Published: January 01, 2010
Walking down the main shopping streets and retail parks in the Russian Federation the Western European shopper can often feel more at home than expected, with a host of foreign retail entrants including Metro, Karen Millen, Auchan, Castorama, Jane Norman, Peacocks, Topshop and River Island.
The Russian retail market is exciting and dynamic despite the financial crisis. It has the potential to be the largest in Europe with a population of around 142 million consumers. The unconsolidated nature of much of the retail market provides ample opportunity for foreign entrants, with Moscow and St Petersburg being the most popular locations for starting out. More established foreign players are now also expanding into the regions.
There are a number of models that can be used to access the Russian market. Choosing the correct one depends mainly on the size and scale of the operation. The franchise model is favoured by many foreign retailers, especially in the clothing sector, as this reduces costs and risks but gives access to local knowledge through the franchise partner. This route is not however without risk and appropriate due diligence of the partner should be carried out initially.
An owned and operated model has been used by many of the big-box operators such as Metro and IKEA. They operate large retail units, which due to their size often work best when owned by the multiple. Wal-Mart is rumoured to be entering the market by acquiring some of the smaller domestic food retailers. This route to market allows access to valuable local market knowledge and economies of scale from the start, which are vital for these larger organisations. It buys a retail footprint from the outset.
There are many pitfalls to be aware of when retailing in Russia. The country is notorious for its lack of transparency, bureaucracy and often inconsistent legislative framework, especially around new store openings, product certification and advertising taxes. Some companies hire security firms who deal with all payments required to remain operating and use partners to lead complex local negotiations.
Staff recruitment can be problematic, even though the general standard of education in Russia is good. In particular obtaining managers for retailers can be difficult as domestic retailers are able to pay many times the market rate and snap up the limited supply of good people.[[[PAGE]]]
One of the largest aspects of growth in Russia, especially for national expansion, is the ageing infrastructure. With 11 time zones and a land-mass larger than Europe, moving goods across the country can take a week, with temperatures ranging from minus 40 degrees to plus 40 degrees. Some retailers choose to outsource this function, while others develop in-house capability. In September 2008 Metro opened its first logistics centre near Moscow to supply its Cash and Carry, Real hypermarkets and Media Markt electricals outlets. 
It’s useful to look more specifically at companies that have entered the market successfully.
IKEA first launched in Russia in 2000 and had a bumper first year with sales over $100m putting it in the top ten grossing retailers in the country. IKEA now has 11 stores including three in Moscow, two in St Petersburg and the remainder in cities with more than one million inhabitants such as Kazan and Nizhniy Novgorod. The future strategy is to focus on smaller cities in the regions, especially by being an anchor unit in the Mega Mall shopping centres around the country (which IKEA owns). Despite some difficulties with a lack of regulatory transparency and bureaucracy, Russia remains one of the most successful markets for IKEA.
Metro entered the market in 2001 in Moscow and now has 74 stores nationwide under its Cash and Carry, Real hypermarkets and Media Markt fascias. Metro was one of the first foreign retailers to enter Russia and has maximised on the first mover advantage: with its previous experience of operating in Eastern Europe and elsewhere worldwide, Russia was a logical next step. Wholesaling, through Cash and Carry, has proved very successful for Metro and its main vehicle for growth. Media Markt, its consumer electronics chain, was the latest brand to be launched in December 2006 in Moscow. Further stores quickly followed in St Petersburg and now in the regions of Rostov-on-Don and Samara. To do this they are leveraging off the supply network established with Cash and Carry.
Much of the future pipeline of retailers entering Russia is concentrated on the clothing sector. The Spanish fashion giant Inditex has seen sales growth of 64% since opening its first store in 2008. This is without a franchise partner, which is in contrast to the usual route for clothing retailers. Gap opened Gap and Banana Republic fascias in late 2008 under a partnership deal with Fiba Holdings, with whom they already have a successful agreement in Turkey. Fast Retailing’s Uniqlo and Hunkemöller, part of the Dutch Maxeda Group, are also looking to expand into the Russian market.
In grocery, the European hard discounters are yet to enter the market because of the tough competition expected from local players. Giants Aldi and Lidl are both contemplating a move but with no plans yet in place until the market recovers.
In conclusion, the Russian retail market represents an exciting opportunity right now for foreign players in all sectors, particularly clothing. There are many pitfalls when entering the market with the complex legislation that exists, but for those who overcome them the rewards are definitely worth it.
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