Market

RUSSIA’S FOOD RETAIL MARKET

The Market in 2018

The Russian food retail market is the world’s 7th largest in monetary terms, and has been growing above 6% on average in the last 5 years¹. Given that modern trade penetration remains relatively low at c. 70% level, we expect it to continue demonstrating robust growth in the next few years and reach above 80% penetration, corresponding to developed markets.
According to Infoline, the total selling space of the largest food retailers in Russia increased by 9.2% YoY to 24.9 mln sqm in 2018. Discounters showed the biggest growth, with their combined selling space expanding by 29.0% YoY, followed by specialized retailers with 28.8% YoY growth in selling space, and convenience stores with 11.8% YoY growth. Growing competition for the best retail locations and proximity to customers continue to put pressure on hypermarkets and supermarkets, leading to gradual declines in their respective shares in overall selling space.


1.Average official exchange rate in 2018 is RUB 62.9264 per 1 USD.


O`KEY aims to meet the needs of all consumer segments by building our strategy around two main retail formats – city hypermarkets and discounters. Under discounters we understand the business which operates a discount business model  – more than 40% SKUs in private labels, standardised store building, standard instore lay-out, low FTE2
Striving for efficiency and productivity across all business processes at our hypermarkets, we create a distinct competitive advantage in the food retail market by attracting new customers and fostering customer loyalty by greatly expanding the range of consumer needs that can be met at a single location. We believe that recent changes in our assortment mix and our new marketing approach will help us to increase sales densities across all our stores in 2019. 
We remain committed to developing a value-for money discounter concept, unique for Russia, with the goal of becoming a shopping destination The segment demonstrated good results in 2018, and we aspire to continue active store rollouts in 2019.
2. FTE – full-time equivalent is a unit that indicates the workload of an employed person in a way that makes workloads or class loads comparable across various contexts.

*The ranking is performed on the basis of net retail revenue 


The online grocery retail market in Russia grew by a considerable 50% in 2018 to RUB 23 bn, accounting for 0.15% of the total grocery market in Russia compared with 0.11% in 2017. The market size increase was mostly driven by demand growth in Moscow and St. Petersburg, while demand in other regions is gradually catching up. 
Key drivers of the rapid online grocery market expansion in 2018: 
• behavioural factors: growing demand for online delivery as mobility increasingly becomes essential to everyday life; 
• new players: several new entrants to the online grocery market in 2018 (Ozon, Perekrestok, Golama); 
• expanding geographic coverage: online grocery services expanded geographically to Kazan, Nizhny Novgorod, Belgorod, Orenburg, Surgut, and Yekaterinburg; 
• enhanced processes: modernisation of IT systems and logistics optimisation (e.g., introduction of dark store concepts). 
Despite Russia’s solid online grocery market growth in 2018, it is still at the nascent stage (0.15% of the total grocery market in 2018) in comparison with global trends, with the world’s top 3 online grocery market leaders (South Korea with a 9% share, China with 5.3%, and the UK with 4.3%)3 setting the online grocery trend for the whole world.
3. Source: Euromonitor

*Ozon does not deliver fresh category products (fruit & vegetables, meat and milk products, etc.). 


ECONOMIC ENVIRONMENT


Despite having suffered several years of headwinds, arising from weak oil prices, interest rate volatility, and the impact of international sanctions, in 2018 the Russian economy showed signs of recovery.


Real GDP growth reached 2.3% YoY, which was ahead of consensus expectations of 1.5%-2%1. The growth was supported by positive developments in the mining industry, transport sector, building and construction sector, as well as the financial and insurance sectors.



Average headline inflation reached 2.9% YoY in 2018 (vs 1.7% in 2017), whereas the food component picked up to 1.7% YoY (vs 1.3% in 2017). The acceleration of inflation at the year end was largely driven by a tighter supply-demand balance in the sugar market, rapid growth in poultry and egg prices, and increasing grain prices. The food inflation is expected to accelerate moderately in 2019 amid a VAT hike and further increases in food prices supporting LFLs of grocery retailers.


The consumer environment in 2018 remained mixed overall as real wage growth slowed toward the end of the year and real disposable income declined for the full year. Real disposable income in 2018 continued to fall amid rising inflation, increased mandatory payments, and stagnant pensions. As a result, real disposable income declined for five consecutive years, reducing by 0.2% YoY in 2018 (including the impact of a one-off RUB 5,000 payout to pensioners in January 2017).

However, the percentage of customers trading down stayed almost the same in 2018 as a year ago reaching 30% on average according to Central Bank of Russia official statistics. The share of customers visiting retail and food retail stores less frequently or ceasing purchase of certain products decreased YoY by 2 p.p. to 22% on average in 2018 compared with 24% one year ago. The percentage of customers who made deeper spending cuts over 2018 decreased to 34% compared to 37% in 2017.


Consumer confidence gradually deteriorated throughout 2018 from the initial peak reached during the first quarter through public sector salary indexation. With no additional catalysts, growing inflationary expectations, and declining real disposable income, consumer confidence plunged to –17% in the fourth quarter of 2018. 


Food retail sales grew by 4.0% YoY in nominal terms, having accelerated throughout the year amid accelerating inflation. In real terms, food retail sales increased by 2.3% YoY. 

Outlook

According to Ministry of Economic Development of Russian Federation real GDP growth in Russia in 2020–2021 will amount to 2% and 3.1% respectively. We remain cautiously optimistic on the outlook for the Russian consumer. We expect consumer sentiment to remain mixed in 2019 as growing inflation and a slow-down in real disposable income growth will continue to put pressure on consumer confidence. 
We continue to base our strategy on a more cautious scenario in light of the challenging operating conditions continuing throughout 2018. We believe that by investing in our business today to enhance efficiency and ensure price competitiveness alongside our strong reputation for quality and service, we will be one of the best-positioned retailers in the Russian market to benefit from future market growth opportunities.