The Russian retail industry is one of the most promising sectors of the country’s economy. Over the past five years, retail turnover has surpassed Russia’s GDP growth, and forecasts indicate that this trend should continue for the foreseeable future.

A.T. Kearney, the management consulting company, ranked Russia number one in its 2004 Global Retail Development Index among the top 30 emerging markets worldwide, stating “Retailers continue to be attracted not only by the size of the Russian market, which is home to 143 million people and an estimated $280 billion in annual consumer spending, but also by its potential growth.”

More evidence of the growing strength of Russia’s retail sector can be found in the “Top 100 Emerging Companies of the Russian Consumer” market survey. Sponsored by The PBN Company and Interactive Research Group (IRG) in late 2003, this study showed that 42 of the top 100 Russian consumer companies produce or sell fast-moving consumer goods, often in competition with big international companies such as Unilever, Procter & Gamble, or Danone.

Retail trade benefits significantly from the growing income of the Russians, as well as from Russia’s political stability and economic recovery of the past few years. Currently, the retail market is dominated by small and medium-sized traditional stores, open markets, and kiosks. Low market concentration presents domestic retail companies with promising growth and development potential.

The Moscow Retail Market

According to Russian statistics agency Goskomstat, Moscow accounts for 27 percent of total domestic retail turnover, making it the country’s largest and most developed market. Almost all major domestic retailers are present in Moscow, and most have only recently started expanding into the regions. Although Moscow has the highest number of modern stores in Russia, over 70 percent of Moscow’s retail turnover comes from open markets, kiosks, and traditional shops. In 2003, retail turnover in Moscow exceeded $41 billion, a 24 percent increase over 2002 in nominal dollar terms. According to the Moscow city government, there was an average of 506 square meters of retail space per 1,000 inhabitants in the beginning of 2003 - a nearly threefold increase over the past 10 years. Nonetheless, Moscow is still well behind western capitals in terms of retail space per capita.

Over the next four to five years, Russian retail trade is expected to grow intensively, stimulated by macroeconomic factors (GDP growth and increases in consumer income and spending), structural changes in the market, and steady increases in retail company efficiencies. Chain retailers with modern store formats stand to increase their respective market shares significantly.

36.6: A Symbol of Russia’s Emerging Retail Sector

Pharmacy Chain 36.6 is symbolic of Russia’s fast-growing retail sector. The company (www.pharmacychain36-6.ru) was created six years ago out of a drug manufacturing operation after its founders hired McKinsey & Co and the Santa Catalina Group (SCG) brand consultancy to evaluate the potential for a network of integrated health and beauty outlets. The result: 36.6 became the first western-style, open-format pharmacy in Russia.

In 2003, 36.6 became the first Russian retail company to do an initial public offering (IPO), raising $14.4 million. It used the capital raised in its IPO to expand its presence throughout Russia. Today, the chain owns more than 230 stores across the country, and boasts offerings of “high-quality, affordable health and beauty products at attractive, convenient, customer-friendly stores.” By 2008, 36.6 is targeting a 10 percent market share and sales of $800 million by developing old stores, opening new stores, and acquiring other pharmacy networks. Currently, the chain is focusing on regional expansion of more than 1,000 stores throughout Russia. However, Russia’s capital city still accounts for three-quarters of the company's revenues. 36.6 has also attracted the attention of the global retail community. It recently became the first Russian company to become a member of the U.S.-based National Retail Federation; and its CEO, Artem Bektemirov, became the first Russian member of the NRF Board of Directors - a clear indication that Russia is on the radar of retail leaders worldwide. 

Overall, the pharmaceuticals and cosmetics/toiletries sectors in Russia have demonstrated impressive growth over the past three years. The retail pharmaceutical market’s overall value increased by 62 percent from 2000 to 2003; and the cosmetics and toiletries market grew by 40.2 percent during the same period. In 2003, the entire retail market for these two consumer categories comprised $8.8 million, representing an increase of 48 percent from 2000.

Retail Foods – Supermarkets and Hypermarkets

Retail chains that sell a wide assortment of foods and groceries are the largest and most dynamic modern retail format in Russia. Many leading retail companies are planning IPOs in the near future and actively attracting external investors. Supermarket chains first appeared in Moscow in 1994, when the first Sedmoy Kontinent (Seventh Continent) store was opened. By the end of 2002, there were 28 retail food chains comprising a total of 384 supermarkets; and by the end of 2003, the number of stores rose to 550, an annual increase of 45 percent (for 2003). One of the most successful examples of a supermarket chain is Pyaterochka. The company appeared in 1999 in St. Petersburg. Its shareholders are two limited liability companies and the EBRD, which has invested over $40 million in the company and retains a blocking stake.

Today, Pyaterochka is the largest food retail chain in terms of sales and number of stores (260 stores in Moscow, St. Petersburg, and several regional cities). Unlike Seventh Continent and other high-end Russian food retailers, Pyaterochka has geared its focus toward the rapidly emerging Russian middle class. 

Retail Associations

The increasing prominence of retailer associations has also played a positive role in the development of the Russian retail sector. Together with the emergence of small and medium-size business advocacy associations, these entities have helped foster the development of organic business growth in a country still dominated by oligarch-affiliated, mega-corporations called “holdings.” Prominent among these bodies are the Association of Retail Trade Companies (www.acort.ru), the Association of Trade Companies and Producers of Consumer Electronics and Computer Technologies (www.ratek.org), and the Russian Association of Pharmaceutical Chains.

A Unique Trade Opportunity

This transitional period of dynamic growth in Russia’s retail sector provides U.S. producers and suppliers with a unique opportunity to tap into a rapidly evolving market. The combination of the Russian population’s relatively high percentage of disposable income and pent-up consumer demand - especially in the regions outside Moscow and St. Petersburg - provides U.S. companies with a window to develop brand awareness and loyalty that won’t remain for long. The key, of course, is to develop reliable working relationships with trustworthy Russian business partners. This requires discernment, thorough due diligence, and expert advice from reliable sources on the ground in the target market.

About the author:

 Peter B. Necarsulmer is chairman and CEO of The PBN Company, an international strategic communications firm, headquartered in Washington, D.C., with offices in London, Moscow, Kyiv, Chisinau, Riga, and Almaty. (www.pbnco.com)