Anybody attending Walmart’s annual general meeting this year in June might have noticed something curious. A fair number of the retailer’s associates were from Russia – a country where Walmart has had an office since the beginning of the year, in Moscow, but has no stores: at least not yet. At the same gathering, recently installed ceo Mike Duke said that one of his best-ever visits was to Russia: “I’ve never seen so many people in a store. The only thing was, it wasn’t our store!”
Even the ceo of Russia’s largest grocer, X5, has said that he expects Walmart to arrive soon, backing up the (by now) pretty strong suspicion that the Bentonville behemoth is considering a Russian debut.
Whatever the truth behind all of this, Walmart’s Russian overtures are symptomatic of a broader phenomenon: the desire on the part of retailers across the world to open in what’s still perceived to be a land of opportunity. To date, the European retailers and big-box operators have made the best strides in opening stores beyond St. Petersburg and Moscow. Names such as IKEA, Obi (a German DIY retailer) and Castorama (a French DIY outfit) are all now up and running, in some cases as far east as Siberia, which only begins around four hours’ flying time east of Moscow.
But for the great majority of European retailers that have taken the plunge, Russia means Moscow or St. Petersburg. And, significantly, there are still few North American operators in Russia, Walmart’s Moscow office notwithstanding.
Several factors are contributing to this lag. First, there’s the spectre of corruption. The recent decision by IKEA to suspend further investment in the country, owing to what it said is the requirement to back every initiative with a bribe, exposes the problems that foreign retailers are almost certain to encounter. Russian president Dmitri Medvedev has made curbing corruption one of the goals of his presidency and has signed a law prohibiting surprise inspections by fire and health authorities that are often used to extort companies.
And, of course, there’s also the gloomy economic news that’s been leaking out of the country over the last year. The Russian stock market has been hit harder than any Western bourse since the crunch kicked in, and the boom in luxury retail and consumption has declined almost as rapidly as it took hold earlier in the decade. After nine consecutive years of retail growth, sales in April fell 5.3 percent – the third monthly decline in a row. Unemployment, on the other hand, rose to 7.7 million, according to the Federal Statistics Service.
Anna Sadovnikova, a consultant at London design firm SCG, which has worked extensively in Russia for nearly a decade, says: “Back in October-November 2008, when the world economic crisis finally hit Russian consumers, people were shocked.” That said, Russians remain avid consumers. Says Sadovnikova, “Consumer mindsets [in Russia] now are very similar to the rest of the world. People feel they need to spend less, but at the same time are not willing to compromise their lifestyle. Consumers are trying to balance the economic need with the desire to enjoy purchases.”
A quick trip around any of the mid-market malls that surround downtown Moscow, or through Okhotny Ryad, the three-level underground shopping complex just beyond Red Square that’s home to many Western retailers, reveals that the cash registers are still ringing. “At the moment, the mid-market is under attack, but not as much as the luxury market,” says Elena Chuvakhina, head of business development at Fitch London. “In the mid-market, where there are Western brands, their Russian counterparts are really suffering. Russians would rather go to Zara or Benetton [for example], than buying local.” From the store design community’s perspective, therefore, the branded mid-market is where the Russian action is likely to be for some time to come, as the top end of the spectrum looks like a busted flush in these troubled times.
The Russian experience of U.K. mid-market fashion retailer Karen Millen is instructive. This is a retailer with 16 outlets in cities across western Russia, the bulk of them in Moscow. It generates more revenue from this portfolio than it does from all 25 of its stores in and around London. The store design is broadly the same as in the U.K., but the Russian enthusiasm for reasonably priced, branded mid-market fashion from overseas has made this a success story that far outstrips anything back home.
“The trick is that the middle sector is actually everything but the top end,” says Nick Hill, retail director at Viva Retail, and a director at Minima Retail Group, both of which have extensive retail operations in Russia. “So, for example, New Look (a U.K. discount fashion retailer) is mid-market, but Miss Sixty is also mid-market.”
Perhaps for geographical reasons, U.S. retailers have not proved so quick off the mark, although a few names such as Calvin Klein Jeans, Levi’s and Nike are well established west of the Urals. And for the most part, incoming retailers have brought their store designers with them – their Russian outposts look very similar to their home country counterparts. Worth noting, too, is that the annual meeting of the International Association of Department Stores (IADS) took place in Moscow, in April. It was the first time the IADS has selected an Eastern European location for its get-together, and it’s significant that both U.S. retailers and design consultancies were among the delegates who made the trip.
Russia remains a country that is, like many other parts of the world, economically embattled, but this does not mean that it will be ignored. The first wave of foreign retailers has been in the country for nearly a decade and when Walmart finally decides the time is right, a U.S. stampede seems sure to follow.
SIDEBAR: RUSSIAN BY THE NUMBERS
Room to Grow: The Russian economy is only around a fifth of the size of the U.S. This may make it sound like a relatively unattractive proposition -- particularly when a projected 6 per cent GDP contraction is factored in for the current year -- but retailing is still in its infancy in many parts of the country.
Sizing It Up: Scale is a positive and a negative. Russia is a country of 141million people, distributed over a land mass that is 2.5 million square miles larger than Canada. This means that while the population is sizable, it is highly concentrated and, like the US, makes Russia a regional country. Foreign retailers and designers will be forced to concentrate on specific areas and cities.
Capital Investment: Moscow accounts for around 20 per cent of Russia’s GDP. Taken alongside its hinterland, it has a population of 17 million, making this the center of the retail economy, with St Petersburg coming in a distant second. Other cities, such as Omsk and Novosibirsk, in Siberia, are being developed, but for the foreseeable future the Russian capital is where foreign retailers will cluster. Commercial real estate prices continue to be among the world’s highest.
This is part 2 of VMSD's Special Report, "Deconstructing BRIC". To read the initial installment, on Brazil, click here.