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. Last Updated: 07/27/2016

Retail Market Ripe For Shopping Boom

The time of disorganized, private retail is winding down. If a handful of land and tax barriers can be lowered, the retail market will be poised to take off.

The major retail players these days are those with the first-mover advantage — Ramenka, with its large shopping complexes, and supermarket chains Sedmoi Kontinent and Perekryostok. The advantages secured by the first movers include obtaining the right properties and establishing themselves before the competition.

While these retailers have already built a loyal customer base, the sheer growth of the spending power of a large and underserviced population means there is plenty of room for new entrants to turn enormous profits.

Retail is continuing to develop more quickly in Moscow and St. Petersburg than elsewhere in Russia because of the disproportionately higher spending power of their residents. This trend should continue through 2001, depending on how steadily the economy grows.

In Moscow, shoppers are getting more consistent prices and service as the city moves to close outdoor markets and place merchants in new buildings such as the Dorogomilovsky shopping center and the new Gorbushka initiative.

Interest also is emerging in combining upmarket retail space with office space in the center of the city.

But one of the biggest niches that remains to be filled this year is for hypermarkets, those warehouse-sized stores offering everything from bread to coats. Ramstore has opened three hypermarkets, but there is room for many more. Several retailers — both foreign and Russian — are actively looking at the market. One Russian company, Hypercenter, has declared a very aggressive plan to construct and start operating several hypermarkets in Moscow. Large international hypermarket chains like Metro and Tengelsmann have also declared plans to enter Russia, but they are taking their time in drawing up investment plans.

The main reason many would-be entrants are moving slowly is that a number of barriers remain for foreign chains.

One hurdle is the inflexibility of local tax laws. Although tax rates are not very high, the costs are denominated in rubles and therefore difficult to recover in dollar terms.

Major tax concessions aimed at supporting investors are often inflexible and their availability to specific investment projects depends largely on legal arrangements rather than economic substance. For instance, retailers do not qualify for profits tax holidays during the payback period. These holidays are available only to new manufacturing projects.

Existing currency control rules also create obstacles for foreign investors who would like to convert revenues of their Russian retail outlets into hard currency and keep their funds in secure foreign banks.

But despite barriers, Moscow is shaping up to be a hot spot for retailing. As disposable income among the population rises, so will the demand for a quality retail experience — rather than shopping in outdoor markets. This means that there is space for new entrants as well as for further growth by existing players.

Chris Worth is partner of the Consumer Industrial Products Group, Boris Kharas is senior manager of Management Consulting Services and Dmitry Rudakov is tax manager at PricewaterhouseCoopers.