Russian Retailer Grows Its Share

GLYNN DAVIS

LONDON — Russia will undergo massive change and report major growth over the next five years, but, unlike other emerging economies, it has plenty of strong, home-grown players who will provide stiff competition to any international operators entering the Russian market, one local retail chain executive said last month.

Speaking at the IGD Global Retailing conference, Antonio Melo, chief operational officer of X5 Retail Group — the leading Russia-based food retailer — warned overseas grocers to be very careful when entering the market.

He said his own X5 Retail Group poses the biggest threat to outsiders looking to gain a foothold in Russia. The company last year achieved sales of $5.32 billion from its 900 stores (accounting for 21.4% of the market) in addition to sales from its 700 franchised stores, which combine to make it 30% larger than its main rival, Germany-based Metro.

But despite the strong local players, Melo acknowledged that Russia is proving a tempting market for international grocers. Food sales grew 31% during in 2006 and 2007, and the growth of modern retailers with organized distribution systems is running at 50%. These businesses account for 33% of the market, and Melo predicted they will represent 45% of the market by 2010.

With this backdrop, X5 has been growing rapidly, and during the first quarter of 2008 achieved revenue growth of 61% and a same-store sales increase of 29%. This sort of growth is being enjoyed across its hypermarkets, supermarkets and smaller soft discounter stores.

Much of the focus to date has been on growing the number of soft discounter outlets, of which it operates 700, but this is changing as hypermarkets come more to the fore. It is buying 20 stores from Karusel in St. Petersburg to add to its existing 14 units.

The company is also spreading beyond the key Moscow and St. Petersburg markets, which account for 84% of total group sales: “Our strategy is to open offices in the regions — with operations teams, supply chain teams and development teams, and then buy the local leader, so immediately we have the platform to grow and use our supply chain,” Melo said.