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East European Focus: Retailing in Russia – hit hard by the crisis, but a good time for foreign entrants

by Martijn Peeters, Strategy Director, PricewaterhouseCoopers Russia

The Russian retail market has been considered to be a retailer’s paradise. Russian consumers like to spend, they were rapidly becoming wealthier and over 70% of the 142 million live in urban areas, making them accessible to retail chains. As a result there was strong growth across all retail segments driven by rising incomes, low retail penetration, especially outside of Moscow and St Petersburg, and low consolidation in most segments (e.g., food retail top 5 below 10%).

This resulted in revenue growth figures of more than 50% per year due to both strong like-for-like sales growth and rapid store roll-out. In addition, profitability of retailers was relatively high with 6-10% EBITDA margins for the largest grocery retailers such as X5 Retail Group and Magnit, mainly as a result of limited competition. The modern trade format, especially hypermarkets, quickly became popular among Russian consumers.

All non food segments also showed tremendous growth; for example the DIY segment or the consumer electronics retail sector, which has been growing on average by 20% per annum between 2000 and 2008, driven by disposable income growth and increased consumer credit availability as well as residential real estate development.