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. Last Updated: 07/27/2016

Germany's Metro Earmarks $112M for Shops

German retail giant Metro AG has announced it plans to invest over $100 million in setting up a chain of Cash & Carry shops in Moscow, a sign that Western retail heavyweights are brushing off jitters about Russia.

The plan would make Metro, the No. 3 chain in the world after U.S.-based Wal-Mart and Carrefour of France, the biggest foreign chain to enter Moscow and one of the largest Western retail investors.

"This means that Metro is the first fully international retailer that has announced that they are going to come to Moscow," said Michel Pascalis, managing director and top retail expert at the Jones Lang LaSalle real estate agency. "I believe it is the first among others that will come within a year from now."

Metro plans to open a total of nine Metro Cash & Carry shops over the next five years, company officials said at an international trade conference Friday.

An initial investment of $112 million will be used to set up six stores, and consumer demand will determine the timing of the opening of the other shops, said Holger Grape, a member of the Metro board of directors.

The first Cash & Carry outlet is expected to cover 10,000 square meters and open in 2001.

Metro, which for now does not plan to open a distribution center in Russia, will import all the goods that it sells from Europe.

Company officials were reluctant to give further information about their plans, saying that they were still hammering out the details.

"We have yet to select a format for retail stores and the required volume of investment is still unclear," said Grape.

The strategy would be ironed out toward the end of this year, he said.

The Cash & Carry shops will be based on the popular Western warehousing format under which corporate customers — mainly small retail outlets, cafes and restaurants — buy goods in bulk for lower prices than those charged for individual items by regular stores, Metro officials said. Customers will have to obtain membership cards to shop in the stores.

Metro operates a number of Cash & Carry shops in Europe, as well as a chain of hypermarkets called Real.

The company said it has no plans for the time being to expand its Real chain into Russia.

Walter Demets, director of Metro’s Cash & Carry division for the CIS and Eastern Europe, said he was confident that Metro would prosper because the niche for such shops in Moscow is so far unfilled.

Metro hopes to corner the entire market segment — which it estimates is worth $533 million annually — by bringing 50,000 to 100,000 customers a year into each of its shops, he said. Each store is expected to have an average turnover of $60 million.

The company will launch a large advertising campaign to win over the corporate clients, who now do most of their shopping at Moscow’s outdoor markets, officials said.

However, Metro will probably have a hard time beating the prices of the outdoor markets, said Oleg Voitsekhovsky, representative in Russia for the European Trade Institute.

"The cost of goods in Metro will nonetheless be higher than at the markets. Metro must spend a lot of money on equipment, on automating its stores, logistics, training staff and a system for attracting clients," he said.

Still, industry analysts said Metro’s decision was an encouraging sign that investors are finally considering the Russian market suitable for investment.

Long-standing doubts over Russian stability have kept all but a handful of Western investors at bay. The notable exceptions are Turkish supermarket giant Ramenka and Swedish furniture company IKEA, whose investments in Moscow would rival Metro’s plans. Ramenka, which came to Moscow in 1997, has invested about $140 million in its Ramstore chain, while IKEA has spent $40 million on a supercenter and has two more stores in the works.

"I think it is a very positive sign if Metro is coming because they are seeing the potential for the consumer goods market," said Mark Stiles, at Stiles & Riabokobylko real estate agency.

Metro’s plunge would no doubt open the floodgates for Western rivals to enter the market, some observers said.

Pascalis at Jones Lang LaSalle said expansion-driven retailers will have to look to Russia because they have already covered much of Europe.

"They need more areas of expansion and now it is feasible in Moscow," Pascalis said. "There are not a lot of places left that are as stable."