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. Last Updated: 07/27/2016

Western Supermarkets Fight Burgeoning Field

Once small islands of good living in a sea of cabbage and potatoes, Western-run supermarkets are now finding that it takes more than Chips Ahoy to keep the customers coming back.

Burgeoning local competition, stiff tariffs on imported food and a shifting consumer base have all taken their toll, say managers of foreign-style supermarkets.

"A few years ago, there was no problem, there was no competition," said Helmut Fasching, general director of the Austrian-run Vienna House supermarkets in Moscow.

But now there is. In less than a decade, the Russian supermarket scene has metamorphosed from a handful of tiny foreign shops to some 200 Western-style supermarkets, with various sizes and ownership structures and annual turnovers of $2 million to $5 million, according to data from BBDO Marketing.

Grandfathers of Moscow grocery shopping, such as the Irish-run Garden Ring and Finnish-run Kalinka Stockmann, now find themselves surrounded -- on one side by mushrooming homegrown stores that offer similar service and imported food, frequently at lower prices, and on the other by U.S.-style supermarkets that grab customers with a wider product variety.

"The situation is more competitive now than it was before," said Eija Vartila, area manager for Kalinka Stockmann, which opened Russia's first Western-style supermarket in 1989.

To stake out its territory, the Garden Ring says it is targeting upper- and middle-income Russians with more money than time.

"We're betting on the convenience shopper," said Colm Fitzsimons, general manager of the Garden Ring's three supermarkets. "It's what we expected -- the expats come in and set the scene and then the Russians take over."

Fitzsimons said that as the number of bargain-hunting expatriate customers falls, the store has gotten rid of its low-budget range of products and stocks higher-prestige items to cater to the tastes of Russian customers who prefer flashier packaging and established brand names.

"For pet food, we can't sell anything other than Pedigree, Chappie or Whiskas because Russians come in and expect to see what they saw on a TV ad."

While items like fresh orange juice and a video rental service are still aimed at foreigners, the store has begun to concentrate on selling more "Russian mainstream" foods like shrimp salad, frozen fish and caviar, he said. Other Western-managed supermarkets are doing the same. At Super Siwa, a 1,000-square-meter Finnish supermarket near Pionerskaya metro station, an extensive line of pasta and pickles overshadowed a dwindling supply of Mexican food ingredients being sold at cut rates.

The wolves of competition do not go away, however. Indeed, foreign supermarkets are no longer a serious force to contend with, said representatives at Western-style Russian outlets.

"They're no threat because there are so few of them," said Yelena Kudina, spokeswoman for the popular Russian Sedmoi Kontinent chain, which runs two 24-hour supermarkets in Moscow.

After building on Western product selection and management techniques, Russian stores now wield a natural advantage over outsiders in choosing the right marketing mix, Kudina said. "It's easier for Russians to work here. After all, this is where we were born."

Some foreigners agree. "Western supermarkets have been caught sleeping," said Fasching of Vienna House.

Tariffs on imported foods introduced in April and July -- from 10 percent to 30 percent on most items -- altered the landscape of competition. Before, foreign grocery stores focused on high prices for high profit margins, while Russian supermarkets plugged away at using lower prices to attract customers with average incomes, Fasching said.

Now, however, price distinctions have been largely eliminated, store managers said. Russian stores were forced to pass on most of the tariff increases to customers so as not to lose their already slim margins. But Western stores found they could not jack prices up too much lest they lose their client base to Russian competition.

"We were forced to reduce our prices," Fasching said. "Now our prices are fully competitive with rynoks [markets] and kiosks."

The tariff regime also eliminates one traditional strategy of supermarkets in the West: cutting costs by buying in bulk. Russia applies customs duties to each imported item with no discounts for bulk purchases, said Ruth Cook, director of indirect tax services at the American consulting firm Price Waterhouse.

Also, Cook pointed out, Russian law forbids firms registered as foreign companies from directly importing food into the country. That leaves many supermarkets at the mercy of importers for the cost of the goods they put on the shelf. Some price differences, then, would depend on an individual store's pricing policy. Others, Cook said, "are probably a function of the way products are imported."

The range of possibilities is infinite. Under Russian law, charitable or athletic organizations such as the National Sports Foundation can import food now and pay tariffs later. Other distributors can arrange discounts while some "blatantly cheat," said Cook, by declaring higher-value products as cheaper items.

In such a complex business, smaller competitors can often undersell prices at Moscow's largest supermarket, Unikor, a German-Russian joint venture.

At the 1,800-square-meter store recently, grapefruit was selling at $3.70 per kilogram and 250-gram boxes of Kellogg's Corn Flakes for $4.66. Meanwhile, the same day, grapefruit was going for $2.50 per kilogram at Stockmann's and 500-gram boxes of Kellogg's Corn Flakes could be had for $4.80 at the Garden Ring on Bolshaya Sadovaya Ulitsa.

"With such prices, we couldn't compete in Europe at all, but here we can hold our own," said Ramiz Scheikhov, commercial director of Unikor.

The secret, said Scheikhov, lies in the store's range of products.

"Customers come for what we offer," he said. "Very few stores can do the same."