Russian retail: An illustration of structural growth opportunities in Eastern Europe

13 Oct 2015

By Alexis Mathieu

The late 1950s and early 1960s heralded a golden age of food retail in Europe. Spearheaded by companies such as Sainsbury’s and Tesco in the UK and Carrefour in France, the large self-service store concept changed grocery shopping.


Today, organised retailers dominate the market. In France, the modern retail format represents 80% of the food retail market; in Germany, the figure reaches 88%.

We are now, finally, seeing this trend in Russia.

As the “revolution” unfolded in Western Europe, the USSR food retail market was served through a range of state stores. Goods shortages and extensive queues were common. After the Cold War and the liberalisation of the economy, this channel disappeared to make way for independently-operated stores. These were small, but a rising entrepreneurial spirit combined with capital availability meant organised chains could develop.

This year, for the first time, modern formats have overtaken their traditional peers as the largest sub-segment, with a 53% share of the food retail market. Representing just 21% in 2006, chains have gained an average of 4% per annum – and there is no reason the progress in convergence should stop here.

Thanks to prosperous market conditions (15% compounded annual growth in the past nine years), alternatives such as traditional stores, street kiosks and open markets also expanded. There was space for everybody.

Now things may get tougher. A challenging economic outlook means continued market growth is not assured. In the competition for the consumer’s wallet, proximity to customers and flexibility in assortment and hours may not be enough to fend off bigger newcomers. Professional competitors, improving their operations thanks to economies of scale in areas such as logistics and suppliers’ terms, can deliver lower prices with little impact to their financial results.

Modern players have emerged mainly through the rollout of new stores. An example of the pace of expansion is market leader Magnit, which opened its first convenience store in 1998 and by 2005 had a network of 1,500 locations. As of the end of 2014, it had 8,344 convenience stores, 190 hypermarkets and aimed to open a further 1,200 stores in 2015 alone. Yet Magnit only holds 7% market share.

In the next decade, we anticipate further growth for organised players – partly to the detriment of traditional channels. Consolidation among large players should also occur when the returns on investment on marginal new selling space fall to a level where M&A is an appealing alternative. Magnit and its four largest competitors hold 19% of the market. In Western Europe, the top five players usually hold around 70%.

We expect a small number of companies will emerge to dominate the space. Robust long-term structural trends can offset potential cyclical headwinds, and market leaders can depend on multiple levers of growth: market expansion, a shift towards organised retail, and consolidation.

We invest in Eastern Europe to take advantage of this type of trend: the “catch-up” phenomenon, which provides exceptional long-term investment opportunities – not just in food retail, but also banking/insurance, internet services, and transportation.


Alexis Mathieu is investment manager of the SWMC Emerging European fund at S.W. Mitchell Capital

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