THE Q4/03 STATE OF THE FOOD RETAIL INDUSTRY IN URBAN RUSSIA An industry review utilizing open systems approach with content analysis Harri Lorentz Electronic Publications of Pan-European Institute, 1/2004 http://www.tukkk.fi/pei 1 TABLE OF CONTENTS 1 EXECUTIVE SUMMARY..................................................................................... 3 2 INTRODUCTION................................................................................................... 4 3 RESEARCH FRAMEWORK ................................................................................. 6 3.1 The system hierarchy in the framework......................................................... 6 3.2 The operating environment ............................................................................ 9 3.3 The industry ................................................................................................. 10 3.4 The firms in the industry.............................................................................. 11 4 METHODOLOGY OF THE STUDY................................................................... 15 4.1 The research data and the choice of analysis method .................................. 15 4.2 Content analysis as a method of research .................................................... 18 4.3 Conducting a qualitative content analysis.................................................... 20 4.3.1 Developing a classification system.................................................. 20 4.3.2 Defining the unit of analysis............................................................ 23 4.3.3 Coding and reporting in content analysis ........................................ 23 4.4 Establishing research trustworthiness .......................................................... 27 5 THE STATE OF RUSSIAN FOOD RETAILING IN Q4/03 ............................... 30 5.1 Supersystem elements in Russian food retailing.......................................... 31 5.1.1 Demographic (DEM)....................................................................... 31 5.1.2 Economic (ECO) ............................................................................. 32 5.1.3 Cultural and social (C&S) ............................................................... 35 5.1.4 Political and legal (P&L)................................................................. 36 5.1.5 Technological (TEC) ....................................................................... 38 5.1.6 Natural (NAT) ................................................................................. 39 5.1.7 New entrants (ENT)......................................................................... 39 5.1.8 Buyers (BUY).................................................................................. 42 5.1.9 Substitutes (SUB) ............................................................................ 43 5.1.10 Suppliers (SUP) ............................................................................... 46 5.2 System elements in Russian food retailing .................................................. 48 5.2.1 Structure (STR)................................................................................ 48 2 5.2.2 Strategic groups (GRP).................................................................... 49 5.2.3 Competitive moves (MOV) ............................................................. 51 5.3 Subsystem elements in Russian food retailing............................................. 52 5.3.1 Firm growth (GRO) ......................................................................... 52 5.3.2 Retail chains (CHA) ........................................................................ 54 5.3.3 Store types (TYP) ............................................................................ 55 5.3.4 Firm specific information (INF) ...................................................... 57 6 SUMMARY WITH CONCLUSIONS.................................................................. 64 6.1 Summary ...................................................................................................... 64 6.2 Conclusions with managerial implications .................................................. 68 6.3 Future research on the subject...................................................................... 70 7 REFERENCES...................................................................................................... 71 APPENDIX 1: COMPANY PROFILES......................................................................75 APPENDIX 2: SAMPLE ARTICLE SOURCES….....................................................89 APPENDIX 3: SAMPLE ARTICLE REFERENCES..................................................92 3 1 EXECUTIVE SUMMARY The research originates from the discussion the author had with the head of Raisio Group plc (a major Finnish food manufacturer) representative office in St. Petersburg, Russia. A concern was raised on the company’s strategy in the Russian market, and more specifi- cally, the question of with whom to do business in the perceptibly dynamic and changing market. Knowledge on the trends and phenomena in the industry would potentially help in the strategy development of the company. The need for a thorough assessment of the industry was thus articulated, providing the author an opportunity to work on the matter. The purpose of the study was to obtain a clear picture of the present state (as of Q4/03) of the food retail industry in the Russian cities of Moscow and St. Petersburg. Therefore the author set as his research goals the following: (1) to provide a framework for a holis- tic analysis of the food retail industry through theory review, (2) to identify the prominent trends, phenomena, and agents in the food retail industry, and (3) to describe the promi- nent trends, phenomena and agents in the food retail industry. The author focused on the retail chains (multiples) operating in the set geographical area, be they domestic or inter- national in origin, in contrast to including all the incumbents of a fragmented industry. The study is descriptive in nature, and it employs a qualitative research method (con- tent analysis) in the analysis of the 330 retail oriented business newspaper articles from various Russian language sources. Based on the theory framework (three level system hierarchy) the articles were coded and analyzed by their content, and consequently results were derived in numerical form and in summaries on the prominent topics. Summaries on the system hierarchy elements were presented and company profiles provided. It was apparent from the research results that (1) the share of retail chains of the total retail turnover is growing in the urban areas of Russian Federation, at least in the Moscow and St. Petersburg areas, (2) the retail chain organizations are becoming larger in terms of turnover and market coverage. The chain organizations’ role as a strategic group is thus increasing. In order to deal with retailer power and to gain access to the vast market in Russia, two approaches are recommended for Raisio Group plc: (1) partner with the industry winners, and (2) increase channel equity by enhancing brands and creat- ing consumer demand through promotion. 4 2 INTRODUCTION Russia has been an intriguing target of study for the author for some time. The author’s interest towards the country was initiated by the two years spent in various parts of the vast Russian Federation in the late 1990s. During this time first hand experience was gained on the rapid changes taking place in the operating environment. The implications of the 1998 crisis were surprisingly practical and concrete: skyrocketing prices, shortage of products in stores, and riots in banks, were some of the effects felt by ordinary people. The tension and disappointment could be felt in the air, as the hard earned wealth was in some cases wiped out completely. Since then the Russian economy has recovered to some degree, and the author considers it a privilege to be able to observe a developing economy in its growth struggles with a contextual experience of one’s own. This experi- ence has been useful in the author’s academic pursuits as well as in work. It is now the author’s attempt to gain more insight into the Russian economy by study- ing one of the most important industries in a modern economy, namely food retail indus- try. The role of distribution in an economy is undisputedly important, retail function be- ing an essential part of the distribution channel. In many ways the level of development of the distribution and retail function in the economy portray the overall level of devel- opment of the economy (Mallen 1977, 117). For example retail sales growth is a widely observed variable in economic news, due to its contribution to GDP. Russia is a special case due to its experiments with command economy (communism) in the not too distant past, and thus interesting target of study in the area of distribution and retail (see e.g. Ruohonen 1999, Lorentz 2002). It is hoped that the reader may benefit from this study by gaining insight into the retail industry development in general and the Russian food retail industry in particular. In order to obtain a clear picture of the present state (as of Q4/03) of the food retail in- dustry in the Russian cities of Moscow and St. Petersburg, and the chains’ role in it, the author sets as his research goals the following: (1) to provide a framework for a holistic analysis of the food retail industry, (2) to identify the prominent trends, phenomena, and agents