The New Russian Revolution: Retail

Call it the Russian retail Revolution.

After a dozen years, Western-style retail development is beginning a transformation of Russia’s secondary cities, which expect billions of dollars of investment in the next few years after a decade of being outpaced by Moscow.

Meanwhile, Russia’s two largest cities, Moscow and St. Petersburg, are seeing increasing investment from international retailers like Ikea, though U.S. companies–with the exception of McDonald’s–don’t have a big presence there yet.

Though Russia is still largely perceived as a risk for foreign companies – with poor market infrastructure and few adequate facilities to even house retail, as well as political issues – the increasing purchasing power of Russia is starting to ignite a retail boom.

Currently, the annual income in Moscow is around $7,000, and around half that figure in the rest of Russia, according to Jones Lang LaSalle. Income is expected to grow 46 percent by 2010, and much of that money will land in retail coffers.

“Retail is definitely the booming segment of Moscow’s commercial real estate market,” said Yulia Nikulicheva, associate director for Jones Lang LaSalle Moscow. “Personal income is growing rapidly.”

Overall, Moscow accounts for around 25 percent of the more than $100 billion spent annually on retail in Russia. But the capital city has only seen sustained shopping center development over the last three years. And the city of 10 million is still focused on eliminating such obstacles as outside street markets in its drive to establish Western-style retail space.

At the peak of the open-air street market in 1998, there were more than 1.6 million square meters of street retail in the city. Partly as a result of a decree issued by the mayor of Moscow and enforcement efforts, that number is now down to around 600,000 square meters.

Jean-Christophe Cattin, head of the retail department for Jones Lang LaSalle Moscow, said efforts are being made to educate the public about the benefits of indoor Western-style stores. “There is a guarantee on the products,” he said. “There is air-conditioning and heat. It’s nearly at the same price, and with more service.”

Modern shopping centers, a recent phenomenon in Moscow, are now a booming business on the outskirts of town.

“The first modern shopping center opened in 1997,” said Cattin.”But then the Russian crisis happened, so the real start was in 2000.”

International companies – there are only a dozen or so major players in Russia – gravitate to these new developments.

Ikea, for example, started its business in Russia in 2000, opening a wildly successful store in the Moscow suburbs. Reportedly, the company has invested more than $150 million in its local operations. In December, the company also opened a new store in St. Petersburg, which has 4.5 million residents.

Other international companies operating in Moscow are less well known. The major players are mostly European. They also tend to be family owned,” because they can take the business risk, something shareholders might not be comfortable with,” acknowledged Cattin. American brands are sold in Moscow, but don’t have their own stores, with the major exception of McDonald’s.

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“McDonald’s was one of the happy few who entered Russia,” said Cattin, who said he sees it more likely that U.S. companies will eventually partner with European retailers going forward, rather than necessarily entering the market themselves. “It’s a long way from the U.S., and these European countries are of course a lot closer,” he said.

Foreign companies include French food retailer Auchan, which operates “hypermarkets” in Russia, similar to Wal-Mart in the U.S., perfumery and cosmetics chains like Yves Rocher and L’Etuale, Germany’s METRO AG, Turkey’s Migros Turks and others.

Russia-based retailers -the most popular ones sell food and consumer electronics – are more likely to operate within Moscow itself, where retail space is more primitive. The situation could change, thanks to an initiative that is converting old manufacturing space in one section of the city.

It was these native Russian companies that first started spreading to the country’s secondary cities, along with a few of the international retailers, making inroads into what is a huge untapped market.

Overall, only around 2 to 4 percent of Russian customers shop in modern retail facilities, such as malls and supermarkets, according to a report by Moscow investment firm Renaissance Capital.

There are 13 cities in Russia with a population of a million or more, excluding Moscow and St. Petersburg.

Russia’s sixth largest city, Samara, for instance, which is 750 miles east of Moscow and which has a population of 1.2 million, just got the first Western-owned and-operated hotel outside Moscow and St. Petersburg when a Marriott Renaissance opened there this fall.

In Kazan, another regional city east of Moscow, Ikea is spending a reported $100 million to open a huge mall that will house its first store in the Russian heartland.

Cattin said there is a great demand for shopping centers in the regional cities. He also said there is a great desire for international fast food outlets in addition to McDonald’s, to supplement local fast food outlets.

There are also few U.S., or even European, brands sold in the smaller cities. “A brand clothes shop would be very successful,” he said.

Cattin said Jones Lang LaSalle is involved in working with both international retailers like Ikea as well as Russian developers who are largely the ones driving the work of building shopping centers and retail spaces because of their local knowledge.

“Russian developers need more advice because the whole process really only started very recently,” Cattin said.

Besides Jones Lang LaSalle, CB Richard Ellis has an office in Moscow through associate Noble Gibbons. Colliers has an office, and Cushman & Wakefield operates in Russia through an affiliate.

As far as potential political problems for companies and concerns raised by the jailing of Yukos boss Mikhail B. Khodorkovsky recently, Cattin maintains there aren’t major problems for companies as long as they stay clear of politics.

He acknowledged that some foreign companies are doing market surveys in Russia asking about the repercussions of the Khodorkovsky jailing, but said, “if retailers understand they just deal with economic and business development, everything is fine.”

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