Tesco Said to Be Planning Stores

bloombergBritish retailer Tesco has been considering the Russian market since 2005.
Tesco, Britain's largest supermarket chain, plans to open its first Russian stores as wages and consumer spending surge, three real estate advisers who have held talks with the retailer in the country said.

The British retailer is looking for ways to enter the market, said Jeff Kershaw, senior director at the Moscow office of CB Richard Ellis, the world's biggest commercial real estate company. Tesco is studying possible store sites, said two people at other property firms who asked not to be identified.

Tesco spokeswoman Lisa Kavanagh said the company does not comment on "rumors and speculation."

The retailer owns stores in emerging markets from Turkey to Malaysia and makes more than 25 percent of its sales outside Britain. The company would compete with X5 Retail Group, Russia's largest supermarket owner, Germany's Metro and France's Carrefour in a food-retail market UBS says is worth $191 billion and grew 32 percent last year.

Tesco is taking its time to enter Russia because "the population is concentrated in cities which are very spread apart, and that is particularly difficult for a food retailer in terms of distribution," said Chris Gower, an analyst at MF Global in London. Metro, X5's closest rival in Russia, "has taken a long time to establish itself because of the bureaucratic difficulties," he said.

The British retailer, which has said it has considered entering Russia since at least 2005, "didn't make any commitment yet," CBRE's Kershaw said in an interview last week.

A PricewaterhouseCoopers report last week said red tape, corruption, worker shortages and lengthy delivery times outside Moscow and St. Petersburg hamper local retailing.

IKEA, the world's largest home-furnishings retailer, entered the country in 2000. It has faced demands to build road links and is having trouble buying enough land to build stores over large lots.

Tesco has also considered potential franchise partners in Russia, one of the real estate executives working with the British company said. X5 has said it would potentially cooperate with Tesco as a franchise partner.

"You have to make it in Moscow, but most of the retailers are concentrated there and Tesco would face stiff competition from X5," said MF's Gower, who rates Tesco "buy." He expects Tesco to introduce big cash-and-carry stores along the lines of their Chinese outlets, or else open shops that don't sell food.

Tesco declined 2.5 pence, or 0.6 percent to 390.25 pence in London trading Friday. The shares have fallen 18 percent this year.

A 10th year of economic growth has enabled more Russians to eschew street markets and small stores for the higher-priced food sold by supermarkets such as X5's Pyatyorochka stores.

Russia's economy grew 8.1 percent last year and the average wage increased an annual 16.2 percent, reaching about $750 per month in December. Retail sales grew 15.2 percent in 2007.

UBS said in a March 4 report that supermarkets and superstores would account for 45 percent of Russian food retailing by the end of 2009, up from less than one-third in 2006, with the rest generated by open markets.

Tesco opened in the United States in November, with a chain of Fresh & Easy convenience stories.

Tesco's operations outside Britain now account for about half the retailer's floor space about 10 years after the first expansion abroad.