DOMESTIC TRADE

Basic information

Text by: Svetlana Lobovikova

The retail trade market was almost non-existent in Russia even still in 1991. This was the case in particular with food, as in most of the Russian regions the consumers could buy for example eggs, meat and butter only with coupons. The situation started to improve gradually, with supply meeting demand more efficiently. Currently, the retail and wholesale trade play an important role in the economy of the Russian Federation accounting for about 20% of the GDP. There are more than 1 million trading companies with about 5 million people on their payroll in Russia.

Retail trade volumes are growing in Russia according to the Committee for Statistics of the Russian Federation (RF), and the share of non-food products seems to be increasing. Small commercial outlets continue to dominate the market. It is estimated that only 6% of Russian customers do shopping in supermarkets and trade centres. Most people buy food and necessities in small shops, open-air markets and kiosks. Outlets with an annual turnover of less than USD 40,000 take up about 60% of the total shop floor space in Russia and the number of small retail businesses amounts to over 400 000. The sector is mostly in private hands, the state owning only about 3% of retail and 8% of catering businesses.

The structure of consumption within product categories has not changed much over recent years, but it is still dominated by dairy and meat products as seen in the figure below.

Source: GfK-MR Russia Russian Retail Review, June 2001

The share of supermarkets in Russian sales turnover is only 1%. Both domestic and foreign retail chains are slowly developing, spreading throughout the big cities, such as Moscow, Saint Petersburg, Ekaterinburg, and Nizhni Novgorod. Moscow, with 7% of Russia's total population, accounts for about 30% of the national retail trade turnover. This is explained by the higher level of incomes in Moscow and by the fact that Moscow is the shopping centre for Central Russia and other regions. The share of supermarkets as a distribution channel is higher in Moscow than anywhere else in Russia.

Along with the development of supermarkets and retail chains there are vast opportunities for producers and sellers of food processing and packaging equipment, retail and sales automation equipment, construction companies, and suppliers of goods themselves. The leading companies in the equipment and information technologies for trade are RUSSKYI PROEKT, SERVICE-Plus, FIT, 1C/1C-RARUS, CheckPoint, etc.

TOP 10 RUSSIAN RETAIL COMPANIES (data on the beginning of 2001, rating of the National Trade Association based on sales turnover)

Brand retail and small-scale wholesale shops owned by the manufacturers are also popular, as they are considered to ensure the assortment and high quality of products and services as well as cut down on distribution prices and stock volumes. In addition, they help the manufacturers to create a brand image and do effective market research. Brand retail shops are most common for domestic food producers (bread, confectionary, meet products, alcohol, etc). For example, RAMSTORE (chain of 8 stores) is going to offer its first so called private labels products in 2001. PEREKRESTOK and DIKSI are also planning to manufacture products under their brands as well. Both domestic and foreign producers hold brand outlets in personal care products, cars, and home appliances.

An international problem related to branded goods in particular is the manufacturing of pirate copies of the branded goods. In Russia the market for pirate copies is relatively large. The leading products are music CDs, about 75% of all sales are pirate copies produced in Ukraine. Video records, DVD and satellite programs are also being illegally distributed on much higher scale than in Europe, but still the problem is smaller than in Turkey and China. Eastern Europe and Russia are the major consumers of pirate software. Other goods that are most often encountered with illegal copies include branded clothes (e.g. Ralph Lauren, Calvin Klein, Timberland, Adidas and Nike), perfumery (e.g. Chanel, Givenchy), expensive watches, spare parts and accessories for cars, etc.

The largest Russian food retailers: PEREKRESTOK, KOPEYKA, DIKSI, MEGAMART founded the Russian Retail Alliance in April 2001. The joint annual turnover of the alliance is $500 million from their 72 stores located in Moscow and St. Petersburg. The strongest company in the Russian Retail Alliance is PEREKRESTOK - a retail chain and wholesaler. The company has 29 shops: 24 supermarkets and 5 discounters. The customers of PEREKRESTOK are over 100 companies from Moscow, Vladikavkas and Stavropol in Southern Russia, Chelyabinsk (Urals), Tyumen (Western Siberia), and Chita (Eastern Siberia/Transbaikal) within Russia. Outside of Russia, PEREKRESTOK has customers in Baku (Azerbaijan) and Chisniau (Moldova).

The leading Moscow retail chains include: THE SEVENTH CONTINENT http://www.7continent.ru] (15 supermarkets), M-VIDEO (11 outlets, electronics), SPORTMASTER (11 outlets, sporting goods), STARIK HOTTABYCH (8 outlets, construction materials) and ARBAT PRESTIZH (3 outlets, cosmetics). These companies decided to combine their resources and experience to implement joint marketing and investment projects. The total annual turnover of the 5 companies is expected to reach $400 million in 2001.

The professional association of trade companies in Russia is National Trade Association (http://www.anrt.ru). It represents the interests of the major trade companies in the Russian Federation, organizes conferences and seminars, the annual forum TRADE IN RUSSIA (since 1998), and nominates for PRODUCT OF THE YEAR and GOLDEN SCALE awards.

Foreign retailers in RF

International retail chains have shown strong interest in the Russian retail market but not many of them operate in the market. The market is currently at the initial development stage and many foreign companies find it too uncertain to enter yet. For example, clothing retailers such as BRITISH HOUSE and NEXT tried to enter the market in the mid-1990s but left after the financial crisis of 1998. The British clothing and food retailer MARKS & SPENCER has been exploring the possibility of expanding into Russia since the early 90s but has declined the idea of opening a store in Moscow so far. However, the company still continues to explore the market.

However, a number of international food retailers currently operate in Russia, and several companies are investigating the market, looking for reliable partners and negotiating to open their stores. Examples of active foreign investors are the French company TATI that already has two stores in Moscow and plans to open another 5 during the next two years and Finnish company STOCKMANN that has worked in Russia for 12 years. Stockmann has a supermarket of 2000 sq. m and a fashion store in Moscow and two stores in St. Petersburg. Another Scandinavian company, the Swedish furniture and household products company IKEA opened its first superstore in Moscow region in 2000. The company has already invested 200 million USD in the Russian market. The company plans to expand its operations and also start mass production of furniture in Russia. So far only 5% of production is manufactured in IKEA's furniture factories in Leningrad region, Nizhny Novgorod and Altayysky Kray.

Another French company AUCHAN (221 hypermarkets and 523 supermarkets in 12 countries) plans to open two hypermarkets in Moscow region in 2002 while the Dutch retailer SPAR (18,000 supermarkets in 32 countries) plans to open 30 shops in Moscow during the next 3 years. Spar plans to build non-expensive supermarkets under 1500 sq. m in partnership with Russian company RUSMED, a large domestic food distributor. In addition to opening supermarkets by itself, SPAR also plans to offer shops for franchising. SPAR is also planning to expand its operations outside Moscow, to Nizhni Novgorod in the first place.

The world's third largest trade company Metro AG from Germany (2000 outlets in 21 countries) plans to open its first Cash&Carry centre in Moscow in 2002. Metro AG (http://www.metro-ag.de) intends to open 5-6 Cash&Carry stores in Moscow and Moscow region by 2005 and invest 180 million USD. Another German company AVA AG (364 hypermarkets, supermarkets, optic shops and construction goods outlets in Germany) has already started the construction of its first supermarket in Moscow region. The store will have food, household appliances and construction goods departments.

Also two Turkish companies RAMENKA and VETA are actively operating in the Russian retail market. RAMENKA has already opened 2 shopping centres and 7 supermarkets in Moscow investing 120 million USD in the Russian retail business. It plans to increase dramatically the number of shops and intends to build 2 more shopping centres and some 50 supermarkets. The company does not plan to expand outside Moscow in the near future. VETA has so far been operating in other CIS countries and planned to open its first supermarket in Moscow in 2001.

Wholesale trade

A new period for the Russian wholesale trade started in 1991 after the amendment of the centralized distribution of products and materials. The Laws "On property in the RSFSR" of 24 December 1990 and "On enterprises and entrepreneurial activities" of 25 December 1990 were put in force. Prices were liberalised and new forms of trade intermediaries started to appear. The major market participants are currently trade houses (some of them doing retail sales as well), wholesale and cash & carry markets and a big number of small intermediaries who account for 56% of the total wholesale trade volumes.

Interestingly, the soviet GOSSNAB system also survived and was transformed in 1992 into the Federal Contract Corporation ROSCONTRACT (http://www.roscontract.ru) in conformity with a Decree of the President of Russia. Today it is a public company working to implement a number of programmes of the Russian Government. The governments of Moscow and St. Petersburg and the administrations of quite a few regions all over Russia are actively cooperating with the Corporation in carrying out various trade and investment projects. The sphere of its activity is wholesale trade in general-purpose industrial products and consumer goods. The Corporation's wholesale network covers the whole of Russia. However, in 2000 the corporation was faced with the threat of bankruptcy. The parties came into agreement, but the situation is still not fully resolved.

Commodity exchanges played a very important role in the economy especially in the early 1990s, when the new links between sellers and buyers were established. The Law N 2383-1 "On Commodity Exchanges and Trade" regulates the activities of commodity exchanges. Nowadays, they still take a big share of wholesale trade in standard goods. Some of the stock exchanges also do trades of options and futures.

One of the recent proposals from the Ministry for Taxes and Levies is to require monopolies to sell at least 30% of their production through the commodity exchanges. If approved by the government as a measure to prevent unhealthy competition and confront the monopolists, the regulation will apply to oil, gas, metal, jewels, forest and forest products, grain, and sugar producers.

Franchising

All over the world, franchising is considered to be one of the most effective forms of business dissemination. The Russian market is not an exception though the development of the market is still far behind the western countries. According to the Russian Franchising Association (http://www.a-z.ru/raf/), about 24 international franchising networks are present now in the Russian market, including the biggest ones, Coca Cola, McDonald's (http://www.mcdonalds.com), and Baskin Robbins (http://www.brpi.ru). Also international law, accounting, and consulting companies favour franchise operations. Domestic franchising chains are also developing, the pioneers are the vertically integrated oil companies, using franchising as a tool to develop their retail chain. An examples of success is the LUKOIL gasoline network and accounting and management automation computer systems of the 1C products.

Experts estimate that there is a vast market for franchising in the fast food, dry cleaning and laundry, services, hospitality, and retail trade sectors of the market. The other promising sector is so called technology franchising, especially in food industry. Big dairy producers, such as Ehermann, Danone, WimmBillDann have already started the practice of technology transfer to the local milk producers.

However, establishing a legal framework to regulate franchising business activities and provision of favourable financing conditions are required in order to encourage new franchising projects.