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. Last Updated: 07/27/2016

Nipping at Portugal's Heels in Retail Sector

Jones Lang LasalleMoscow appears to be following the pattern seen in Hungary's retail market, with malls like the Mammut center in Budapest.
The development of the local retail market is likely to follow the pattern set by Portugal, Spain and leading Central European markets, said Ian Elliott, European director of retail consulting for Jones Lang LaSalle.

But it will take some time for Russia to catch up with Portugal, the European Union's poorest member, which is President Vladimir Putin's stated economic goal, Elliott said.

Moscow is now in a similar position to that of Portugal a decade ago, he said.

According to Jones Lang LaSalle, in 1990, per capita gross domestic product was $6,984 in Portugal and the Portuguese spent about a third of their disposable income on food. Muscovites today have an average income of some $7,000 and also spend about a third of their disposable income on food.

By contrast, Western Europeans spend just 18 percent of their income on food, Elliott said.

Portugal's first shopping centers covered 30,000 square meters and in seven years had reached 100,000 square meters. Elliott said he has seen shopping centers in Poland and Hungary follow the same pattern, but their development took only five years.

"Moscow appears to be moving at the same pace" as Poland and Hungary, he said.

Sergei Azarov, head of retail at Noble Gibbons, the local affiliate of CB Richard Ellis, said retailing in Central Europe and Russia were similar in Soviet times. For instance, there were many street sellers and kiosks.

However, the retail market in Russia has its own characteristics. "It appears that local operators will make up a greater share of tenants than they do in Central Europe," he said.

In addition, the Russian retailers do not have the same access to finance their Central European counterparts do. Therefore, many local retailers are part of larger holdings and associated with highly liquid sectors of the economy, such as the oil industry.

"They use all sorts of different schemes to find money on the market," Azarov said. "This means that any big local chain has only a limited number of sources."

Once finance becomes available, the market will tend to follow the pattern of other countries, he added.

Chris Bennett, chairman of DTZ Central & Eastern Europe, said Central Europe has seen a boom in retail development as Western retailers and retail developers fight for market share.

"The boom started with acquisition of old socialist companies and the conversion of their properties but really took off as Metro and the hypermarket chains entered the market with some of the largest stores in Europe. They were soon followed by developers of shopping centers," he said.

He said there is a danger of the market becoming oversupplied. "There is already consolidation in the sector, and we expect some of the weaker players to continue to exit," he said.

Moscow is following a similar pattern, but the greatest threat to development is likely to be the difficulty of obtaining product because of import tariffs and inadequate local supplies in many areas, Bennett said.

"The present retail boom must lead to improved logistics and opportunities for Russian-based manufacture whether by local or international companies," he said.

Elliott of Jones Lang LaSalle said many shopping centers are likely to develop on the outer fringes of Moscow, close to where the bulk of the population lives.

"As in other countries, small Mom and Pop type retail outlets will close and, unless they find a niche or become more efficient, larger, more competitive centers will take a larger share of the retail space," he said.

What can be learned from the development of European markets can also be put to use in Moscow, he said.

"The experience of those other markets can be used to avoid costly errors and maximize returns for investors, developers, retailers and consumers," he said.

An analysis of different spending patterns is one of the keys to a successful project, he said.

"People seem to think that shopping centers are just built like that," Elliott said. "A lot of people get it completely wrong. It's not only international tenants not understanding the local market but also not understanding how the shopper shops. If you don't understand that, you might as well not even start."

Human behavior often does not correspond to the wishes of architects and designers, he said. "You have to give them not only what they want, but what they think they want," he said. "You have to give them the opportunity to aspire to the lifestyle they have seen in magazines.

"As the competition increases you have to get it right; you can't afford to get it wrong or you will lose a lot of money."