X5 Retail Group, the largest food retailer is Russia, is targeting new supermarkets and proximity stores and is leveraging the power of big data to optimise assortments, pricing and promotions in order to drive sales densities in-store.
Pyaterochka is X5 Retail Group’s proximity store format. It operates around 15,000 stores in Russia, catering for community and convenience needs with a best customer value proposition or soft discount approach.
Perekrestok is X5’s supermarket chain and Russia’s largest with 811 stores. 2020 marks the retailer’s 25th anniversary, making it one of the oldest and first modern format retailers in the market.
Pyaterochka has an approximate 10% share of the Russian grocery market, which is highly fragmented. The X5 Retail Group, for instance, commands a 12% share in total and the top five retailers hold a combined share of just 26%.
But Pyaterochka is eying further growth, according to CEO Sergei Goncharov.
Goncharov joined X5 in June 2018 from Magnit, where he headed up Magnit Cosmetic. Prior to that he worked at Sony Corporation as director for strategy and business development.
“The proximity format is big in Russia and we see quite a bit of market potential for growth with 10,000 more stores in the regions where we are present,” Goncharov states.
However, it will be a more balanced growth approach with the rate of store openings slowing from 3,000 stores per year previously to around 2,000 stores a year today.
“We are opening new stores but the rate of opening is slowing down. Now there is more focus on increasing the density of sales via innovation, labour optimisation and by focusing on the customer experience,” Goncharov says.
For Pyaterochka, innovation spans digital capabilities, pricing and assortment.
Digital touches both inside and the outside of the Pyaterochka business, Goncharov says. Inside means improving internal processes, while outside refers to the retailer’s digital interface with its customers.
Eager to see how its processes measure up, Goncharov reveals Pyaterochka has created a ‘digitisation index’ and ranked processes in the company, according to their level of automation. That encompasses around 200 processes plus almost 1,000 sub-processes across all X5’s retail chains, he says. Pyaterochka ranks 2.5 times lower than Amazon on the Index but considerably higher than other retailers, Goncharov reports.
Big data strategy
For assortment planning, pricing and promotions at Pyaterochka, X5 Retail Group is harnessing the power of big data and it’s very much a home grown approach.
Former X5 head of M&A, Anton Mironenkov, has been appointed to the newly created role of head of big data, leading a new team.
It’s a top-down and retail driven approach. “We are focused on what’s more relevant for the retailer itself, not the technology,” Mironenkov says.
X5 has consulted with companies like Dunnhumby to develop its big data strategy, creating its own tools and algorithms and adjusting the models according to store formats, as well as regions.
Assortments have been created for store formats and are specific to a region and introduce localised goods, Mironenkov says. Pyaterochka has 120 assortment clusters, for example.
The initial work has focused on Pyaterochka proximity stores, the largest part of the X5 business, but also because it has a smaller overall assortment of 4,500 SKUs on average.
The aim is to cover as many consumer needs as possible but with fewer SKUs, Mironenkov says.
For Goncharov, big data has turned assortment selection on its head. Instead of selections being made by category managers and supplier recommendations, Pyaterochka has revised that process, he says.
Instead, the retailer has looked at all of the 2 billion transactions of its loyalty card holders over a year and scrutinised the items that went into those transactions and the connections between purchases.
The project has culminated in a Customer Decision Tree or CDT, where Pyaterochka understands when certain products are bought and when they are bought with other products or if substitutes are made.
“It’s a very sophisticated algorithm that makes proposals to category managers for assortment selection by machine rather than by hunch,” Goncharov says. However, managers still have a view of the process and can change orders and intervene, he adds.
Pyaterochka is also deploying big data for its promotional plans to distinguish between good and bad promotions and ensure it is not losing margin. A promotion on chocolate bars, for example, could generate increased sales for brand A but if other brands undersold during that period, the retailer loses margin. Additionally, customers may stock pile on brand A while it is on promotion, damaging future sales. All that data goes into the promotional planning and proposals are put to the category managers.
“It’s more science than art but we help people to understand how to improve their results,” says Mironenkov. “The organisation needs to learn why decisions are made before they become routine,” he explains.
Similarly with pricing, Pyaterochka is working to optimise margins. While assortment planning is geared to increasing sales and not losing margin, pricing is geared to increasing margins but not losing sales, Goncharov says.
Pyaterochka is currently trialing digital pricing and the early results are reported to be “very good” with prices changed as frequently as every three days to maintain the retailer’s value proposition.
Mironenkov reports the retailer scans competitor pricing and also uses external suppliers to source pricing data. All the numbers are put into a centralised system and analysed alongside the demographics of people who live around the stores. Pricing strategies are then developed by region and by category and pricing decisions are made accordingly, dependent on the retailer’s criteria ie if it wishes to price above or below a competitor or to win sales, for example.
Mironenkov reports there are 120 assortment clusters in Pyaterochka, which are affected by store size. Larger stores may operate one assortment cluster in drinks but multiple in bakery, for instance; whereas a smaller store would operate one assortment cluster in bakery since the range is not as large. As well as tracking competitor pricing, the retailer also monitors price perception to maintain a halo, best customer value approach to pricing but not EDLP.
Another new customer-facing digital service at Pyaterochka is Express delivery. Here, the retailer is leveraging its 15,000-strong store network – 70% of the population live within 500m of its stores – to fulfil online orders; currently within 30 minutes from placement of order, although the target is 15 minutes, Goncharov says.
The service is currently on trial in two stores south west of Moscow and, if successful, will be rolled out. For Goncharov, there are three clear reasons it’s an imperative however.
“One, online sales are two to three times larger than offline. Two, if we don’t do it, someone else will do; and three, online shoppers have different missions and will buy something else as well,” he says. The mantra, he adds, is to be agile. “Fail early, fail fast and learn,” he smiles.
Fresh food to go
Global trends for fresh food on the move are also on the Pyaterochka radar. “People want to spend less time cooking and focus more on fresh food to eat and ready to go,” Goncharov says.
“We’ve done our research and, in the US, more than half of what people consume is out of home,” he continues. “We understand the trend and are preparing for it.”
So-called channel blurring is very real and apparent in today’s marketplace.
“We need to be in the restaurant business,” Goncharov acknowledges. “We sell ingredients but the customer does not want ingredients but the experience of consuming food, so it’s our job to think about how to give that final product to them. Borders are disappearing and we don’t know what will happen in five to 10 years time but we are competing in the restaurant/food industry.”
In preparation, X5 Retail Group has set up a Smart Kitchen, which supplies 200 SKUs of freshly made products including lunches, sandwiches and crepes to stores and also fulfils Express delivery orders.
Fresh foods you can trust is one of the pillars of Pyaterochka’s latest Customer Value Proposition. The others include low prices, amazing convenience and caring for the community/sustainable.
On the latter, the business takes its role seriously in areas such as plastic reduction, for example.
“Thirteen million people come to our stores every single day and 8 million will have already visited our stores by lunchtime – that’s the population of Switzerland. We have a huge responsibility to the country and the planet to do the right thing,” Goncharov states.
“We have to do the right thing and set an example and hopefully others will follow. By making it a little better, hopefully we will leave a legacy,” he says.
In store, that translates to doors on chiller cabinets and smart controllers for heating and lighting plus reverse vending and Pyaterochka is reported to be making significant progress.
Improving staff welfare is another target. Goncharov reports the company has cut staff turnover by 20 percentage points year-on-year in nine months of 2019 by fair compensation and training.
“We can’t make customers happy if our employees are not happy. We can implement cost cutting initiatives such as cutting down on shrinkage and logistics but not with regard to fair salaries or treatment of our employees,” he says.
Meanwhile, Pyaterochka takes care of its customers with localised assortments – it has stores in five of Russia’s 10 time zones and there are 5,000 miles between stores – and low prices. “The Russian economy is ok but not exuberant,” Goncharov says.
There’s also a watchful eye on digital trends, which are very prevalent among Gen Z, he adds. “They are 10-15 years old but they are the base of our customers in 10 years’ time and we have to be prepared for that. They are health conscious and time conscious and value for money is very high on their agenda.”
Perekrestok, X5 Retail Group’s supermarket chain, is targeting a further 1,000 stores in Russia, subject to locations and availability. On average it opens 100-150 stores per year: over 150 in 2018 and 115-130 this year. The chain, which has an average store size of 800sq m to 1,600sqm, is focused on fruit and veg, fresh categories, bakery, over the counter sales and ready to eat foods.
According to Perekrestok CEO Vladislav Kurbatov, supermarkets are replacing the mission of hypermarkets by being in closer proximity to customers and able to fulfil all their needs. Indeed, Perekrestok is in the process of taking over 34 of X5’s 91 Karousel hypermarket stores to convert to its own format. The retailer has also trailed three smaller models of its supermarket format this year and Kurbatov reports sales have not decreased by squeezing the selling space and increasing the sales density.
The trend towards smaller stores became apparent two years ago, Kurbatov reports. But, while Perekrestok has won increased frequency from its loyal shoppers, the number of SKUs per transaction has been reduced.
“People are coming more often but they are buying less,” he says. Shopper promiscuity has been heightened too. Previously shoppers would visit two to three stores to complete their purchasing but today they visit seven to eight.
And, they are increasingly led by promotions. Perekrestok does participate but keeps promotions at a certain percentage of sales in order to support margins and reinvest in the business.
“Our like-for-likes (Perekrestok has recently reported its fifteenth quarter in a row of positive like-for-like traffic growth) show people are not coming to us for promotions,” Kurbatov says. The chain also reported 18% growth in revenue in Q3 versus the same period in 2018.
It’s a different story in the hypermarket sector where 45-50% of sales are done on promotion. The customer appetite for ‘big box’ stores is also dwindling, Kurbatov says. Plus, many hypermarkets are located in shopping malls and face direct competition from other retailers. Consequently, hypermarkets tend to sell groceries cheaply and make money on non-food.
Substituting the Karousel hypermarket model with the Perekrestok supermarket format makes good business sense, Kurbatov says. “We have a lot of inventory because we work primarily within grocery but get good sales density and no over stocks.”
Loyal customer base
Perekrestok is winning appeal within Russia. It reported 30% growth in its loyal customer base year-on-year plus a 19% year-on-year increase in total sales in the first nine months of 2019.
Kurbatov reports it has around 6m active users who account for 70% of total sales. The retailer’s Net Promoter Score is also up 8 percentage points year-on-year, a significant turnaround on its performance three years ago.
According to Kurbatov, loyalty card holders shop with Perekrestok once every three months. It enables the retailer to interact and engage via targeted promotions and personalised offers. Shoppers can scan QR codes to collect points, which are redeemed at the point of purchase. Additional points can also be collected via supplier-funded promotions.
Perekrestok wins access to the buying history of loyalty card holders and can link that to its online store to see what people are being off- and online.
“The spend of people who buy online is much higher than someone who buys offline only,” Kurbatov reports. “Plus, online shoppers also come to Bricks & Mortar stores and the average cheque is higher.”
As a result, this group is more visible to Perekrestok and it has a better understanding of their needs, so is better able to personalise promotions and send targeted offers, Kurbatov adds.
Ready prepared meals
While Perekrestok stores are famous for their fresh food offer, acceptance of prepared foods has been a slow burn but is now winning traction, Kurbatov reports.
“Historically, prepared meals were sold over the counter from departments like deli etc. However, a lot of people were cautious that if the food was cooked in-store, it was near its expiry date and didn’t trust it. Today’s generation views ready-to-eat food very differently,” he says.
Now products such as prepared meals and pre-packed food, made in the Smart Kitchen facility in Moscow, are readily accepted in-store; although the preference is for self-serve versus over the counter sales.
“Consumers trust these prepared meals more now. They have no additives, which means they won’t last as long so the fresh perception is good and this trend is picking up.”
Kurbatov reveals the Smart Kitchen now makes 3,000 sandwiches a day for the whole of Moscow, for example, and Perekrestok sells a total of 7,000 in the capital and 30,000 in the whole marketplace.
New technologies are being rolled out thick and fast at Perekrestok including self checkout and scan and go. Acceptance of self checkout has been pretty rapid, even among retirees, Kurbatov says. Card only machines have been introduced too and today around 70% of all payments are made by card in Perekrestok. Further, 6% of people now use scan and go and the spend is higher since users can monitor their spend along the shopping journey, Kurbatov says.
Electronic price tags are also being piloted at the supermarket chain, improving both efficiency and service levels; while queues are being monitored via video surveillance and stores will open extra checkouts if a third person joins a queue. The technology is also being used to monitor on-shelf availability.
Increasing the penetration of fresh foods is a key goal at Perekrestok in order to differentiate from proximity stores and hypermarkets. It’s about providing what Kurbatov dubs a ‘gastromarket’, where people come every day for fresh foods.
“We want to be the number one choice for fruit and veg, ready to eat, fish and meat plus lifestyle products,” he says.
Caring for the community is another box Perekrestok is keen to tick. It has also installed reverse vending machines for plastic bottles, offering discount coupons in partnership with Unilever.
In addition, it began recycling the plastic bags used for online deliveries two months ago based on customer feedback. In the first month alone, it recouped 60 kilos of plastic waste.
Online still only represents around 1.5% of total Perekrestok sales but has quadrupled year-on-year, Kurbatov reports. Perekrestok has three dark stores in Moscow and one in St Petersburg. Currently it delivers 6,000 orders per day to the Moscow region and St Petersburg but anticipates fulfilling 7,000 by early December.
Big data and personalisation
Back in the big data department at X5, Mironenkov is busying his team not only with pricing, assortment and promotion planning but on enhancing the retailer’s forecasting abilities. Mironenkov reports X5 is targeting a three-week forecast for each SKU per store. Once that’s achieved it will turn its attention to suppliers to improve forecasting accuracy since they typically require at least a six month forecast due to production cycles.
A logistics project is also geared to improving the speed at which fresh products are delivered into store.
In each instance, there’s a joint team of big data specialists and retail executives collaborating on pricing, promotions or assortments etc.
“Big data doesn’t know the business enough and Sergei’s guys don’t know how to build the software. The joint team solves the problem and is closer to the business than an external provider,” Mironenkov says.
The business is also keen to move towards more personalised offers, once again switching decision making from an art into a more scientific approach.
Promotions are inherently dangerous for many in the food retail sector, Mironenkov maintains. Not only are there compliance issues in-store, retailers need the “Goldilocks” amount of stock for a promotional period – neither too little or too much – and they don’t wish to run in tandem with a competitor, for example.
“Switching to personalised offers will change the approach to business,” Mironenkov says. “We’ve looked at a lot of European retailers and in the US. It’s a trend but we want to be one of the first to implement it at scale.”