Russian Logopark of Crisis Age

07.04.2009 — Analysis

Foreign companies give Urals retailers a logistics masterclass. In the marketplace they go for class A warehouses exclusively. Maria Truskova, a RusBusinessNews correspondent, found out why Russian businessmen prefer a class of warehousing not as high.

A modern megapolis is inconceivable without a well developed logistics system. Ekaterinburg is no exception - the city is located on the main transit route connecting the Western part of Russia with Siberia and the Far East. The capital of the Urals Federal District is quite capable of becoming a proper distribution centre for the cities of the Urals region - Chelyabinsk, Tyumen, Kurgan, and Khanty-Mansiysk. Ekaterinburg itself is one of the largest trade and business centres in Russia. There are more than 2,850 retail companies in the region. In 2008 the retail turnover total amounted to 362 billion roubles. Ekaterinburg's share in the Russia's total retail volumes amounts to 2.4% (St. Petersburg - 4.1%, Moscow - about 18%).

Moreover, a large number of wholesale companies have been registered in Ekaterinburg. As of 1 January 2008 there were 450 of these; by the beginning of 2009 the financial crisis has reduced this figure to 394. In the current year, another 30 to 40 companies are expected to leave the marketplace. However, according to Victor Konteev, the Deputy Mayor of Ekaterinburg, this should not be a cause for concern - the strongest and most dependable companies will maintain their positions and continue their active development even in this difficult economic situation.

In 2007-2009 the Sverdlovsk Oblast warehouse real estate market was on the rise, and there was a lot of high quality premises construction going on at that time. However, the further plans that the developers had were rather seriously cut down by the financial crisis. The construction of the Euro-Asian International Transport and Logistics Centre was suspended due to the shortage of funds. Out of the intended 45 thousand square metres, only 10 thousand have actually been built. A similar situation has developed on the sites of the Novokoltsovsky logistics complex and the transport and logistics terminal based in Ekaterinburg Koltsovo airport. Foreign companies - VVV Company, London & Regional Properties, and Raven Russia - have also dropped their plans for the warehouse property development projects implementation in the Sverdlovsk Oblast.

"The companies which wanted to come to the Urals and to create a distribution centre in Ekaterinburg were forced by the crisis to fold their plans. Very few companies today are still continuing to implement projects", says Konstantin Kalistratov, the Director General of Kinetika logistics company. The key method of keeping your customers today is to reduce prices for logistics services.

According to Konstantin Selyanin, the Director General of the Accord-Invest Urals branch, the cargo transportation prices are plummeting in Russia. "The production decline has had a direct impact on the amount of work offered to haulage companies. For instance, the railways were actively engaged in the transportation of metal parts, whilst at the time of crisis the amounts of these products manufactured have decreased several times. As a consequence, the amounts of the railway cargo transportation have dropped by 30%. The volumes of cargo transported by ship or truck also fell 25-30%. The competition amongst haulage companies has intensified accordingly - they fight hard for each and every job", Mr. Selyanin commented.

Similarly the warehouse property rents are on the decrease. The previous year saw 130 thousand square metres of warehouses put into operation in Ekaterinburg and its satellite towns. According to the data provided by Guram Tukhashvili, an analyst of the Ural Chamber of Real Estate, the total area of premises amounted to 1.5 million square metres at the end of 2008. Furthermore, the market is dominated by low quality offers - 76% are class C or D premises, usually former factories or plants converted into warehouses. In the beginning of 2008 there was a serious shortage of class A and B premises, but currently these premises are very hard to keep occupied.

Companies en masse are refusing to keep their goods in warehouses which are high quality but expensive. In order to retain their clients, the leaseholders reduce their rents en masse. During January and February 2009 the warehousing rents dropped by 12%, whilst on the whole, as compared to the third quarter of 2008, the fall amounted to 20%. Today renting class A or B+ premises would cost 400 roubles per square metre on average, class B - 340 roubles, and class C - 290 roubles. Some companies are already offering class A premises for 350 roubles per square metre.

Experts think it is understandable that local retailers are not using class A premises any more - by far not all companies in the Urals today are capable of using the logistics as a business tool. On the other hand, logistics is an inalienable part of business for large Moscow-based and European retailers.

In contrast to the regional companies, the world class players started to appreciate class A warehousing long ago. Auchan, Mars, X5 RETAIL GROUP, Gillete, General Motors, Sportmaster, and Magnat (official Procter & Gamble distributor) rent warehouses at the modern Pyshma logopark built in 2007-2008. In the nearest future, the famous Swedish company Oriflame will have a warehouse in this logopark as well. These organisations operate on vast territories, which is why their primary concern is that the transportation and storage costs are not excessive.

Analysts predict a huge growth in the demand for rented warehouse space for the middle of 2010; by 2011 we may see high class warehousing shortages in the Sverdlovsk Oblast again.