Will Russia drive the return of hard discounters in Europe?

Date : 16 April 2021

Amin Alkhatib

Senior Retail Analyst

Leading discounters in Europe are developing their format and offer as they look to attract shoppers from other channels. This is seeing them evolve to be more like supermarkets, leading them to adjust their ranges, locations and adding value to compete beyond a solely price-focused strategy.

However, in Russia, the discount format is taking a different trajectory. While some are evolving towards a supermarket-like offer, others are building their strategies around the hard discount format.

Svetofor exploiting a gap in the market

Svetofor found and has filled a gap in the Russian market with a no-frills, low-price format, which was launched by its parent company, Torgservis, in 2009. Stores have a warehouse look and feel, with a heavy use of pallets, little to no signage, and price tags printed on A4 sheets of paper.

Source: IGD Research

Svetofor began in Siberia but started to expand its presence near major cities and Moscow in 2018. It opened stores in residential areas where its strong price offer on B brand products was attractive to shoppers. This helped drive its like-for-like sales performance, which boosted its total sales performance, which was underpinned by strong store network growth. Together the initiatives have helped it report sales growth over 20% annually since 2018.

Leading Russian retailers react to hard discount’s growing threat

Leading retailers began to identify Svetofor as a threat to their market share when it started growing its presence in and around the country’s major cities. In 2020 and 2021 three of the leading Russian retailers have looked to compete by launching trials for their own versions of the hard discount format, while subsequently announcing plans to expand their network size.

In 2020 X5 Retail Group and Magnit, respectively, launched pilots for the Chizhick and Moya Tsena banners. In 2021 they have said they plan to increase the number of stores in 2021 to 50, for the former, and 53 for the latter. Lenta has since also launched two pilot stores in 2021, under the 365+ banner, and said it will disclose further plans for the brand by the end of H1 2021.

Discounters in Russia evolving to cover further shopper missions

Mirroring steps from European discounters, Russian retailers are adapting their formats and offer. They are doing so to compete for two very different types of shopper; first, those who are traditionally choice-seeking urban supermarket users and, secondly, value-seeking hard discount shoppers.

For example, X5 rolled out over 600 Pyaterochka stores under its urban discount store concept in 2020. Adapted to provide a smaller store and offer, the new design fits into densely populated urban areas, while offering the benefit of a greater choice than a convenience store.

Source: IGD Research

Hard discount offers a no-frills shopping experience that transfers the costs savings generated by efficient stores that require comparatively less investment to shoppers in the form of lower prices. This format differs from a food discounter, in that it invests comparatively little in stores’ look and feel or on marketing. They also, usually, do not have a fresh food offer.

Leveraging wider network for competitive prices

Chizhick, Moya Tsena and 365+ have a long way to go to catch up with Svetofor, which operates from almost 1,900 stores in 2021. However, all are in the shadow of Pyaterochka’s network of almost 18,000 stores. The focus of these new banners will be on the price competitiveness of their offer, which they will aim to meet with their value-priced private label range.


 

Source: IGD Research

They will be focused on improving price competitiveness more than on growing network size. This is because they can leverage their wider network sizes and buying power with suppliers. This is illustrated in the graph where the arrows for the three competing banners show how they aim to catch up with Svetofor on pricing, as the latter aims to grow network size.

National network growth is likely to be in 2022

The three new hard discount banners are still in their trial stage as retailers assess their profitability and scalability. What will be key to their success is to achieve a level of price competitiveness like Svetofor’s before rolling them out more widely. These trials are likely to last until the middle-to-end of 2022 before a decision is made on whether to expand their networks beyond 1,000 stores.

Hard discount can win in Eastern Europe in the short term…

Torgservis has an international presence, via its Svetofor and Mere banners, and has plans to expand further in Europe. The pandemic’s expected economic effects are likely to benefit that international growth and encourage Torgservis to expand its presence faster and quicker.

Expansion into CEE markets and Germany will face competition from incumbent discounters like Lidl, Aldi and Biedronka. However, these discounters are shifting towards a more supermarket-like offering, leaving a gap for a no-frills hard discount retailer. In the short term, the pandemic and economic fallout will drive more households into becoming more frugal with their grocery spend, and hard discount offers that option.

…but the format will face challenges in the long term…

In the long term, it will be difficult for hard discount to compete on price only as established discounters offer shoppers value in the form of a wider choice of branded goods, more mission focused ranges and added value from loyalty programmes.

Also, hard discounters like Mere have not established brand loyalty in their newly entered markets. Also, as Mere does not spend on marketing it will be challenging to build brand awareness versus Biedronka and Lidl, who have been increasing their advertising budgets each year recently.

Hard discounters will also struggle to maintain price competitiveness as range and availability will fluctuate. There will be supply inconsistencies when a B brand becomes too expensive for the retailer to offer at a competitive price. Such retailers do not have a private label range to fill in gaps and supply reductions.

…so, they will need to evolve

In Russia Svetofor will need to evolve after it establishes a large enough network. It will need to develop a private label range and increase its presence in leading cities. Whereas in CEE hard discount has yet to flourish, so it needs to focus on growing its store network in low-cost locations that contain significant low to mid-income household catchments.

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