CIS countries – attractive for retailers despite economic crisis

2010-04-01

In the last decade, foreign interest in retail in the CIS countries has risen dramatically. This is no surprise – the region is inhabited by 277 million people but does not yet have a well developed retail industry.

Despite their geographic proximity to one another, CIS countries have little in common in terms of political, social and economic characteristics. The retail industry in these countries is, therefore, far from being homogeneous, yet it is one of the most dynamically developed sectors in the CIS according to the Interstate Statistical Committee of the Commonwealth of the Independent States.

Among the CIS members, Russia and Ukraine are regarded as the most appealing locations for investment in the retail segment. The lion’s share of retail turnover generated in the CIS group of countries is accounted for by Russia.



Rapid economic development of the CIS countries from 2000 to 2008 led to an increase in personal incomes, which subsequently drove an increase in the value of total retail turnover. Since 2000 nominal GDP in the CIS has risen by 71% and, at the end of 2008, amounted to $2,167.3bn. During the same period, retail turnover rose by 171% and amounted to $758.5bn in value.
Nevertheless, the global financial crisis has altered the economic landscape of the CIS countries. In 2009 GDP fell by 7% compared with 2008 and retail turnover decreased by 6% year on year in volume terms.



Up until 2008, both retail trade turnover and GDP had been on the rise. The growth of the retail sector had been even more dynamic. Since 2009 this has changed and the rate of growth has slowed. The majority of CIS members – Ukraine and Russia among them – recorded a decline in the volume of turnover from retail trade last year. However, despite setbacks elsewhere, several countries recorded positive year-on-year growth in this department. These were: Azerbaijan, Armenia, Belarus, Tajikistan and Uzbekistan.




The recession in the CIS area is expected to stimulate mergers and acquisition activity (M&A) in the retail industry. Retailers experiencing problems become more attractive as potential acquisition targets. An example of such activity is the acquisition of a 50%-plus-one-share in the Russian consumer electronics chain Eldorado (operating in Russia, Ukraine and Kazakhstan) by the Czech entity PPF Group in October 2009. Another example is the takeover of the 82-supermarket Paterson chain by the Russian retailer X5 Retail Group at the end of last year.

Many CIS retail chains have already found that, in the current climate, they are unable to grow at the same rate as had been possible before the crisis and have suspended their capital-intensive projects. The near future is likely to be a difficult period for those medium-sized national and local players that have taken considerable bank loans to fund their development. For example, the Ukrainian retailer of consumer electronics and household appliances and operator of 17 stores, City.com, is on the verge of bankruptcy after having amassed debts of UAH 200m ($25.1m). In contrast, larger players are likely to be in a better position to withstand the crisis, with government support or cooperation with international players more likely to be an option for such organisations.

Russia

In recent times, Russia has emerged as one of the world leaders in terms of providing an advantageous retail environment. In fact, owing to its rapid economic growth and favourable policy framework, Russia is the second most attractive destination for retail after India, according to the A.T. Kearney Global Retail Development Index (GRDI). The GRDI identifies the opportunity to invest in organised retail. Russian retail business is considered to be very attractive since the retail segment is still underdeveloped, logistics networks are beginning to improve, disposable income has been on increase and the competition level is generally still low. In addition, the global financial crisis has served to lower the cost of entering the market, with rental rates, as well as construction material and labour costs, all having fallen.

Despite this favourable climate for investment, the Russian retail segment witnessed significant decline during 2009 due to the effects of the global financial crisis and a slowing economy, both of which have led to low consumer confidence and a contraction in consumer spending. In 2009 total retail turnover in Russia amounted to RUB 14,516.9bn ($494.9bn) – a year-on-year increase of just 4.3% and 23.8 p.p. lower than the growth rate reported one year earlier. In volume terms, retail trade turnover fell by 5.5% compared to the equivalent 2008 figure. However, in January 2010 retail turnover increased in volume by 0.3% year on year, which marks the first growth since the onset of the economic crisis.

According to the Federal State Statistics Service 1,152,900[1] people work in the retail industry in Russia, a figure equating to 3.1% of the country’s total workforce. In addition, each of the seven federal districts exhibit considerable differences in terms of the current stage of development of the retail markets, competition level and thus, their development prospects. These differences are influenced by the number of people inhabiting each of the federal districts, their purchasing power and also the number of retail outlets in each district. For example, the smallest, but most populous federal district, the Central Federal District, which includes Moscow, is the largest retail market in the country, accounting for one-third of retail sales in the country. In addition to the aforementioned factors, the current structure of the retail segment in Russia should also be taken under consideration. The majority (almost two thirds) of turnover from Russian retail is generated by traditional channels, individual entrepreneurs in the form of open-air markets, fairs, bazaar stands, hawkers’ trays, kiosks and small corner shops.