Last of the big spenders
Russians are still spending like there’s no tomorrow and, as Andre Cooray dicovers, the top global retailers are looking to enter the market for the long haul
"Appearances and prestige have been an important part of Russian culture ever since the time of the Tsars. Russians prefer to look good today rather than saving the money for future purchases"
Even taking into account the depressing monetary realities echoing from the rooftops of Moscow’s grandest mansions all the way to the icy depths of Siberia’s heart of darkness, some of the biggest global retailers are ready to make their move on the Russian market. While Topshop owner, Arcadia, opened its first regional store in the southern Russian city of Krasnodar in March 2008, a ten-year plan by B&Q owner, Kingfisher, to open 50 of its Castorama outlets in the region is in the pipeline.
Overall, wages of Russians rose by 25 percent last year, the Moscow Times reported in January 2009. Many Russians have little debt and high disposable incomes due to mortgage-free lifestyles (most opt to reside in family owned homes), and heavily subsidised electricity and gas costs. The burgeoning middle class and evolving retail market will dictate future sales growth in Russia. Also, a thirst for high-end products and brands will continue to increase consumer spending.
Business Monitor International (BMI) predicts Russia’s mass grocery retail sector will grow 56.8 percent in the next four years, from US$35.5 billion in 2009 to US$55.66 billion in 2013. Therefore, despite the negative effects of the world financial crisis, Russia’s retail market is still considered a newly emerging force to be reckoned with.
Russia’s bloated economy aided by previously high oil prices and bullish foreign investment, and set against a now politically stable milieu, has helped turn curiosity about retail opportunities into action. By 2012, the country is expected to surpass the UK and Germany in terms of retail market size. Foreign companies are poised and now ready to tap the fragmented and unsaturated market of a country comprising 142 million people and home to the world’s second largest number of billionaires.
Wal-Mart, the largest retailer in the world, has joined the Russian Retail Association setting the wheels in motion to enter the world’s largest country’s retail market, Reuters reported in December 2008. French retailer, Carrefour, and Auchan, Germany’s Metro AG, are members along with Russian food giants X5 Retail Group and Magnit. Wal-Mart is expected to take the mergers and acquisitions route, creating mutually beneficial alliances, as many local Russian retailers face financial trouble, BMI reports. Furthermore, the market is expected to consolidate as faltering retail businesses start to drop out due to the current credit shortages.
The Russian mass grocery retail sector was only being serviced by 8 percent of the top five global retailers in 2007, this according to international standards is extremely low, and highlights just how unsaturated the market really is, says BMI. Russia’s regional customer base is where the true potential for firms, like Wal-Mart, lies because it’s a niche area that has been severely neglected by the mass grocery retail sector until now. Thus, the race is on to reach these consumers residing away from major cities and claim significant market stakes.
BMI, confident that Russia’s economy will remain resilient, expects it to grow 4.65 percent between 2010 and 2015 after its decline by 0.9 percent this year. Foreign companies are therefore gearing up to enter the Russian retail market for the long haul.
“Among the major characteristics of their [the Russian people] behaviour is consumers’ willingness to spend a large part of their disposable income on luxury goods, such as designer clothes. Appearances and prestige have been an important part of Russian culture ever since the time of the Tsars. Given the fast-changing societal developments, Russians prefer to look good today rather than saving the money for future purchases,” Valentina Glubokovskaya, states in her recent article ‘Russian Consumers Want to Splash their Cash,’ for brandrepuplic.com.
According to Glubokovskaya, Russians are extremely curious about new products and brands making it ideal for new retailers (both foreign and local) to enter the market and prove themselves. What’s particularly interesting is that Russians are still spending like there’s no tomorrow despite the bleak future of the world economy. They equalled the French, Belgians and Swiss when it came to holiday spending at the end of last year, putting them ahead of Germany and the Netherlands.
Russians are big spenders but at present, their needs as consumers are not being met. Global retailers have faith that the Russian economy will be restored and continue to grow in the future, based on predictions that energy prices will rise once again. It’s also in the best interest of Russia’s leaders to maintain financial stability: future policies are therefore likely to be in favour of a free consumer market.
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