International Finance Corporation Private Enterprise Partnership

Ukraine SME Survey and Sectoral Analysis Project

Ukrainian Retail Market

Study funded by

the Ministry of Foreign Affairs of Norway

April 2003

Kyiv, Ukraine

39560

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International Finance Corporation Private Enterprise Partnership

SME Survey and Sectoral Analysis Project

Address 4, Bohomoltsa Street, 01024, Kiev, Ukraine Telephone 38 044 253-0539

Fax 38 044 490-5830 E-mail nshevchuk@ifc.org

Web www.ifc.org/ifcext/pep.nsf/Content/ProjectsPublications

Ukrainian Marketing Group

Address 66-B, Chervonoarmiyska Street, 01150, Kyiv, Ukraine Telephone 38 044 220-5643

Fax 38 044 220-5724 E-mail info@umg.com.ua

Web www.umg.com.u

Tebodin Ukraine LLC

Address 20, Esplanadna Street, 01023, Kyiv, Ukraine Telephone 38 044 230-2616

Fax 38 044 227-0200 E-mail a.dukhno@tebodin.kiev.ua

Web www.tebodin.com

3

Table of Contents

1. Introduction ....................................... ......................................................................................... 5

1.1. Executive Summary..............................................................................................................5

1.2. Definitions of retail formats ...................................................................................................7

2. Retail Market Overview............................. ................................................................................. 9

2.1. General Description of the Ukrainian retail (food and non-food) ...........................................9

2.1.1. Estimated Market Size (food / non-food) ....................................................................10

2.1.2. Number of Retail Outlets and Sales Areas .................................................................13

2.2. Ukrainian Food Retail Sector ..............................................................................................14

2.2.1. History and trends in food retail..................................................................................14

2.2.2 Comparative analysis across CEE countries..............................................................14

2.2.3. Trends in Ukrainian food retail....................................................................................17

2.2.4 Investments in the sector ...........................................................................................19

2.2.5 Customers..................................................................................................................19

2.2.6 Estimated Market Size (food retail) ............................................................................20

2.2.7 Number of Retail Outlets ............................................................................................21

2.2.8 Main food retail formats..............................................................................................22

2.2.9 Key Players in Ukrainian food retail............................................................................24

2.2.9.1 Key food retailers on the Ukrainian market ..........................................................24 2.2.9.2 Factors that influenced the decision to start retail business .................................28 2.2.9.3 Background of retailers ........................................................................................29

2.3. Local practices....................................................................................................................30

2.3.1 Discount / loyalty systems ..........................................................................................30

2.3.2. Seasonality / changes of sales...................................................................................30

2.3.3. Distribution system.....................................................................................................32

3. Administrative Procedures.......................... ............................................................................ 35

3.1. Administrative Barriers........................................................................................................35

3.1.1. Registration of a Business Entity................................................................................35

3.1.2. Permitting procedures ................................................................................................36

3.1.3. Ukrainian legislation on retail. Sanitary regulations and certification of food products 42

3.2. Operational barriers ............................................................................................................44

3.2.1. Infrastructure ..............................................................................................................44

3.2.2. Trade equipment and software...................................................................................44

3.2.3. Human resource issues..............................................................................................45

3.2.4. Supply of goods / Assortment ....................................................................................46

3.2.5. Customs.....................................................................................................................47

3.2.6. Financing of retail.......................................................................................................49

4. Regional Overview .................................. ................................................................................. 50

4.1. Regional Development .......................................................................................................50

4.2. Description of Largest Cities (by number of inhabitants).....................................................53

4.2.1. Kyiv ............................................................................................................................53

4.2.2. Kharkiv .......................................................................................................................56 4.2.3. Dnipropetrovsk ...........................................................................................................58

4

4.2.4. Odesa........................................................................................................................ 60

4.2.5. Donetsk ..................................................................................................................... 62 4.2.6. Zaporizhia.................................................................................................................. 64

4.2.7. Lviv ............................................................................................................................ 66

5. Key Foreign and Domestic Players, New Entrants - Pr ofiles of 25 Retailers...................... 68

5.1. Profiles of key retailers (alphabetical order) ....................................................................... 68

5.1.1. ATB-Market ............................................................................................................... 69 5.1.2. Begemot Shopping Center......................................................................................... 69

5.1.3. Billa............................................................................................................................ 70

5.1.4 Brig ............................................................................................................................ 70

5.1.5. Euromart.................................................................................................................... 71

5.1.6. Fozzy......................................................................................................................... 71 5.1.7 Furshet ...................................................................................................................... 72

5.1.8. Intermarket ................................................................................................................ 73

5.1.9. Kit .............................................................................................................................. 73 5.1.10. Klass Supermarket .................................................................................................... 74

5.1.11. Kolibris / Agrocontract................................................................................................ 74

5.1.12. Maxi........................................................................................................................... 75 5.1.13 Megamarket............................................................................................................... 75

5.1.14. Obzhora..................................................................................................................... 76

5.1.15. Rainford ..................................................................................................................... 76

5.1.16. Rorus......................................................................................................................... 77

5.1.17. SPAR......................................................................................................................... 77

5.1.18. Target ........................................................................................................................ 78 5.1.19. Tavriya-V ................................................................................................................... 78

5.1.20. Tiko Market................................................................................................................ 79

5.1.21. VAM Supermarket ..................................................................................................... 80 5.1.22. Velyka Kyshenia ........................................................................................................ 80

5.1.23. West Line................................................................................................................... 81

5.1.24. YUSI .......................................................................................................................... 81

5.2. New entrants ...................................................................................................................... 82

5.2.1. Metro Cash & Carry Ukraine Ltd................................................................................ 82

ANNEXES........................................................................................................................................... 84

Annex 1. Ukrainian political and business environment................................................................... 85

Annex 2. Sources of information .................................................................................................... 88

Annex 3. Retailers Contact List ....................................................................................................... 89

Annex 4. Authorities Contact List ................................................................................................... 93

Annex 5. Contact list of equipment and services for retail companies............................................ 95

Annex 6. Macroeconomic Situation in Ukraine ............................................................................... 97

Annex 7. Retail sector characteristics in countries of Central and Eastern Europe ...................... 101

Annex 8. Barriers for development of supermarket / hypermarket business................................ 107

Annex 9. Guide to permitting procedures in Ukraine .................................................................... 137

Annex 10. Regional development ................................................................................................ 138

5

1. Introduction

1.1. Executive Summary

Objectives

The three objectives of this report are to describe the current situation in the Ukrainian food retailing market1

for potential investors, provide an overview of the main administrative and regulatory barriers to entry, as

well as present short descriptions of the top 25 Ukrainian food retailers in 2002. The sections of this report

address each of these objectives respectively.

This report was prepared for the International Finance Corporation (IFC), member of the World Bank Group,

by Tebodin Ukraine with funding from the Government of Norway. Most of the information was obtained

through face-to-face interviews with key Ukrainian retailers, as well as with local experts such as trade

authorities, merchandise and equipment suppliers, retail promoters, financial organizations, and

consumers2. Detailed data on administrative barriers was provided by the Ukrainian Marketing Group (UMG)

through a quantitative survey of 77 supermarkets and hypermarkets throughout Ukraine.

This report does not represent the opinions of IFC, nor of the Government of Norway.

Main Findings

� In 2002, according to reports of the State Statistics Committee, Ukrainian retail trade turnover

exceeded US$ 12 BN, or US$ 250 per capita, with an annual growth rate of 15% in real terms.

Food retailing comprised approximately 50% of the market.

� The Ukrainian retail market is in an early stage of development. There are only about 2 retail outlets

(both food and non-food) per 1000 inhabitants, and the corresponding retail sales area is only

135 square meters per 1,000 inhabitants. This can be compared to 10 outlets per 1,000 inhabitants

in Poland and 16 in Hungary.

� The market is highly fragmented. There were only approximately 750 “modern format” stores

(supermarkets and hypermarkets)3 in Ukraine in 2002. The share of retail trade going through these

outlets is estimated at less than 10% overall, and at about 19% in Kyiv.

� Today there are approximately 20 food retail chains operating in Ukraine, but only three can be

called national players with stores in more than 3 regions in addition to Kyiv. Of these, only one –

Billa - is a foreign investment. Another foreign investor, Metro, is in the process of entering the

market.

� Over the next 5 years local players will be expanding quickly and foreign players are expected to

enter the market. Key cities – Kyiv, Odesa, Dnipropetrovsk, Kharkiv, Zaporizhia will offer the bulk of

________________________________________________________________________ 1 Definition and description of Ukrainian political and business environment are presented in Annex 1 for reference. 2 See Annex 2 for sources of information and Annexes 3-5 for contact details of retailers, local authorities and other companies 3 See Chapter 1.2 for Definitions of retail formats

Deleted: profiles

6

the opportunity with per capita food turnover in 2002 at $1,125, $338, $310, $302, and $292

respectively.4

� Ukrainian authorities have declared support to foreign retailers interested in entering the country.

As stated in the Instruction of the President of Ukraine dated 28 December 2002 No. 1-1/1658 to

local authorities, they should consider proposals for construction of modern shopping centers and

provide relevant support, facilitate the process of land allotment, and make provisions for land plots

with the required infrastructure for future retail outlets in the regional development plans.

Experience of current retailers clearly shows that good relations with local authorities are a key

success factor in overcoming the administrative barriers to market entry.

� The main administrative barriers to retail in Ukraine center on selection of appropriate retail space,

the high cost of land, and the bureaucracy involved in dealing with state officials. The extent of such

barriers varies significantly, however, depending on whether a company buys, rents, or builds

premises.

� Green-field construction: For retailers who opted for green-field site construction,

obtaining land possession rights was the most significant administrative barrier: three-

quarters cited bureaucratic procedures involved in obtaining permits for land

possession rights as a barrier to doing business. Another 76% of these retailers cited

high prices on land plots as an administrative barrier, while just over half had

difficulties finding suitable land plots.

� Purchasing space: For retailers having purchased retail space, the cost of premises

was cited as the main barrier by just under half of respondents. While bureaucracy

related to obtaining permits from state officials remained a difficulty for these retailers,

it was cited just over one-third of respondents.

� Renting space: The main difficulties for retailers who rent their premises centered on

high rental rates and difficulties in finding appropriate space for their outlets, cited by

just under half of retailers. Various administrative difficulties related to official

bureaucracy are significantly mitigated, and cited by under 20% of respondents.

� As more than 90% of all food items sold in Ukraine are of local origin, the key difficulties

experienced in ongoing operations by current retailers include the disruption of deliveries,

fluctuating prices and unstable quality of product.

� Personnel issues and finding qualified staff also cause operational concerns: half of retailers cited

the level of staff qualifications as a key barrier, while one-fifth claimed that the low level of staff

culture was a major barrier to their operations.

________________________________________________________________________ 4 See Chapter 4.1 for regional development data

7

1.2. Definitions of retail formats

When speaking about the retail sector, experts sometimes use different languages by giving the same

things various names. For example, some say ‘chain’ retail, while others call it ‘large’ or ‘modern type’, while

all mean ‘retail chain of stores’.

Definitions of key retail formats currently available in the Ukrainian market are presented below. However, in

practice only some retailers have established stores of a clear format and the major market share still

belongs to mixed retail formats. Therefore, at the moment identification of formats in the Ukrainian retail is

rather conventional.

Hypermarket (no chains currently present in Ukraine, only several stores)

� Sales area – at least 5,000 m2

� Range of products – 15,000-30,000 goods (foodstuff share is around 60-70%)

� Gross sales margin – 10 - 20% with discount system

� Target group – end consumers with average and above average income

� Average purchase – UAH 100-120 (USD 20)

� Sections with delicatessen and semi-finished products (of own cookery, mini-bakery)

� Usually new equipment and good interior

� Location – in the city; easy access

� Large parking lot near entrance

� Wide range of non-food items including clothing, footwear and stationery

� Wide range of additional services

Cash & carry (3 chains)

� Sales area – at least 7,000 m2

� Range of products – 15,000 – 30,000 goods

� Gross sales margin – 5 - 10% with discount system

� Target group – owners of shops, restaurants, hotels and other businesses (HoReCa)

In Ukraine also end consumers with average and below average incomes

� Average purchase – UAH 250-300 (USD 50)

� Inexpensive equipment and plain interior

� Location - outside the city

In Ukraine – in industrial zones with inconvenient public transport approach

� Parking near entrance

Supermarket (more than 15 chains)

� Sales area – up to 5,000 m2

� Range of products – 10,000 – 12,000 goods (food accounts for about 80%)

� Gross sales margin – 25-50% with loyalty / club system

In Ukraine gross sales margin in supermarkets is lower at the moment – 15-20%

� Target group – end consumers with average and above average income

� Average purchase – UAH 50-60 (USD 10)

� Sections with delicatessen and semi-finished products and salads (of own cookery, mini-bakery)

� Usually new equipment and good interior

� Location – in the city (residential area); easy access

� Parking near entrance

8

Discounter (3 chains)

� Sales area – up to 1,000 m2

� Range of products – 1,500-3,000 goods (usually only foodstuffs)

� Gross sales margin – 10-20%

� Target group – end consumers with average and below average incomes

� Average purchase – UAH 15-20 (USD 3)

� Private labels

� Location – in the city (residential area); easy access

Ukrainian traditional formats:

� Gastronom – small or medium-size grocery store trading over the counter (sales area < 500 m2)

� Universam – store trading over the counter that sells mainly foodstuff with an additional section for

non-food items (sales area > 500 m2).

� Kiosk – small outlet with sales area up to 10 m2 trading through a window and selling mainly small-

piece items (sweets, chewing gum, beverages, bread and rolls).

� Pavilion – small shop (sales area 20-60 m2) having entrance for consumers (main difference from

kiosk) and offering the same range of products as kiosk.

� Street or open market – covered or open-air market specialized in foodstuffs, non-food items or

mixed. Usually its sales area is at least 1,000 m2.

9

2. Retail Market Overview

2.1. General Description of Ukrainian retail (food and non-food)

Recent retail development is stipulated by the growth of the Ukrainian economy 5 that has demonstrated a positive stable trend since 2000. As shown in Figure 1, in 2000-2001 the retail sector followed the growth of

GDP and industrial production, while in 2002 retail turnover increase outran these two indicators, reaching a

15% rate of growth.

An increase in production volumes by Ukrainian enterprises (especially of foodstuffs and consumer goods manufacturing) has resulted in retail sales growth and contributed to the promotion of retail.

Figure 1. Development trend of main macroeconomic i ndicators (Y-o-Y terms)

Source: State Statistics Committee of Ukraine

On the other hand, retail growth has been propelled by an increase in consumer activity based on steady

income growth (more than 20% annual growth rate over 2000-2002). According to official data, average

annual income per household totaled USD 640 in 2002. Taking into account the incompleteness of official

statistics, this amount can be assumed to be much higher (which makes an average annual income per

household about USD 1,200).

According to the forecasting figures of the Ukrainian Ministry of Finance6, household income should rise by

more than 25% in 2003 (forecast by International Center for Policy Studies7 predicts a 14.8% increase). This

forecast is based on the positive financial and economic indicators achieved in Quarter I of 2003. This would

give an additional impetus to retail development, as in Ukraine over 80% of income is spent on the purchase

of goods and services. Similarly, about 60% of household income is spent on food purchases.

It is also remarkable that most foreign direct investment (FDI) was directed into the improvement of wholesale and retail trade as well as at the food industry. Each of these sectors attracted USD 854 mn, or,

taken together, more than 30% of the total volume of FDI as of 1 January 2003 (data of State Statistics

Committee).

At present the Ukrainian retailing market is characterized by the major trends described below.

________________________________________________________________________ 5 See Annex 6 for detailed information 6 Source: news of 3 April 2003, published at Podrobnosti (http://www.podrobnosti.ua/) based on UNIAN materials

(http://www.unian.net/) 7 Source: ICPS Macroeconomic Forecasts (http://www.icps.kiev.ua/)

-10

-5

0

5

10

15

20

1997 1998 1999 2000 2001 2002

%

GDP trend

Industrial production trend

Retail trade turnover trend in comparative prices

10

� Consolidation of retail business (instead of existing centralization before the 90’s) and development of

large- and small-scale retail chains

� Vertical integration and acquisition of other businesses (mainly agro and food-processing) by retailers.

Vertical integration provides for stable supply and sales. However, in order to guarantee sales growth and

popularity with consumers, the quality of products manufactured by own enterprises must be very high.

In the opinion of experts, the share of own brands must not exceed 20% of the product category

assortment.

� Construction of shopping centers (malls) in large cities

The market for modern sales areas is not saturated, and 4-5-fold growth in the number of shopping centers

is set to occur within the next 5 years. Shopping centers are developing in large cities where consumers

are ready to pay for the goods and quality of service that they offer.

� Another recent feature is transformation of street markets into shopping and entertainment centers. This

provides for smoother adaptation of customers to the new formats.

� Growth of promotional activity of retailers

Such means of promotion as providing materials at the point of sale, producing leaflets, use of consumer

motivation slogans, support of social and other events are widely employed by retailers.

� Tendency towards merger / association

The League of Professional Retailers is currently being organized in Ukraine. The goal of this

association will lie in pursuing the interests of local retailers (both food and non-food). A similar

industrial union has been active in Russia since 2001: The Association of Retail Trade Companies

(ACORT).

� Dialogue with local authorities, improving relations between retailers and legislative authorities

The majority of owners / managers of local rapidly developing retail outlets in all large cities are also

deputies of the local councils. This provides for smoother resolution of current issues (especially as

concerns land plot allocation).

2.1.1. Estimated Market Size (food / non-food)

The retail trade industry is one of the key sectors of the Ukrainian economy, and its share of Ukraine’s GDP

amounts to about 30% (based on the data of the State Statistics Committee).

Total retail volume declared by all business entities (including physical persons) amounted to UAH 65.6 bn (or USD 12.3 bn) in 2002 (data of State Statistics Committee). This figure is the most realistic available from

official sources to characterize retail turnover, but it does not allow for making comparisons. That is why

further in this report retail sales of enterprises8 only will be taken into consideration.

The difficulty of performing statistical analysis is one of the key hindrances for making correct estimates of

the actual situation in this sector.

________________________________________________________________________ 8 Methodology of State Statistics Committee: retail turnover is determined as the volume of sales of goods to the population

through all operating enterprises (without taking account of their property form) of retail trade network, catering network, as well

as sales by industrial, transport and other non-trading enterprises directly to the population through their pay-offices. Beside this,

retail turnover also includes sales of foodstuffs through the retail network to institutions, organizations and enterprises for

providing meals to their clients (in health centers, kindergartens and schools, hospitals, etc.).

11

The data available from State Statistics Committee of Ukraine cannot be considered comprehensive for the

following reasons:

• it is based on official data from companies (data that differs from reality as some enterprises do not submit the information in a correct way);

• it does not cover all market players rather only those companies that submit information (local regulations do not provide any penalties for non-submission of data to local statistical bodies);

• it is calculated using disputable (non transparent) techniques and methodology;

• it is presented mainly in oblast profile (which makes it extremely difficult to use when analyzing the situation in specific cities).

According to reports of the State Statistics Committee, in 2002 the retail sales volumes of Ukrainian

enterprises totaled UAH 39.7 bn, or approximately USD 7.4 bn, 15% higher than in 2001 and almost 40%

higher than 2000. In year-on-year terms, retail volumes have been growing by 14-15% in real terms (in

comparative prices) for two consecutive years, and promise to maintain that growth rate over the coming

years.

Table 1. Ukrainian retail trade turnover indices: 1 997-2003.

Period

Macroeconomic indices 1997 1998 1999 2000 2001 2002

Retail trade turnover, UAH mn 18,933 19,317 22,151 28,757 34,417 39,691

Retail trade turnover, USD mn 10,168 7,886 5,362 5,286 6,407 7,447

Retail trade turnover increase, Y-o-Y terms, % 2.0 14.7 29.8 19.7 16.1

Retail trade turnover increase in comparative prices, Y-o-Y terms, % 0.2 - 6.6 - 7.1 8.1 13.7 15.0

Retail trade turnover per capita, UAH 374 384 444 581 707 825

Retail trade turnover per capita, USD 254 210 238 237 171 155

Source: State Statistics Committee of Ukraine

The trend in Ukrainian retail trade turnover over the last 6 years is presented in Figure 2. Though retail

turnover in local currency showed stable growth, the situation is different when analyzing the same indicator

in hard currency. The drop of 1998-1999 was the consequence of the Russian financial crisis of August

1998 that had also influenced the Ukrainian economy. The crisis resulted in the sharp devaluation of

Ukrainian currency and a consequent cutback in consumer activity.

The continuos growth in retail turnover volumes started in 2000. As noted above, this trend is related to

overall improvements in the Ukrainian economy, which lead to an increase in consumer activity.

Figure 2. Ukrainian retail turnover 1997-2002.

19 1922

29

34

40

108

5 5 67

1997 1998 1999 2000 2001 2002

Retail turnover, total, UAH bn Retail turnover, total, USD bn

Source: State Statistics Committee of Ukraine

12

Food sales make up approximately 50% of total retail sales. This indicator is relatively high (for comparison,

in Germany and Poland food sales amount to less than 40% of retail turnover9), as non-food retail is

undergoing a revival after a deep crisis in the mid 90-ies.

Figure 3. Commodity structure of Ukrainian retail t urnover.

Source: State Statistics Committee of Ukraine

Ukrainian goods make more than ¾ of total retail turnover (see Figure 4). At the same time, their share is

much higher in food sales (almost 94%).

Figure 4. Commodity structure of Ukrainian retail t urnover in 2001 by origin of goods.

61%

94%

76% 24%

6%

39%

0% 20% 40% 60% 80% 100%

non-food

food

all goods

produced in Ukraine imported

Source: State Statistics Committee of Ukraine

________________________________________________________________________ 9 Source: Polish Official Statistics http://www.stat.gov.pl/english/index.htm; Federal Statistical Office of Germany http://www.destatis.de/; Frankfurt-based retail analysis company M+M EUROdATA (http://www.mm-eurodata.com)

44%

63%

52%

50%

48%

56%

37%

48%

50%

52%

0% 20% 40% 60% 80% 100%

1990

1995

2000

2001

2002

food non-food

13

2.1.2. Number of Retail Outlets and Sales Area

As data on the number of retail outlets differs, information from different sources is presented in this section.

At the beginning of 2002, Ukrainian retail was characterized by the following indicators:

� Official figures from the State Statistics Committee declare that at the beginning of 2002 there were

96,393 retail outlets in Ukraine. The total number of outlets had reduced by 37,269, or almost 28%, compared to 1995 (see Table 2). Similarly, the number of kiosks remained at the same level, but the

number of stores (both food and non-food) decreased considerably. The reduction in the total number of outlets is connected to a process of consolidation in the retail

sector and an increase of number of stores of modern format. However, their share in the total

number of outlets is still less than 1%10.

� Sales per retail outlet amounted to UAH 357,049 (or USD 66,989) as of the end of 2001. This makes

about a 30% increase over the previous year.

Table 2. Number of retail outlets and their special ization.

as of the year end Number of outlets Sales area, '000 m2

1995 2000 2001 2001 to 1995, +/- 1995 2000 2001 2001 to 1995, +/-

Retail outlets, total 133,662 103,246 96,393 - 28%

Stores, total, incl. 109,528 77,885 72,277 - 34% 10 ,950 7,029 6,515 - 41%

- food 46,338 31,503 28,780 - 38% 4,565 2,800 2,570 - 44%

- non-food, incl.: 37,994 25,790 24,947 - 34% 4,614 2,484 2,330 - 50%

univermags 733 223 175 - 76% 656 291 252 - 62%

- mixed type 25,196 20,592 18,550 - 26% 1,771 1,745 1,615 - 9%

Self-service stores, incl.: 23,826 4,471 3,639 - 85% 2,337 535 548 - 77%

* food 9,407 1,461 1,213 - 87% 769 160 188 - 76%

* non-food 8,553 1,054 867 - 90% 1,173 188 172 - 85%

* mixed type 5,866 1,956 1,559 - 73% 395 187 188 - 52%

Kiosks, total 24,134 25,361 24,116 0% n/a n/a n/a

Source: State Statistics Committee of Ukraine

Retail Density

The number of retail outlets per 10,000 inhabitants equals 20 (or 2 outlets per 1,000 inhabitants). Available sales area (both food and non-food) is currently about 135 m2 per 1,000 inhabitants whereas the norm for available sales area that existed in the Soviet Union was 215 m2 per 1,000 inhabitants.

Total sales area of retail outlets amounted to 6,522,366 m2 as of the end of 2002.

Table 3. Retail density indicators (based on 2002 r esults) 11

Retail trade turnover in 2002 Density of retail trade outlets, units per 10,000 inhabitants Sales area, m2

Region

Total, UAH mn per capita, UAH Total incl. stores To tal per 10,000 inhabitants

Ukraine 39,691 825 20 15 6,522,366 1,346

Source: State Statistics Committee

________________________________________________________________________ 10 See Chapter 2.2.7 for details 11 Breakdown per oblast is presented in Annex 10 (Table A.10.1)

Deleted: ¶¶

14

2.2. Ukrainian Food Retail Sector

2.2.1. History and trends in food retail

With the breakup of the USSR, one of the world’s largest food retail chains disappeared. This centralized

chain had been built up over many years and in the late 80’s comprised 800,000 stores across the Soviet

Union, of them more than 116,000 in Ukraine. One-time Prodtorgs and Silpos (food retail regulating

departments in each city district and in the countryside), wholesale food storage, storage for fresh fruit and

vegetables etc. ‘disappeared’ quickly and no substitute has yet come to take their place.

In the former system all shops had their mission: either an ordinary food retail outlet with all main food groups

presented, or a specialized outlet (trade in fresh fruit and vegetables, baby food, food for diabetics, etc.)

Thus, in recent years certain attempts have been made to build up a new distribution and retail system using

both old and new elements.

2.2.2 Comparative analysis across CEE countries

This subchapter presents a comparative analysis of food retail sector developments in the countries of Central

and Eastern Europe (CEE). Data on major trends (by country) are given in Annex 7.

As the Ukrainian retail sector is in the initial stage of its build-up, different development models can be applied.

Based on expert opinion, Ukraine is most likely to follow the Russian model, where local companies dominate

at the moment but foreign retailers gain increasingly more ground. At the same time, the share of modern

formats in Russian retail turnover remains small (about 4-5% in 2002).

On the other hand, experts believe that the Ukrainian authorities are trying to replicate the Polish experience

in their attempt to prevent quick development of retail chains. However, they are attempting to accomplish this

before market saturation, while in Poland it is being initiated afterwards.

Ukraine: At the end of February 2003 the Council of Entrepreneurs under the Cabinet of Ministers of Ukraine announced that it had started working on the draft law ‘On Retail Chains in Ukraine’ together

with the Ukrainian Ministry of Economy. As of April 2003, there is no detailed information on this

document. However, experts believe that it will be aimed at the protection of local retailers and may

become another hindrance in the way of foreign investors.

Poland: In November 2002 the Polish Sejm passed a law on retail trade, designed to defend small retailers from encroachment by large chains. The law limits and declares the assortment of goods

offered by retail chains and sales conditions. Therefore, stores with sales area exceeding 400 m2 are not

allowed :

- to sell goods or services at a price that does not include a markup (exclusion is made only for

special reasons)

- to sell goods for which customers can pay in coupons issued by large chains

Moreover, there is a special limitation for discount chains: the share of private label products cannot

exceed 20% of total sales of the chain.

The major differences in retail market development in CEE countries are outlined in Table 4 below.

15

Table 4. Comparison of food retail developments in CEE countries

Country Share of modern formats in retail turnover Dominating chains Market fragmentation

Poland considerable foreign high

Czech Republic considerable (about 70%) foreign low

Hungary considerable (about 50%) foreign low

Lithuania considerable (about 60%) local low

Russia insignificant (less than 10%) local high

Ukraine insignificant (less than 10%) local high

In the graphs below the main market indicators of the CEE countries are compared.

Basic comparison allows drawing the conclusion that the Ukrainian retail market is far behind similar markets in other CEE countries.

The amount of foreign direct investment attracted per one Ukrainian is 3.3 times less than per one Russian, 14.3 times less than per one Pole, and 32.6 times less than per one Hungarian (see Figure 5).

Figure 5. Foreign Direct Investment (cumulative as of end 2001), USD per capita

Source: national statistics agencies Comparison of retail turnover per capita shows that (according to official statistics) an average Ukrainian spends 4 times less on purchases of food and non-food items than an average citizen of the Baltic States, and 17.5 times less than an average Pole.

Figure 6. Retail turnover in CEE countries in 2001, USD per capita

* There are two figures given for Ukraine. USD130 is the official data on retail turnover provided by the State Statistics Committee of Ukraine. USD 466 is an estimation made on the basis of official data on consumer expenditures, also provided by the Statistics Committee of Ukraine .

Source: national statistics agencies

2,900

2,257

1,276

959720

29689

-

500

1,000

1,500

2,000

2,500

3,000

Hungary Estonia Poland Latvia Lithuania Russia Ukraine

558 542 514 466

2,280

1,880

707

-

500

1,000

1,500

2,000

2,500

Poland Hungary Russia Estonia Latvia Lithuania Ukraine*

130

16

Ukrainian retail chain outlets are also less developed than those in other countries (see Figure 7). For

example, in Poland there are 98 outlets per 10,000 inhabitants while in Ukraine there are only 20.

Figure 7. Number of retail outlets in 2001 per 10,0 00 inhabitants

Source: national statistics agencies

As shown in Figure 8, modern formats have a relatively low share of retail turnover in Ukraine and Russia -

about 10%, vs. 50-70% in Poland, Hungary and the Czech Republic.

At the same time, the share of street markets in Ukraine and Russia is high (30-50%) compared to 10% in

Poland and 1% in the Czech Republic and Hungary.

Figure 8. Retail turnover distribution between reta il formats, 2002

Source: GfK Polonia, 2002; ACORT; experts’ estimates

161

9883

3120

0

20

40

60

80

100

120

140

160

180

Hungary Poland Estonia Russia Ukraine

1421

81 1

17

32

20

4 6

12

17

22

6 3

37

23

28

63

40

10

1

1 26

50

7 3 7

3 3 4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Poland Czech Hungary Russia Ukraine (estimate)

Hypermarkets Supermarkets Discounters Groceries Street markets C&C Others

17

2.2.3. Trends in Ukrainian food retail

The following trends accompany Ukrainian food retail development:

� Development of large-scale formats and transition to self-service technology. Establishment of new

retail formats on the basis of the old food stores / loss of specialization of the old outlets

Such retail formats as hypermarkets and supermarkets have quickly gained popularity as a substitute

for old-format stores. This has led to the purchase of almost all former univermags, universams and

gastronoms and the set-up of new retail outlets instead. Thus, the majority of stores became multi-

profile, trading both in food and non-food, and stores with a narrow-specialization have almost

disappeared.

� Use of modern retail technologies including equipment of retail outlets and IT solutions for chain stores

� Establishment of distribution centers by the largest retail chains

Following worldwide practice, further development of distribution centers will continue with the growth of

retail chains.

� Appearance of private labels

Though there are only a few examples of private labeling in Ukrainian retail, this segment is expected to

grow soon. Private labels have already appeared at Furshet (Furshet brand for canned vegetables and

ravioli), Silpo (Baba Galia for flour), Euromart (Euromart brand for disposable tableware and ravioli) and

ATB (ATB brand for cereals, napkins); all of these products are manufactured locally. Spar has also

placed private labels on the shelves of its stores, but all 150 items are imported.

� On-line stores and delivery services development

Some chains (like Furshet, Megamarket, Tavriya-V) have developed their Internet sites with

incorporated on-line stores where consumers can buy products without leaving their homes. Home and

office delivery services have recently become an additional means of increasing consumer loyalty.

� Development of franchising retail

Retail on franchising terms is currently represented by Spar. This growing chain is owned by a

Ukrainian company that bought a franchise from Spar International.

� Low level of foreign investments in Ukrainian food retail

18

Forecast for Ukrainian retail market development The current period in the development of the Ukrainian retail market is characterized by dynamic changes.

Supermarkets12 are mushrooming and the fight for consumers is ahead.

As international experience shows, tough competition between the chains starts when the share of

supermarkets in a city’s retail turnover comes close to 30%. Therefore, severe competition is expected to

break out within the next 2-3 years.

Local experts think that in two or three years the leaders among large retail chains will be finally shaped in

Ukraine. These retailers will differ only in some aspects, including the presence of private labels on the

shelves of supermarkets and offers of additional advantages to consumers.

In the opinion of retailers and producers, the share of supermarkets in retail turnover within the next 5 years

can reach 20-40%, depending on the region. The largest share is to be gained in Kyiv and such cities as

Dnipropetrovsk, Odesa and Lviv, where the level of consumption is relatively high. In other regions,

supermarkets have decent opportunities to enlarge their share, and these will definitely grow from the current

level of under 10%.

New entrants and their plans

Over the next 5 years both international and new local players are expected to appear in the Ukrainian retail

market. It is expected that they will toughen the competition and contribute to the development of the retail

sector.

� Metro AG is entering the Ukrainian market with its wholesale subdivision – Metro Cash & Carry . It has

already set up a local branch – Metro Cash & Carry Ukraine, and the opening of its first outlet has been

scheduled for 24 August 2003 (see chapter 5 for details).

� Having gained positive experience in Russia, such companies as French Auchan and Turkish Migros

(which operates in Russia as Ramstore) are considering a south-west move to Ukraine.

� Europe’s largest retailer Carrefour (France) has already announced its development plans in Russia

and is expected to enter the Ukrainian market.

� Leading British retailer Tesco is also carefully observing the situation in the Ukrainian market.

Perspective retail formats:

In the opinion of retailers, the most convenient and, therefore, prospective formats of food retail are:

� supermarkets of 1,000 – 2,000 m2 sales area located in the residential districts (neighborhood

supermarkets);

� wholesales and retail stores (cash & carry) with more than 5,000 m2 sales area;

� hypermarkets of at least 8,000 – 10,000 m2 sales area;

� mega shopping centers (more than 20,000 m2 sales area).

________________________________________________________________________ 12 Hereafter, all modern retail formats are meant, if not specified

19

2.2.4 Investments in the sector

Major foreign investments in Ukraine’s food retail market include:

� Western NIS Enterprise Fund (USG Investment Fund) was the first major foreign investor in the

development of retail and wholesale in Ukraine. In 1999, this USG funded institution invested

USD 2.4 mn into development of the first cash-and-carry chain in Ukraine (Euromart). In 2000, another

equity fund – Commercial Capital – provided for the second investment inflow in the amount of

USD 4.5 mn. Though great expansion plans have been declared, the Euromart chain still consists of

5 outlets: 2 in Kyiv and 1 each in Kharkiv, Dnipropetrovsk and Zaporizhia.

� Austrian Euro-BILLA has invested more than USD 20 mn in the development of a western type

supermarket chain in Ukraine. When starting its activity, BILLA announced plans to open 5-7

supermarkets under the BILLA brand every year in Ukraine for the next five years. However, as of

January 2003, there were only 8 supermarkets operating in the BILLA chain (3 in Kyiv, 2 in

Dnipropetrovsk, 2 in Kharkiv and 1 in Zaporizhia). Worth mentioning is that at present BILLA is the only

western managed retail chain in Ukraine (until Metro’s start up).

� German Metro AG is entering the Ukrainian market with its wholesale subdivision – Metro Cash &

Carry. It has already set up a local branch – Metro Cash & Carry Ukraine, and the opening of its first

outlet has been scheduled for 24 August 2003 (construction started on 11 February 2003). Metro plans

the development of cash & carry chain in Ukraine through establishment of outlets in the largest cities:

first, in Kyiv, and later in Dnipropetrovsk, Odesa, Donetsk, Kharkov, Zaporizhia.

2.2.5 Customers

It is the opinion of experts that official statistics present the typical end consumer in Ukraine as poorer than he

really is. In this section only actual data reflecting real consumer abilities and preferences are provided.

Portrait of average customer of supermarkets:

Age: 22-60

Monthly income: ≥ USD 100 (per family member) Frequency of visiting supermarkets: 12 times a month, or approximately 2-3 visits a week

Transport: 45.6% - on foot, 29.4% - by own car, 23.5% - by public transport

Loyalty to the selected store: most customers tend to go to supermarkets of other chains as well.

Average bill in supermarkets Average regular purchase: UAH 30-100 (depending on city)

Average holiday purchase: UAH 50-200 (depending on city)

Product categories bought: 80-90% - food

Average consumer buys 100-120 items during a month

Source: UMG survey, data from retailers

Visits to supermarkets are becoming an alternative for family entertainment. Shopping enjoys wide popularity

both with adults and with kids who like to drive in carts and grab sweets and toys. Worth mentioning is that

unplanned purchases make up to 70% of purchases, therefore the total amount of the bill can often surprise

the consumer at the check-out terminal.

Western consumers have higher brand awareness than their Ukrainian counterparts. Lack of brand loyalty is

considered to be one of the reasons why Western retailers are slow to enter Ukrainian market.

20

However, the brand thinking of local customers is being developed. Most visitors to supermarkets are not very

eager to buy products from unknown manufacturers and prefer products of well-known brands (especially

local). However, for some people price is still a key issue and unbranded products are purchased mainly

because of the opportunity to save money.

Fruit and vegetable juices manufactured by Odesa Baby Food Cannery represent one of the first good

examples of unbranded products. This juice series has been highly rated by customers as all juices are

made from fresh fruit. Another comment: these juices appeared in Tetra Pak cardboard packaging of white

color with no pictures and only the name of the juice on it, at first surprising consumers by its plain design.

2.2.6 Estimated Market Size (food retail)

Food sales make up approximately 50% of total retail sales. According to official information from the State Statistics Committee, food retail turnover reached nearly USD 4 bn in 2002. However, estimated food retail turnover currently exceeds USD 13 bn for Ukraine , when estimates are based on current figures for

consumer spending from the State Statistics Comittee, and the share that food purchases claim of this total

expenditure amount.

The comparative increase in both food and total retail turnover is presented in Figure 9 below. Similar to the

decrease in total retail turnover, the drop in food retail turnover in 1998-1999 was a consequence of the

financial crisis of August 1998, which resulted in a sharp drop in the Ukrainian currency’s purchasing power,

and a consequent cutback in consumer activity. In addition to this, the Ukrainian population has shown a

negative trend since 1994.

Figure 9. Food retail turnover compared to total re tail turnover 13

* Estimation, made on the basis of official data on consumer expenditures.

Source: State Statistics Committee of Ukraine

________________________________________________________________________ 13 These figures are taken from official data on retail / food retail turnover from the State Statistics Committee of Ukraine. As noted in the text, if official figures are assessed in a bottom-up approach (ie figures for consumer spending are used as a basis to calculate turnover) retail turnover exceeded USD 13 billion in 2002 (*). Such obvious discrepancies in official data are ignored by the State Statistics Committee of Ukraine at present.

11

8

5 56

7

26

75

3 3 3 4

13

0.0

5.0

10.0

15.0

20.0

25.0

30.0

1997 1998 1999 2000 2001 2002 2002*

US

D b

n

Retail turnover, total Food retail turnover

21

Estimated annual food retail turnover per capita is USD 274, or UAH 1,460, if figures for consumer spending

are used to calculate this total. At the same time, using official data on food retail turnover gives a value of

around USD 75, or UAH 400.

Figure 10. Annual food retail turnover per capita

* Estimation, made on the basis of official data on consumer expenditures

Source: State Statistics Committee of Ukraine

2.2.7 Number of Retail Outlets

Major marketing agencies (such as ACNielsen, Ukrainian Marketing Group, Gfk, Pulse) conduct retail censuses on a regular basis.

According to ACNielsen data, at the end of 2002 there were about 300 hypermarkets, supermarkets and cash & carries in Ukraine (or more than 500 modern-format stores if mini-markets are included), which combined account for less than 1% of total retail outlets.

Figure 11. Breakdown of retail outlets selling FMCG by format in 2002 (urban areas only)

Source: ACNielsen14

________________________________________________________________________ 14 ACNielsen presentation at the conference “Retail:Effective Organization of an Outlet”, Kyiv, March 24-25 2003.

Small food and mixed22%

Medium food and mixed17%

Specialized stores8%

Large food and mixed

6%

Shops at filling stations

0.5%

Modern formats0.4%

Perfumery / Household

12%

Kiosks / Pavilions35%

99

124 128

92

59 5666 74

274

0

50

100

150

200

250

300

1995 1996 1997 1998 1999 2000 2001 2002 2002 *

US

D

22

Figure 12. Food retail outlets (urban areas only)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

num

ber

of o

utle

ts

1999 135 4,969 10,918 12,833

2000 142 4,929 11,277 13,466

2001 161 4,155 10,883 14,958

2002 255 3,896 11,735 14,703

Modern formats Large food and mixed Medium food and mixed Small food and mixed

Source: ACNielsen15

� Results of a retail census carried out by MEMRB and Ukrainian Marketing Group in 2002 show that the

total number of retail outlets (including open markets) amounts to 113,486. Similarly, the number of supermarkets (both food and non-food) is 459 outlets, or only 0.4% of all retail outlets (1.3% of total number of retail outlets excluding open markets). Detailed data are presented below:

Table 5. MEMRB-UMG 2002 Retail Census Results

Population Split / Area

Tot

al u

nive

rmag

s16

Tot

al u

nive

rsam

s

Tot

al s

uper

mar

kets

Tot

al s

tore

s

Tot

al P

avili

ons

Tot

al K

iosk

s

Tot

al O

pen

Mar

kets

Tot

al r

etai

l ou

tlets

TOTAL UKRAINE 366 459 459 21,023 2,330 11,216 77,634 113,486

>1,000,000 81 129 174 3,866 886 3,436 14,195 22,767

300,000 - 999,999 52 89 98 4,145 367 2,650 18,514 25,915

20,0 - 299,999 233 241 187 13,012 1,077 5,130 44,925 64,804

In our opinion, the number of Ukrainian food supermarkets (including hyper-, mini-markets, as well as cash &

carries) almost doubled in 2002, and in the beginning of 2003 it can be estimated at the level of 700-750

outlets (more than 200 of them located in the 7 largest population centers of Ukraine).

2.2.8 Main food retail formats

It is extremely difficult to squeeze the Ukrainian retail into a common framework. As described in Chapter 1.1.2. even experts often call same formats by different names. ‘Chain’ retail, ‘large’ retail, ‘modern type’ – all these names mean the same generally accepted retail formats worldwide.

________________________________________________________________________ 15 ACNielsen presentation at the conference “Retail:Effective Organization of an Outlet”, Kyiv, March 24-25 2003. 16 Univermag is a large city mall or a department store selling non-food items (sales area is 3,500-22,000 m2).

23

However, in practice only some retailers have established stores of a clear format (supermarkets like Billa and Spar, hypermarkets like Maxi, Aeroportovsky) and the major market share still belongs to mixed retail formats (a mixture between cash & carry, hypermarket and supermarket such as Furshet and Megamarket). Therefore, at the moment identification of formats in Ukrainian retail is rather conventional. Retailers mention the psychological factor – change from street markets to supermarkets is a gradual process – as one of the main reasons for diversity and mixture of formats. Therefore, retailers prefer not to shock consumers, but to please them and develop their preferences in favor of modern shopping instead of street markets. Lack of investments can be also mentioned in this respect, as considerable amounts are required in order to adjust a former production facility or a warehouse to a supermarket or a hypermarket format. In some experts’ opinion, mixed formats are one of the key survival factors in a transitional phase. Thus, at present modern formats adjoin traditional ones in Ukrainian retail. Major existing formats of retail outlets are listed below.

Traditional retail outlets:

� gastronom / grocery � universam � kiosk � pavilion � street or open market

New formats:

� hypermarket � cash & carry � supermarket � discounter

In terms of retail turnover distribution the situation is as follows (see Figure 13): share of street markets and groceries is high – about 50 and 40% correspondingly. The remaining 10% is shared between modern formats. Figure 13. Ukrainian retail turnover distribution b etween retail formats in 2002 (estimate)

Groceries40%

Street markets50%

Discounters3%

Supermarkets6%Hypermarkets

1%

Source: experts’ estimate

Open markets are still one of the most popular forms of retail, though chain companies are working hard trying

to displace them. For example, in Kyiv (according to the information from city trade department) the share of

open markets in the city’s retail turnover reaches 30-35% in food sales (in meat sales – 90-95%) and 20-25%

in consumer goods.

24

2.2.9 Key Players in Ukrainian food retail

2.2.9.1 Key food retailers on the Ukrainian market

All companies active in the Ukrainian food retail can be classified by different criteria such as store format,

number of outlets, retail turnover volume and regional spread.

As there are practically no ‘clear’ formats in the Ukrainian market, all classifications are rather conventional. It

is evident that the majority of retailers operate in the supermarket format, while discounters do not enjoy such

popularity.

Table 6. Formats of Ukrainian food retailers

Store format Sales area, m 2 Brands

Hypermarket About 10,000 Maxi, Aeroportovsky

Cash & carry 2,000 – 8,000 Euromart, Fozzy, Intermarket, Spar Centre

Supermarket 300 – 5,000 Billa, Furshet, Silpo, VAM, Arsen, Kit, West Line, Spar, Klass, Target, Tiko

Market, Megamarket, Tavriya-V

Discounters 300 - 1,000 ATB-Market, Fora, Barvinok

Though one can judge about the importance of a retailer based on the number of set up outlets, the real status

of companies can be evaluated on the basis of a retail turnover. However, these figures are usually not

disclosed by companies. Data on number of outlets and sales area are presented in Table 7.

Table 7. Leading food retailers by number of outlet s

Number of outlets, Company Brands Total sales area, m 2

Jan 2003 Planned

expansion to

Fozzy Silpo, Fozzy, Fora > 40,000 (estim.) 32 70

Garantiya-Trade Furshet 20,000 (estim.) 15 23

ATB-Market ATB-Market 40,000 (estim.) 80 n/a

Rainford Rainford, Partner 10,500 10 n/a

Intermarket Intermarket, Arsen, Barvinok 20,000 (estim.) 13 n/a

Tavriya - V Tavriya-V, Aeroportovsky 15,000 7 appr. 10

Billa-Ukraine Billa 16,000 8 10

Megamarket Megamarket 12,000 (estim.) 3 n/a

Euromart Euromart Cash & Carry 10,000 5 n/a

Kviza Trade Velyka Kyshenia 7,700 4 5

Ukr-Trade Klass 3,000 (estim.) 3 4

Center Spar Ukraine Spar, Center Spar 5,100 3 7

Rorus Rorus 6,650 4 n/a

Brig Trade House Brig 7,000 8 n/a

Target Target Supermarket 3,400 1 3

Tiko Tiko Market 2,120 2 5

TOTAL 198

Source: data from retailers, estimates

25

The following conventional classification by regional spread can be suggested in order to determine the

impact of retailers on the Ukrainian retail market:

� national retailers (see Table 8 for detailed profile)

In Ukraine there are only a few chains that can be called ‘national retailers’, in the true sense of the word. The

key players on a country-wide scale (ie those that have set up stores in more than 3 oblasts) are Fozzy,

Rainford and Furshet. Billa and Euromart, having outlets in Kyiv, Dnipropetrovsk, Kharkiv and Zaporizhia,

follow the leaders. Recently Spar joined this group by announcing expansion to the Cherkasy and Luhansk

markets.

� regional retailers (see Table 9 for detailed profile)

Companies highly influencing the retail industry of more than 1 oblast can be called regional. Their activities

are usually concentrated in neighboring territories/oblasts and they are not of national importance. This group

unites such companies as ATB-Market (Eastern Ukraine) and Intermarket (Western Ukraine).

� local retailers (see Table 10 for detailed profile)

Members of this group have concentrated their outlets in the area of one city or oblast. For example, Kit

covers the market of Zaporizhia, Obzhora dominates in Donetsk, Tavriya-V and Rorus play a key role in the

Odesa market. Kyiv hosts many local retailers such as Velyka Kyshenia, Tiko Market, Begemot, West Line,

Megamarket and others.

Regional food retail coverage is illustrated in Figure 14.

Figure 14. Food retailers regional coverage

According to experts’ estimates, supermarkets’ share in total retail turnover can reach 15-20% in 2003. Although the supermarket sector is highly fragmented, national-level retailers dominate this segment. Regional and local retail chains share the rest equally. A tentative breakdown of supermarkets turnover is presented in Figure 15 below.

26

Figure 15. Key food retailers turnover breakdown (b ased on 2002 - I Q 2003 data)

Source: Tebodin estimates

Presented below are typical profiles of Ukrainian food retailers. They describe the key features of the companies operating on the food retail market.

Table 8. Typical profile of a national food retaile r Fozzy, Furshet, Rainford, Billa, Spar, Euromart

Data Remarks

Ownership Private LLC, CJSC

Year when started operations After 1997 (in retail sector)

Strategy selected when started Become market leader

Target group End consumers (mainly)

Share of the local retailing market / Share of supermarkets market, % (estimate)

10-12 / ~ 60 Aggregated for the group of national

retailers

Sales volume 2002, USD (estimate) 400 mn per chain

Number of outlets From 5 to > 50

Location Kyiv, Dnipropetrovsk, Kharkiv,

Zaporizhia, Lviv, Odesa, Cherkasy, Luhansk, Khmelnitsky, Simferopol

Shops are located mainly in residential areas

Area of an outlet, m2 1,000 - 5,000 sales area

Average monthly turnover, UAH per 1m2 4,000 – 13,000

Average purchase, UAH per bill 50 - 100

Average number of purchases through outlet per day

Regular (Mon-Fri): 4,000 - 8,000 Weekend: 6,000 – 10,000

Holiday eves: up to 10,000 – 12,000

Ways of obtaining space Rent / Purchase / Construction Rent and purchase of former production

/ sales premises

Cost of space + equipment, USD per 1m2 400 – 2,000

Employees per outlet 100 On average

Average gross retail margin, % 12 - 20

Range of products (Assortment) 10,000 - 25,000 70-80% - food products; 20-30% - non-

food

Discount system 1-5%

Average storage area per outlet, m2 200 – 1,000

Distribution Center (DC) no Some chains already have DC or plan

to set it up

Private labels yes

Availability of parking lot yes Almost all shops have free parking lots

Delivery service yes Delivery to home (cash or card payment) and office (bank transfer)

Source: combined data from retailers

Regional retailers20%

Local retailers21%

National retailers59%

27

Table 9. Typical profile of a regional food retaile r

ATB, Intermarket, Brig, Target

Data Remarks

Ownership Private LLC

Year when started operations 1996-1998 (in food retail)

Strategy selected when started Leadership in the regional niche

Target group End consumers (mainly)

Share of the local retailing market / Share of supermarkets market, % (estimate)

3-4 / ~ 20 Aggregated for the group of national

retailers

Sales volume 2002, USD (estimate) 200 mn per chain

Current investments, USD > 5 mn estimate

Number of outlets From 10 to > 80

Location Dnipropetrovsk, Kharkiv, Zaporizhia,

Lviv, Cherkasy Shops are located mainly in residential

areas

Area of an outlet, m2 500 - 5,000 sales area

Average monthly turnover, UAH per 1m2

5,000

Average purchase, UAH per bill 20 - 60

Average number of purchases through outlet per day

Regular (Mon-Fri): 1,000 - 4,000 Weekend: 4,000 – 10,000

Holiday eves: up to 8,000 – 10,000

Ways of obtaining space Rent / Purchase / Construction Rent and purchase of former sales

premises

Cost of space + equipment, USD per 1m2

400 – 1,000

Employees per outlet 100 On average

Average gross retail margin, % 12 - 17

Range of products (Assortment) 5,000 - 20,000 70-80% - food products;

20-30% - non-food

Discount system 1-5%

Average storage area per outlet, m2 200 – 1,000

Distribution Center (DC) no However, the largest networks already

have DC

Private labels yes Only the largest companies have

Availability of parking lot yes Almost all shops have free parking lots

Delivery service yes (only the largest companies) Delivery to home (cash or card payment) and office (bank transfer)

Source: combined data from retailers

28

Table 10. Typical profile of a local food retailer Begemot, Kit, Klass, Kolibris, Maxi, Megamarket, Obzhora, Rorus, Tavriya-V, Tiko Market, VAM, Velyka

Kyshenia, West Line, YUSI Data Remarks

Ownership Private LLC, Private Enterprise

Year when started operations After 1997 (in retail sector)

Strategy selected when started Leadership in the local niche

Target group End consumers (mainly)

Share of the local retailing market / Share of supermarkets market, % (estimate)

3-4 / ~ 20 Aggregated for the group of local retailers

Sales volume 2002, USD (estimate) 60 mn per chain

Current investments, USD > 1 mn

Number of outlets From 1 to 10

Location Kyiv, Dnipropetrovsk, Kharkiv,

Zaporizhia, Lviv, Donetsk, Odesa, Luhansk, Lutsk

Shops are located mainly in residential areas

Area of an outlet, m2 500 - 5,000 sales area

Average monthly turnover, UAH per 1m2

1,000 - 6,000

Average purchase, UAH per bill 15 - 100

Average number of purchases through outlet per day

Regular (Mon-Fri): 1,000 - 6,000 Weekend: 4,000 – 8,000

Holiday eves: up to 8,000 – 10,000

Ways of obtaining space Rent / Purchase / Construction Rent and purchase of former production

/ sales premises

Cost of space + equipment, USD per 1m2

400 – 1,000

Employees per outlet 100 On average

Average gross retail margin, % 12 - 20

Range of products (Assortment) 5,000 - 20,000 70-80% - food products;

20-30% - non-food

Discount system 1-7%

Average storage area per outlet, m2 200 – 1,000

Distribution Center (DC) no The largest chains plan to set it up

Private labels yes Only the largest companies have

Availability of parking lot yes Almost all shops have free parking lots

Delivery service yes (only the largest companies) Delivery to home (cash or card

payment) and office (bank transfer)

Source: combined data from retailers

2.2.9.2 Factors that influenced the decision to sta rt retail business

Among the factors that determined companies’ development in retail, the following issues were mentioned as

key by retailers: ⇒ attractive market sector,

⇒ existing niche in the local market,

⇒ growing demand by end consumers for high-quality retail services,

⇒ positive experience in the wholesale trade and developed infrastructure for retail start up,

⇒ high profitability of retail business,

⇒ convincing results of conducted market research,

⇒ cooperation with leading international retailers.

29

A few retailers also mentioned that the Ukrainian legal framework of the early 90’s considerably contributed to the emerging of many new trading businesses: legislation pushed companies towards trading activity, as it was quite difficult to start up production.

Some companies started their retail business with a single outlet (which could have been small and even non- food oriented) without having a retail chain in mind. However, having gained good experience with one shop, those companies developed large successful chains.

The trading company Intermarket started its activities in 1992 trading with clothes and foot-wear, having only

7 employees in a shop with a total area of 110 м2 in Halytska St., Lviv. Market analysis and understanding of

consumer needs in the mid-90’s became the key factors for a profile change to trade in food and

accompanying goods. In 1996 the new name ‘Intermarket’ was introduced; since that time the company has

been opening new shops each year. And now it works in three formats – cash & carry, supermarket,

discounter – and has 13 outlets and comprehensive development plans. Source: company site www.intermarket.lviv.ua

2.2.9.3 Background of retailers

The majority of retailers started their activities with the wholesale trade and / or import of foodstuffs in the beginning of the 90’s. Having gained a certain amount of experience with the development of their own distribution network, many companies faced the necessity of opening their own retail outlet (as some traders admit, ‘just to see’). Since this niche was open, the retail business brought about a positive experience which further lead to a company’s reorientation. Some companies selected a diversification strategy and after development of retail chains they made the decision to acquire other businesses. Therefore, many companies in Ukraine involved in retail have a diversified business portfolio and retail is only one part of their activities. The scheme below describes the development of most trading companies:

Wholesale

company

opening

Distributors

network

development

Opening

1st retail

outlet

Gaining positive

experience in

retail

Retail

network

development

Acquisition

of other

businesses

Sales of

their

products

through

own

network

As access to sufficient financial resources was not simple, companies had to raise their own capital for

development in the retail industry. So, some companies presently active in the retail market earned their

starting capital in other economic sectors (like oil and gas).

Business concentration brought into existence diversified trading and industrial groups that have their own

distribution and retail networks, as well as their own production facilities.

Food brands belonging to the leading trading and industrial groups are:

- Fozzy Group: Miagkov and 220V (vodka and low alcohol), Odessa (champagne), Izmail (wine),

Nizhyn (canned vegetables), Olivier (mayonnaise);

- Rainford Group: Rainford (chocolate), Bon Boisson (mineral water and soft drinks), Karat (vodka),

Miasnaya Gildiya (meat), Bravo and Schodnia (dairy), Vivat (bread)

30

2.3. Local practices

2.3.1 Discount / loyalty systems

Ukrainian retailers use such major types of discounts as:

a. Special offers (special price for some goods for a few days)

b. Price reduction during certain hours or days (usually 9-11 AM or 9-11 PM, and during weekends or on

Sundays)

c. Special prices to discount or client card holders (as part of a loyalty system)

a. Special offers allow promoting a certain product or brand (sometimes, completely new or with a new

design) making it more accessible for customers and forming a consumption habit. In some shops

special offers cover one product from each group, which draws poorer customers into becoming loyal

visitors.

b. Announcement of discounts for the entire product range during certain time periods helps to spread

customer flow more equally. Such a need arises when a store is well-located (and long check-out

lines occur) or when a store wants to draw additional customer groups (in some cash & carry outlets

wholesale prices are effective on Sundays).

c. The way of getting a discount card differs by retail chain: you can either make a single purchase for a

certain amount or just buy a card (price varies from UAH 15 to 100). Some chains provide city

authorities with discount cards. Most retailers provide special discounts to their personnel, which

allows double benefits: sales increase and motivation of personnel rises.

The discount rates granted to cardholders range from 1 to 7% depending on the chain and special conditions

(amount accumulated on the card account, cost of last month’s purchases, etc.).

Recently, joint programs with commercial banks have become very popular. For example, you can get a

discount in a certain supermarkets or become a discount cardholder, if you have a card issued by a certain

bank (if you have a plastic card from Pravex Bank you automatically get 1% discount card at Velyka Kyshenia

chain).

Discount or client cards can be ordered in Ukraine (they are produced by specialized local companies). The

average period for the production of plastic cards is 10-12 working days.

2.3.2. Seasonality / changes of sales

The seasonality of sales is expressed through fluctuations in the number of purchases and average check

amounts during certain time periods (on a daily, weekly, monthly and annual basis).

Retail customer flow (at a neighborhood supermarket) during the day is divided as follows:

- housewives and pensioners are usual morning visitors;

- those who are employed are evening (after 6 PM) visitors.

The highest number of visitors occurs on Friday nights and Saturdays, while during working days and

Sundays the number is level.

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Monthly peaks are related to the salary pay days (in some companies the whole salary is paid at the beginning

of the month, while in others it is paid in two parts – advance in the middle of the month and the rest of salary

at the beginning of the month).

Wholesalers’ flow to the stores that provide services for professional customers - HoReCa and small retail

outlets - is high during working hours (10 AM to 5PM) of working week days (Monday through Friday). The

wholesalers’ flow is usually evenly distributed throughout the month.

Almost all retailers marked annual peaks of sales around the following traditional and religious holidays:

- New Year (and orthodox Christmas – 7 January)

- Women’s Day (8 March)

- Easter (usually falls in March or April)

- May Holidays (1-2 and 9 May)

- Independence Day (especially for the stores located in the city centers – people are outside and

spend more on food and drinks)

- Valentine’s Day (14 February) – this holiday had recently gained popularity

The New Year period (mid December – 1 January) is marked by an increase of up to 60-70% in average

sales. Other holidays provide for a 15-20% increase over normal work periods.

Special days for each region include City Day, professional holidays affecting many people in a particular

industrial region (like Miner’s Day in Donetsk, Metallurgist Day in Dnipropetrovsk and Zaporizhia) and public

events (such as soccer games, concerts, etc.). It is mainly outlets located in the city center, a pedestrian zone

or next to the area where an event takes place that experience sales increases on these days.

The majority of retailers experience a sales decrease in summer (about 10-15%), although some of them deny

this fact.

The tentative annual sales distribution (based on retailers’ estimate) is presented in Figure 16 below.

Figure 16. Approximate distribution of annual retai l turnover

Source: data from retailers

0

2

4

6

8

10

12

14

16

Janu

ary

Febr

uary

Mar

chAp

rilM

ayJu

ne July

Augu

st

Sept

embe

r

Octo

ber

Nove

mbe

r

Dece

mbe

r

% o

f ann

ual r

etai

l tur

nove

r

32

2.3.3. Distribution system 17

The Ukrainian distribution system is based on the application of two main schemes:

I. Direct supply

Producer

Retailer

This scheme is one of the most commonly used in Russia, and presently it is gaining increasingly more

influence in the Ukrainian market.

The direct supply scheme is used mainly only by the largest producers due to its high costs (own logistics /

transportation units) and risks. Producers usually apply such a system through their regional branches or by

means of direct deliveries.

The direct scheme allows the producer to receive an additional profit and to facilitate the production planning

process due to close contacts with retailers (which allow for receipt of the latest information and a quick

response to consumers’ needs and competitors’ actions). This scheme also contributes to increasing a retail

chain’s influence on the market as a whole.

In the largest Ukrainian cities, which account for the lion's share of sales, the majority of producers practice a

‘mixed’ scheme: a producer works directly only with VIP-clients (large retail chains), and small-scale retail is

left to distributors.

Many large juice, beverage, dairy and meat manufacturers use the direct scheme. With dairy and meat

products it works especially well due to the short shelf life of products.

II. Supply through intermediate agents a) Supply through distribution company

Producer

Distributor

Retailer

In contrast to the American and European practice, where retail chains fulfill distributors’ functions through

their own distribution centers, in Ukraine the distributor’s task within this scheme is to supply goods directly to

retail outlets. Operational control is carried out by trade representatives who supervise merchandise lay-out,

inventory stocks and plan the delivery schedule.

This scheme is used mainly by small-scale producers or firms just entering the market. They work through

distribution companies which give them favorable conditions. After gaining some experience, transition to the

direct scheme is possible.

One of the modifications of this scheme is an exclusive distributor model. In this case, a distribution company

can receive rights for product distribution in a specific region(s) or the whole country. However, such a

distributor should have a good track record and a large regional network in order to gain producers’

confidence and receive considerable discounts.

________________________________________________________________________ 17 See Chapter 3.2.4 for details on supply of goods / assortment

33

b) supply through distribution company and wholesaler

Producer

Distributor Wholesaler

Retailer

The scheme with the participation of a wholesale company came into existence mainly due to producer’s low

amount of control over the distribution process. However, the recent trend is to eliminate wholesalers from the

distribution chain. This is a major reason why recently many of them have either gone out of business due to

bankruptcy or changed their profile (some of them began distribution or production activities).

The main trends observed in the Ukrainian distribution system are as follows:

� Distribution channels have been minimized, while the usage of the direct supply scheme has intensified

over the last years. At the same time, it is almost impossible to estimate the share of different supply

channels as their usage varies by market sector.

For example, in the opinion of juice market operators, in this market segment sales through distributors

account for less than 10% of total sales volume in the large cities and 30-50% in the regions. The

remainder is left to direct distribution.

� Distribution companies have been forced to narrow their product portfolio, as promotion of specific

trademarks (not competing with each other) has become the main task of a distributor.

� The number of distributors linked to one particular producer has reduced (in large cities – usually to 2-

4). This is connected to territorial division between the distribution companies.

� With market development, the distributors’ margin has decreased to 10-15% in 2002-2003 from more

than 20% in 1999 (in most competitive markets this profit margin is only 2-3%).

� Local distribution companies have begun diversifying their business activities, as there is a fear that

retail chain development (and setting up of retail chains’ own distribution centers) will lead to a crisis

situation for distributers in 2-3 years.

� Joint mutually beneficial businesses have been established by producers and distributors. In this case,

producers receive additional guarantees of successful merchandise promotion and distributors gain

additional resources for their activities and provisions for long-term cooperation.

Key Ukrainian merchandise suppliers to retail chain s

Producers

� Dairy products: Galakton, Bilosvit, Lactalis-Ukraine, Molochny Dom, Wimm-Bill-Dann, Lustdorf

� Meat products: Kyiv Meat Processing Plant, Rusanovka Meat Plant, Yatran (Kirovohrad Poultry Plant),

Lisichansk Meat Plant, Kovelski Kovbasy (Kovel Meat Plant), Kolos (Chernivtsi Meat Plant)

� Fresh poultry meat: Mironivsky Khliboproduct, AgroMARS

� Confectionery: Roshen, AVK, Kraft Foods, Nestle, Kharkiv Biscuit Factory

� Beverages: Coca-Cola, Obolon, Sun Interbrew, Pepsi, BBH, Sarmat, IDS, Megapolis, Fozzy

� Canned fruit and vegetables (including juices): Chumak, Veres, Sandora, MST-Region, Odesa Baby Food

Cannery, Vitmark, Vinnifruit

� Fish products: Pleyady, Prodimpex, Interrybtorg

� Household goods / Perfumery: Procter & Gamb