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. Last Updated: 07/27/2016

Retailers Put Their Money on the Middle Class

APForeign retailers, such as Sweden's IKEA, have flocked to Moscow take advantage of its largely untapped consumer market.
A virtually untapped consumer market and a growing economy are fast turning the country into a retailer's dream.

Shopping malls and retail outlets last year accounted for the biggest single chunk of foreign direct investment -- $757 million -- and more money is expected to flow in as local and foreign businessmen expand their networks.

"It is a land of opportunity and I think it will remain so for some time," said Viktor Belyakov, supervisory board director at the Pyatyorochka discount chain store.

"Effective operators will have a chance over the next 10 years to find their niche."

One of the world's largest food store chains, Spar of the Netherlands, has four shops in Moscow and one in Nizhny Novgorod. Swedish furniture chain store IKEA has invested $200 million in Moscow and plans to build shops in 11 other cities. Turkey's Ramstore has 13 shops and France's Auchan has just opened Russia's largest food hypermarket and plans another later this year and a third in 2003.

Although the average Russian's income, by Western standards is very low, he has no mortgage, insurance premiums or school fees to pay and little trust in banks, therefore -- a research note from Moscow-based investment bank Renaissance Capital reasons -- he has as much disposable income as the average European.

"We believe it will be another three to five years before an average Russian is likely to concentrate on long-term investments [such as] buying cars, real estate and paying for education, rather than just spending on cyclical goods," analyst Natalya Zagvozdina said in the report.

She said a typical Russian consumer with a monthly income of $144 spent about $25 per purchase in supermarkets, the same as consumers in some other parts of Eastern Europe.

This translates into 2001 retail turnover of $102 billion and $54.2 billion in the first half of this year, she said.

"There is a mistaken view all over the world that there is no Russian middle class," said Lennart Dahlgren, IKEA's Russia country manager.

"A typical Russian family lives in a normal flat. They come here [to IKEA] and they go to Ramstore and Auchan and the habits of these modern Russian customers do not differ from the habits of European consumers," he added.

Russian store chains are expanding fast.

Pyatyorochka, in which the European Bank for Reconstruction and Development has a minority stake, operates 80 discount shops in St. Petersburg and 39 in Moscow.

It plans to have a total of 150 shops by the end of the year. "There is room for up to 200 Pyatyorochka shops in Moscow," Belyakov said.

The Sedmoi Kontinent food chain plans to increase the number of its stores to 30 from 22 this year and add seven or eight new shops next year. It is also preparing to build about 20 hypermarkets in Moscow to sell to retail and wholesale clients.

Sedmoi Kontinent spokesman Valentin Zapevalov said the only way to compete was to branch out around the capital, helping the chain to increase its bargaining power with suppliers.

"The competition, which will be very serious, will force Russian retailers to develop more actively and to work to the highest Western standards," he said.

Pyatyorochka's Belyakov welcomed the inflow of large foreign retailers, saying "Western retailers help make the market more transparent."

But retailers complained there was less and less available trading space in Moscow.

Shops built in the Soviet era are too small and cramped to be adapted to the needs of modern retailers.

"There is competition, but not for the consumer. Competition is for trade space," Belyakov said.

Zapevalov said the Sedmoi Kontinent chain used to buy old stores and adapted them, but is now building new ones.

Although some foreign retailers are tapping into the outlying areas, most businessmen said regional development would lag behind Moscow by two to five years.

"Moscow is potentially the biggest and the most concentrated market in Europe, as the Moscow metropolitan area ... has a population of 12 million," Zagvozdina said, adding that Moscow's closest rival was London with 7.4 million.

She said that with about 8 percent of the Russian population concentrated in the capital, the Moscow retail market of $35 billion in 2001 accounted for about 30 percent of the country's entire retail turnover. Renaissance Capital expects the Moscow market to grow 25 percent in dollar terms in 2002.

"There are very many huge districts in Moscow where there is no form of civilized trade," Belyakov said, referring to open-air markets that boast low prices but have few facilities and no shelter in the winter.

"The future for Russian retail is with companies that can give good quality at fair low prices," IKEA's Dahlgren said.