The Market Overview
Consumer & Retail : Rise of the Russian Middle Class
Lev Khasis (X5 Retail Group) – X5 Retail Group is Russia’s largest food retail chain (in revenue terms) but has a market share of just 5%, which implies spectacular growth potential. Sector consolidation will continue going forward, implying increasing competition. Accelerating inflation will have a generally negative impact on the economy but should be supportive for food retail chains, which will likely be able to pass on the impact to customers and could see faster LFL sales dynamics. The regions, despite lower disposable income, offer decent opportunities due to lower entry costs and limited competition. Selling prices in Moscow discounter stores are actually lower than in the regions, which explains the higher ROI in regional stores.
Sergey Galitsky (Magnit) – The company reiterated its positive outlook for 2011 and does not foresee a slowdown in revenue growth from the current 40%+ per annum in ruble terms. The next three years will be interesting for the development of the industry, as the environment is becoming more predictable and company-specific factors will determine growth, profitability and ROI. The regulatory environment remains a concern, as federal laws are not always properly adhered to by local authorities, and it can take considerable time to resolve bureaucratic issues. The upside for producers will come from import substitution, as even in food retail, its proportion is high.
Ksenia Ryasova (Finn Flare) – Finn Flare offers pure exposure to development of the Russian middle class, and the retailer’s diversified format has allowed it to successfully withstand the challenge of recent years, as the discounter segment outperformed in 2009, while the company is now seeing customers returning to “mass market” stores. A number of Finn Flare’s competitors went out of business in 2009, mainly those focused on the upper-middle segment (Tom Tailor, Diesel, Kookai). As a result, real estate has become more available, and Finn Flare opened 73 stores in 2010, bringing its total to 252 by year end. The retailer projects revenue growth above 40% in 2011. Cost inflation is the main concern, as cotton prices have doubled in China, which will start have an impact on selling prices (and potentially demand) in the spring. The pace of consolidation in the industry is very slow, and we should not expect large M&A deals in this space.
Mikhail Kusnirovich (Bosco di Ciliegi) – The company saw LFL sales growth of 30% in euro terms in 2010, which points to underpenetration of the Russian market. The retail sector’s role is understated in Russia, with none of the largest retailers among the top 10 Russian brands, while the sector’s potential for growth and increased employment is not widely advertised.
Ivan Svitek (Home Credit Bank) – The bank’s revenues climbed 30% in 2010, while profitability improved. Home Credit Bank introduced its “0 0 24″ loan program (zero deposit, zero interest for 24 months) in July/August, with 30% of consumer electronics purchases in specialized stores being financed with loans extended via the program. The bank sees plenty of pent-up demand in Russia, with consumers revealing changes in consumption patterns, switching from washing machines and refrigerators to education loans. There is also substantial demand for financial services in the regions, while competition with Sberbank remains very low in some areas.
Sergey Petrov (ROLF Group) – The company is a car retailer, with a particular focus on the middle class. ROLF Group was badly hit by the downturn, revenues plummeting more than 50%. However, the recovery is underway, revenue growth hitting 100% y-o-y in January. For now, the company regards 30% of the population as potential customers, while the figure stands at just 3% for luxury brands. In addition, the company thinks there is a shortage of highly qualified labor, which is reinforced by the high degree of automated production processes.
Dmitry Yeremeev (Richemont Russia) – The company’s main area is the production of luxury watches (e.g. Cartier and Montblanc). According to Richemont, the typical Russian consumer is quite different from the international one, as he/she is less rational than the European counterpart and not looking for innovative products like the Chinese, for example. Notably, for some brands, sales to Russian clients generate 40% of revenues, while sales in Russia account for 5% of revenues. The company sees opportunities for long-term development via offering a better assortment in Russian stores.