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New Retail Alliance in Russia

Sedmoin Kontinent
Photo: LZ Retailytics
Increasing market consolidation in Russia is driving smaller operators out of the market, as the recent closure of Sedmoy Kontinent illustrates.

A new Russian retail alliance, appropriately dubbed ‘Альянс’ ('Alliance') and currently consisting of three regional retail chains, has plans to take a top five position among the country’s grocery retailers by 2020. As reports, discussions with other companies are also under way, with the venture targeting middle-sized regional retailers with a strong market presence in 78 out of 85 Russian districts. The alliance will consolidate purchasing and negotiation of terms, as well as support its members in the areas of business processes, personnel recruitment and assortment building.


Copy-Pasting Existing Models Won’t Work

Reaching a top five position in Russia within three years seems pretty ambitious. Especially when you consider that in 2020 – according to LZ Retailytics data – the number five grocery retailer in Russia will post almost EUR5bn of gross revenue. This means that the alliance would have to unify around 5,000 average-sized neighbourhood stores to reach this threshold. The three chains proposing to merge so far only comprise 200 stores, so significantly more operators will need to get on board to meet this target. However, we believe that the initiative to join regional operators is indeed a valid approach, with the potential to counteract the increasing presence of federal players beyond metropolitan areas.

The crucial factor will be to what extent the new construct will differ from a conventional buying group. Unlike organisations such as Coop, Hungarian CBA or Polish PGS (Polska Grupa Supermarketów), an umbrella retail brand and accompanying marketing at this phase for locally established retail networks is unlikely to bring much added value. Also, joint business processes, associated with an integrated IT system, would mean high up-front investments and therefore would likely invalidate the project. This leaves assortment unification aimed at driving volume advantages. For the most part, fresh ranges are sourced regionally (with suppliers like Miratorg and Russkaya Akvakultura exceptions); leaving ambient food and near-food items as the focus areas. With no unified market presence, only phantom brands (next to standard supplier brands) would be an option at this stage, which would then be in direct competition with X5’s ‘Krasnaya Cena’, Auchan’s ‘Kazhdy Den’ or Lenta’s and Perekrestok’s eponymous medium-tier labels – all of which are supported by strong marketing.

In our view, the current business model is at the early stage of a buying group, with the main benefit being a decrease in purchasing costs for members. However, to win locally against federal players, each regional retailer must individually capitalise on its local hero status to differentiate itself against national chains. This leaves the newly-created alliance focusing on cost advantages – buying time against increasing competition – with the need to grow its base until other options become available and economically meaningful.