Retail Chains’ Race for Russia

EuropeThis article was written by Marina Donova, Max Horsley and Jonathan Weber, members of the Lauder Class of 2014.

Thanks to relative political stability and strong oil and gas prices, Russia’s retail turnover more than quintupled from 2001 to 2011 and now exceeds US$600 billion annually. Data suggest that this sector is entering the steepest part of its growth curve. How will Russia’s retailers face the challenges of this critical period of expansion? Will foreign retailers manage to get a slice of this growing pie?

Despite the widely held notion that the majority of Russia’s GDP comes from extractive industries, this sector accounted for less than 12% of GDP in 2011 according to Rosstat, the Russian Statistical Bureau. The wholesale and retail sector, in contrast, amounted to more than 16%. As the per-capita income of Russia’s 140 million consumers continues to rise, the retail sphere is becoming more important than ever.

Russia’s enormous size and level of economic development mean that retail in Russia divides the market among many players. While large retail chains dwarf the majority of competitors in market capitalization, their market share is relatively small. The X5 Retail Group, the largest food retailer, for example, controls only 5.6% of the market, and the top 10 food retailers comprise less than 20% of the market. This is in stark contrast to the developed markets of Western Europe, where leading food retailers hold a quarter of the market or more — e.g., Tesco (30% market share) in the U.K. and Edeka (26% market share) in Germany.

This opportunity for consolidation is fueling a pitched battle among Russia’s retail chains to establish regional and national market share. Which chain prevails as top dog will depend on how well it can confront the logistical challenges of the country’s decaying infrastructure, responsibly manage expansion and successfully navigate an uncertain regulatory environment.

Originally published by Knowledge@Wharton January 2, 2013 as part of The Lauder Global Business Insight Report 2013: Building Blocks for the Global Economy.

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