Review of the FMCG Retail MarketResearch of the Company “RBC.research”
External shocks and structural disproportions of economic development led to a deceleration of the Russian economy starting with late 2014. The key drivers of growth in the previous years, namely consumer demand and high prices for oil, rapidly stopped stimulating the economy, and the GDP growth rates became negative. Retail trade, being one of the most important indicators of the state of the economy, confirmed the start of a crisis: its real figures in 2015–2016 turned out to be among the worst ever recorded in modern Russia. A decline in retail turnover in 2015 equaled 10% in 2015 and 4.8% in 2016. In terms of retail trade turnover last year, Russia returned to its figures of mid-2010.
The reason for such a significant drop in retail trade in real terms lies in a number of factors. However, the most important ones among them are declining real incomes and growing prices: in 2015 the consumer price index for food products equaled 14%; in 2016 the situation stabilized, and the predicted consumer price index for food is 7.3%.
Despite the difficult situation, which forced many regional and local players off the market, the major federal and international networks continued their active development and geographic expansion.
In December 2016, analysts at “RBC Market Research” conducted a full analysis of the network segment in FMCG retail. The work identified the key trends of food retail trade in 2015–2016.
ONGOING MARKET CONSOLIDATION
In 2015–2016, the largest FMCG chains continued increasing their share in the food product market. The market consolidation by the ten largest players reached 24.3% in food product retail trade turnover in 2015. Considering the larger share of networks in retail trade turnover in Western European countries, which Russian retailers are oriented toward, the share of major networks is expected to keep increasing.
“X5 Retail Group” expects the share of two leaders of the food retail market to have increased to 40-50% by 2025–2026. In 2016, the two largest players, “Magnit (Magnet)” and “X5 Retail Group” accounted for around 16% of the food retail market.
STORES’ GROWTH RATES ARE STILL HIGH
Over the past 2 years, the 10 largest network players opened over 5,500 stores. The share of the ten leading retail chains in terms of the number of stores in the whole Russia’s FMCG network retail exceeded 55%. High rates of store openings have to do with both further geographic expansion and the desire to occupy a share in the region as large as possible in crisis. Retailers largest in the number of outlets – “Magnit” and “X5 Retail Group” – were operating over 20 thousand stores in 2016.
AUTHORITIES COMPLICATING RETAIL NETWORK DEVELOPMENT AND EXPANSION
Antitrust, switching to online cash registers, the tightening of the law ‘On trade’ as well as other measures proposed by the federal authorities in order to increase market competition create problems for the FMCG retail market. One of the key innovations – switching to an online cash register system, which implies that cash registers are supposed to send electronic bills to the fiscal data operator – is to take effect on July 1, 2017. However, most market players believe that the implementation of online cash registers would require additional considerable expenses on hardware and software, and would bear risks for the time being, such as issues with uninterrupted Internet access as well as insufficient stability of the Federal Tax Service servers, and others.
Authorities in most regions are trying to influence the operation of major networks another way, by controlling the product range (determining the share of locally produced goods and regularly requiring to increase it) and by making them involved in the social block (priority employment for employees of closing networks, investments in jobs in the region etc.).
CHANGING CONSUMER DEMAND
The worsening of the geopolitical situation, sanctions and counter-sanctions imposed, ruble devaluation and the increase in the rate by the Bank of Russia had a negative impact on consumer demand in late 2014 – early 2015. Having faced a decline in real incomes, the population was forced to change their strategies of behavior. A lot of consumer behavior trends formed in 2015 remain relevant: a real recovery from the crisis to the levels of 2012–2013 is expected to be reached only after several years.
Among food products, the decrease in consumption mainly concerned expensive and imported goods: fruit and vegetables, meat (demand shifting from pork and beef to chicken and turkey), sausages, finished bakery products and others.
Another important trend of 2015–2016 is the growing popularity of private label products among Russians.
GEOGRAPHICAL PROSPECTS OF THE MARKETS
Despite the country’s large territory, federal retailers have already occupied – or are in progress of occupying – most regions of Russia. For instance, “Magnit” is not present in only 20 federal subjects of Russia (the Far Eastern Federal District, several subjects of the North Caucasian Federal District, Kaliningrad, and Crimea). The expansion by “X5 Retail Group” continued in 2016 with stores opening in Kemerovo region, whereas “Dixi” proceeded with its development in the Urals (the farthest east outlets of the company are in Tyumen). The lower population density to the east from the Urals only makes it possible for federal players to develop in large towns and suburbs. A decline in the rates of territory expansion by the leading federal players is to be expected – at the moment Krasnoyarsk and Tomsk regions in the east and the Khanty-Mansi Autonomous Okrug in the north appear to be the extreme geographical points for growth. Establishing separate distribution centers further to the east appears to be unprofitable today, and working with remote distribution centers is problematic.
REACHING THE LIMITS OF EXTENSIVE DEVELOPMENT
Several years ago, development of networks could be considered extensive: in the conditions of low competition from stores of older formats, new chains were succeeding even with their existing disadvantages and were opening thousands of stores, conquering the market. Now that the limits of geographical growth are close (it is expected that there will be no ‘new’ regions in 4-5 years) and competition is growing, the situation is changing, which encourages networks to react by improving their product ranges, planning, branding and services.
One of the most important factors in the success of “X5 Retail Group” during the past 2 years is efficient rebranding: in late 2013 the group announced the rebranding of “Pyaterochka (Five)” stores – it was planned to change the appearance of the retail outlets as well as the product range and approach to customers, and to update the logo. Later other stores by “X5 Retail Group” were updated – “Perekrestok (Crossroads)” and “Karusel (Carousel)”.
In July 2016, “Magnit” retail chain opened convenience stores in a new format – according to the CEO of the chain Sergey Galitsky, ‘annual modernization of 400-500 outlets of the convenience store chain’ is planned by the company for the next 4 years.
On November 16, 2016, “Dixi” Group announced its intention to renew its convenience store format following its two largest competitors. “Dixi” is planning to change its design, zoning and display of goods. Just like its competitors, “Dixi” is planning to move fresh and perishable goods closer to the entrance; in addition a flower aisle will be tested, and other improvements will be made. The new format is expected to be tested in 30% of the stores, and the final decision on switching to the new format is to be made in September 2017.
Despite all the difficulties that large FMCG network retail faces, companies’ financial results appear to be stable: the average revenue growth rate of the top 10 FMCG retailers in 2015 amounted to 20% – figures for 2016 are expected to be lower than that, but still higher than the growth rates of food retail as a whole. The normalization of the economic situation in 2017–2018 should lead to a resumption of real growth in retail trade and further development of all FMCG retail segments. The growing role of network players in the market is an objective process of consolidation of food product retail trade, if the development of retail trade in Russia is regarded according to the Western scenario. At the same time the market offers a place for other players such as specialized regional and local networks, and non-network participants. Traditional forms of trading, such as markets and fairs, also continue to exist and are even getting a new life, in particular in large cities.
“RBC Market Research”