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. Last Updated: 07/27/2016

Supermarket Majors Create Cartel

Russia's first grocery cartel was born Thursday as the nation's top supermarket chains formed an alliance to boost their bargaining power with producers and defend against the impending invasion of global retailing giants.

Four chains — Moscow-based Perekryostok, Kopeika, Dixi and St. Petersburg's Megamart — which between them posted revenues of $391 million last year, said they had already blacklisted more than a dozen top domestic producers for using regressive, "Soviet-style" business tactics.

The companies whose products have been banned by the new alliance, dubbed the Russian Retail Alliance, include some of the biggest names in the food and beverage sector, such as juice and dairy giant Wimm-Bill-Dann, top brewery Baltika and the historic confectioner Rot-Front.

"Since the beginning of this year we refused to work with 15 suppliers, including Wimm-Bill-Dann," said Alexander Kosyanenko, general director of Perekryostok, which has 28 stores in Moscow and 2000 revenues of $156 million. "All of those companies are now on the so-called 'black list.'"

Kosyanenko said that Wimm-Bill-Dann wanted more than 10 percent of his store's floor space to display its products, including the best-selling J-7 juice line and Chudo yogurt. But when he refused, saying that it wouldn't be profitable, WBD insisted. With neither side backing down, the feud ended with Perekryostok's blanket ban on WBD's products.

Executives from the other three members of the alliance expressed similar experiences with other producers, and not just over tactics, but with price and quality problems as well.

Toms Berzin, the general director of Dixi, said that his chain had stopped working with WBD more than 9 months ago. "We made a taste test of J-7 juices versus other brands and found that several Russian juices are of equal quality," he said. "So, we stopped selling J-7 and started selling Sokos because our consumers are not ready to spend $1 on a liter of juice."

"We stopped working with some companies and will not resume, I guess," said Alexander Samonov, general director of Kopeika. Samonov also singled out WBD, Baltika and Rot-Front, but included French dairy giant Danone's Bolshevik cookie factory, the Ostankinsky dairy factory, leading Moscow bakery Proletarets and soft-drink maker Ranova.

"It hurts to realize that the majority of Russian producers still have no idea what the word 'marketing' means," Samonov said.

WBD spokeswoman Yulia Belova dismissed the effect of the ban on her company's products, saying that the four chains only account for 2 percent of the company's total annual sales of $460 million.

"It is just a mosquito bite for WBD," she said.

Her reaction to the formation of the Russian Retail Alliance, however, was surprisingly positive: "It is very good for the consumer."

Kosyanenko said that the alliance's mission now is to lobby for better wholesale prices and set common retail prices to avoid a price war. The alliance also intends to consolidate its operations with suppliers and fight the black market.

"Being together, we are going to strive for the reduction of retail prices by reducing our own expenses," he said.

"Retail supermarkets in the West can dictate their policy to suppliers — the prices, the quality of products," said Troika Dialog analyst Andrei Ivanov.

"In Russia the situation is upside down. There is no strong chain dictating to suppliers," he said. "Probably now, being together, the alliance can talk to suppliers like they do in the West."

According to the president of the National Trade Association, Vadim Zuikov, the three Moscow-based chains, Perekryostok, Kopeika and Dixi, had a combined turnover of $266 million last year in Moscow alone — or 38 percent of the "civilized retail food market."

To join the alliance, a company has to be welcomed by all the other members and have annual sales of at least $50 million," said Kosyanenko.

Perspective membership, however, is limited due to the fact that only three supermarket chains currently meet the $50 million requirement: Sedmoi Kontinent, Prodmag and Turkish giant Ramenka, which owns the Ramstore chain.

Kosyanenko said that the alliance would like Sedmoi Kontinent to join, and Valentin Zapevalov, Sedmoi Kontinent's deputy director, said that his company had nothing against it, but "no proposals had been offered."

Kosyanenko said that Prodmag was not yet aware of the alliance and that he would "never work with Ramenka." He did not elaborate.

Alexei Krivoshapko, an analyst at United Financial Group, said that he "couldn't imagine" Perekryostok and Sedmoi Kontinent working together because they are owned by rival groups.

MDM group owns Sedmoi Kontinent, and Alfa Group owns Perekryostok.

"MDM and Alfa would fight with each other," Krivoshapko said.

The other major reason to unify, the alliance said, was the pending arrival of global majors.

The world's third-largest retail chain, Germany's Metro AG, said late last year that it was ready to spend $112 million to open nine locations in Moscow over the next five years. And while Metro does not deal exclusively in groceries, it still does a considerable food business and could offer local supermarkets some stiff competition.

"Metro is not our direct competitor, but even this does not make us less worried," said Oleg Leonov, general director of Uniland, the parent company of the Dixi and Megamart chains.

And global giant Auchan of France announced last month that it had struck a deal to open hypermarkets in the Moscow region and will invest a minimum of $40 million.

With the foreign invasion under way, the Russian Retail Alliance laid out bold new plans for expansion to cope with the new competition.

Perekryostok plans to increase sales this year to $220 million over last year's $156 million by opening six or seven new supermarkets and one hypermarket by the end of the year.

Kopeika plans to double sales to $120 million this year and spend $30 million to open some 15 more stores.

Dixi, which began operations just last year, forecasts revenues to grow from $50 million in 2000 to as high as $80 million in 2001. The company plans to spend $9 million to open 50 smaller shops in Moscow and 25 in St. Petersburg.

Non-alliance member Sedmoi Kontinent is not going to be left behind, either. The company said that it would open 10 new supermarkets this year and expects sales to grow 150 percent to nearly $200 million.

Zuikov predicted that Dixi would soon become the No. 2 chain after Perekryostok. "In two weeks' time, Dixi is going to open 10 new shops in Moscow in the course of one week," he said.