Russian retail: Story of structural growth opportunities

By Alexis Mathieu, SW Mitchell, Investment Manager of the SWMC Emerging European fund.

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.

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