Russian retailers look to expand while global players hold off

Retailers say slowing demand is hurting their sector, but the cloud may have a silver lining – providing opportunities for new investors in the market.

Russia’s consumer boom is on hold. More than 7% of Russians are registered jobless – and the disposable income of those who have jobs, has fallen almost 12% over the past year. This has led to a situation where Lev Khasis, CEO of the X5 retail group, sees very cheap entry costs in the retail sector.

“Never in the past was there the opportunity to invest with such low levels. And all companies are growing very fast, and especially talking about X5 for example. We are right now 2 times bigger than the beginning of last year, but our valuation is 6 times less, and for sure it’s a unique opportunity for investors.”

Russia’s leading food retailer X5 group says it will use this year of crisis for aggressive expansion, eating up smaller players. Smaller rival, Magnit, has also confirmed on Monday that it is looking to open up to 400 new convenience stores in the coming year, despite its investment budget being trimmed.

However, foreign majors are not expected in Russia in the near future, according to Stephen Paul Ogden, Board Chairman at Lenta.

“Its really a question for the WalMarts, the Tescos, and the Sainsburys of this world. Now the trouble with those guys is that sometimes they move a bit slowly. Sometimes, for example, with a Tesco, the decisions are made in the UK. They’re often made by board members who really don’t know very much about Russia. The decision making process of the major retailers, sadly, for them, is sometimes a bit cumbersome.”

Russians still consume less, per head, than their counterparts in most western countries, but food inflation is much higher than in the west. Experts say, food prices in Russia jumped by 2% in January alone and may rise 50% on imported goods this year.

Insiders say there is room to cut costs and improve competition – but that’s not enough to attract new foreign players spooked by local business culture and global economic fortunes.