Russian retailers experiment with hard discount strategies that are shaking up the sector

Russian retailers experiment with hard discount strategies that are shaking up the sector
Russia's second largest chain in the children goods category, Dochki-synochki, has introduced a range of good priced at RUB99, RUB199 and RUB299 as an experiment in discount sales that is shaking up the retail sector. / bne IntelliNews
By Ben Aris in Berlin April 27, 2021

Six years of real income stagnation have caused a small revolution in Russia’s retail sector as more companies are experimenting with fixed price hard discount offers to boost revenues at the cash desk.  

Hard discounters have gained ground in Russian retail, with the number of hard discounter retail format stores in Russia rising by 25% from September 2017 to September 2020. The largest retailers X5 Retail Group and Magnit are also testing discounter formats.

The change has been pioneered by Fix Price, as profiled by bne IntelliNews in an interview with Anton Makhnev, the chain’s CFO. Fix Price is the fastest growing variety value retailer globally and went public on March 5 at a price of $9.75/GDR, implying a market capitalisation of $8.3bn, with the shareholders raising $1.7bn and bringing the free float to 21.3%.  

Now other stores are jumping on the bandwagon. Russian regional supermarket chain Svetofor of the Southern Krasnoyarsk region became the fastest growing Russian retailer in 2020, with RUB180bn ($2.3bn) in revenues, making it among the country's top 10 retailers.  

And other firms are actively experimenting with the model of fixed price deep discounts as Russian shoppers are increasingly on the hunt for bargains.  

The second-largest chain in the children goods category, Dochki-synochki, has started to test corners with three price points (RUB99, RUB199, RUB299, or $1.32, $2.65, $3.98) across its 33 Moscow outlets, according to Kommersant.  

The assortment covers 500 SKUs and management reports a 15% uplift in the check for stores with the respective corners, reports VTB Capital (VTBC). The company operates 180 outlets and controlled a 3% market share in 2020 vs. 22% for market leader Detsky Mir.

Fix Price is the leading variety value retailer in Russia with a market share of 93%. The niche has moderate turnover (RUB177bn in 2020) and represents 0.5% of overall retail (compared with 2.5-4.0% on developed markets). The expansion of this share is associated with the rapid organic growth of Fix Price and the potential entrance of other players that could extend the addressable market,” VTBC said in a note.

Fix Price currently has eight anchor price points, from RUB50 to RUB299 (all below $4). In the 2020 product mix, the non-food assortment represented 75% of the total, while the toys (5%), and party and celebrations (5%), categories could potentially overlap with children goods resellers.

Fix Price growth has been so rapid that the other market leaders in the traditional organised retail segment have been forced to set up their own hard discount subsidiaries to prevent Fix Price eating further into their market share; both X5 and Magnit have launched value store spin-offs.

In the last three years, Fix Price key lines have surged 2.4-3.2x to revenues of RUB190bn, EBITDA of RUB37bn, and net income of RUB17.5bn (under IFRS 16), according to VTBC.  

“The roll-out yielded high returns and last year return on invested capital (ROIC) reached almost 100%. The market assigns high multiples for such rapid profile and Fix Price trades on 2021F EV/EBITDA of 13x,” VTB said.  

Fix Price has given itself a very big lead in the value retail niche and has already rolled out thousands of stores, meaning any challenger will have to invest billions of dollars to take the value retailer market head on.  

“Those appealing metrics could drive an entrance of new players into the niche, representing the prime downside risk to us. We do not see the arrival of a large-scale federal competitor in variety value retailing as that would require sizable investments and the roll-out of a large store count (over 4,300 outlets for Fix Price). In our view, disruption is more likely to come from niche non-food operators and a more discounted proposition from nationwide food retailers.”

 

 

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