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East European Focus: The Rewards of Russian Retail

by Andy Garbutt, Retail and Leisure Director, PricewaterhouseCoopers LLP (UK) 

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.

How can you enter such a market?

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.

Barriers to entry

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.