Retail Revolution in Russia

Vadim Radaev

Laboratory for Studies in Economic Sociology

26 June 2013

Высшая школа экономики, Москва, 2012

www.hse.ru

Laboratory for Studies in Economic Sociology

• Since 2006 LSES conducts sociological research on consumer markets

• LSES conducts policy oriented research on request of the leading business associations

• LSES provides publication of e-journal Economic Sociology and newsletter ESForum

LSES projects (1)

• Prospects for the light industry development in Russia (for Retail Companies Association, 2013)

• Examining the Informal Alcohol Market in Russia (for International Center for Alcohol Policies, 2012-2013)

• The retail companies’ costs of cash and non-cash payments transactions (for Retail Companies Association, 2012)

• Impact of parallel import legalization on consumer markets (for RATEC and RusBrand, 2011)

LSES projects (2)

• Major trends in the markets for counterfeited goods and an impact of the new Custom Union (for RusBrand, 2010)

• System of monitoring for status and trends in trade activity (for the Russian Federation Ministry for Industrial Production and Trade, 2010)

• Online trade market: supply chains and tax optimization schemes (for RATEC, 2010)

• Current status and major development prospects of the Russian retail trade (for Sberbank of Russia, 2009)

Economic impact of trade is increasing

In employment, %

2010

1990In GDP, % In investment, %

Source: Rosstat

Impact of trade to the state budget revenues is comparable with that of oil and gas industries

Source: Rosstat

|

Retail turnover increased by 10 times since 2000

Source: Rosstat

|

Retail turnover growth has been two-fold higher than GDP growth in 2000s

Source: Rosstat

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Retail revolution in 2000s

• New domestic and global market actors

• Expansion of civilized trading formats (supermarkets, discount stores, hypermarkets)

• Diffusion of new technology and logistics

• Transition from supplier-driven to buyer-driven supply chains

New retail market actors

• Domestic chain stores were established in the 1990s and grew up to nationwide operators in the 2000s

• Global chain stores entered the market in 2000s (IKEA, Metro, Auchan, Leroy Merlin, Zara)

• Traditional (over counter) independent stores are pushed away

• Open-air markets are closed down by municipal authorities

New profile of retail trade

Phenomenal growth of retail market leaders

• Annual growth of sales

– 40-70 per cent before the 2008-2009 crisis

– 20-30 per cent after the 2008-2009 crisis

• Open as many new outlets as possible

• Active regional expansion

– Getting down from the largest to smaller cities

– Moving frontier from Western to Eastern regions of Russia

Russian companies strategies:grab the space and do it fast

• Brownfield strategies, renting trading facilities

• Development of franchising schemes

• Mergers and acquisitions (after 2005)

• Use of medium-sized trading formats:

– supermarkets

– soft discount stores

Global companies: focus on sustainable growth

• Greenfield strategies, building up new outlets

• No franchising schemes

• No acquisitions of local companies

• Use of large trading formats

– hypermarkets

– cash & carry

Russian companies in comparative perspective: Labour productivity is low but sales per square meter are high

Sales per square meter (USD)2000 2011

Sweden 5 965,2 7 579,9

Russia 1 594,1 6 484,0

France 5395,6 5 747,4

UK 4 196,6 5 227,1

Finland 3 776,5 4715,3

Germany 3 734,3 4 239,1

Italy 3 831,0 3 949,8

Romania 1 673,0 3 586,6

Greece 2 897,9 3 508,6

Poland 2 737,4 3 071,1

Turkey 1 081,0 2 805,9

USA 1 998,2 2 586,8

Hungary 1 466,2 2 018,6

Sales per worker (USD)

2000 2011

France 17947,1 21005,1

Italy 15871 17820,9

USA 14091,1 18539,7

Sweden 13905,9 18952,8

UK 13695,2 18613,6

Germany 13666,4 14106,6

Finland 13471,9 19926,5

Greece 11735,3 12984,3

Hungary 4916,2 8327,5

Poland 4544,5 6386,5

Turkey 1778,1 6671,0

Russia 1241,1 6035,6

Romania 693,4 3433,1 Source: Data Euromonitor

www.acort.ru|

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Retail companies break through to the top of business rankings

• 2000 – no retail companies

• 2004 – 17 retail companies in top-400 4 retail companies in top-100

• 2011 – 17 retail companies in top-400 12 retail companies in top-100

4 retail companies in top-50

Source: ‘Expert’ ranking of top-400 companies in Russia

Market leaders

Retail company

Place in the ranking Turnover, 2010 (mln rbls)

Number of stores

X5 Retail Group

17342 701,30

3660

Magnit 25 236277,5 5346

Auchan 31 178142,6 51

Metro. Cash & Carry

40 132484,4 58

Good prospects for further consolidation

• Modern chain store companies – 30 per cent

• Large areas of Russia are still unexplored

• Five largest retail companies make:

– 5 per cent of total sales

– 12 per cent of sales in grocery market

– 60 per cent of sales in consumer electronics

Online trade growth is three-fold over five years

Online trade, 2011, %

UK 8,3

Finland 7,9

USA 4,9

France 4,6

Germany 4,3

Sweden 4,1

Poland 3,9

Russia 2,1

Hungary 2,0

Romania 1,2

Italy 1,0

Turkey 0,8

Greece 0,8

Source: Data Euromonitor

www.acort.ru|

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Trends for the future

• Annual retail turnover growth will decrease (6-8 per cent)

• Increasing consolidation of the market by the market leaders

• Market leaders will continue their extensive growth but give

more attention to effectiveness

• Russian grocery market will become the largest in Europe

• Non-food segments will grow faster than food segments

• Chain stores will push away independent stores and open-air

markets

• In contrast to Eastern European countries, Russian domestic

retail companies will keep their markets and compete

with the global companies

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Puzzle: why did the state suddenly come back

• Retail trade has been a most liberalized and privatized market sector in Russia since 1992

• The state did not intervene for 15 years

• Restrictive trade law was initiated in 2007

• Despite active resistance of leading retailers, the law passed by the end of 2009

The state intervention is aimed at limiting retailers market power

• Marketing fees are prohibited except for 10 percent bonus for the volume of sales

• Maximal delays in payments for supplied goods are fixed for chain stores (10-75 days)

• Chain stores obtaining 25 percent of the market in municipal district should not open additional trading outlets

• Government is supposed to intervene if the price increase on necessities in the stores exceeds 30 percent in 30 days

Background: change in supply chain

• Transition from producer-driven to buyer-driven supply chains occurred in 2000s [Gereffi 1994]

• Shift in the market power from suppliers to favour of retail companies

• Retailers gaining their market power established the new rules of exchange

Background: relational conflicts

• Chain stores failed to provide cognitive and sociopolitical legitimacy for the new rules of exchange causing relational conflicts

• Attempts to settle down disputed issues between leading retailers and suppliers failed

• Relational conflicts in supply chains were aggravated by the financial crisis in 2008

Background: appeal to the state

• Suppliers tried to compensate for the lack of their bargaining power by appealing to the state intervention

• Populist public debate on ‘domination of the trading mafia’ was developed

• Demand for the new formal regulatory norms was claimed by the Russian President

How to pass a disputable law

• Prime Minister Vladimir Putin was invited to a chain store to see unfair pricing examples

• Draft law on trade was submitted to the State Duma within one month

• In two months the law was approved in the first reading

Fight in the Parliament

• Russian MPs suggested more than 300 amendments:

– to fix retailers’ gross margin

– to limit the share of imported goods

– to restrain sales of private labels

– to reserve shelves for small suppliers

• Some odious amendments were rejected but major anti-chain-store discriminatory statements remained

U.S. Store Wars, 1930s

• Anti-chain-store legislation was enacted in 27 out of 48 states with discouraging taxes as a key element

• Legislation was initiated by associations of small retailers and farmers from local communities

• Chain stores managed to get hold of institutional change

• Anti-chain-store legislation was repealed at the end of 1930s [Ingram, Rao 2004]

U.S. Store Wars, 2000s

• Small suppliers complained on limited access to store shelves and slotting fees

• 90 percent of complaints ran against large suppliers

• Federal Trade Commission spent three years on research getting no definite results

• The number of court precedents against slotting fees was reduced

[Klein, Wright 2007]

Russian Store Wars, 2000s

• Anti-chain-store opposition took a character of intrastate rather than grassroots movement

• Political lobbyists of large suppliers rather than independent retailers played a major role in opposition

• Almost no research was carried out. Existing results were not taken into account

• No evaluation of regulatory impact was undertaken ex ante or ex post

LSES study data sources (1)

• Time: 2010 (November - December)

• Survey: 512 filled questionnaires

• Respondents: Managers of retail chains

and their suppliers

• Sectors: Grocery sector (75%),

home electronic

appliances (25%)

• Regions: Moscow, S.-Petersburg,

Yekaterinburg,

Novosibirsk, Tyumen

Higher School of Economics , Moscow, 2011

LSES study data sources (2)

• Series of 38 in-depth interviews with the market actors and political experts

• Records from the expert meetings:

– Ministry of Economic Development

– Ministry of Industrial Production and Trade

– Federal Anti-Trust Service

– State Duma (Parliament) Committee on Economic Policy and Entrepreneurship

Changes in procurement contract process over

the last 2-3 years as viewed by market sellers

Making contracts with

large exchange partners

Retailers (N = 249) Suppliers (N = 220)

Became easier 12% 5%

No change 81% 75%

Became more complicated 7% 20%

Making contracts with

small exchange partners

Retailers (N = 244) Suppliers (N = 236)

Became easier 15% 15%

No change 80% 76%

Became more complicated 5% 9%

Changes in contract requirements to the

suppliers from chain stores over the last 2-3 years

Price discounts Retailers (N = 243) Suppliers (N = 218)

Decreased 7% 3%

No change 79% 71%

Increased 14% 26%

Payment delays Retailers (N = 243) Suppliers (N = 231)

Decreased 11% 5%

No change 77% 61%

Increased 12% 34%

Slotting allowances Retailers (N = 233) Suppliers (N = 210)

Decreased 11% 4%

No change 83% 78%

Increased 6% 18%

Marketing fees Retailers (N = 223) Suppliers (N = 184)

Decreased 17% 10%

No change 78% 76%

Increased 5% 14%

Penalties Retailers (N = 236) Suppliers (N = 221)

Decreased 7% 5%

No change 85% 80%

Increased 8% 15%

Federal Antimonopoly Service started checking up the trading companies to enforce the new trade law

(December 2010)

Large chain stores

Small and medium chain stores

Became subjects to check-ups

33% 26%

Received formal prescriptions to change

77% 40%

Federal Anti-Trust Service conducted 370 check-ups of trading companies

and examined 15 thousand procurement contracts in 2011

Federal Antimonopoly Service put more

pressures on market sellers accused of

violations of the trade law

Source: Federal Antimonopoly Service data

2010 2011 2012

Number of legal cases against firms 128 220 171

Share of legal cases initiated by the FAS RF, % 93 90 89

Number of judgements regarding violations of

the trade law by the firms

97 141 124

Number of orders issued by the FAS RF 47 116 91

Number of penalties charged by the FAS RF - 59 119

Sum of penalties charged by the FAS RF

(thousand rbls)

- 31296 141800

Trade law did not balance the market power but increased administrative costs

• Contract terms and conditions have not substantively changed for 75-80 per cent of market sellers and for became even worse 15-20 per cent of market sellers

• Suppliers provide even more critical evaluations

• No difference is observed between grocery sector affected by the trade law and home electronics sector non-affected by the law

• Administrative costs increased due to reshaping procurement contracts, more controlling check-ups, prosecutions and fines imposed by the Federal Antimonopoly Service

Debates over trade law implementation are ongoing

• Federal Antimonopoly Service first rejected, then recognized the conclusions of this study

• But public officials do not admit that state intervention into the contract relationships is not needed

• Public officials suggest new amendments to the trade law to strengthen restrictions imposed on trading companies

• The story is to be continued…

Books on Russian retailing

Papers in English

http://ssrn.com/abstract=2002071

Vadim Radaev

WHERE DOES THE DEMAND FOR

REGULATION COME FROM?

THE STATE’S RETURN TO THE

RETAIL TRADE IN RUSSIA

BASIC RESEARCH PROGRAM

WORKING PAPERS

SERIES: SOCIOLOGY

WP BRP 02/SOC/2011