Russia: Top Russian retailers' results and 2017 outlook

Date : 13 April 2017

Top Russian retailers Magnit, X5, Dixy, and Lenta reported double-digit sales growth in 2016. We look at what’s driving this and provide our outlook for 2017.

Magnit store expansion drives sales growth as like-for-like stagnates

Magnit opened almost 2,000 net new stores in 2016 to drive a 13.1% increase in sales revenue. But the Russian retailer closed over 450 stores and reported a 0.3% decline in like-for-like sales. Consumer spend and confidence in Russia continued to be hit by its economic crisis and it is illustrated in Magnit’s stagnant shopper traffic and spend in 2016.

We believe Magnit in 2017 will invest to raise traffic and spend by developing brand loyalty and increase price competitiveness as it looks to develop its own loyalty scheme and increase local fresh food offer.

X5’s 2016 expansion strategy outpacing key competitors

X5 Group’s 27.8% sales revenue growth in 2016 was driven by the opening of more than 2,000 new stores. This performance was also supported by a firm single-digit growth in shopper traffic and average spend that year. X5’s plan in 2017 is to open at least 2,000 stores mostly in smaller and cities in the eastern federal districts where there is zero to low X5 penetration.

Pyaterochka drives X5’s 7.7% like-for-like growth and all formats report traffic increase

X5 like-for-like sales performance in 2016 was driven by Pyaterochka’s 7.5% growth, although much was inflation driven. Some of the growth is also attributed to the traffic and spend growth across all formats. Traffic growth was assisted by the refurbishment of 94% of Pyaterochoka stores and 52% of Perekrestok stores. Improved store layout, look and feel, and addition in-store tobacco shops supported the increase in shopper traffic. This was alongside the development of loyalty schemes in Perekrestok and Karusel that targeted individual consumers with promotional discounts.

Dixy’s double-digit 2016 sales growth deflated by a decline in its profits

Dixy Group reported a 14.3% sales revenue growth and 4.4% growth in like-for-like in 2016 but was deflated by its 28.7% drop in earnings. Dixy announced that earnings dropped because of heavy price discounts in the face of costly marketing campaigns, rising staff costs and rent. Newly appointed CEO Sergey Belyakov announced that Dixy will focus on cost reduction to improve earnings. The plan for 2017 is to increase turnover share of private label from 15.5% to 25% in 2017 instead of heavy discounting.

Lenta’s conservative approach for a sustainable growth strategy

Lenta reported a respectable growth of 21.2% in sales revenue and 3.9% in like-for like performance. Lenta’s pillar of profitable growth is its emphasis on cost-optimisation via joint-procurement agreements, an integrated supply chain, and optimised store design. The retailer expects profitable growth with a 20% rate of return on capital expenditure in 2017.

Lenta announced an ambitious growth plan to double its selling space and break into the top three rank by 2020. We believe this is an ambitious target considering Auchan a RUB 20bn (€330mn) investment in 2017 to open 24 new stores and expand the distribution network.

Sustained level of store expansion expected in 2017

The top two Russian retailers, Magnit and X5, will continue to expand stores rapidly, at least 2,000 new stores each. Overall the Russian retail market will maintain a level of store expansion levels on par with 2016. Sales revenue will continue to report solid positive sales performance and improved earnings. And focus on drive of traffic and basket size growth will continue through investments in customer loyalty and increase of fresh offer.