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Russia's retail sector will stagnate

The Russian retail sector is the sixth largest in the world, following closely behind the United States, China, Japan, France and India. So far, the sector seems to be growing unabated. Supermarket giant Magnit saw its sales grow by 33 percent in June and appears on the list of the 50 Most Valuable Brands of Europe. Competitor Lenta expects sales to grow by 34 to 38 percent this year. The X5 Retail Group, formidable competitor with three supermarket chains, has a turnover of 16.8 billion dollars. But according to analysts, the end might be near. The growth of Russian retail, they claim, will see some serious stagnation in the coming years.

Lenta continues to grow

Supermarket chain Lenta is the only Russian company to go public this year. Just before the Ukraine crisis affected markets, Lenta’s shares were introduced on the London Stock Exchange. The retailer’s IPO managed to collect 1 billion dollars. Although the markets reacted to the political crisis in the region, Lenta reported no major changes in consumer behaviour. In fact, the retailer reported a growth of 37.3 percent in the first quarter to $ 1.1 billion. In the last quarter of 2013, sales grew by 35 percent.

During the second quarter of this year, the retailer’s growth was persistent, with 39 percent. The second quarter saw the opening of seven new branches; three hypermarkets and four supermarkets. Over the entire year, the chain expects to achieve a growth of 34 to 38 percent, as opposed to 31 percent in 2013.

More stores and sales
The chain also expects to expand the number of stores by 24 hypermarkets and 15 supermarkets. This corresponds to a 30-percent increase in the net sales space. In late June, Lenta counted 82 hypermarkets and 14 supermarkets, with a combined retail space of 545,000 m2.

Sales and profits have grown significantly in recent years. In 2010, Lenta managed a turnover of almost EUR 1.5 billion. In 2013 revenues amounted to EUR 3 billion. Profits increased in these years from EUR 47 million in 2010 to 150 million in 2013.

Europe's largest companies
Compared to Lenta, rival retailer Magnit is doing slightly less well, as its growth rates are lower than last year’s. However, the chain released a projected growth of between 22 and 24 percent, which is slightly down from last year’s 29 percent. In June, progress was well above average, at 32.8 percent. The company states to have achieved a turnover of 1.9 billion dollars this month, putting semi-annual turnover at 10 billion.

X5 big rival
Although Magnit is market leader and has the advantage of operating at the lower end of the market, competition is increasing, one of the main competitors being X5. The two chains are in a fierce battle for the lead in the industry. X5 is owned by oligarch Mikhail Fridman and includes three supermarket formats; discounter Pyaterochka, supermarket Perekrestok and hypermarket Karusel.

For the past few years, the chain has been focusing on expanding the number of stores, opening 577 stores in 2011 alone. By the end of 2013, the counter stood at 4544 outlets. The largest part of these (3568 stores), represents discount stores, followed by 390 supermarkets, 83 Karusel hypermarkets and 189 convenience stores.

The chain has a strong market position in the regions of Moscow and St. Petersburg and is generally well represented in western Russia. Over the first quarter of 2014, X5, with a turnover of 4.12 billion dollars, reported slightly lower sales (0.9 percent) than in the first quarter of 2013. This decrease in revenue was largely due to disappointing sales in the Perekrestok and Karusel outlets. Discounter Pyaterochka grew by 2.4 percent to 2.8 billion. The net profit for the first quarter increased by 8.5 percent compared to the same period a year earlier, amounting to a little over 70 million dollars.

The growth rates of the retailers include the new stores, making the reported increase slightly higher. Analysts expect that over the next five years, retail in Russia will grow by one to four percent each year. However, some say Russian retail seems to be reaching its zenith. Further growth is becoming increasingly difficult in a country with a declining population and major logistical challenges due to its size.
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