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Shrinkage and Rationalisation Awaits Post-Recession Russian Retailers

With Ikea trialling a range of mini-store formats and M-Video exploring a flurry of different positionings for its newly expanded operation, Russian retailers have yet to find any clear way out of the sanctions-spurred wilderness.

Photo: Ikea Russia: The ultimate big-box store looks to thriving through downsizing.
Ikea Russia: The ultimate big-box store looks to thriving through downsizing.
Photo: Ikea Russia: The ultimate big-box store looks to thriving through downsizing.
Ikea Russia: The ultimate big-box store looks to thriving through downsizing.

Russia's retail sector has gone through a period of considerable tumult of late. Buffeted on one side by the ever-encroaching tide of e-commerce vendors, it has simultaneously had to contend with dwindling consumer spend as the stagnation of the economy as a whole hit home, a situation exacerbated by the international sanctions imposed by the EU and the US.

Inevitably, the sector set to emerge from these testing times will be very different to the one that thrived in the pre-2008 boom years. Indeed, a number of one-time high-street fixtures – notably Mir, TechnoPower and Uyuterra – have vanished entirely, while many others have been obliged to merge with former competitors or to expand into market sectors they would have once shunned.

Even the very largest players have been far from immune to the chill winds that have laid waste to the sector. The mighty Ikea, for instance, has been reduced to scaling down its retail outlets, a reality brought home by the debut of its comparatively dinky slimmed-down store format in Moscow's AviaPark Shopping Mall late last month.

Apparently the first of a new breed of store for the veteran Swedish flat-pack furniture retailer, the Moscow outlet boasts just 300 sq m of floor space. It has also ditched its one-time showroom function in favour of acting as a service point for bespoke furniture orders and a pick-up zone for items ordered online. Remarkably, it will also be the only presence the company maintains in Moscow proper, with its other local – and far larger – outlets consigned to the wrong side of the ring road, deep in the Greater Moscow region.

Perhaps ironically, given that it is now pioneering store shrinkage, Ikea was one of the first global retailers to bring big-box outlets to Russia when the market opened up in the late 1990s. Back then, in fast succession, it opened 14 hyper-stores at sites across the country. Unusually for the company, it also acted as prime developer for several Mega Malls, a role it had never played before and has never repeated in any other territory.

Interestingly, despite its new enthusiasm for smaller stores, with their higher return per square metre than their more capacious counterparts, the company is believed to have not entirely abandoned its heritage format. Plans are apparently proceeding to open three more Mega Malls in the Moscow region, with Ikea again playing the lead developer, landlord and proprietor role.

Clearly keeping its options open, at the same time it is also said to be looking to trial various new formats, services and product portfolios. Interestingly, many of the designated test sites are said to be in close proximity to a number of its existing hypermarkets, a move that may confuse consumers, while also disconcerting longstanding staff.

It is not the only retailers taking an experimental approach to trading in post-recession Russia either. In the case of M-Video, one of Russia's largest consumer electronics and household electrical appliance chain operations, it is still bedding in the additional 415 outlets it took on following its acquisition of Eldorado, once its primary rival.

Its challenge now is to profitably maintain its new stores alongside its existing 424 sites, with many of these operations unfeasibly close to one another in terms of catchment area. At present, the plan seems to be to maintain the separate branding of the acquired operation, with Eldorado positioning itself at the budget end of the market, while M-Video looks to monopolise sales of more upmarket items and build on its existing success with its dedicated in-store M_mobile smartphone and gadget zone.

Designed to offer a stylish take on electronics shopping, the concept is also to be rolled out as standalone 200-300 sq m stores under the M_mobile by M-Video branding. The first such outlet has now opened in Moscow's AmphiMoll Shopping Centre with a mission to super-serve the kind of image-conscious young shopper deterred by the more conservative trappings of the M-Video masterbrand. In line with this, it only sells smartphones, tablets and a range of other digitally enabled-devices, while also offering the kind of integrated payment plans all but guaranteed to drive up the per-square-metre profit yield.

In the case of M-Video and Ikea, their respective retail sectors are both well-starred at present. In 2017, consumer-electronic spend in Russia topped US$20 billion, with more than 10% of that solely derived from smartphone sales, a sub-sector given a massive boost by the staggering pace of technological upgrade, with NFC and facial recognition, for instance, both seen as must-have features by many of the country's young, highly technically-competitive consumers.

For Ikea, its particular windfall comes courtesy of the expanding number of cheap and easily-arranged mortgages, which have, in turn, jump-started the furniture and furnishings sector as new homeowners look to make their mark on their property purchases. As a bonus, these loosened purse strings have also reinvigorated the second-homes market, with demand now high for garden furniture and the other trappings required to fully enjoy these newly acquired rural retreats.

For Hong Kong manufacturers and distributors, maintaining an awareness of Russia's shifting retail patterns is all but essential, given the huge scale of the market. Unfortunately, the likely coming consolidation does not bode well, with the independent sector, in particular, facing being almost wholly squeezed out by the all-too-competitive pricing bestowed upon these consolidated mega-chains by their sheer buying power.

That, however, will still leave open the option of servicing Russia's ever-swelling e-commerce sector. Even here, though, margins are likely to narrow, despite costs remaining far lower than those incurred by conventional retailers, largely on account of the ease of price comparison continually driving purchase points ever lower.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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