Sedmoi Kontinent IPO reflects Russian retail ambitions

Related tags St petersburg Russia

Russia's Sedmoi Kontinent has become the country's first retail
group to float on the stock market - a move widely seen as a bid to
raise cash for expansion before the expected influx of western
chains, as Chris Jones reports.

Sedmoi Kontinent, Russia's third largest domestic food retailer with sales of $445 million last year according to analysts M+M Planet Retail, has raised around RUR2.3 billion from the sale of 15 per cent of its share capital in last week's initial public offering.

The company is yet to confirm what the cash will be used for, but it is highly likely that most of the funds raised will go towards expanding the chain's store portfolio, both within its current strongholds of Moscow and St Petersburg and elsewhere.

The Russian retail sector remains highly fragmented, with the top five grocers (both domestic and foreign) holding a combined share of just 7 per cent - extremely low by western standards. This, combined with the concentration of virtually all modern retail outlets in Moscow and St Petersburg, makes the Russian market highly attractive for investors, and Russian operators are increasingly keen to stake their claims before western groups such as Wal-Mart, Tesco and Carrefour take over as they have done in many other countries in central and eastern Europe.

Russia's leading supermarket group is Pyaterochka, whose 260 or so outlets generated some $933 million in sales last year, accounting for 2.3 per cent of total Russian grocery revenues. Germany's Metro group is the number two player, with sales of $760 million in 2003 and a market share of 1.9 per cent, while Turkey's Migros Turk is the number three player with sales of $489 million and a share of 1.2 per cent.

Perekiostok, a Russian chain with aspirations of joining the stock market in 2006, is the number four operator with sales of around $450 million, just ahead of Sedmoi Kontinent, according to M+M Planet Retail.

Although there are just two western chains in the top five, a number of other foreign groups are active in the market, such as Germany's Edeka and Rewe and France's Auchan, but M+M Planet Retail's Boris Planer pointed out that the difficulties in doing business in a market as large and unpredictable as Russia meant that most foreign groups have expanded at a far slower rate than originally expected.

"To show how difficult the market is, it is interesting to highlight that the average supermarket transaction in Russia is only $4.40 (and probably $10-15 in western-style hypermarkets), and due to this - plus exceptionally high property prices - Auchan is not hoping to generate any profits until after seven of eight years of operation,"​ he said.

But with the Russian authorities increasingly keen to welcome foreign operators - not least because their presence is seen as helping to reduce the black market and increase VAT income for the government, according to Planer - domestic operators such as Sedmoi Kontinent are determined to strengthen their positions in advance of a new wave of international investment.

This is likely to focus on the 12 Russian cities with a population in excess of 1 million inhabitants where modern retail outlets are yet to take a foothold, according to Planer. Russian chains are already moving into cities such as Nizhniy Novgorod, Samara, Kazan and Yekaterinburg, and other such as Novosibirsk, Omsk, Ufa and Perm are likely to follow as and the steady drive eastwards continues over the next few years.

But there is a risk involved in pioneering the retail trade in these provincial cities, no matter how large the population. Per capita spending in Moscow and St Petersburg is probably two to three times above the national average of around $1,929, making these two cities the logical place for companies to concentrate their efforts, not least because prices are not much lower in Russian supermarkets than they are in the west, despite a major disparity in spending power.

Pushing further afield also causes problems with supply chain and logistics which will need to be overcome before real growth can be achieved.

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