Comment: The Ukraine conflict makes Russia even tougher for foreign retailers

As the world continues to mull the geopolitical ramifications of events in Crimea, the business community is also watching carefully.

However, it is the impact on Russia, rather than Ukraine, that is likely to be causing them sleepless nights. In the aftermath of the decision to deploy troops in Crimea the rouble plunged to new lows against the euro and dollar, raising concerns that Russia’s US$700bn retail market may become even more difficult.

A tempting market?

On the face of it, Russia’s retail potential looks strong. Forecast nominal retail growth touching on double digits will be eroded by persistent inflation, but even in real terms sales are still expected to grow by around 4% per year. Rising wealth levels, as well as an emerging group of super-rich consumers, are driving a market in which disposable income is expected to rise by 50%in the next five years, pushing retail sales past the US$1trn mark.

This has been reflected the performance of domestic retailers such as Magnit and X5.The latter retailer reported double-digit growth in rouble sales last year, while Magnit has gone one better, reporting a 25% jump in year-on-year sales for February. An ambitious store opening programme has enabled Magnit to recently overtake X5 as Russia’s largest retailer.

Tough to crack?

However, even before the complication of Crimea, Russia has been far from a pushover for foreign retailers. Current rouble instability has echoes of previous economic scares in a country that was forced to redenominate the rouble in 1998. It is perhaps telling that Magnit and X5, Russia’s two domestic giants, have chosen to list on the London Stock Exchange rather than at home.

The Russian retail market has been so tough for foreign retailers that Carrefour famously lasted only a few months before exiting in 2009. With wealth focussed in urban centres, particularly Moscow and St Petersburg, lower incomes elsewhere mean that price competition is fierce and the national scene is fragmented.

Metro has managed to carve out a presence but, according to figures from planet retail, it has a grocery retail market share of less than 1%, with Russia accounting for less than 10% of Metro’s global sales. French retailer Auchan fares better, but its own market share is less than one-half that of the likes of X5 and Magnit.

Troubled times?

Metro’s own plan to launch an IPO of its Russian operations has been put under threat by events in Crimea. But the tumbling rouble has prompted alarm bells to ring across the board. Adidas was moved to warn that currency headwinds from a weaker rouble would impact revenue, while even the success of X5 and Magnit was not enough to push share prices down. Another Russian retailer, Lenta, also found its own stock market debut dented by fears over Russia.

A swift resolution will no doubt restore confidence in Russia, whose long-term potential is undisputed. But the pace of retail development is slow and difficult, especially given the strength of Russia’s domestic retailers.

Even attempts to tap into trends such as e-commerce present challenges. Moscow’s Data Insight recently claimed that the Russian e-commerce market grew by 26% to reach US$14bn last year, a figure they expect to double by 2015.

However, despite interest from firms such as Asos, Amazon, eBay, and Alibaba, the market is also well served by domestic players such as Ozon (part-owned by Japan’s Rakuten), Yandex and Ulmart. Ulmart already claims to account for almost 10%of Russia’s ecommerce sales, with its chairman Dmitry Kostygin reported as saying “Amazon has no chance” in Russia. He may be wrong, but when it comes to retail it seems that there is no simple or easy path for foreign entrants.

Jon Copestake is chief retail analyst at the Economist Intelligence Unit