The merger between Russian consumer electronics giants M.Video and Eldorado is expected to be announced very soon and will create not just one of the biggest electronics retailers in Europe, but a top 10 global player.

The crisis of the last eight years has forced a consolidation in many sectors in Russia, but until now the deals have usually been the market leaders taking over the best of their struggling smaller rivals. The M.Video-Eldorado merger will be the first big-with-big merger combining two of Russia’s top companies to create an unrivalled national retail champion as big as any company in the rest of Europe.

The merger makes sense as M.Video, founded in 1993, was starting to run out of road. Since Alexander Tynkovan set up the first store a quarter of a century ago on Maroseyka street in central Moscow (hence the M in the name), the company has grown to be the dominant force in the sale of gadgets and widgets so beloved by the Russian consumer. Today it has 424 stores in over 160 cities across Russia and employs over 15,000 staff. Sales have ridden the wave of rising middle class incomes and topped RUB200bn ($3.4bn) at the end of last year, and the company is still growing.

Eldorado has a similar profile. Although, unlike M.Video, it is not publicly traded, it has 415 stores and achieved revenues of RUB106bn ($1.8bn) in 2017.

“We are a national champion brand,” Tynkovan and Said Gutseriev, the owner of Eldorado tells bne IntelliNews in an exclusive interview. “The recent crisis has been painful but we have been through multiple crises like the one in 1998. We are well trained by this environment and there has been a very high level of competition the whole time,” explained Tynkovan, exuding the energy he is famous for as a legendary retailer in the Russian market.

Tynkovan sold his remaining shares in M.Video to Gutseriev in April 2017 who paid the market rate of $7 per share, but says that he will stay on and manage the combined business for at least three years to ensure a smooth integration.

The Gutseriev family was later into the retail game and acquired Eldorado in December 2016 for a reported RUB26bn ($523mn) from Czech investment group PPF Group N.V., the investment vehicle of Czech billionaire Peter Kellner. Ranked by Forbes as Russia’s richest family, its patriarch Mikhail Gutseriev, Said’s father, made his first fortune with Russneft (not to be confused with the state-owned oil giant Rosneft) that bought up small oil fields, too small to interest the various major oil companies in the sector, until it was a major player in the oil game. Since then Safmar has gone on to invest into leasing, real estate, warehousing, finance and now retail.

“We were thinking about where we needed to go next and we decided that with the advent of the internet and e-commerce, retail offered the most attractive investments,” says Gutseriev, who is just about to turn 30 and has taken over running the family’s retail investments amongst other things.

M.Video in the driving seat

M.Video will remain in the driving seat after the merger. “We plan to have two brands but one model,” says Tynkovan, who only ever had one job, working as a sales assistant in an electronics retail store, before starting M.Video.

“It was the arrogance of youth,” says Tynkovan. “I thought I can do this and so rented a room with my partner Pavel Breev and put some TVs and video recorders on the shelves and started selling them.

The company grew quickly but remained Moscow-based as in the 1990s all the money in Russia was concentrated in the capital. M.Video went to the regions in 2000, just after Vladimir Putin took over from Boris Yeltsin as president and ushered in the boom years. Sales were driven by the 10% annual gains in income that marked that decade thanks to the recovery of oil prices from a low of $10 per barrel to a peak of $150 some 15 years later. The petrodollars primed the pump and started a virtuous circle of spending, profits, investment and wage hikes turning that fuelled the boom.

As the business became seriously large, Tynkovan realised that they needed to go to the next level and started looking around for advice.

“We couldn't afford to hire the likes of McKinsey or Deloitte so I approached people that had been running other retail networks but were now retired and hired them as consultants. They taught us how to do catalogue, retail, store and distribution management.”

The next step was also to hire expats to work in management due to the perennial shortage of qualified mangers in Russia, which remains a problem to this day.

Finally, on the recommendation of his friends, he set up a board of directors. This was also unusual as most businesses were run in the Soviet fashion where the owner sat the top of a narrow chain of command and simply ordered their minions about. Tynkovan set up a board of directors four years before the company eventually went public in November 2007, making the transition to listed life easier.

“We started to run the business using the board of directors just because it was a more efficient way to run the company, and adopted all the best corporate governance practices even before we became a public company. If you are serious about creating a serious company then you just need to do it,” says Tynkovan, who is widely seen as a pioneer of Russian retail, setting trends that have become industry standards.

M.Video was also the first to embrace unsecured consumer credits to boost sales. In the early noughties the new kid on the financial block was Rustam Tariko’s Russky Standart (aka Russian Standard), an upstart bank that offered unsecured credit to customers on nothing other than a copy of their passport and the promise to pay the money back.

At the time these highly risky loans were considered a flash in the pan, but the volumes of credit went ballistic and super-charged the retail consumption was the fuel for Russia’s economic boom.

“We were the first to have credit brokers in store. Russky Standart's first consumer credit was made to a consumer in an M.Video store,” says Tynkovan, who adds that credit increased the store’s sales by 20-30% almost overnight until at its peak a third of M.Video’s sales were being made on the never-never. The economic crisis has reduced the share of credit in sales somewhat, but even today 19% of sales are made on credit.

The Omni store

Now the business is changing again thanks to the explosion of e-commerce which is already seriously disrupting traditional retail and the role of stores. M.Video launched its website in 2000 but it has only been in the last eight years that the Russian consumer has really embraced online shopping and Tynkovan is meeting the challenge with his “omni-store” concept.  

“When Russians started to shop online in 2010-2011 it totally changed the retail landscape. We had to see it either as an opportunity or as a threat. We chose to see it as an opportunity,” says Tynkovan, who has built up the online business on three pillars: an “endless shelf,” price competitiveness and offering a superior service.

The assortment of the goods a store offers is obviously a core part of the business, but the advantage of online shopping is you can offer an unlimited number of goods.

“The store space footprint doesn't matter now. It makes no difference if you shop is 5,000 square meters, 1,200 or even 800 at a good location. The customer can come in and see the display samples, but if they want a different colour TV or a fridge with some extra functions they can simply order it online and it will be delivered. It leads to much better stock management and makes it easier to sell,” says Tynkovan.

Price is important, and with the strength of M.Video’s brand in theory the company can command a premium. However, Tynkovan insists on offering the lowest prices and backs the promise with a price guarantee: even if the shopper buys a TV on Friday and M.Video cuts the cost of the same set by 20% the following Monday, M.Video will refund the difference.

“A tiny number of people actually make use of this service, but still it gives the consumer confidence in our stores and that is important,” says Tynkovan.

By 2005, Tynkovan says he had learned all he could from his international peers. He believes that now M.Video has overtaken them and is the leading and most innovative retail business in Europe.

“We are ahead and more advanced than the other companies in our sector in the rest of Europe. We are still exchanging knowledge with our peers but we have been able to be more innovative,” says Tynkovan. “For example, we never allowed there to be a difference between online and offline prices, while other companies took some time to integrate these two.”

It's the leapfrog effect at work, where Russia has jumped over several stages of development and gone directly to state-of-the-art solutions. Business leaders like Tynkovan have embraced new technologies from the very start, and M.Video has been especially progressive. For example, when Russky Standart started adding significantly to the company’s bottom line, Tynkovan organised a credit broker desk in all his stores, which cooperates with 11 banks, so customers had to fill in only one form and then could choose from the best deal on offer.

The next stage is to create “one retail” which will be the full digitisation of the sales experience, says Tynkovan. When a customer enters the store they will be “checked in” by the sales staff using smart phones. In this way all their decisions and preferences can be recorded and followed up on. It will allow the store to identify its “hot” and “cold” areas and products that will improve the layout and stock management. Customers can buy a product simply “kissing” their phone with that of a member of staff, transferring payment and delivery details from one device to the other as well as connecting to inventory and credit control at the company.

“All retail is headed to the mobile phone,” says Tynkovan.

Giga-merger

Russia remains a volatile place to run a company and after the 2008 crisis struck, the economy took a huge hit as the virtuous circle stopped turning. Things then got worse for retailers as economic growth sank to zero in 2013 despite oil prices remaining over $100 per barrel as the petro-driven growth model was exhausted and Russia ran up against its structural limitations. Incomes began to fall and real disposable incomes have been negative for almost three years now. 

However, as the market leader M.Video was insulated from the worst of the slowdown. “When the market starts to slow then the weak companies start to disappear. We had the leading model and lots of online projects were folding so we didn't feel the slowdown that much. Our market share was growing dramatically and we were still profitable,” says Tynkovan.

The same story has repeated itself in many sectors connected to the consumer, which have seen a rapid consolidation as the leading companies increased their market share and maintained sales volumes, even if margins have been squeezed.

Now the game is going to change again with the merger, as the combined company Eldorado will be unassailably large.

As M.Video is already a publicly traded company the combined entity will remain listed.

Safmar has bought out Tynkovan’s 57.7% stake in M.Video with the remaining 42.3% as a traded free float. Importantly Safmar also made a voluntary buy out offer to the minority investors at the same prices as for the main shareholders, as part of the deal, which is not always the case. When state-owned banking giant VTB recently bought out the owner of Russian regional supermarket chain Magnit, minority investors were outraged when VTB deliberately limited the stake purchase to 29%, despite the fact that owner Sergei Galitsky owned 32%, to avoid having to make a mandatory offer to minority shareholders. Leading fund Prosperity Capital Management called the deal a “spit in the face for all investors.” A quarter of M.Video’s minorities took up the buy out offer.

The synergies of the M.Video-Eldorado deal are obvious, with stock control being the most important. Getting stock management right is a key element in retail as if you have too much stock you loose money and if you have too little then you lose revenues, says Tynkovan. Having a single distribution platform is also a cost cutter as one logistics system can serve both brands. Safmar’s position as a major player in the warehousing business can only add to the improved profitability mix.

“They are similar businesses and they have always competed as they have the same number of stores and a similar brand,” says Gutseriev. “The idea is to put the two brands onto the same model – the M.Video model – and centralise the stock and management functions into one entity.”

Following the expected deal, Tynkovan says he will concentrate on cementing the lead of the combined entity on the Russian market and ensure a smooth merger, but longer term both men say they have ambitions to expand internationally.

“We are strategic investors and not financial investors,” says Gutseriev. “We have some final discussions about the deal. We will go through all corporate procedures and submit the terms of the transaction for a vote at the EGM, so all the shareholders will have a say. For sure, M.Video is doing the Eldorado deal at absolutely market conditions, and in adherence to best corporate practices. We are in this retail business for the long-term and that means best practises as that is the best way to run a business.”