Nov 30

Russia’s Top Food Retailer Bets On Hard Discounter Growth – X5 CFO

Stephen Bierman
Oct 27, 2021
Image: X5 Group

X5 Group is Russia’s leading food retailer and it has a plan to keep it that way, by rolling with the changes – pandemic and economic – and seeing off challengers.

Staying on top, which for X5 entails expanding to a 15-percent market share by 2023, will depend on forging ahead with existing strategies, as well as a massive scale-up of a new format – hard discounters, X5 Chief Financial Officer Vsevolod Starukhin told the New Economy Observer in an interview.

“We will be rolling out this hard discount format quite aggressively in the next three years,” Starukhin said. The retailer plans to move from early-phase operations this year to opening 3,000 of its Chizhik hard discounter stores during the next three years and securing the top position in this fast-growing segment.

Rational consumption on the rise

Customers are coming to stores with a more rational approach to shopping, as more than a year of pandemic-linked lockdowns and isolation measures have hit business and economies. As if the pandemic wasn’t reason enough, inflation related to spiking commodities prices globally has only given consumers another reason to seek better value for money wherever possible.

Vsevolod Starukhin, X5 Group

The hard discounter format sees retailers sourcing their own products using private labels, allowing them to offer competitive prices thanks to, among other things, lower marketing costs. And Russia has plenty of space to grow in this sector.

Hard discounters represent about 20-30 percent of the market in Germany and Poland, while in Russia they occupy only about 5 percent of the market. As a result, there will continue to be a “high demand from the population and it will be growing fast,” according to Starukhin.

Surging online sales

The other major retail trend, which the pandemic has supercharged across markets globally, has been online sales and delivery. X5 holds the number-one position in Russian e-grocery, even as competition is fierce in this rapidly growing segment.

X5’s online segment doubled from about 1 percent of revenue last year to 2 percent of revenue through the first nine months of this year. That growth rate is not going to slow, as X5 sees online sales reaching 5 percent of total revenues by 2023, Starukhin said.

The path to that number, and when and where the market may begin to saturate, is not easy to identify. The space is marked by many new players that are investing heavily in infrastructure and logistics in the race to grab market share. Meanwhile, market delivery models based on non-food items are increasingly breaching into some foodstuffs to make the economics of logistics work.

Battle for market share

The spending battle for market share certainly looks intense and the challenge is obvious. Yet things are perhaps not as hectic as seen from the X5 vantage point.

The current level of competition will not be sustainable, as players are pushing earnings negative in an effort to build out and capture market share, according to Starukhin. X5’s trump card, in this regard, may be the 18,600 existing stores it already has across its three retail chains. It doesn’t have to enter the spending race – instead, it can develop more cautiously and profitably, he said.

X5 also doesn’t have to advertise additionally for brand awareness, with 62 million active loyalty cards already in circulation. It has already established logistics and technology attached to its Pyaterochka and Perekrestok retail chains as part of the growth trend, Starukhin said. Now, things are just going faster.

Just one year ago, X5 had less than 500 stores providing online sales. That number has currently tripled to about 1,400 stores. And the company has invested heavily in technology that enables it to tailor the pricing and assortment in individual stores to local community needs, which vary among big cities and smaller ones.

Beyond new formats and segments, X5 is also pursuing organic expansion throughout the Russian regions. It seeks to increase the EBITDA margin of its food retail operations from about 5 percent in the regions towards the 10 percent it currently delivers in Moscow and St. Petersburg. 

In addition to expanding its hard discounter network, X5 plans to open an additional 4,000 or more Pyaterochka proximity stores in the next three years as it grows organically.

A Chizhik hard discounter store. Image: X5 Group

X5 started paying dividends in 2017 and will seek to balance growth with payouts, which have grown over the years, according to Starukhin. The amount set aside for shareholder payouts increased to RUB 50 billion in 2020 from RUB 22 billion its initial year. The yield has been an attractive 8 percent. In the future, the company will continue to seek to be competitive with dividend payments and maintain its top spot in food retail by continuing to deliver double-digit revenue growth.

New trends: retail investors and ESG

Another area where X5 is innovating is in its work with retail investors in Russia. The company has started holding separate calls for retail investors on a quarterly basis and engages this audience through retail investor-focused media platforms and events.

“For us, it’s a great opportunity,” Starukhin said, noting that GDP liquidity is higher on the Moscow Exchange than in London. 

Likewise, X5 has addressed environmental concerns such as recycling and climate change which have moved into investor focus. The group set a target to reduce GHG emissions by 10 percent per square metre of selling space by 2023 vs. 2019. X5 is on track to meet this goal, having already achieved a 9 percent reduction.

As part of its ESG strategy, the company is also increasing sustainable packaging in its private-label goods. It additionally plans to increase the share of recyclable solid waste generated by its retail chains to 95 percent by 2023. In 2020, that figure stood at around 85 percent. X5 recycled more than 620,000 tonnes of cardboard, plastic, film and other materials from its distribution centres and retail chains last year. 

Delivery, online and food retail will continue to be a hotly contested space in Russia and globally as consumers adopt new shopping habits in the wake of the pandemic. Businesses will need to move fast to stay cost-competitive while responding to new customer demands.

X5 certainly has a plan. And with an existing dividend payout, it also has some concrete money, as opposed to future notional earnings, as ammunition to woo investors.

The task, then, seems like it will be all about execution.

Stephen Bierman

Stephen Bierman is a finance and energy reporter with over 15 years of experience, including at Bloomberg News and Energy Intelligence.

Tweets at: @StephenBierman1

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