Thu.
Jan 21
2021
EM Food Retailers Embrace Digital Innovation After COVID-19

Image: X5 Retail Group

The COVID-19 pandemic has transformed the retail sector by pushing millions of customers to shop online. In food retail, growing shares of online revenue have boosted the digital revolution in growing markets like Russia, where the businesses that have invested the most in tech have come out as leading market players after the pandemic.

When Russia went under lockdown, experts predicted that supermarkets could be among the few winners of the ensuing economic downturn. And they turned out to be right, as Russia’s leading food retailers – including Lenta, Magnit and X5 Retail Group – stepped up their operations and expanded delivery services in response to a surge in online demand.

The pandemic accelerated the shift to e-commerce in Russian food retail, with Magnit creating its first e-commerce strategy team and Lenta opening two online stores with delivery partners. But the leader in digital transformation has been X5 Retail Group, whose move to online helped the company widen the revenue gap among its competitors, according to its recently released H1 results.

According to Sova Capital senior analyst Artur Galimov, X5’s second-quarter financials were “expectedly strong…with the EBITDA margin at 8.4% and net income 4% higher than consensus.”

While Russian e-commerce was already seeing explosive growth before the pandemic, the lockdown environment cemented the digital trajectories of major retailers like X5. By April 2020, online sales at X5’s e-commerce arms Perekrestok.ru and Delivery.Pyaterochka showed a nearly 5-fold increase year-on-year.

As revenue from online sales and express delivery continued to grow throughout the quarantine period, X5 became the leading player by turnover in Russia’s e-grocery segment in the second quarter of 2020. Digital innovations also accelerated at the retailer’s brick-and-mortar stores, where the company installed self-checkout machines and online video monitoring of queues to help customers maintain social distancing.  

And it’s not only the company’s retail operations that are increasingly going digital: in response to the COVID-19 experience, X5 launched a large-scale internal reorganization that will see up to 60% of employees transition to full or partially remote work by 2021. According to X5, this new ‘phygital’ office will combine physical and digital work spaces in a model that promises to give employees more flexibility while cutting down on the use of office resources like water, paper and electricity.

Russia’s belated entry into e-commerce – online sales accounted for only 4.5% of total retail turnover in 2019 – turned out to be a blessing in disguise in the pandemic environment, as the country’s top retailers moved quickly to adjust to the new demand for digital. The Russian experience suggests that retailers in developed markets may have something to learn from their emerging market counterparts – particularly those in food retail – during the age of corona.

For example, at the height of the coronavirus outbreak, UK retailers remained skeptical about the prospects for online food retail, which accounts for around 7 percent of the UK grocery market. The hesitance to expand online operations by top retailers like Ocado created massive pressure on UK stores during a pandemic-fueled round of panic buying.

Meanwhile, the numbers show that British consumers are increasingly purchasing their groceries online, with one in five British households using online delivery as of June.

In response, leading food retailers Aldi and Lidl are launching e-commerce offerings in the UK, where observers say their lack of online services has held them back in market share growth. But these moves may not be enough to bridge the companies’ e-commerce gap. The German discount grocer Lidl, for its part, is betting on a new mobile app which offers a range of money-saving options, but the company has yet to develop a full-fledged online store.

Whether retailers are ready or not, the digital transformation is here to stay. The number of online grocery buyers increased by 30% globally after the pandemic, according to the research firm Kantor Group, and this presents new opportunities for innovation and growth. As retailers around the world develop their online offering, the dynamic digital players of emerging markets like Russia will be a key group to watch.

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