After a decade of growth, Russian supermarket chains are running up against the limits to growth – both in terms of saturation in local markets and market share limits imposed by the Federal Antimonopoly Services (FAS) – and are switching their focus to improving profits instead of opening more stores.

The food retail space of the top-200 is up 2.6% YTD to 23.5mn sqm, according to consultants InfoLine, with additions down by 13% in the second quarter y/y to 660,800sqm as organic growth starts to give way to improving efficiency. The two industry leaders – Magnit and X5 Retail Group — accounted for 58% of the total additions YTD.

“The deceleration in the organic growth rate became an industry-wide trend and reflects the robust penetration of modern formats (some 70% in 2017), pressured household budgets and limitations associated with the 25% market share threshold for certain municipalities,” VTB Capital (VTBC) said in a note. “In our view, only the largest players are going to be able to maintain a rapid pace, as their chains offer significantly more appealing services through the best purchasing terms, extensive logistics platform and wide coverage.”

Supermarkets are one of the most sophisticated parts of the Russian economy, but it has taken nearly 25 years to replace the Soviet era ‘Producti’ and ‘Unimag’ retail formats with modern retail outlets. As the process comes to an end most Russian cities and larger towns are now serviced by supermarkets and the companies are already starting to focus on new formats to boost sales and better meet the changing demands of the population.

The change in strategy comes as the two supermarket kings Magnit and X5 intensify their fight for supremacy in the Russian market. X5 overtook Magnit in terms of revenue turnover at the end of last year, while the long time leader suffered a dislocation after Magnit’s founder and largest shareholder Sergey Galitsky sold 29% of his stake for RUB139bn ($2.4bn) to state-owned bank VTB on February 16.

The company seemed to lose its way after being a poster boy for the modernisation of the Russian economy for almost a decade. However, more recently the new management seems to be fighting back. Both firms have recently reshuffled management and at Magnit brought in some seasoned professionals from X5 to restart its strategy. X5 has reported strong results in the second quarter, whereas Magnit is yet to see a pick up in its second quarter results, but analysts are increasingly keen on the company as a turnaround story and its appeal to portfolio investors is on the up again.

The game will get harder now, as growth is no longer simply a question of opening more stores faster than the other guy.

“X5 continuous deceleration in net openings from the 2,500 outlets guided for this year. The company is less aggressive in its search to enter new regions, is almost at the limit of its allowed market share in core geographies, and is more focused on stores with weak sales (more than 300 net closures in 1H18). For 2018-22F, we see selling space and revenues increasing at CAGRs of 10% and 12%, respectively (the best in the industry),” VTBC reports.

One new direction retailers are exploring to improve their profits is going online. The rise of e-commerce in Russia has been so fast that it is now visibly impacting the foot traffic in Moscow’s largest malls, as indicated by the Watcom Shopping index.

X5 has just launched its first “dark store” – a retail outlet that is dedicated to serving online orders and has no physical customers. The company is also in talks with China’s online store JD.com to set up a joint venture in Russia.

For Magnit’s part, it is eyeing a takeover of SIA Group, one of the largest pharmaceutical distributors in the country, from Marathon Group, as a way of diversifying its revenues.

“We see the prime growth pillars being the introduction of innovative retail instruments than can allow personalised retail and marketing on the store level. The latter is particularly important for Moscow, where there is still room for new stores (X5 has a 16% market share) and household budgets are higher,” VTBC said.