Russian big box operator Okey has announced that it plans to triple its DA! discount network within the next three years, making its expansion a priority for the group. The country’s first grocery hard discount chain operates in Moscow and the surrounding area, with 54 stores (as of the end of 2016). The sales concept comprises around 1,800 FMCG items, of which almost 50% are private label, offered in a no-frills environment at competitive prices. In its second year of operation the discount banner's revenue contributed 3.4% to total group sales, posting like-for-like increases of more than 60%.
Okey’s announcement to make the discount segment chief priority is a courageous move in the right direction to evade increasing competition from Lenta and market leaders X5 and Magnit. Many Russian retailers prefer to brand their minimarkets as discounters for image reasons, but Okey’s case is unique. Getting a former Aldi/Hofer executive on board suggests real commitment to an authentic hard-discount sales concept not developed in the marketing department.
So how will tripling the chain’s footprint affect Okey’s position in the market? Considering the low initial store base, the discount segment will barely reach 10% of group revenue in three years. With market leaders X5 and Magnit expected to grow with more than 1,000 stores each, an increase of 50 stores per year seems like a drop in the ocean. And with competitive pricing the key value proposition in the new channel, it is questionable whether the group’s buying volume will allow for sustained investment in price.
At the same time Okey’s results are under pressure, with net profits dropping. We ask ourselves, where will the retailer take the financial resources from in order to finance the necessary expansion and price investments to create a noticeable market presence for its new venture? Putting recent information about a potential acquisition of the group into perspective, the addition of DA! to the group’s portfolio certainly raises the market value and future attractiveness of Okey in case of a takeover.