Sergey Galitskiy gets indignant very quickly when asked about investors these days. “I don’t know what investors fantasise about,” says the founder and chief executive of Magnit, Russia’s largest grocery retailer by revenue and number of stores. “If they want to continue to make 60 to 70 per cent per year all the time, that is not Magnit, that is Las Vegas.”
Mr Galitskiy’s anger is understandable. After reporting weaker than expected sales for December, the company’s London-listed GDRs lost 20 per cent of their value in less than a month. Some investors read the dip as a signal that a sector seemingly immune to Russia’s slowing economy might be starting to feel the pinch.
In the past 16 years, Mr Galitskiy has built his business from one grocery store in Krasnodar, a midsize southern Russian city, into an empire with 8,093 stores in more than 1,800 cities. Magnit’s net income grew 41.8 per cent to Rbs35.6bn ($1bn) last year, as revenue rose 29 per cent to Rbs449bn.
Its share price recovered somewhat following strong results announced in January. But behind the jitters is the question of how much more space grocery retailers need in Russia – a country with a shrinking population and logistical challenges, given its expanse across two continents.
“If you look at consensus views in Russia, the sector is no longer going to grow at double-digit rates,” says Alex Sukharevsky, a partner at consultancy McKinsey, in Moscow.
McKinsey expects the Russian grocery retail market to grow by about 4 per cent a year over the next five years. It is already the world’s sixth-largest grocery market, according to Euromonitor – behind the US, China, Japan, France and India – with a value of $267bn last year.
Russian consumers have been showing a reduced appetite for spending big on groceries in recent years. “Since the crisis in 2009, there has been a mind shift by consumers towards value,” says Mr Sukharevsky. As a result, like-for-like sales have not been growing nearly as fast as total revenues, which reflect new-store openings. Magnit’s like-for-like sales growth was 3.9 per cent last year, but its closest rival, X5, achieved only 0.7 per cent.
Large retailers have achieved the bulk of their growth by grabbing market share from traditional corner shops and open-air markets – something that analysts believe they can keep doing for several years. Magnit alone opened 1,209 stores in 2013, and plans to add another 1,400 this year.
Market researchers at Euromonitor and Planet Retail expect that operators of hypermarkets and discount stores can increase their share of Russian retail from today’s 60 per cent to 75 per cent in five years.
In the race for this piece of the pie, Magnit is still in pole position. “Magnit is the safest name because it’s a low-end grocery retailer,” says Boris Vilidnitsky, an analyst at Barclays. “If they can’t afford to shop at Magnit, they can’t afford to eat.”
But competition is growing. The X5 group of oligarch Mikhail Fridman, which Magnit overtook as the market leader early last year, is trying harder to turn round its long-struggling collection of different chains.
Since 2011, X5 has been focusing on opening new stores and refurbishing its existing outlets – after failing to integrate the Perekriostok and Karusel supermarkets and the Pyaterochka and Kopeyka discount chains that it acquired in a buying spree. Its total sales growth accelerated to 12 per cent in the final quarter of last year, driving up its share price just as Magnit’s was sliding.
Smaller rivals are also set on expansion. Lenta, a retailer in which private equity group TPG has a stake, said last week that it planned to raise $1bn for further expansion, through a London IPO. While its sales were only one-quarter of Magnit’s in the first half of last year, it has a focus on hypermarkets, where Russian shoppers spend most on average.
Germany’s Metro has plans to float part of its Russian cash and carry business in the first half of this year. France’s Auchan has been so successful in attracting customers to its Citi hypermarkets in shopping malls that it has adopted this format, developed in Russia, in other markets as well.
But the world’s largest grocers – such as Walmart, Tesco and Carrefour – have found it harder to win customers in emerging markets. French grocer Carrefour’s attempted invasion of Russia in 2009 was only slightly less successful than Napoleon’s: the world’s second-largest grocer by revenues pulled out just months after opening its first store in the country.
Under its former chief executive, Sir Terry Leahy, Tesco – the world’s third largest grocer by sales – was bent on world domination. Since Sir Terry’s departure, however, Tesco’s ambitions have become smaller. Last year, the grocer signed a joint venture with China Resources Enterprise after failing in its attempt to go it alone.
However, as market leader, Mr Galitskiy is undeterred. “We have always said that X5, Auchan and Lenta are strong, but we are stronger,” he insists. “We will always try to maximise our profits, then try not to reduce our market position,” he says. “We face that choice anew every day. We revise our plan any minute.”
Few challenge his record in doing that. Analysts say that Magnit’s network of 22 distribution centres, its fleet of more than 5,500 lorries and its automated ordering system to monitor inventory all help to keep costs low, price flexibility high – and bargaining power with suppliers strong.
“If Magnit sees that a store needs a lot of sunflower seeds, they try to figure out where that demand comes from and what it means for the other stores,” explains Mr Vilidnitsky of Barclays. “They have the best programmers on the ground.”
“The biggest advantage a food retailer can have is its logistics and supply-chain management, but X5 doesn’t have that because they combined several companies with different IT systems and logistics.”
He believes that Magnit has the potential to increase its market share from 6 per cent to 15 per cent.
Mr Galitskiy observes: “When you stop listening, that’s the path to decline. I am scared every day.”
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