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4.3 Distribution and import channels

General patterns

In tapping the Russian market, distribution in the country’s vast territory is one of the biggest challenges for traders. In particular, the transport infrastructure in many parts of Russia is relatively less developed. As a result, the majority of domestic cargoes rely on railways for delivery, although the railway system on the whole is not very modernised. Moreover, cargoes destined for smaller cities and rural areas still need to be delivered by light trucks, given the lack of hard-surface roads that can allow heavy trucks to pass through. 

To complicate matters, the majority of the population is sparsely spread out in over a thousand cities and towns. While Moscow and St Petersburg have 10.5 million and 4.6 million people, respectively, there are only a few major cities with a population exceeding 1 million. Therefore, it is quite a difficult task to distribute goods to a Russian population that is so spread out, let alone the less developed transport infrastructure.

To effectively distribute their products in the market, Hong Kong traders should note the major distribution hubs in the country. Not unexpectedly, Moscow and St Petersburg are the most important hubs. While Moscow, the capital, is the largest political and cultural centre in Russia, it also engages in a variety of industrial activities, such as manufacturing automobiles and trucks, machine-tools, electrical gadgets and instruments, chemicals, textiles and foodstuffs, thereby making it a distribution hub for most consumer as well as industrial goods.

Meanwhile, St Petersburg, the second largest city, is another important business and cultural centre in Russia. Thanks to its geographic proximity to other West European countries, St Petersburg plays an important role in Russia’s international business. It is also Russia’s most important port in the Baltic Sea.

Besides, Nizhny Novgorod has the biggest automobile manufacturing centre in Russia, with a population of 1.4 million, while Yekaterinburg is a major centre for heavy transport and chemical engineering industries, and non-ferrous metal works, with a population of 1.3 million. As these cities are also the centres of their respective regions, they have naturally become the distribution hubs there.

A burgeoning and underserved retail market

Following years of privatisation and an unprecedented influx of Western retailers, the Russian retail market, though not left unscathed by the global recession, is not only considered one of the most dynamically developing and attractive worldwide, but one of the most promising sectors of the Russian economy. Despite significantly slowing down, Russia’s retail market still managed to see growth in the recession year 2009, thanks largely to the sustained domestic demand underpinned by the country’s sizable population of spending consumers. Retail sales in Russia were up 2% year-on-year in 2009, giving rise to an aggregate market size of more than US$480 billion. While not all lines of retail businesses enjoy the same degree of success in the increasingly competitive Russian market, fashion retailers always stand out in the sales battle, thanks largely to the nation’s passion for fashion. According to a recent report by PriceWaterhouseCoopers, despite the economic fallout, Russia is still performing well for fashion retailers, especially those in the mid and value markets, with quite a number of them suggesting that sales per store in Russia are among their best in Europe.

Retail turnover in Russia

Source: Federal State Statistics Service

In tandem with the dynamic sales growth, the retail landscape in Russia has undergone enormous transformation, with bazaars and markets upgrading to modern shopping complexes with enhanced shopping environments and elements like movie theatres, coffee shops, bowling alleys, fine boutiques and restaurants. However, as described by the chairman of F.D. Lab Retail Group (the fastest growing retail franchise and licensing company in Russia), the Russian retail market is still a long way behind Western standards. On the other hand, in the wake of the opening up of the retail sector to foreign investment, the Russian retail sector is not immune to the changes in favour of consolidation and influx of established foreign players, despite some slackening in the pace of foreign investment in the immediate aftermath of the global crisis. However, the retail market in Russia – a vast country spanning 11 time zones (more than any other country in the world) from Eastern Europe to Northern Asia – is still highly fragmented, with the top 10 retailers accounting for less than 10% of the market jointly in 2008. This fragmentation not only poses great challenges to potential entrants who want to penetrate the market and obtain a leading position by buying existing retail operators in the country, but difficulties for overseas suppliers who want to make their debut in the thriving retail market in Russia.

Retails sales in Russia, 2009

Remark: Percentages shown above are calculated according to retail sales.

Source: Euromonitor

Average retail prices of selected consumer goods, 2009*

Specification

Price (in RUB)

Women’s overcoat (for spring and fall), wool or semi-wool – one piece

5,631

Men’s suit, two pieces, of wool or semi-wool – one set

4,849

Men’s shirt of cotton or mixed fabric – one piece

618

Women’s skirt of mixed fabric or semi-wool – one piece

1,325

Jumper, sweater or jacket for adults – one piece

1,268

Men’s socks of cotton or mixed fabric – per pair

49

Women’s tights – per piece

90

Men’s leather shoes, upper of leather – per pair

2,125

Women’s boots (for winter), upper of leather – per pair

3,810

Colour TV sets

10,564

* Average in December 2009

Source: Federal State Statistics Service

While the overall drive for retail consolidation and modernisation continues amid the global economic slump, it is somewhat affected by the worsening economic conditions which have acted in favour of grocery retailers and the development of certain retail formats such as discounters when consumers are getting back to basics. Some retailers have begun to scale back their operations and/or revised their expansion strategies to prioritise the concept of simple and non-fancy retailing. For instance, Dixy Group (a leading food and everyday household supplies retailer in Russia) has planned to close down its convenience store chain, V-Mart, to concentrate on the discounter and hypermarket formats.

On the other hand, with a still low degree of participation of foreign operators (nine of the top 10 retailers are operated by Russian companies), the Russian retail market is believed to have plentiful room for foreign companies to expand, especially in second-tier cities such as Chelyabinsk, Kazan, Nizhny Novgorod, Novosibirsk, Perm, Samara, Voronezh and Yekaterinburg. For example, Russia’s X5 Retail Group has doubled its presence in Yekaterinburg with its Pyaterochka discount store chain in recent years to seize the vast untapped market potential there. In spite of such a positive portrayal, not all foreign retailers have succeeded in gaining a foothold in the Russian retail market, companies like Carrefour (the French retail giant decided in October 2009 to withdraw from Russia just four months after opening its first store in the country) are pulling out of the market.

Top 10 retailers by sales (2009) in Russia

 

Retailer

Country of origin

Chains

Website

1.

X5

Russia

Pyaterochka, Perekriostok, Karusel

www.x5.ru

2.

Tander

Russia

Magnit

www.magnit-info.ru

3.

Eldorado 

Russia

Eldorado, SSE

www.eldorado.ru

4.

Auchan

France

Auchan

www.auchan.ru

5.

Euroset

Russia

Euroset

http://corp.euroset.ru/

6.

M. Video 

Russia

M. Video

www.mvideo.ru

7.

Lenta

Russia

Lenta

http://lenta.com

8.

Kopeyka

Russia

Kopeyka

http://kopeyka.ru

9.

O’Key 

Russia

O’Key, O’Key Express

www.okmarket.ru

10.

Dixy

Russia

Dixy, Megamart, Minimart, V-Mart

www.dixy.ru

Source: Euromonitor

Despite market saturation, big cities like Moscow and St Petersburg still account for the lion’s share of retail spending and sales growth in Russia. Upon the budding economic recovery and substantial rental decline of retail spaces, these big cities are expected to maintain their pep and continue their lead in retail spending, with shops featuring strong lifestyles and fashionable offers in the mid-market seeing the greatest potential. Another positive development came in December 2009 when a new high-speed train, Sapsan, connecting the two largest cities of Moscow and St Petersburg came into operation, cutting the journey time to 3 hours and 45 minutes at a top speed of 250 kilometres per hour.

Major shopping centres in Russia

Name

Website

Moscow

Atrium Mall

www.atrium.su

Evropeiski Shopping Mall

www.evropeysky.ru

GUM

www.gum.ru

MEGA Mall

megamall.ru

Okhotny Ryad

http://ox-r.ru

Petrovsky Passage

www.petrovpassage.ru

TsUM

www.tsum.ru

St Petersburg

Apraksin Dvor

www.apraksin.ru

Gostiny Dvor

www.bgd.ru

Another retail market trend worth noting is the emergence of Internet stores in Russia. As the country’s forerunners in private ownership, private brands and trademarks, nationwide consumer electronics and household electrical appliance chains have started bringing their sales into the virtual world and introducing the format of pick-up stores (similar to that of the US) in recent years. For instance, the largest national consumer electronics chain, Eldorado, has merged its Internet store services with the pick-up store format offering services all over Russia. In so doing, online shoppers, after placing their orders on the store’s website, can choose to pay for and pick up the merchandise in any of the chain’s stores across the country. Among others, Technosila (also known as Technopower) is another Russian nationwide electronics chain seriously considering the option of expanding the scale of Internet selling, while Domo, Vasko, Podberi and Ozon are the most popular Internet stores selling consumer electronics and household electrical appliances in Russia. This trend expansion of the format of pick-up stores to far-flung cities or towns by nationwide chains can yield new opportunities for Hong Kong suppliers as it helps new-to-the-market companies extend their reach to markets beyond already very competitive and saturated big Russian cities like Moscow and St Petersburg.

The continued emergence of national or regional importers/distributors

Another notable development of the distribution system in Russia is the continued emergence of national and regional importers/distributors, especially in major cities such as Moscow and St Petersburg. Such national importers/distributors usually have a dealership and agency network in more than one federal district[4], although it is still difficult for a single importer/distributor to serve the whole market across Russia. While selling to giant wholesalers and retail groups in major cities, they can also reach out to clients in remote cities and towns. In many cases, these distributors have set up or rented warehousing facilities in major distribution hubs, from which they supply to their dealers and agents in local markets across Russia. Nevertheless, there are still a large number of small importers operating and selling mainly to wholesalers and retailers in major cities. Some large retailers (sometimes they are importers themselves), in order to minimise cost and better suit their design and branding needs, have set up their own import departments for direct sourcing from local and overseas manufacturers.

Along with changes in the distribution and retail sectors, import channels for consumer goods have also evolved in Russia. Russian importers, which are largely small-sized companies, still play an important role in importing consumer goods into the country. Yet the scenario has started to change with the emergence of national and regional distributors, which source goods directly from local as well as overseas suppliers. On the back of their vast network, national and regional distributors are able to place volume orders of consumer goods with suppliers, including Hong Kong exporters.

Selected examples of national importers/distributors and retailers in Russia

Consumer electronics

White Wind DIGITAL

http://www.digital.ru

Eldorado

http://www.eldorado.ru

Euroset

http://euroset.ru

Expert

http://www.expertonline.ru

M. Video

http://www.mvideo.ru

Mir

http://www.mirinfo.ru

Technosila

http://www.technosila.ru

Fashion (i.e. clothing and footwear)

Carlo Pazolini

http://www.carlopazolini.ru

Econika

http://www.econika.ru

Gloria Jeans

http://www.gloriajeans.biz

OODJI

http://www.oodji.biz

O’Stin

http://www.o-stin.ru

Monarch

http://www.monarch.ru

Sela

http://www.sela.biz

Jewellery and timepieces

Yashma Zoloto

http://www.yashmazoloto.com

Moskovskoye Vremya

http://www.watches.ru

Northern Watch Company

http://www.watchbusiness.ru

Toys and games

DETI

http://www.detishop.ru

Detsky

http://detmir.ru

Korablik

http://www.korablik.ru

Simba Dickie Group

http://simba-dickie.ru

Furs & leather

Russian Furs

http://www.rusmeh.ru

Snow Queen

http://www.snowqueen.ru

Gifts and premiums

Bagatelle

http://www.bagatelle.ru

LeFutur

http://www.lefutur.ru

Home furnishings and building materials

Maxidom

http://www.maxidom.ru

Laverna

http://www.laverna.ru

 


[4] There are a total of eight federal districts in Russia, namely, the Central Federal District (with an administrative centre in Moscow), the Far Eastern Federal District (Khabarovsk), the North Caucasus Federal District (Pyatigorsk), the Northwestern Federal District (St Petersburg), the Siberian Federal District (Novosibirsk), the Southern Federal District (Rostov-on-Don), the Urals Federal District (Yekaterinburg) and the Volga Federal District (Nizhny Novgorod).

Content provided by Hong Kong Trade Development Council
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