Russian retailer Magnit plans to strengthen its production arm by acquiring a large-scale farming business in the Lipetsk region. According to business portal RBK, the Krasnodar-based company submitted a request to the Russian Federal Antimonopoly Service (FAS) concerning the purchase of vegetable producing company OOO Moskva na Donu, which grows potatoes and carrots on 700 hectares of farmland.
Already in the past Magnit announced plans to extend its agricultural production mainstay as part of its long-term strategy. The company committed to invest around RUB52bn (EUR700mn) by 2022 into its farming business. To date Magnit operates its Zelenaya Liniya greenhouse complex on 80 hectares and also acquired the confectionery Konditer Kubani, and the Kuban bakery plant, both located in the retailer’s home city, Krasnodar.
Following a move by Auchan to integrate a meat processing plant in Tambov into its structure, now Magnit has its sights on a promising add-on to its farming business located in Lipetsk (incidentally 200km from Auchan’s Tambov facilities). Just a coincidence? We do not believe these cases to be an upstream integration trend for the whole industry, but motives might be similar.
Potatoes and carrots seem unspectacular. However, when considering traditional eating habits in Russia’s regions – where the majority of Magnit’s store network is located – it can be safely assumed that both items are a basic commodity in everyday life. Taking into account that Magnit’s grocery store count has crossed the 11,000 mark, and that the company has been allegedly importing potatoes from other countries in the past, the decision appears logical. Although a production level of 25,000 tons per year will not be enough to cover the retailer’s annual volume, it for sure means increased planning capacity and a massive cost reduction in comparison to foreign-grown produce. Considering that these vegetables are included on the list of socially significant items, for which prices are monitored regularly and can be regulated by the government, it appears prudent to internalise this part of the supply chain. One more aspect is worth consideration: After the embargo for certain food products from the European Union was imposed, Russia’s administration announced increased support for the domestic food production industry. Magnit’s massive step into farming might not only secure cheaper sourcing at a quality standard defined by the retailer itself, but could also guarantee political and financial support for the future.