Wed.
Feb 24
2021
Discounter Shopping Model Booms As Value is King

Image: O’Key Group

Shoppers prioritized value last year as a pandemic-related economic downturn hit wallets in Russia.

That trend is likely to stick, according to Armin Burger, Chief Executive Officer at Russian grocery retailer O’Key Group, which is forging ahead with an expansion strategy for its DA! discounter chain.

And the numbers back him up. O’Key Group has seen annual revenue growth rates of over 35% in DA! since 2018, well before the pandemic. That figure exploded to 45.3% year-on-year growth last year, according to year-end results. That came as a 27.8% increase in like-for-like net retail revenue growth and a 15.8% rise from increased selling space. The discounter’s share of Group net retail revenue reached 15% last year.

The backbone of the value proposition to cash conscious consumers has been the store’s own brands: groceries and sales items which DA! itself has selected, designed, sourced and offered under the store’s various brand names. These items generate almost 50% of DA! revenue and can be sold at a price that is 20-30% lower than comparable branded goods of the same quality, as money isn’t spent on keeping a large number of items for sale as well as on store staff, promotion or advertising.

The Group plans to speed up store openings to 30-50 DA! stores annually starting from 2021, retaining Moscow and the Moscow region as the main focus for its business, Burger said. The Group opened 18 net DA! stores last year. It sees sales from the discounter as occupying an increasingly larger part of the big pie, eventually reaching up to 40%-50% of the Group’s revenue.

Meanwhile, sales via O’Key’s delivery platform increased by 28% last year, and reached an impressive 3.7% of net retail revenue in Moscow and 2.1% in St. Petersburg.

E-grocery gained a lot of attention last year due to its impressive growth rates, and this is a segment where the Group plans to press ahead, according to Burger. Despite the hype, the Group plans to build online delivery services in a measured fashion, he said. The goal is to keep online expansion profitable while avoiding logistics-related pitfalls.

In 2020, in addition to its own delivery service in Moscow and St. Petersburg, the Group expanded its online operations across all the major cities of its footprint. This was achieved via partnerships with nation-wide delivery operators. The Group plans to continue developing its own e-commerce platform, with a particular focus on Moscow and St. Petersburg, according to its Q42020 report.

In hypermarkets, shoppers made fewer trips due to the pandemic yet tended to stockpile goods, which led to a largely neutral result last year. However, O’Key hypermarkets showed a healthy like-for-like sales growth of 2.5%. The retailer is strategically committed to the hypermarket format and sees potential in its development.

Despite the popularity of online sales, many customers still want to see a wide range of goods first-hand, including fruits and vegetables, fish and meats, and dairy products. O’Key is conveniently located, and shoppers will continue to use malls or one-stop shops as a format, especially with Russia’s cold or inclement weather, commented Konstantin Arabidis, Chief Financial Officer at O’Key. 

The presence of O’Key hypermarkets in the largest cities across Russia also creates an established infrastructure for further expansion of the Group’s e-commerce business, Arabidis added.

The Group is modernizing its hypermarkets based on a new concept that involves space reorganization and assortment optimization, with a particular focus on the fresh and ultra-fresh products range, their quality and presentation. It aims to service maximum customer needs for a one-hour shopping trip.

O’Key Group listed shares on the Moscow Exchange late last year in addition to its London listing, something which should help increase liquidity, Burger said.

DA! growth has been a value generator and is at the forefront of the Group’s message to investors, along with a commitment to dividends.

The company has paid dividends annually since its listing in London and continue to do so in the interest of all shareholders.

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Stephen Bierman

By Stephen Bierman

Stephen Bierman is an energy markets journalist and the editor of New Economy Observer.

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