Russia

Key economic/demographic statistics

Inhabitants (mn)	141.407
GDP (USD mn)	1,737,564
GDP (% real growth)	6.8
Consumer price inflation (%)	11.4
Consumer spending (USD mn)	763,047
Retail sales, net (USD mn)	456,575

Source: Planet Retail 2008

Key retail and consumer products companies

	Retailer	Category	Multinational / Domestic	Sales revenue 2007 (US$m)
1	X5 Retail Group	Food Retail	Domestic	5,284
2	Metro Group	Food Retail	MNC	4,801
3	Eldorado	Consumer Electronics	Domestic	4,568
4	Magnit	Food Retail	Domestic	3,676
5	Rolf Group	Car dealer	Domestic	3,600
6	Euroset	Mobile Handset Retailer	Domestic	3,417
7	Auchan Group	Food Retail	MNC	3,400*
8	M.Video	Consumer Electronics	Domestic	2,114.1*
9	Lenta	Food Retail	Domestic	1,559
10	Svyaznoy	Mobile Handset Retailer	Domestic	1,493

	Consumer company	Category	Multinational / Domestic	Sales revenue 2007 (US$m)
1	Baltika	Food & Beverage	MNC	2,182.2
2	Wimm-Bill-Dann	Food & Beverage	Domestic	1,762.1
3	Sun Interbrew	Food & Beverage	MNC	1,474.5
4	Procter and Gamble	Fast Moving Consumer Goods	MNC	1,334.5
5	Philip Morris Izhora	Tobacco	MNC	1,158.5
6	Nestle Food	Food & Beverage	MNC	1,138.8
7	Coca-Cola	Food & Beverage	MNC	916.6
8	BAT Russia	Tobacco	MNC	782.1
9	Liggett-Ducat	Tobacco	MNC	700.7
10	Petro	Tobacco	MNC	636.1

* Revenue by experts' estimates

** Most global consumer companies do not disclose revenues for Russia in the financial statements. We are providing data based on 2006 revenues, that were published in Expert's rating of Top-400 Russian companies, using internal companies' data.

(Source: Kommersant's 'Top 50 Russian Retailers' rating (Apr 2008) and Expert's Top-400 Russian Companies' rating (Oct 2007))

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Key trends and issues

Solid growth in the sector: The Russian retail market has witnessed very solid growth rates over the last several years, making the sector one of the most actively developing ones in the economy. This has been fuelled by continuing growth in the overall economy, increasing personal consumption and an increasingly organised marketplace. Organised retail is booming due to improving living standards and Russian consumers’ desire for more convenient stores with better prices and service. Improvement in the well-being of the population is mainly reflected in consumers' growing interest in comfort, extra services and, increasingly, the shopping experience. As the overall retail market expands, the share of expenditure on food products is decreasing and being replaced by expenditure on non-essential goods and services.

The Russian Federation is recognised as a country with a high level of disparity in incomes. The richest population is concentrated in Moscow, St Petersburg, large regional centers and several smaller cities where enterprises in the extracting business are located. However, while the ultra rich fuel the rapidly expanding luxury market, it is the growing middle class that really drive the retail boom.

Limited number of multinational players in the domestic market: Both India and China are faced with intensifying competition from global retailers such as Wal-Mart, Tesco and Carrefour. Only Carrefour has a formal presence in Russia, although they have yet to open an outlet. This is in complete contrast to the consumer goods sector, in which international players have significant interest and presence, often establishing or expanding their own production capabilities.

Increasing inflation: Russia faces an increasing inflation rate which recently has had a significant impact on the cost of basic foodstuffs. This has raised the real possibility of government regulation of retail prices. Draft legislation already promotes the regulation of the level of market consolidation for retailers, and there are indications of the government’s desire to control distribution of alcohol. Recently the government has adopted new milk regulations in an effort to promote home production. Under new standards only whole milk will be allowed under the label of milk. Dairy manufacturers will have to label products made with powder as ‘milk drink’.

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Challenges faced by companies in entering the market

Operational effectiveness and cost reduction: This is compounded by a shortage of good retail space, supply chain management issues (warehousing and logistics) and shortages of labour. With a largely unconsolidated retail market, further M&A activity is inevitable. This will lead to fewer retail players with greater competition for market share and downward pressure on margins. This will affect both the retailer and the producer. The trend toward IPOs is also likely to continue. A clearly defined strategy for growth in this promising sector has now become crucial for success. Retail companies’ ongoing competitiveness can only be ensured via cost and operational effectiveness, access to capital and other growth resources and effective mobilisation of human capital.

Consolidation: The retail market is currently very fragmented. The top five retailers account for only about 5% of the market. In the UK by comparison the top four have 85% of the market. Companies will need specific strategies to deal with market consolidation.

Administrative barriers: Bureaucracy and unclear and inconsistently applied legislation cause serious concern. Increasing red tape and uncertainty create inefficiencies for retailers.

Development and expansion: Site availability and the increasing costs of development and rent are leading to a much more balanced approach to market development. The capital requirements and slower development associated with construction are being considered against potentially large increases in rent costs and business risks.

Although a limited number of market participants consider M&A as a growth strategy, this will clearly be the approach favoured by those few companies with the resources to make acquisitions and the ability to integrate them into existing operations. The biggest problem for M&A is price overvaluation and the non-transparency of targets. Regional chains may gain from this consolidating activity, as they may be highly attractive targets in the future.

Major Russian retailers kept growing faster than the market in 2007. However, the debt load of retail chains is growing in tandem with their profits. For many retailers, it has reached a critical level, due to the international financial crisis and reduced credit limits, depriving trade chains of the opportunity to refinance loans. This trend has slowed the rate of expansion and placed increasing importance on improving the profitability of existing stores.

Although only a small number of companies are looking to IPOs to fund expansion, this remains an attractive proposition for those that are prepared for the process and for the demands of public ownership.

Internal costs and efficiencies: There is clearly a focus on cost optimisation, inventory management, process efficiency and IT development to enhance profitability and competitive position. While 50% of the recent PwC Russian Retail Market Survey participants believe that their existing systems are capable of meeting current needs, the rest anticipate upgrades in 2008 and 2009. IT systems’ ability to meet growth expectations and provide an integrated response to management’s information needs will be a critical success factor for most retailers.

Another significant issue that affects cost structure is the shortage of skilled management. More managers are needed to cope with the growth that retailers are experiencing. Attracting and retaining qualified management will place heavy demands on human resource departments to devise longer term and more focused remuneration and incentive packages.

Corporate social responsibility (CSR): While the benefits of a positive CSR programme are recognised here, the concept is not as developed as in Western Europe. While many participants indicate that CSR and environmental programmes exist internally, a much smaller proportion extend their monitoring of health and safety and workplace conditions throughout their supply chain.

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Case study

Russian retail chain

A big Russian retail chain with 100 stores asked PwC Russia to provide recommendations on possible options to increase effectiveness of its foreign trade structure from the tax, customs and legal perspectives. The project required analysing the processes and functions currently being implemented and providing analysis of possible options to structure international trade transactions.

We also assisted the client in developing a new corporate information system. We led developing the information systems' architecture, implementing the methodology and reviewing and optimising business processes.

Because of our long-term relationship with the client, we were able to understand the requirements and suggest sound solutions within demanding deadlines. Benefits for the client included relevant and timely operating information, an improvement in financial transparency and optimisation of business processes.