Retail Revolution in Russia

Vadim Radaev

Laboratory for Studies in Economic Sociology

26 June 2013
, , 2012 www.hse.ru

Laboratory for Studies in Economic Sociology

Since 2006 LSES conducts sociological research on consumer markets LSES conducts policy oriented research on request of the leading business associations LSES provides publication of e-journal Economic Sociology and newsletter ESForum

LSES projects (1)

Prospects for the light industry development in Russia (for Retail Companies Association, 2013) Examining the Informal Alcohol Market in Russia (for International Center for Alcohol Policies, 2012-2013) The retail companies costs of cash and non-cash payments transactions (for Retail Companies Association, 2012) Impact of parallel import legalization on consumer markets (for RATEC and RusBrand, 2011)

LSES projects (2)

Major trends in the markets for counterfeited goods and an impact of the new Custom Union (for RusBrand, 2010) System of monitoring for status and trends in trade activity (for the Russian Federation Ministry for Industrial Production and Trade, 2010) Online trade market: supply chains and tax optimization schemes (for RATEC, 2010) Current status and major development prospects of the Russian retail trade (for Sberbank of Russia, 2009)

Economic impact of trade is increasing

In GDP, %

In employment, %

In investment, %

1990

2010

Source: Rosstat

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

Source: Rosstat

Retail turnover increased by 10 times since 2000

Source: Rosstat

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

Source: Rosstat

Retail revolution in 2000s

New domestic and global market actors Expansion of civilized trading formats (supermarkets, discount stores, hypermarkets) Diffusion of new technology and logistics Transition from supplier-driven to buyerdriven supply chains

New retail market actors

Domestic chain stores were established in the 1990s and grew up to nationwide operators in the 2000s Global chain stores entered the market in 2000s (IKEA, Metro, Auchan, Leroy Merlin, Zara) Traditional (over counter) independent stores are pushed away

Open-air markets are closed down by municipal authorities

New profile of retail trade

Phenomenal growth of retail market leaders

Annual growth of sales
40-70 per cent before the 2008-2009 crisis

20-30 per cent after the 2008-2009 crisis

Open as many new outlets as possible

Active regional expansion

Getting down from the largest to smaller cities Moving frontier from Western to Eastern regions of Russia

Russian companies strategies: grab the space and do it fast Brownfield strategies, renting trading facilities Development of franchising schemes Mergers and acquisitions (after 2005) Use of medium-sized trading formats: supermarkets soft discount stores

Global companies: focus on sustainable growth

Greenfield strategies, building up new outlets No franchising schemes No acquisitions of local companies Use of large trading formats
hypermarkets cash & carry

www.acort.ru

Russian companies in comparative perspective: Labour productivity is low but sales per square meter are high
Sales per square meter (USD)
Sweden Russia France UK Finland Germany Italy Romania Greece Poland Turkey USA Hungary

Sales per worker (USD)

France Italy USA Sweden UK Germany Finland Greece Hungary Poland Turkey Russia Romania
2000 17947,1 15871 14091,1 13905,9 13695,2 13666,4 13471,9 11735,3 4916,2 4544,5 1778,1 1241,1 693,4 2011 21005,1 17820,9 18539,7 18952,8 18613,6 14106,6 19926,5 12984,3 8327,5 6386,5 6671,0 6035,6 3433,1

2000 5 965,2 1 594,1 5395,6 4 196,6 3 776,5 3 734,3 3 831,0 1 673,0 2 897,9 2 737,4 1 081,0 1 998,2 1 466,2
Source: Data Euromonitor

2011 7 579,9 6 484,0 5 747,4 5 227,1 4715,3 4 239,1 3 949,8 3 586,6 3 508,6 3 071,1 2 805,9 2 586,8 2 018,6

Retail companies break through to the top of business rankings

2000 no retail companies 2004 17 retail companies in top-400 4 retail companies in top-100 2011 17 retail companies in top-400 12 retail companies in top-100 4 retail companies in top-50
Source: Expert ranking of top-400 companies in Russia

Market leaders
Retail company X5 Retail Group Magnit Auchan Metro. Cash & Carry Place in the ranking 17 25 31 40 342 701,30 236277,5 178142,6 132484,4 Turnover, 2010 (mln rbls) Number of stores 3660 5346 51 58

Good prospects for further consolidation

Modern chain store companies 30 per cent Large areas of Russia are still unexplored Five largest retail companies make: 5 per cent of total sales 12 per cent of sales in grocery market 60 per cent of sales in consumer electronics

www.acort.ru

Online trade growth is three-fold over five years

Online trade, 2011, %

UK Finland USA France Germany Sweden Poland Russia Hungary Romania Italy Turkey Greece
Source: Data Euromonitor

8,3 7,9 4,9 4,6 4,3 4,1 3,9 2,1 2,0 1,2 1,0 0,8 0,8

Trends for the future

Annual retail turnover growth will decrease (6-8 per cent) Increasing consolidation of the market by the market leaders Market leaders will continue their extensive growth but give more attention to effectiveness Russian grocery market will become the largest in Europe Non-food segments will grow faster than food segments Chain stores will push away independent stores and open-air markets In contrast to Eastern European countries, Russian domestic retail companies will keep their markets and compete with the global companies

Puzzle: why did the state suddenly come back

Retail trade has been a most liberalized and privatized market sector in Russia since 1992 The state did not intervene for 15 years Restrictive trade law was initiated in 2007 Despite active resistance of leading retailers, the law passed by the end of 2009

The state intervention is aimed at limiting retailers market power

Marketing fees are prohibited except for 10 percent bonus for the volume of sales Maximal delays in payments for supplied goods are fixed for chain stores (10-75 days) Chain stores obtaining 25 percent of the market in municipal district should not open additional trading outlets Government is supposed to intervene if the price increase on necessities in the stores exceeds 30 percent in 30 days

Background: change in supply chain

Transition from producer-driven to buyerdriven supply chains occurred in 2000s [Gereffi 1994] Shift in the market power from suppliers to favour of retail companies Retailers gaining their market power established the new rules of exchange

Background: relational conflicts

Chain stores failed to provide cognitive and sociopolitical legitimacy for the new rules of exchange causing relational conflicts Attempts to settle down disputed issues between leading retailers and suppliers failed Relational conflicts in supply chains were aggravated by the financial crisis in 2008

Background: appeal to the state

Suppliers tried to compensate for the lack of their bargaining power by appealing to the state intervention Populist public debate on domination of the trading mafia was developed Demand for the new formal regulatory norms was claimed by the Russian President

How to pass a disputable law

Prime Minister Vladimir Putin was invited to a chain store to see unfair pricing examples Draft law on trade was submitted to the State Duma within one month In two months the law was approved in the first reading

Fight in the Parliament

Russian MPs suggested more than 300 amendments:
to fix retailers gross margin to limit the share of imported goods to restrain sales of private labels to reserve shelves for small suppliers

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

U.S. Store Wars, 1930s

Anti-chain-store legislation was enacted in 27 out of 48 states with discouraging taxes as a key element Legislation was initiated by associations of small retailers and farmers from local communities Chain stores managed to get hold of institutional change Anti-chain-store legislation was repealed at the end of 1930s [Ingram, Rao 2004]

U.S. Store Wars, 2000s

Small suppliers complained on limited access to store shelves and slotting fees 90 percent of complaints ran against large suppliers Federal Trade Commission spent three years on research getting no definite results The number of court precedents against slotting fees was reduced [Klein, Wright 2007]

Russian Store Wars, 2000s

Anti-chain-store opposition took a character of intrastate rather than grassroots movement Political lobbyists of large suppliers rather than independent retailers played a major role in opposition Almost no research was carried out. Existing results were not taken into account No evaluation of regulatory impact was undertaken ex ante or ex post

LSES study data sources (1)

Time: Survey: Respondents: 2010 (November - December) 512 filled questionnaires Managers of retail chains and their suppliers

Sectors:

Grocery sector (75%), home electronic appliances (25%)

Regions: Novosibirsk, Moscow, S.-Petersburg, Yekaterinburg, Tyumen

Higher School of Economics , Moscow, 2011

LSES study data sources (2)

Series of 38 in-depth interviews with the market actors and political experts Records from the expert meetings: Ministry of Economic Development Ministry of Industrial Production and Trade Federal Anti-Trust Service State Duma (Parliament) Committee on Economic Policy and Entrepreneurship

Changes in procurement contract process over the last 2-3 years as viewed by market sellers
Making contracts with large exchange partners Became easier Retailers (N = 249) 12% Suppliers (N = 220) 5%

No change
Became more complicated Making contracts with small exchange partners Became easier No change Became more complicated

81%
7% Retailers (N = 244) 15% 80% 5%

75%
20% Suppliers (N = 236) 15% 76% 9%

Changes in contract requirements to the suppliers from chain stores over the last 2-3 years
Price discounts Decreased No change Increased Payment delays Decreased No change Increased Slotting allowances Decreased No change Increased Marketing fees Decreased No change Increased Penalties Decreased No change Increased Retailers (N = 243) 7% 79% 14% Retailers (N = 243) 11% 77% 12% Retailers (N = 233) 11% 83% 6% Retailers (N = 223) 17% 78% 5% Retailers (N = 236) 7% 85% 8% Suppliers (N = 218) 3% 71% 26% Suppliers (N = 231) 5% 61% 34% Suppliers (N = 210) 4% 78% 18% Suppliers (N = 184) 10% 76% 14% Suppliers (N = 221) 5% 80% 15%

Federal Antimonopoly Service started checking up the trading companies to enforce the new trade law (December 2010)
Large chain stores Small and medium chain stores

Became subjects to check-ups

Received formal prescriptions to change

33%
77%

26%
40%

Federal Anti-Trust Service conducted 370 check-ups of trading companies and examined 15 thousand procurement contracts in 2011

Federal Antimonopoly Service put more pressures on market sellers accused of violations of the trade law
2010 Number of legal cases against firms 128 Share of legal cases initiated by the FAS RF, % 93
Number of judgements regarding violations of the trade law by the firms Number of orders issued by the FAS RF Number of penalties charged by the FAS RF Sum of penalties charged by the FAS RF (thousand rbls)
Source: Federal Antimonopoly Service data

2011 220 90
141 116 59 31296

2012 171 89
124 91 119 141800

97 47 -

Trade law did not balance the market power but increased administrative costs
Contract terms and conditions have not substantively changed for 75-80 per cent of market sellers and for became even worse 15-20 per cent of market sellers Suppliers provide even more critical evaluations No difference is observed between grocery sector affected by the trade law and home electronics sector non-affected by the law Administrative costs increased due to reshaping procurement contracts, more controlling check-ups, prosecutions and fines imposed by the Federal Antimonopoly Service

Debates over trade law implementation are ongoing

Federal Antimonopoly Service first rejected, then recognized the conclusions of this study But public officials do not admit that state intervention into the contract relationships is not needed Public officials suggest new amendments to the trade law to strengthen restrictions imposed on trading companies The story is to be continued

Books on Russian retailing

Papers in English

Vadim Radaev

WHERE DOES THE DEMAND FOR REGULATION COME FROM? THE STATES RETURN TO THE RETAIL TRADE IN RUSSIA

BASIC RESEARCH PROGRAM WORKING PAPERS

SERIES: SOCIOLOGY WP BRP 02/SOC/2011

http://ssrn.com/abstract=2002071