International analysis: Russia’s Magnit on course to overtake grocery rival

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Russian grocery retailer Magnit has doubled its profit to $807m (£513.2m) in comparison with 2011. The food retailer reported an impressive net profit margin of 5.57%.

Magnit has been the first modern grocer to open in many Russian towns

Net revenue increased by 26.5% to $14.48bn (£9.2bn) in its 2012 full year, making Magnit the best-performing grocer in Russia and one of the most profitable grocers in Europe.

Magnit has been the number one retailer in Russia in several respects over the past couple of years. It has been the fastest-growing large grocer since 2010, outperforming rivals such as X5 and Auchan.

The retailer has opened more than 2,800 stores since 2010, almost three times more than X5.

It has also maintained leadership in like-for-like sales growth among Russian retailers for successive years now, with annual like-for-like increases peaking at 11.1% in 2011.

Magnit, as the only large grocer operating in Russia, did not begin its development in retail hubs such as Moscow and St Petersburg but initially developed its store network from its home city of Krasnodar, targeting regional cities with fewer than 500,000 inhabitants.

At first, this strategy seemed unlikely to prove successful, because consumer spending in Moscow and St Petersburg a decade ago was several times higher than in regions such as the south of Russia.

However, Magnit secured an advantage by being first to move into many towns. It was not rare to find a Magnit hypermarket was the first modern grocery store in a city.

As consumer spending began to rise and - crucially - a burgeoning middle-class became established beyond Moscow and St Petersburg, Magnit’s strategy started to pay off.

A focus on core formats and organic store development is another factor in its success. In the past 10 years, Magnit consistently invested in its core formats of supermarkets and compact hypermarkets.

That was in stark contrast to X5, which directed resources into the development and testing of various formats.

Magnit’s expansion strategy was clear and simple, rooted entirely in fast, organic development and full control over its store network. In contrast to X5, Magnit does not operate any franchised stores and mergers and acquisitions have never been an integral part of its growth plans.

Without a doubt, Magnit will become the largest Russian retailer in terms of revenues in 2013, replacing leader X5.