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. Last Updated: 07/27/2016

Global Stores Tap Into Growing Middle Class

Russia is getting closer to a real consumer society everyday, but the Western idea of one-stop shopping is still just a dream.


The out-of-town superstore, built like an aircraft hangar and with huge amounts of parking space, has yet to appear. Neither Russian nor western companies have in general taken the plunge of opening department stores or hypermarkets.


One of the few exceptions is Global USA, with four stores in Moscow and three elsewhere in Russia.


And that came about by accident. Global USA started off as a computer retailer, which in turn started out from a computer maintenance office set up in an office of a scientific research institute in Ulitsa Usacheva near Sportivnaya metro in the south of the city. Moreover, its founder and chief executive, Imdad Haque, 39, a U.S. citizen now married to a Russian wife, had no experience in department store retailing.


After a background in the computer business on the east coast of the United States, Haque came east seven years ago. "In 1989 I was working in Kazakhstan on a computer networking project," he said. In Moscow, in 1990 and 1991, he sold computers. "We would package them and add Russian documentation. We sold a lot of computers in 1992. I then saw an opportunity for retailing.


"We expanded the store to consumer durables in the middle of 1993," he continued. "Now we sell everything."


Global's Usacheva premises have grown to 2,200 square meters. A new store was opened at Sokol, with 1,800 square meters, in April last year, and a third added near Taganka last July. The fourth, which opened at the end of last year, is at Babushkinskaya, and is the largest to date, at 6,000 square meters.


The first move outside the capital was to Nizhny Novgorod, where a store opened in December 1994. Others followed in St. Petersburg and in Rostov-on-Don. The Nizhny and Rostov stores are both small, test sites to assess demand, and will be converted into computer stores if and when larger stores are launched in these cities.


Haque said he remains sole owner of Global's Russian operations and its allied companies in New York, Hamburg, and Singapore. Haque declined to give figures for profitability, but said that the group's annual turnover now exceeds $100 million.


All this has meant a rapid evolution in the way Global USA does business. When he started off, Haque recalled, he bought electronics retail from an outlet in New Jersey, and shipped them here to sell them again retail. Today he prides his company on the sophistication, and cost effectiveness, of its supply network.


Global USA works in the United States through a cooperative network called True Value which represents smaller and medium-sized retailers, giving them the buying advantages of much larger retail chains. The network makes purchases from 1,000 vendors. "No one buys cheaper than we do in America," Haque claimed.


In addition, Global has a company which buys for it in Singapore. There is a warehouse in New Jersey and another in Hamburg, which acts as the consolidation point for shipments to Russia via Global's own fleet of close to 30 trucks.


Controlling shipments means reliable and rapid delivery, Haque said. "A truck can leave Hamburg on Friday and be here on Monday."


Some Western manufacturers, having seen Russian and other trading companies buy cheap abroad and sell dear back home, have set up their own retailing operations in Russia, only to find that the importers had either preferential import tax exemptions, or ways and means of getting round customs and other taxes that the Western company could not match.


Global's insistence on controlling the import process itself has not put his company at any disadvantage, Haque believes. He also seems unfazed by security worries (Global uses the services of an American security firm).


Haque stresses that it was his understanding of how Russia operates that has been central to his success. The contacts, and the knowledge of how the country works, cannot be picked up so quickly, he said. In particular, he said he has good relations with the Moscow City trading department. "It is important to pay your taxes," he added.


One reason Haque believes he has been able to avoid many of the pitfalls that Western businesses have encountered in Russia is that, despite having arrived in Moscow early on, he did not form a joint venture. In hindsight, "It was a smart thing" not to have a local partner, he said. "I have heard so many stories of joint ventures in which the [Western] partner was thrown out." The same cautiousness extends to premises. Haque prefers to buy them outright if possible, to avoid possible fallings-out with landlords. The Sokol and Taganka sites were both purchased.


The expansion to move from electronics into a wider range of goods was an obvious one. Two or three years ago, he said, Russians' spending was heavily concentrated on televisions and music centers. Now most families have a color television, and spending is on a broader spread of products.


Having expanded its product range to include clothes, bedding, furniture, power tools, and cars, as well as electronics and domestic appliances, Global's most recent stores, those at Taganka and Babushkinskaya, have a large section for do-it-yourself and "remont" products. Haque believes there is a huge and as yet largely untapped market for such stores in Moscow.


Global USA does not advertise at all in the Russian press. Instead, for nine months it has started to distribute no less than 3 million color brochures every month into home mail boxes around Moscow. The brochures are funded by the suppliers of what Global sells.


That Global thinks such mass distribution is worthwhile is evidence of its belief in the extent to which consumer buying power has increased, at least in Moscow. "There is a tremendous middle class," said Haque. "The situation has changed tremendously over the last year." A secretary in Moscow, if she has subsidized housing, may now have similar buying power to her contemporary in New York, he claimed.


The retailing infrastructure to serve the growing buying power is as yet very immature. The attractiveness of smaller department stores is not completely clear: any one department is considerably smaller than specialist shops. At Ulitsa Usacheva, for instance, the food selection is much more restricted than at several Moscow supermarkets, and prices, while not particularly high, can be bettered.


Global, meanwhile, continues to expand. The next venture is right in the center of Moscow, on the capital's main shopping street, Tverskaya, in the premises of the former Tverskoi Gastronom near Red Square. Haque is hoping it will be ready to open in time for the U.S. Independence Day holiday on July 4. Global has bought a majority stake in the premises, he said. Four sales points within Global premises are planned for the American sales catalogue Sharper Image.


A big new departure is the franchise Global has taken to open Planet Hollywood restaurants in both Moscow and St. Petersburg. The first, in the capital at Krasnopresnenskaya, is due to open in September.


Haque said this expansion has not required the company to raise additional capital. It is possible the company may go public, but "it is too early yet," he said.


For the time being, rivals are difficult to find. "I have no competition," said Haque.


The old Soviet univermag stores, where the amount of goods on sale often seemed to be in inverse proportion to their floor area, have not been revitalized to compete in a consumer market now heavily dominated by imports. Privatized individually, they have not achieved economies of scale or buying power, and many rent out sections to smaller retailers in an ad hoc manner.


Also noticeable by their lack of activity in the last couple of years are the large foreign retail chains. Big overseas department store chains have dipped their toes in the Russian market but none have opened really big stores here yet.


Finland's Stockmann, for instance, which operates the largest department store in the Nordic countries in Helsinki, came to Moscow in 1989 but has yet to take the plunge and open a big store.


Having opened food outlets to begin with, Stockmann has subsequently opened two clothes stores, and one DIY/automobile parts store.


Jukka Hienonen, director of international operations, said that the main reason why the company had not yet opened a department store in Moscow was the lack of suitable premises. This is despite its business association with Kalinka, a company part owned by the city of Moscow. Doing deals for existing retail premises was difficult, he said, because now such stores have been privatized, they often have an unwieldy structure of several hundred shareholders.


Hienonen admitted that Stockmann had not reacted as fast as it might have to the changing Moscow business environment, and that the Russian operations had lost money for two years. They returned to profit this year, Hienonen said, after overheads were cut -- notably via a reduction in the number of Finnish expatriates. Prices were cut too, which resulted in a considerable rise in turnover, Hienonen said.


Stockmann opened its first big department store in the CIS in Tallinn in April at a cost of around $15 million. Hienonen said other locations are being considered, and intimated that Moscow was high on the list.


British store chain Littlewoods, which has been in St. Petersburg since 1991, also lost money last year on its four stores and three franchise operations in cities in the northwest.


Despite the red ink, the chain, which specializes in low price goods, still intends to expand in and around St. Petersburg, but has yet to open in Moscow.


Ironically, the only serious competition in the department store business in Moscow comes from a quintessential Soviet emblem, the GUM store bordering Red Square, and to a lesser extent TsUM on Petrovka.


While other Soviet-era Univermag stores are floundering, GUM and TsUM have found a successful formula in acting as emporia of foreign products, a big roof with rows of small stores underneath. The 150-store GUM complex, which houses among others small outlets of two large European department chains, Galeries Lafayette and Karstadt, last week announced that trade turnover almost doubled last year to $180 million, and that it plans to extend into provincial cities.


A broker in Moscow, who asked not to be identified, commented apropos the GUM results that there were only two big retailing markets in Russia, for cheap products, and for expensive.


The rapid growth of Global USA, which caters to the middle class, suggests that this may no longer be true.