering the development of business has recently made a stir within and especially outside Russia. How do they treat foreign retailers in Ekaterinburg?

- To begin with, I will talk about the competitive advantages of Ekaterinburg from the point of view of retail network development. For about 5-6 years we were the only Russian city which started the development of its own retail sector. Thanks to Monetka, Kirovski, and Kupets, the establishment of powerful food retail sector has become possible. No doubt that foreign chains have been looking closer at the city for some time now; they have done their market research, they studied the macroeconomic situation - and yet were in no hurry to come here, seeing rather formidable competition in Ekaterinburg.

Nevertheless, it finally happened as the city's macro economy in 2006-2008 was very attractive for investors, and made it possible not only to invest money but also have the payback within a reasonable time. It was then that first foreign non-food retail chains opened their stores in Ekaterinburg.

I would note that currently there are 150 chains operating in Ekaterinburg - food and non-food retail, catering, and consumer services.

When foreign chains arrived we set a goal that each chain must not only bring new goods and new food matrix but also new technology and new culture of service.

In the course of five years we have developed absolutely normal working relations with foreign chains. Of this I can give you many examples.

When MEGA was built in Ekaterinburg and Michael Nelson became the project manager, for two years, as a member of the municipality's delegation at the International Commercial Property Exposition EXPO REAL in Munich, he introduced the city from the point of view of a developer and investor.

Just yesterday I had a meeting with the new manager of Auchan in Ekaterinburg; we discussed ways to increase the volume of contracts with local producers and suppliers. I had similar meetings with IKEA and many others, too.

For example, McDonald's has been looking at Ekaterinburg for a long time. Maybe their corporate ambitions were too high. Nevertheless, they have now three restaurants in the city and plan to open a McAuto [a drive-thru].

Ekaterinburg has all the prerequisites for international chains to open and develop. Auchan is planning to continue the development; we know that OBI is going to build its second facility. We have other requests the implementation of which will not go as quickly, given the existing economy situation. Nevertheless, not a single international chain has given up ideas of continuing its development in Ekaterinburg.

- Would it be correct to say that there are no dual standards for retailers in Ekaterinburg, that the conditions are equal for both foreign and Russian companies?

- Our goal is to use all of the resources of international chains and maximize their adaptation to the Ekaterinburg area. The only objective there is that the citizens must get a new quality of goods, a new range of products, and a new culture of service.

Beyond any doubts, each international chain has its own corporation level. The legal and organizational basis, and logistics have been developed in their home countries. We have our own peculiarities. For example, when we look at the huge range of products in Auchan we understand that a certain part of their products is not produced within the Sverdlovsk Oblast, and has to be imported from Moscow and Europe.

When METRO has arrived and began to sign supply contracts with local producers, the latter were in shock as they were not ready for the terms of contracts proposed by METRO. However, now we can say that the relations between our producers and the foreign food retailers have liberalized to a certain extent.

We, the authority, have to resolve the two matters - that of information, which means providing the information about market participants (operators), and that of organization. This does not mean bureaucratic administration. I believe that the business relations must be based on the economics of the market. Bureaucratic administration of the market may be efficient at the first stage; this, however, may lead to adverse effects at the second stage.

The parties have to successfully negotiate; however, in the existing economic conditions we set the goal for ourselves to monitor the credit discipline. A factory has produced a product and supplied it to the retailer, then the retailer defers payment for three months. We, then, certainly have to remind the chain of the fact that the producer needs funds to continue to operate. The producer-retailer-authorities triangle that we have built helps finding quicker answers to many questions.

- Do developers approach the city administration now with proposals to build new shopping centres? Or, has the crisis postponed the time for such visits for a few years?

- We have a project called "Shopping Hubs". It includes the development of retail, catering, and consumer services. Our goal is to have a whole range of products and services within such a hub. The MEGA centre area is the best example - it has car dealerships, an electronics store, and METRO.

The very name for the concept - "shopping hub" - has first appeared in Ekaterinburg. This format does not exist anywhere else in Russia. They "tie up" over 80% of shopping areas in Ekaterinburg.

In 2007-2008 we became the number one city in Russia in terms of shopping space per 1,000 citizens, this amounted to 840 square metres. This is more than in Moscow, Saint-Petersburg, and other cities. This year, nearly 200 thousand square metres of shopping space is going to be commissioned; thus, by 1 January we achieve the level of about 900 square metres. This is less than the 1,200-1,300 square metres forecasted before the crisis, however. Our goal is to locate the shopping centres, catering, and consumer services evenly - in terms of geography, specialization, and buyer and traffic access convenience.

In order to think of the construction of a shopping centre, one must be very well funded. Secondly, one should have a well-developed professional concept. This has been an underlying problem for some of the first shopping centres in Ekaterinburg. An underdeveloped concept in terms of product range, price segment, and buyer traffic has driven some of the shopping centres into obsolescence - buyers won't go there.

Ekaterinburg currently has 21 shopping centres larger than 5,000 square metres of shopping area. No doubt this format is interesting for the shopper, since goods and services are offered in an integrated manner. Therefore, the crisis notwithstanding, several new shopping centres will be commissioned this year.

- Is there no risk of Ekaterinburg becoming oversaturated with shopping centres?

- When we speak of saturation we keep in mind two indicators. We are undoubtedly ahead of the average national level; however, but we lag behind the average European level by 30-35%.

Moreover, one should not only assess the shopping space per capita, but also the level of spending capacity and the real income of population. If there is a gap between the forced growth of shopping spaces and the low wages of the buyers, shopping centres will remain empty.

According to the 2008 macroeconomic indicators Ekaterinburg has achieved the trade turnover level of 362 billion roubles. This is 67% of the Sverdlovsk Oblast turnover total. Furthermore, the trade turnover in 70% of the subjects of the Federation is lower than in Ekaterinburg.

The combination of new shopping spaces and the high spending capacity have ensured the key element - the actual saturation of these shopping centres with shoppers. The situation is currently changing - sales volumes are reducing significantly, mostly in the non-food group e.g. household appliances and cars.

- In recent years, besides the foreign retailers, hotels of global brands have appeared in Ekaterinburg. How would you assess the prospects for this business?

- When reviewing the results of the June SCO Summit in Ekaterinburg the city got high marks and this is very important for me as a professional - Ekaterinburg can handle international projects within its infrastructure.

The hotel business has actually started to develop just six years ago when Ekaterinburg only had three municipal hotels. Now there are 54! This is a massive breakthrough. Recently we have been building 10-12 hotels a year. Hotels are a serious part of the hospitality infrastructure. Without it, Ekaterinburg will never establish itself as a business travel centre.

We have achieved a rather good occupancy rate of 68% in 2008. The current adjustments are severe as this indicator has halved for some of the hotels.

What do we have to do in the nearest future? We must develop a system for rebranding Ekaterinburg. The city is ready to host over 500 congress events a year. 200 trade fairs are held in Ekaterinburg annually. Some of these events' participant will stay at hotels.

In hotel as well as retail business, the arrival of foreign chains - Hyatt, Park Inn, and Ramada - means new technologies and a new professional level. We have arranged for the chains to invite their leading managers for conducting master classes. We have to establish a business community of hoteliers in Ekaterinburg.

- The consumer services sector will hardly be of any interest for foreign businesses. This is the domain for our own entrepreneurs, and, by all appearances, they are not sitting on their hands...

- The number of consumer service enterprises has grown by 20% in 2008. 500 businesses providing 42 kinds of services have come to the market. These are hairdressers and barbers, shoemakers, tailors, etc. In the first half of the current year, 115 more businesses were established.

The volume of their services is 3.8 billion roubles in current prices. As compared to January-June last year, the growth is 118%.

The figures prove that at the time of crisis the consumer spending moves from goods to services. The reduction of income does not allow them to buy a new suit or pair of shoes, so the citizens have them cleaned and repaired. We did forecast this situation last year.

However, the basics of the consumer service network were, of course, established before the crisis. The retailers would have never sold so many cell phones and other household appliances unless Ekaterinburg had a service maintenance network.

The development of consumer service sector achieves another very important goal, the job creation. In 2009, we set the goal of creating 10 thousand jobs - in retail, catering, consumer services, hotels, and business centres. Ekaterinburg faces the challenge of redundancies at large plants. The specialists who worked there have a high level of intelligence and organization skills. This is much higher than the service sector market. Today, the engineers who were made redundant offer their services in the labour market. Smart managers must see this and carry out a high quality personnel reform by hiring educated specialists.

- Then there is the problem of professional knowledge and skills - an engineer does not know the nuances of fine cuisine or sewing technology...

- They need to be taught. I would note that even the graduates of industry-specific colleges are not prepared to work in the new market conditions. The key challenge for our education system is in that it is monopolized. When there is no competition, quality will not prevail. The services sector is growing whilst the inflow of trained personnel is not always adequate. Entrepreneurs are experiencing acute staff shortages.

What do we do? Each year 12 to14 thousand people attend professional development training courses. Moreover, employers conduct expert assessment of all training programmes. It is they who assess the number of classroom and workshop hours. All in all, 36 private training centres operate in the city currently, including those in chain structures and large shopping facilities.