PAPER: SECTOR SAINT-PETERSBURG

Date: March 2014 Flanders Investment & Trade Saint-Petersburg

Retail sector Saint-Petersburg | March 2014 ______1 1. RETAIL CHAINS IN SAINT-PETERSBURG

For many years Saint-Petersburg has been a national leader in chain retail: the share of all chains in the total retail turnover is more than 84% which is close to standards in Western and Central Europe. Besides, many big federal chains come from Saint-Petersburg, such as: “Pyaterochka”, “Lenta”, “ОK” and “Karusel”.

Saint-Petersburg has a high per capita concentration of chain shops:

 Hypermarkets – high concentration (11,9 shops per 1 million people)

 Supermarkets – low concentration (2,5 shops per 100 thousand people)

 Discount \ “Neighborhood” shops – highest concentration in (5,5 shops per 10 thousand people).

Local market leaders include: hypermarkets “ОK”, “Lenta” and “Karusel”; supermarket “Perekrestok”, discounters “Pyaterochka” and “Dixy”.

Other national and international retail chains also demonstrate a high revenue growth, such as: hypermarkets “”, “Metro Cash&Carry” and “”; discount stores “Narodnaya Semya” and “Polushka”.

In 2013, the total retail turnover in Russia rose only by 1,8% (in 2012 – a rise of 6,3%) and that caused an increased competition between chains, as well as consolidation of the retail market. Some small retailers closed their shops in Saint-Petersbrug. A decline in per capita income and high requirements to food quality and service create new challenges for retailers. Discounters take up these challenges by transforming their format to “neighborhood” shops; hypermarkets and supermarkets respond to them by adding fresh products and introducing shop-in-shop concept.

2. HYPERMARKETS IN SAINT-PETERSBURG

The food retail market in Saint-Petersburg is characterized by high levels of market concentration and centralization. Saint-Petersburg has the highest concentration of hypermarkets among Russian cities with the population over 100 thousand people.

Most of the hypermarkets belong to big national and international chains: “Auchan”, “Metro Cash&Carry”, “Prisma”, “Real”, “ОK”, “Lenta” and “Karusel”. Competition in this segment is very hard: local chain retailers (ОK, Lenta and Karusel) perform better and demonstarate higher efficiency than international retailers (Metro, Real and Auchan).

Due to the highest level of hypermarket concentration in Saint-Petersburg, most of customers live close to hypermarkets and can go shopping on foot. So, hypermarkets squeeze dicounters and neighborhood stores out of the food market. In contrast to Saint-Petersburg, people in do shopping in out of city shopping areas over the weekend.

3. PREMIUM SEGMENT – DELICATESSEN SUPERMARKETS

According to food market experts, a decline in per capita income will have no effect on the premium segment. On the contrary, food retailers still develop delicatessen supermarkets. The market share of the premium segment accounts for 2%.

The dominant delicatessen supermarket chain in Saint-Petersburg is called «Land». In October 2013, this chain opened its 9th supermarket in Saint-Petersburg. According to their business development

2 ______strategy, the company will continue expansion in the city increasing the number of stores to 15 up to 2015.

The second market player is «Azbuka Vkusa», a delicatessen retail chain from Moscow. It operates 4 supermarkets in Saint-Petersburg and plans to open 11 stores within 4 years. It will result in an aggressive competition on this market.

Other market players include:

 “Globus Gourmet”, a deli supermarket operated by a chain from Moscow;

 “Super Babilon”, 2 supermarkets run by a local operator;

 “Stockmann”, a Finish supermarket;

 “Super Siwa”, a Finish supermarket.

“Premium segment” is a very general term and is not used in Europe. According to the range of products, such supermarkets are called “Biomarkets” in Europe. As for the premium segment in Saint- Petersburg, “premium” means a good service, high-quality food and a wide range of products that includes imported products, private lable products, and bioprodcuts from farmers located in the Leningrad region. The price of products does not matter.

4. DISCOUNT / “NEIGHBORHOOD” STORES

Discounters started to develop in early 1990-s (“Pyaterochka” and “Dixy”). Now the concentration of discounters is very high in some districts of the city, but some still have a lack of discounters.

This format is now the main driving force in chain retail in Saint-Petersburg. There is a need for discounters on Vasilievsky Island and in Petrogradskaya area. The following discount chains are expanding very well: “Polushka’, “Narodnaya Semya”, “7 Steps”.

5. WELL-DEFINED STANDARD VS SLOTTING FEE

On the one hand, chain retail is a well-defined standard that provides everything (purchasing, pricing, merchandising, customer service). On the other hand, it provides stiff requirements to other players of the food market: producers, suppliers, customers and partners. For instance, retail chains do not like to deal with small food producers because they can supply small amounts. Thus, small producers have to unite or cooperate with each other, establish their own trade firm or sell their products at a low price fixed by the chain operator. Besides, producers are often asked to pay for product marketing and promotion, return of unsold goods, etc. In general, they have to pay chains to take their products (“slotting fee”). But low purchase prices in chains do not suggest low retail prices: the price of a product in a hypermarket or supermarket is often higher than that in a discount store.

Thus, chains have no interest to purchase Russian products. They tend to buy imported products which sometimes lack quality, but are cheaper. Bulk purchasing of imported products causes sometimes a sharp decline of bulk prices in a particular segment, but it has no effect on retail prices.

Retail sector Saint-Petersburg | March 2014 ______3 Tables:

Leaders of FMCG chain retail shops in St.-Petersburg and Leningrad region in 2012

Net avails Nr. Retail Chain Group / Operator 2012, Bln of RUR 1 Karusel http://karusel.ru Х5 Retail Group 78,4 Perekrestok www.perekrestok.ru www.x5.ru Petyorochka http://pyaterochka.ru 2 Lenta www.lenta.com Lenta 66,0 3 O’KEY www.okmarket.ru O’KEY Group 58,7 O’KEY Express 4 Narodnaya 7Ya www.7-ya.ru Intertorg 24,2 Idea www.7-ya.ru Spar www..ru 5 Dixy http://dixy.ru Dixi Group 20,5 6 Auchan www.auchan.ru Auchan Groupe 15,7 Auchan-city 7 Polushka www.polushka.info Polushka Group 13,3 Lime http://limefresh.ru 8 http://magnit-info.ru Magnit 8,5 9 XL http://xl-retail.ru Retail Severo-Zapad 7,4 Group 10 Prisma www.prismamarket.ru S-Group 7,2 www.s-kanava.fi 11 METRO Cash & Carry www.metro-cc.ru Metro Group 4,9

Source: INFOLine (http://infoline.spb.ru)

Hypermarkets in St.-Petersburg – shop count

Hypermarket Shop count O’KEY www.okmarket.ru 17 Lenta www.lenta.com 16 Karusel http://karusel.ru 15 Auchan www.auchan.ru 6 Prisma www.prismamarket.ru 6 K-Ruoka www.k-ruoka.ru 4 Metrо C&C www.metro-cc.ru 3

4 ______Russian public retailers key data

Total Sales in Capitali- Growth square Company 2013 (bln zation P/E EV/EBITDA Shops (%) (thousand of RUR) (bln USD) sq. m) Magnit 579,5 29 24,8 24,5 13,7 8093 3010 http://magnit-info.ru 532,7 9 4,6 18,8 6,9 4544 2223 www.x5.ru Dixy Group 180,5 23 1,2 17,1 5,1 1799 617 http://dixy.ru Lenta 144,3 35 5,29 26,4 10,5 87 508 www.lenta.com O’KEY Group 137,7 19 2,8 15,5 8,4 95 495 www.okmarket.ru

Some other St.-Petersburg chain supermarkets

# Name Website

1 Super Siwa http://www.siwa.ru

2 Gastronom 811 www.cb811.ru

3 Kir24 http://kir24.ru

4 NETTO www.netto-shops.ru

5 Real Svezhie produkty www.tdreal.spb.ru

Gourmet stores (premium segment)

# Name Web

1 Land http://supermarket-land.ru

2 Azbuka Vkusa http://av.ru/ 3 Globus Gourmet http://globusgurme.ru 4 Stockmann (gourmet shop) http://www.stockmann.ru/ru/st.-petersburg/delicatessen

Retail sector Saint-Petersburg | March 2014 ______5