Discounter As Precursor Of Takeover Of Urals Retail

21.10.2009 — Analysis

The Urals Region has become a sweet spot for large operators of retail trade. Effective consumer demand remains high even at the time of crisis. Many local producers are working at the local markets which means there is always someone to make a supply deal with. The most important factor, however, is that having got into a turbulence area inefficient players leave the market. Retail premises and consumers purses fall to the fittest.

X5 Retail Group, the largest Russian retail chain, has increased the number of its stores in the Urals by 15% in the first half of 2009, their number reached 150. Aleksey Krasnikov, the Director of the Х5 Retail Group N. V. Urals office, talked about the regional food market potential in the interview for RusBusinessNews.

- How would you estimate the capacity of the Urals retail, and in particular - food - market?

- According to the Rosstat data in the six months of 2009 the integrated total volume of trade in the Sverdlovsk, Chelyabinsk, and Tyumen Oblasts, and in the Perm Krai amounted to 600 billion roubles. The food segment is responsible for 45%, the rest is non-food stores.

Of course, the crisis affects our chain. However, in the structure of the Urals X5 office the discount stores (Pyaterochka) account for 80% of assets. And the choice of the thrifty buyer en masse has shifted towards this format since the beginning of 2009. As a result in the period from January to September the Group's sales in the region have grown by 11% in comparison to the same period last year. Growth of the LFL traffic in all retail formats in the third quarter 2009 amounted to 18.6% compared to the third quarter 2008.

- X5 does not make a secret out of its plans to continue the expansion in the Urals market. How do you calculate the efficiency of new outlets and what sort of investment does opening of a new shop require?

- Coming to a new market we assess the level of paying capacity and preferences of the population, the level of development of transport and logistics infrastructure, and competition. For instance in Chelyabinsk there is an acute shortage of premises for the development of hypermarkets. This is why Karusel and Perekrestok formats will not come there very soon. In this respect the situation in Tyumen is better. Retail and entertainment centres here have premises that meet the company's requirements (the total area of the centre 35 to 40 thousand square metres with parking for 900 cars and entertainment area). The spending capacity of the population in the oil and gas capital of Russia is higher. This is why Tyumen has become the first city in the Urals Federal District where the company opened two Perekrestok supermarkets.

It is impossible, however, to be able to say a priori which format is going to be more successful. The optimal option is when the company is working in several directions. This raises the economic sustainability. It is worth mentioning that it is easier, faster and cheaper to open discounters, as they take less room and need less investments of resources and time. To open a Pyaterochka, for instance, we need 1-1.5 months, a supermarket takes 5 to 6 months. Hypermarkets larger than 10 thousand square metres can even take years to start up as the process is directly linked to the availability of premises on the real estate market.

- The Urals food retail is still highly competitive: multinational companies, large Russian chains, and regional and local retail players with many years of history behind them - they all are represented here. How to you draw shoppers to your stores?

- Every day we monitor other segments of the market, we continually conduct actions that stimulate sales, and we are always ready to offer out shoppers the lowest prices. We cut costs through the constant work with our suppliers, large volumes, and timely payments. Moreover, to reach the necessary level of purchase price we even once consulted our suppliers on issues of logistics so that they could cut their costs.

One more way to reduce spending both ours and manufacturers' is the development of own brands (OBs). From the point of view of economics they differ from branded products just by the lower marketing costs. In September 2009 the Urals office started selling flour under the "Krasnaya Tsena" (best price) brand. The orders to make this flour we placed with the Ekaterinburg flour mill. The thing is that retail prices for flour in the Urals federal District are amongst the highest in the country and we found the way to lower them with the help of our own brand. So far the monthly volumes amount to 100 tons, the project is at its very beginning and it is too early to consider even the intermediate results. Some indicators are apparent already and in the future we are going to broaden the OB products range. We are going to sell cereals under own brands.

- How many good are represented today in the X5 stores product line and what are the logistics between the producer and the store shelf?

- In Pyaterochka shops, taking into account the shift of the demand towards the basic products, the product range has narrowed from 3.5-4 to 3 thousand items. There are about 35 thousand goods in Karusel shops at the moment. In the new conditions there are much fewer imported goods in our chain. Except for the "exchange" commodities (sugar for instance), the company now has direct contracts with manufacturers. Now the share of local agro products in the turnover of our shops in the Urals amounts to more than 50%. This could be higher. It is just that some products are simply not produced in the region. More often agro producers do not understand that they are in the market and have no negotiation skills. For instance the Sverdlovsk meat suppliers offer us the price of 200 roubles per kilo while exactly the same product can be purchased at the producers' market for less. It is the same with chilled poultry. This is why our shelves in Ekaterinburg display the products of the Argayasha brand of the Chelyabinsk Uralbroiler and not the Sredneuralskaya or Reftinskaya poultry farming plants.

In terms of logistics in recent years X5 has been building its own logistics infrastructure and developing own truck fleet. Now there are 22 distribution centres of the Group in Russia with the total area of more than 220 thousand square metres. Three of them are in the Urals. Through the integrated logistics we tripled the centralisation of the supply in the region, reaching the figure of 60%. This means that the majority of our partners do not have to deliver the goods to the shops themselves. The products are delivered to the centres instead, and then - to the stores of the chain. The supplies of fruit and veg, liquor, groceries, and dried foods have been centralised entirely.

In December-January 2010 we will commission the fresh chamber in the Chelyabinsk centre and centralise the transportation of chilled foods and increase the total figure to 80%. As a result we save time on stocktaking and delivery. Employing distribution centres enables us to cut logistics cost by 20-30%. Cleaning up our spending here and there as a result we considerably increase the marginal profitability of the company.

Interview prepared by Yevghenia Yeryomina