Leading Belarus retailer Eurotorg is ready to expand with a new store concept into remote regions and small villages. As disclosed by news portal tut.by, the market leader is preparing to tap into settlements of 400 inhabitants or less. The specially developed store concept will feature up to 1,500 SKUs within sales areas of 80 to 140 sq m. For villages below 200 inhabitants the company will employ Avtolavkas (shops on wheels).
Currently the predominant trade format in Belarusian rural areas are the neighbourhood shops of state-owned Belkoopsoyuz – Belorussian Union of Consumer Societies – of which the company operates several thousand. With a SKU count of 300 to 350 items, these corner shops serve the fundamental shopping needs of the rural population. In recent months, however, delivery reliability as well as the profitability of Belkoopsoyuz have been eroding, such that the supply situation has caught the eye of the federal administration.
Eurotorg’s new concept seems promising to us. Following exponential growth of its store network over recent years, the pace of expansion for the innovative privately owned retailer has slowed down drastically. International development was hit by the economic crisis in 2014 and is taking a long time to recover. Online activities took a hard hit after the sales of alcohol and tobacco were limited to bricks & mortar outlets. Wholesale trading points based at its hypermarkets are a novelty, but in our opinion will not be a significant contributor to sales growth.
Now Eurotorg aims to complete its footprint by tapping into smaller settlements. Back in 2014, the company started its first venture into less populated areas, at that time thwarted by Belkoopsoyuz’s strong political support. In the current economic make-up, we believe political pressure has turned the tide in favour of Belarus’s most popular grocery retailer. Where Belkoopsoyuz’s communist-style organisation is burdening the state budget, sometimes under the guise of social responsibility, Eurotorg’s new clear-cut modular approach appears a financially sustainable solution. The fact that prices in rural shops are up to one-third higher than in urban areas with a higher level of competition supports this.
We are convinced that Eurotorg will be able to overcome the – mostly political – obstacles. This does not however mean that the project will necessarily take off by itself. The cap in local market share at 20% might prevent a fully-fledged roll-out. However, amendments in competition laws are on their way and in the current situation political deciders might be inclined to reassess market structures. Still, the same authorities often represent the interests of behemoth Belkoopsoyuz and have been thwarting Eurotorg’s advances to obtain land plots and supply routes in the past. We would however expect that with the presidential administration addressing the topic, resistance in the top-down bureaucracy is likely to crumble.
Furthermore, the open issue of alcohol licenses would fundamentally influence the whole venture’s feasibility and profitability. However, with the current number one state-competitor holding the right to sell all foodstuffs, including tobacco and cigarettes, Eurotorg should be able to capitalise on its role as the number one grocery supplier with a nationwide coverage. Recently implemented projects were on a fairly minor scale, but this proposed advance into Belarus’s remote territories would seem to provide the potential to grow substantially, without the risks of cannibalisation in its home area or the danger of sunk investments created by further international expansion.