Consumer electronics market – more consolidated than prior to the onset of the economic crisis. An interview with Kakha Kobakhidze, CEO of Eldorado

2010-04-08

Retail Update Russia talks to Kakha Kobakhidze, CEO of Eldorado, about the situation on the consumer electronics and household appliances market in Russia, the impact of the recession on the market and the company’s development, as well as about Eldorado’s plans for the future.

Katarzyna Koprowska, Retail Update Russia: How do you evaluate the performance of the consumer electronics and household appliances market in Russia in 2009?

Kakha Kobakhidze: According to our estimates, which are in line with reports produced by market research companies (GfK, for one), the market contracted by 18-20% year on year to approximately RUB 640-650bn.

K. Koprowska: What changes did you observe on the market during 2009? Was it easier or harder to operate than in 2008?

K. Kobakhidze: 2009 was tough for both retailers and vendors, the only exception being the month of January. There was a noticeable increase in consumer activity at the beginning of the year. As the value of the rouble was dropping people were basically getting rid of cash to make bigger purchases.

In the end though, consumers became much more rational. For example, prior to the onset of the economic crisis, purchases on credit contributed up to 30% of our sales volume. Thus far in 2010, this has been less than 20% and it was significantly lower in 2009.

The market became more consolidated. Smaller manufacturers and smaller retailers have already left the field and we feel that there may be several more about to do the same. Some companies are still unstable. Russia’s consumer electronics and household appliances market now has more in common with Western markets, which are generally more streamlined.

Both domestic customers and companies have learned their lessons during the crisis and have been able to wean themselves off their “loan addiction”. Many used to live or develop beyond their means, heavily relying on borrowed financing. With banks having become more stringent in how they lend money, everybody now looks at their own capabilities and financial situation in a more realistic light.

K. Koprowska: How has the economic crisis influenced the development of Eldorado?

K. Kobakhidze: Every major business had to deal with economic turbulence, but not every one of them was ready and fully understood the scale of the approaching turmoil.
We began adapting to the new market conditions back in summer 2008, and so were better prepared to deal with the effects when the crisis took hold in autumn.

We examined every single stage of sales process and our operations to improve efficiency, cut costs and streamline the business as a whole. We developed a road map with Key Performance Indicators for consistent evaluation and these have helped us to understand our current position and identify where further effort is required.

That said, we still experienced our share of difficulties but we have kept the company on track and have a lot of confidence in our performance. Our partnership with PPF Group, a major investment and financial group in the CEE region, has greatly contributed to this favourable position. In September 2009 PPF Group acquired a 50%-plus-one-share stake in Eldorado’s equity. We enjoy strong support and benefit from the expertise in business development and financial management provided by the new shareholder.

K. Koprowska: Could you go into greater detail about the measures undertaken by Eldorado to cope with the crisis?

K. Kobakhidze: We still currently undergoing a thorough reorganisation process, which was agreed upon with PPF Group. We have completed the bulk of the initiatives we had planned to do, but the process is not over yet.

Initially, we revised our logistics operations, switching to cross-docking and cutting down on warehouse space in Russia’s regions. The objective was to decrease the number of points between vendors and our stores. Product ranges were also examined and optimised. We outsourced certain functions so that we could benefit from smoother operations. We also streamlined our internal structure, removing what was considered to be a superfluous layer of management and also overlapping functions to get closer to our customers. One can say that Eldorado became more agile.

In retrospect, we see that every step taken had a positive and measurable impact on cash flow or operating costs. At this stage we are still keeping costs in check – providing that this does not affect the customer experience.

K. Koprowska: Was the closure of the company’s premium-segment ETO chain also one of the measures? Does Eldorado plan to resume this project in the future?

K. Kobakhidze: ETO chain was closed in line with our reorganisation plan. A crisis is not the best time to operate more than one core brand. We needed to consolidate resources and concentrate on our key objective, which is the development of the Eldorado network. That being said, thanks to having operated the ETO chain, we have gained invaluable experience in the premium segment, which may prove useful when the market fully recovers. It is already helping us to improve our stores and provide enhanced service and an improved customer experience.

K. Koprowska: Over the last 10 years, Eldorado has been a market leader on the consumer electronics and household appliances market in Russia but in the first half of 2009 the company’s main competitor, M.Video, recorded slightly higher revenues (RUB 38.4bn) than Eldorado (RUB 37.8bn). Was this position reflected over the whole year?

K. Kobakhidze: Yes, it is true that in the first half of 2009, the revenues generated by M.Video were greater than ours, however, over the course of the whole year, our (unaudited) revenues amounted to RUR 89bn, while those of M.Video were RUB 83.3bn. In fact, we demonstrated very solid performance and the best results on the market again last year.

K. Koprowska: The crisis forced many Russian retailers to leave the Ukrainian market and some local players ceased to exist, yet Eldorado managed to increase its presence in Ukraine by opening stores on the premises previously occupied by the now-bankrupt Domotekhnika chain. Can you comment on this?

K. Kobakhidze: According to the agreement between Igor Yakovlev, the founder of Eldorado, and PPF Group, Eldorado’s stores in Ukraine (operating under the Eldorado banner) are no longer affiliated with the Eldorado chain in Russia. We believe that our Ukrainian partners have the expertise and track record necessary for success.

K. Koprowska: What trends, in your opinion, will shape Russia’s consumer electronics and household appliances market in 2010? Can we expect the market to recover?

K. Kobakhidze: 2008 was the year of exceedingly optimistic expectations. In 2009, however, market participants were treading carefully, so last year was artificially underrated. Due to market volatility, suppliers played it safe and introduced certain measures to minimise risk. As a result, we experienced some difficulties with the availability of goods.

Overall, we expect to get back to normal operations in 2010 and believe that the market may demonstrate signs of recovery. Growth may be driven by the new media segment (notebooks, mobile phones, media players, digital cameras). These devices have short life cycle and require more frequent replacement.

K. Koprowska: What are the company’s development plans for this year? How many stores does Eldorado plan to open and in which regions?

K. Kobakhidze: We identified three key points when planning further development: location, brand and human resources. We aim to develop the chain, build up brand equity and improve customer service, all by better understanding our customers, tailoring stores to their needs and focusing on daily interaction. We also invest heavily in training programmes for our employees so that we, as a company can enhance the level of service provided to our customers.

We also improve our stores according to consistent guidelines and plan to open more than 50 new stores in top-tier locations, each of which will have a larger trading area.

K. Koprowska: How many Eldorado stores are there currently and how many are operated by the company and how many operated on a franchise basis?

K. Kobakhidze: There are currently 700 Eldorado stores in Russia. We are present in all Russian cities with populations of over 500,000 and we are also present in 92% of cities with populations of 250,000-500,000. Almost half of Eldorado stores are owned and operated by Eldorado.