By Mikhail Burmistrov, general director, InfoLine-Analytics
The Russian food retail market – one of the largest in Europe with an estimated value of RUB 17.4 trillion (or about USD 240 billion) in the 12 months to the end of June 2021 – has undergone seismic changes in recent years. The latest trend driving the growth of the sector is Russians’ increasing demand for convenience shopping, with new retail champions emerging as a result.
One key trend has been the rise of “ultra-convenience” retailers, akin to a 7-Eleven in the US or neighbourhood shops in Europe. These stores are compact, conveniently located ad designed to meet the need for quick purchases of everyday goods. What makes the Russian example unique is that one company has translated this format into a nationwide business with a highly efficient and highly profitable business model – unlike in other markets, where convenience stores are often franchise operations and generally low-margin.
The undisputed leader in this space in Russia is Mercury Retail, which was formed in 2019 from the merger of the Red & White and Bristol chains with Dixy supermarkets. Mercury Retail sold Dixy to Magnit in July this year in order to concentrate solely on the ultra-convenience segment, and now operates around 13,500 stores as of June 2021 under the Red & White and Bristol brands.
The key to the success of Red & White and Bristol has been its ability to combine close proximity to customers (shops are usually within a five minute walk of where customers live) with a highly focused and relevant product assortment and – crucially – a relentless focus on best prices (compare this to convenience stores in other markets, where higher prices can often be a “trade-off” for the convenience aspect).
Increased demand for convenience retail goes hand-in-hand with urbanisation. Currently 75% of the Russian population of 146 million people live in urban areas and this is continuing to increase; also increasing the percentage of the working population, set to be 58% of the total – about 84 million people – by 2025. Another key driver is economic. With real wages under pressure, Russians are increasingly seeking out value in their everyday purchases, and are more likely to switch to retailers that offer the best prices.
Russian buying habits are also changing. Consumer behaviour is becoming increasingly rational, doing more price and quality comparison, demanding more natural ingredients and better environmental standards. Ultra-convenience serves this shift well, as the average non-food assortment in such stores is less than 5%, meaning fewer impulse purchases.
The smaller, more personalised assortments due to store size (usually between 50 and 200 sq m) also positively affects consumer behaviour, as once the product range has been tailored to the customers they no longer need to do comparison. This is dependent on feedback, transparent pricing and ease of purchase – all things which can be achieved easily in the tech-savvy Russian market.
Convenience retail – both online and offline – has come into its own during the coronavirus pandemic. Food retail sales in Russia got a boost from COVID as Russians who found their ability to travel abroad restricted spent more money at home – we estimate Russians will spend an additional RUB 150 billion at domestic food retailers in 2021, and an extra RUB 50 billion in 2022, as a result. Mercury’s stores have seen some of this come their way, with many customers who visited a Red&White or Bristol store during the lockdown becoming loyal customers for their everyday shopping.
The food retail market will get an additional boost from RUB 300 billion of targeted social support to help pensioners and families with school-age children with food purchases, as well as more migrant workers returning home (an additional RUB 60-80 billion). As a result, we expect the Russian food retail market to grow by 9.7% in 2021 to RUB 18.2 trillion.
Online operators like Yandex.Lavka and “ultra-fast” delivery operator Samokat have also done well in the past 18 months, and are expected to become major players in the big cities by 2025. However, while online food retail has grown exponentially in recent years, the growth of online retailers will be restricted by the scale of Russia’s rural areas, which are particularly difficult to serve with digital models. In these areas, customer loyalty to offline retailers such as Mercury – an established price leader across a number of categories – has increased as a result of rising inflation.
The bricks-and-mortar ultra-convenience model, by contrast, has proved to be scalable nationwide, even in a huge country such as Russia. Red & White and Bristol both started out in Russia’s regions and has been operating successfully in both major cities and smaller towns across the country for years. Mercury Retail has ambitious goals to grow its store numbers many times over in the coming years across the country, including a tripling of store numbers in St Petersburg and quintuple growth in Moscow, meaning stores would be within a five-minute walk anywhere in the city.
Structurally, despite years of growth and the emergence of genuinely world-class modern retailers like X5 and Magnit, the Russian market is still relatively underpenetrated by modern nationwide retail chains and there is considerable room for further consolidation – the 10 largest players in Russia combined have market share of just 36.9%, rather than the level of around 70% seen in more mature markets such as the US, UK, France and Germany. In short, there is still much to play for.
Food and FMCG retail always be an essential market, but it is those who can take advantage of the trends who will be most successful. Mercury Retail’s lean and efficient business model and tremendous growth record – like-for-likes have been growing at double-digit pace for the last several quarters – make the company a strong candidate at the front of the “next wave” of emerging Russian retailers. The company saw its revenue increase by a third during the pandemic, continuing a trend of dynamic growth since 2017. Currently, Mercury Retail ranks third among Russian food retailers with 4.6% total market share (more than 43% of the ultra convenience channel). From this, we forecast that it will account for 9.9% of the total Russian food market by 2025.