TELEBRIEF: Russian retail in the time of corona

TELEBRIEF: Russian retail in the time of corona
Russia's retailers are in the front line of the impact from the coronavirus lockdown. What have they done to cope and what will the long-term consequences be?
By Ben Aris in Berlin May 5, 2020

The coronavirus (COVID-19) is going to do serious economic damage to Russia’s economy, and with most of the population locked down for at least a month, and maybe more, the retail sector is in the front line.

bne IntelliNews and its partners EM put three of the biggest Russian retail companies around a table to find out what they are doing to counter the crisis and how they are faring.

The panel was made up of: Svetlana Demyashkevich, CFO of X5 Retail Group, Russia’s largest food retailer; Ekaterina Sokolova, CFO of M.Video-Eldorado Group, Russia’s largest electronics retailers; and Daniil Fedorov, CFO of Ozon, Russia’s leading e-commerce platform. Sova Capital’s Artur Galimov, the number one Russia Consumer & Retail Analyst, according to 2019 Extel survey, also participated.

Immediate reaction

Moscow was put on lockdown suddenly on March 30 and within 10 days the regime was tightened after a system of QR codes was introduced to ensure compliance. Muscovites are only allowed out of their apartments to walk the dog, take out the rubbish or visit a shop, provided it is not further than 100mn away from their homes.

But the lockdown didn't come out of the blue. Reports of the rapid spread of the virus first in China and then in Italy meant the restrictions were widely anticipated and that led to a few days of panic shopping.

“For us, the situation started to develop quite actively in March,” says X5’s Demyashkevich. “We first saw peaking demand in our Perekrestok Online [food store] and then in our offline stores. The main task for us was to ensure the shelves weren’t empty and that we could provide uninterrupted supplies to our customers,” she said.

The main surge in demand fell between March 15 and 17, putting pressure on logistics, reports Demyashkevich, but health concerns were already rising in priority. “The biggest priority for us also in that period was to ensure the safety of both our employees and customers at our stores.”

All of the members of the panel said they had provided PPE to their staff and were careful to provide as safe an environment as they could to both their staff and customers.

“We actually started to prepare for this back at the end of February because we already saw these trends happening in Europe. So we started making additional supplies to our dark stores and also we started thinking about different scenarios – about how we should react in the stores, in the distributional centres,” Demyashkevich said.

With its chain of supermarkets, X5 has to stay open to provide the population with essential groceries, but the virus hit its non-food stores just as hard.

Ekaterina Sokolova, the CFO of M.Video-Eldorado, said all the pandemic has done is accelerate a strategy already in place to move sales online.

“Currently, in terms of total sales, 90% of our sales are online and that’s exciting... Out of this 90%, of course, we make sure that we do all of our sales in a contactless [way],” says Sokolova. “We also make sure that the customers feel safe and properly served because we will all remember these crisis times. People are stressed and you need to make sure you deliver proper service, because people will remember if you don’t do it well.”

The move to online shopping was already underway in Russia and 4.5% of retail is already provided by e-commerce firms. As bne IntelliNews has reported, Russia’s biggest e-store Wildberries overtook Sportsmaster, a bricks and mortar store, last year to become the country’s biggest purveyor of clothes, fashion and apparel – the first time an e-commerce company has become a retail market leader in Russia.

Ozon Holdings, one of Russia’s big three e-commerce companies, has been one of the big winners as it has seen the demand for it services soar. While the volume of online retail turnover has been doubling about every two years, sales through Ozon, as well as the other big sites like Yandex, were already growing closer to 80% a year, Ozon CEO Alexander Shulgin told bne IntelliNews in an exclusive interview in September 2019.

“We’ve been focusing for the last 5 to 10 years on becoming a big multi-category player. With high assortment, we’re basically the go-to destination for shoppers right now. So we have seen an uptick and I think that also comes with a lot of challenges,” Daniil Fedorov, CFO of Ozon, said.

“We’ve been lucky that we’ve developed quite a big infrastructure and that we actually started early preparations for the high season in the fourth quarter. We opened one of the biggest fulfilment centres in Russia last year, so that helped a lot. Secondly, we started hiring a lot of people from industries which are not doing that well,” Fedorov added.

Fedorov says that Ozon has concentrated on partnerships and all the companies on the panel are already co-operating with each other in some form, partly driven by the move to online. Once you abandon your physical store the reasons to go it alone melt away and any partnership that gives you access to more shoppers make sense – especially if you offer related products and services that don't directly compete with those of your partners.

“It’s amazing to see how the current situation gave a dramatic boost to the transformation of the retail industry in both food and non-food segments,” says Sova Capital’s Artur Galimov. “If we recall the partnership between X5 [Retail Group] and M.Video-Eldorado Group, this could give a very interesting perspective to what hybrid retail performance may look like in the future, whereby conventional boundaries between offline and online, between food and non-food, effectively disappear.”

A large part of what Ozon is trying to build is not an online store per se, but a “market place” that producers – large and small – can use to not only sell their goods, but also get them delivered to punters scattered over the whole country.

“What helped a lot were partnerships with big retail chains. There was recently news that we’ve partnered with M.Video-Eldorado Group and I think that also indicates the transformation that’s happening overall in retail,” says Fedorov.

Permanent changes

The industry experts believe there will be several long-lasting changes to the retail business as a result of the lockdown. First, it has introduced many shoppers to the idea of ordering online, who had resisted the urge to buy using their phones and computers until now.

Another is investment and expansion in the express delivery services that several companies were already rolling out before the lockdown started in April.

“We just started express delivery at the beginning of this year,” says Demyashkevich from X5. “We already have more than 10,000 orders per day and it’s a very scalable model. We think that a lot of customers after using it during the pandemic situation will continue to use it post-COVID.”

M.Video has also made the switch. While punters can still come to the store to look at the weight and feel of an electronic good they are met by an assistant who can show them alternative products online with similar specs. The shopper can quickly weigh up the pros and cons of all the models on offer and the assistant can also offer financing options to make the purchase weigh a little less heavily on the household income at the click of a few buttons.

“We have a strategy at M.Video-Eldorado which is called One Retail. What that means is that we have no channels anymore for our customers. Already for several years now we haven’t considered ourselves to be a traditional offline retailer… We’re the largest e-commerce player in the electronics segment,” says M.Video’s Sokolova.

Probably the biggest change the lockdown has brought is that Russians have switched from cash-on-delivery for online purchases to pre-payment. One of the quirks of the Russian market is that as it emerged from the chaos of the '90s and credit and debit cards remained a relatively new product, online shoppers insisted on seeing the physical good arrive in their hands before they were willing to pay for it. Russia’s e-commerce business has been growing fast in recent years, but it remained unusual in a European context as the customer could chose to pay the courier after he had delivered the goods. That option has gone now.

“There were a few very interesting transformational things on the delivery side. First of all, we turned off post-payment completely. If you look at Russia let’s say six years ago, it was a post-payment e-commerce space...But now all the sales that we have are all pre-payment. So you don’t spend time interacting with the courier,” says Ozon’s Fedorov.

Fedorov says that Ozon has also already introduced an entirely contactless delivery option where the courier simply leaves your package at the door. Ozon guarantees a full reimbursement if the package is stolen, but says that almost never happens. Since the lockdowns, Fedorov expects the non-contact deliveries to become a normal part of the service now.

“We introduced it very early, in August last year and until the end of last year it was just a couple of percentage points, so the adoption was not very good. But with the outbreak that we see right now, at least half of our deliveries are contactless, so people just leave a pre-paid parcel at the door. It’s a very Amazon-like model, a very Western model, which is actually helpful for the business and for the customer,” says Fedorov.

Constraints

However, the crisis is going to hurt the industry and cause some long-term problems, the biggest one being the shock to the economy that has already turned the growth in real incomes negative again, and they could take years to recovery.

“I agree that there are risks of a slowdown in income generation by our consumers in the second half of the year. I think it’s the biggest worry for everybody. But for food retail I think it will be compensated, at least partly compensated, by an inflow of customers from HoReCa [Hotels, Restaurants and Cafes],” says Demyashkevich. “And even after the lockdown, I would expect that people would still be thinking about their safety and consumption patterns will be affected, I’m afraid, until the year end at least.”

For the biggest companies a retail pinch may not necessarily be a bad thing in the long run. Following the last oil shock in 2014 and the subsequent two years of recession, the difficult operating conditions meant that many smaller player either sold up or closed, but the larger companies, with their deep pockets, consolidated their market position. While overall economic growth was depressed, earnings at the biggest companies went up as a consolidation was forced on the market and the leaders used it to improve their market shares. Indeed, in 2016 when the dollar-denominated Russia Trading System (RTS) index was range-bound at around 1,000, the shares of X5 doubled in value as investors started to cherry-pick amongst Russia’s best equity stories.

““In addition to that, during a crisis we usually see quite a significant consolidation of the market and I think for us and for other leading retailers, the decrease in incomes in the population will be at least partially compensated by the effects of consolidation of smaller players in modern retail and also of traditional retailers,” says Demyashkevich.

But there is a lot of work still to do. Ozon’s business can only be improved in the long term by the pandemic, but e-commerce industry is by no means mature.

“The biggest challenge is still infrastructure,” says Fedorov. “We’re showing very dramatic growth rates for now. And the size that we’re going to reach this year is still going to be very small – it should be ten times higher. To do that, of course, we need infrastructure. Russia is a big country and we need to get close to customers – to put fulfilment centres close to customers.”

Sova Capital’s Artur Galimov concurs. Most of the internet-based businesses have focused on Russia’s twin capitals of Moscow and St Petersburg, which have populations as large as most Central European countries, but Russia is a vast country and reaching its inhabitants scattered over 11 times zones is going to be hard.

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This article is the write-up for the bne IntelliNews, EM Telebrief “Russian retail in the time of cornoa.” You can watch the whole conversation online on YouTube here.

 

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