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Major Co-operative Deal Looks to Transform Russia's Retail Sector

Strategic alliance between X5 Retail Group and Tsentrosoyuz offers new opportunities for Hong Kong suppliers.

Photo: X5 Retail: Will co-operative co-operation reap major benefits?
X5 Retail: Will co-operative co-operation reap major benefits?
Photo: X5 Retail: Will co-operative co-operation reap major benefits?
X5 Retail: Will co-operative co-operation reap major benefits?

The recent signing of a deal between the X5 Retail Group and the Central Union of Consumer Societies of the Russian Federation (Tsentrosoyuz) has been hailed as the most significant change to Russia's retail sector in recent years. It sees a significant strategic alliance emerging between X5, one of Russia's top-three retailers, and the country's long-established and widespread co-operative movement.

Between 1933 and 1993, co-operative businesses were the only form of semi-private enterprises permitted to trade in the USSR. As a result, such organisations thrived, evolving into huge operations that survived the end of the Soviet Union, with both Latvia's Lat chain and Tsentrosoyuz, its Russian counterpart, continuing to prosper.

Today, there are Tsentrosoyuz stores in 89,000 settlements across Russia, with 54,000 of them home to fewer than 100 people. As well as distributing products sourced from third parties, it also owns production facilities. These supply its outlets with a wide range of goods, including beverages, bakery and confectionery items, meat and dairy products, as well as home decoration and improvement items, fur and wool products.

In total, Tsentrosoyuz's assets across Russia include 5,000 workshops and 16,500 logistics and distribution points. Its remit also extends to 40,000 retail stores and 5,000 catering establishments.

For its part, X5 is well-known for its innovative approach to the retail sector. At present, it owns and operates a significant number of supermarkets, hypermarkets and convenience stores. In 2014 it entered into a partnership with Voentorg, a retail chain operated by the Russian Defence Ministry and somewhat akin to the UK-based Army & Navy Stores. In what was billed as a "reverse franchising solution", X5 took over 100 Voentorg stores in and around Moscow. The deal floundered somewhat, however, following the advent of the country's financial crisis and the imposition of the EU/US sanctions.

The current deal came about after Pyaterochka, an X5-affiliated retail chain, successfully implemented a further reverse franchising arrangement with Tsentrosoyuz's Moscow regional subsidiary back in 2015. The combined operation trades as Pyaterochka MSPK in 21 districts across Moscow, with X5 providing its co-operative partner with all the necessary branding, goods and equipment in exchange for a management fee.

Under the terms of the deal, some 5,000 Tsentrosoyuz shop-in-shop departments will open within X5 outlets over the next four years. These will target shoppers willing to pay a premium for high-quality farm-fresh produce.

These new stores will trade under the Pyaterochka KOOP branding, KOOP being instantly recognisable by many older Russians as referring to the co-operative movement they were familiar with back in the days of the USSR. As well as their core food-and-drink offerings, the outlets will carry a range of other products, including haberdashery, hosiery, cutlery, dishware, houseware and gardening equipment.

For Hong Kong suppliers and distributors, this alliance offers a number of new opportunities. In the case of the more rural outlets, demand remains strong for several items largely disregarded by Russia's city dwellers, including instant noodles, corned beef, concentrated powder drinks and powdered milk. There is also a market for inexpensive rubber boots, workwear and a number of other items principally distributed in less-developed economies.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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