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. Last Updated: 07/27/2016

The Retail Express Train Picks Up Steam

VedomostiIKEA opened a mammoth 150,000-square-meter Mega Mall — the largest in Eastern Europe — late last year.
Get in fast if you're not there already" sounds like a fire sale slogan and it kind of is -- it's the refrain of retailers on the Moscow market.

  The regions will be next, but for the moment, all the action is in and around the capital, where the growth of new supermarket and shopping-center space is on pace to double for the second year in a row, and everyone wants a piece of the action.

Rather than causes for celebration, increasingly frequent grand openings by global giants like Germany's Metro, France's Auchan and Sweden's IKEA are often exercises in crowd control.

"We couldn't handle the number of people," Auchan spokesman Vladimir Nazarov said, recalling the opening of Auchan's first Russian hypermarket last August. "We actually had to shut down for a few hours."

The 40,000-square-meter complex in the northern suburb of Mytishchi drew 900,000 people in November alone, and customers can still expect a 30-minute wait just to pay for their goods, despite the opening of a second store anchoring IKEA's mammoth 150,000-square-meter Mega Mall south of the city.

"Explosion is the first word that comes to mind," said Gerald Gaige, head of Ernst & Young's business valuation and real estate advisory services group. "There have been so many new stores -- whether it's the old type of Ramstore being replicated 16 times or the appearance of a new entrant like Auchan or Marktkauf," he said.

"Looking at the political, economic and business conditions over the last 10 years, now is the most favorable, best-built base from which to advance."

Indeed, despite the flurry of activity, Moscow is far from saturated, said Cameron Sawyer, president of real estate consultancy GVA Sawyer.

Sawyer said there are only 42 square meters of modern retail space per 1,000 Muscovites, compared to the European average of 198.

"There is little reason to doubt that Moscow is 'missing' more than 150 square meters per 1,000 people, or a staggering 1.5 million square meters of retail space," he said. "The figure is even more if one considers the great extent to which the existing stock of retail space is worn out or obsolete and needs replacing.

"If there is a more promising market for new retail development in the world, I am unaware of it."

Generally freed from many of the living expenses most Europeans have to pay, such as rent and insurance, per capita retail spending in Moscow is close to the European average. In fact, as much as 70 percent of Muscovites' real disposable income is spent on retail goods, according to the Interactive Research Group.

Part of this rapid rise in consumerism is the feel-good factor.

With most of the world economy stuck in a rut, Russia is enjoying its fifth-straight year of growth, further fueling the spending spree in the capital of a country that has only had a free market for a little more than a decade.

Leading the pack of local supermarkets capitalizing on the exuberance are Perekryostok, Sedmoi Kontinent and Pyatyorochka, who are using Western consultants and City Hall connections to roll out as many new stores as possible ahead of their foreign competitors.

Sedmoi, for one, sees its revenue jumping nearly 50 percent this year to $420 million.

Even relative newcomers are getting in on the action, with Peterson expecting total sales at its 11 stores to more than double to $85 million this year.

But Muscovites cannot live on bread alone, which is music to the ears of retailers like M Video and Eldorado.

M Video, which has pioneered the consumer lending market, offering easy credits for its electronics goods, plans to add 14 stores to its existing network of 25 and boost sales from $363 million last year to $500 million in 2003.

Eldorado, the country's largest chain, sees revenues growing 50 percent to $1.2 billion this year, more than double its 2001 revenues of $500 million. The home appliances specialist has grown from a single provincial warehouse in the mid-1990s into a 288-store giant with operations in Ukraine and Poland.

IKEA, the first foreign company to dive in after the 1998 crisis, plans to spend $500 million on increasing its local production and expanding into the regions, with new stores opening this year in St. Petersburg and Nizhny Novgorod.

The Swedish furniture giant's two Moscow outlets should produce combined sales of $240 million this year, according to the company.

Sergei Porter / Vedomosti

The arrival of low-priced German cash and carry giant Metro forced distributors to raise standards to compete.

But for all the success of the supermarkets, 2002 may be remembered as the year of the mall.

"Construction of the Mega Mall, which opened late last year, greatly increased the amount of retail space in the city," said Natalya Oreshina, head of retail at Stiles & Riabokobylko, the local affiliate of Cushman & Wakefield Healey & Baker.

"And the opening of the Atrium shopping center [next to Kursky Station], which provided downtown with a shopping and entertainment center, was a major event," she said.

But the lion's share of growth in retail space came from 'neighborhood' shopping centers in residential districts," Oreshina said, adding that 18 shopping centers in all opened in the Moscow metropolitan area last year.

And along with volume comes building expertise, said Gaige of Ernst & Young.

"An increasing level of retail technology is being used," he said, using as a reference point the underground Manezh shopping center, which was hurriedly built to open in time for Moscow's 850th celebrations in 1997.

"Look at the design of the Manezh compared to one of the latest ones created. You can stand in the Atrium and see at least 70 percent of what is available in the center. In Manezh, you're lucky if you can see 30 percent," Gaige said.

Expertise may be a byproduct of volume, but so are lower costs, and experts say the market is in for a downward correction in terms of rent prices.

Modern retail space is currently going for between $1,000 and $2,000 per meter per month and up to $3,500 for prime locations like Novy Arbat, according to Interactive Research Group.

"We think rents are a little overheated because of the frenzy on the market and the mood," Sawyer said. "Nonetheless, falling rates shouldn't slow development since they will be offset by falling capital costs."

With the race to enter the market well under way, the fight now is for prime locations and personnel, said Andrei Barkin, senior analyst at ATKearney.

Domestic retailers have closed ranks, creating lobby groups to push their interests as foreign firms, which have deeper pockets that allow them to charge lower prices, enter the market.

Barkin said the market was in a "fever" in the months leading up to the opening of the first outlet of notoriously low-cost German cash and carry giant Metro.

To break that "fever," distributors were forced to raise standards and accept tougher new rules of the game. But they didn't give in easily -- last summer Russian chains got the Anti-Monopoly Ministry to investigate Metro's business practices, although the case was eventually dropped.

It was not an isolated case -- Auchan also came under the scrutiny of officialdom in September, when the ministry was asked to investigate dumping accusations made by the Association of Sellers and Manufacturers of Electronic Goods.

But in these boom times, most retail chains are experiencing only pleasant problems.

"Our big concern is managing our rapid growth," said Perekryostok spokesman Leonid Belaga.

The chain, which has 46 stores of varying sizes, reported revenues of $325 million last year, up 35 percent over 2001. The company plans to open a total of 10 new supermarkets this year and expand into Volgograd, Samara and Tolyatti.

Yevgeny Stetsko / Vedomosti

Unlike the first post-Soviet projects, new shopping malls like the downtown Atrium were designed more carefully and used more advanced building technology.

Belaga, for one, said his company isn't worried about the competition because the market "is big enough for everyone."

What Perekryostok and other retailers are really worried about, however, is the lack of suitable land within Moscow's city limits.

"City Hall has wrongly predicted that retailers would flock to Moscow despite high rental rates, but the foreigners have settled outside the ring [in the Moscow region]," said Nazarov of Auchan. "There is a dreadful situation in the center -- there are virtually no stores."

Moscow loses tax revenues while goods in the stores are priced with Moscow shoppers in mind.

Despite a new liberal Land Code, City Hall is reluctant to put development sites up for sale, and when it does, they are often priced several times higher than the market rate.

However, a recent court ruling giving a private company the right to buy the land it occupies could change all that.

"Change will come with court action," said Andrei Goltsblat, managing partner of the law firm Pepeliaev, Goltsblat & Partners.

Whether it's the legal pressure or plain old economic sense, city officials are finally starting to deal with the problem.

"They've seen the amount of taxes going to the Moscow region, and have allocated 60 plots for large-scale developments within the MKAD," Nazarov said.

"But it has taken two years just to get to this stage."