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In an interview to DP, Armin Burger, Chief Executive Officer at O`KEY Group, talked about a new concept of hypermarkets launched in St Petersburg, future of the format going forward, and the company’s other businesses.
What is your focus in your new hypermarket concept?
We relied on the launch of our new concept in Moscow. After one of our Moscow-based hypermarkets was refurbished, sales per square metre surged by more than 30%. We are also happy with consumer traffic. Given the extremely competitive environment, we are aware of the consumer’s demand and willingness to shop in a somewhat different format. Basically, our new concept is about making more space in the shopping area for fresh and ultra-fresh products, predominantly vegetables and fruits, chilled fish, meat, poultry, dairy products, seafood, freshly baked goods, and ready-to-eat options made in-store. The space for these categories has been expanded by over 30%. We aim to offer our customers a product range that is considerably wider than anything else they can find in the market. Also, new concept hypermarkets have a reduced presence of the non-food category. I believe that this is the model for hypermarkets to follow going forward, with fresh products increasingly prioritised and non-food items mainly sold through online channels. As a result, in our new concept stores, we are reducing the area designated for non-food products while expanding space allocated for fresh categories, which we see as the way to go.
In St Petersburg, we have upgraded two stores in 2021 and will continue renovating our stores across the city. In the medium term, we are planning a phased transformation of all our hypermarkets. We expect that once refurbished, they will follow suit of our Moscow hypermarket and demonstrate solid performance in terms of both sales and traffic improvements. Our new concept stores offer the most convenient and up-to-date shopping experience while featuring the latest equipment and technology, which help us to effectively manage a modern hypermarket. We have improved in-house production facilities and upgraded sections for vegetables, fruits, and other fresh items. We expect a very positive result from our store renovation programme.
Recently there has been a lot of scepticism about the prospects of hypermarkets. Given that O’KEY is investing in the new concept, apparently you do not share this view.
I am in charge of two retail formats: hypermarkets and discounters, and I have faith in both. I try to look at the stores the way the consumer would. The discounter format is all about convenience, and if we talk about our DA! discounters, here we offer the best value for money. For the second year running, our LFL sales are up by 30%. This is a strong result that proves just how happy consumers are with this format. On the other hand, we have the second pillar that our strategy is based on, and this is the hypermarkets. Obviously, the old format of the hypermarket is no longer in the game. We have to admit that e-commerce will be taking away most of non-food sales from hypermarkets. As we see from global trends, hypermarkets that fail to adjust to the new reality are losing momentum in terms of both strategy and sales. Three years ago, we started to transform our business in order to reduce the share of non-food items in our stores while at the same time considerably expanding presence of fresh products. I also have no doubts that non-food sales can only be ousted by sales of fresh products if suppliers of the latter ensure proper quality.
In other words, a customer-focused hypermarket with a strong and well-balanced product range will always be popular among customers. This is the format that has the best growth potential – this is something we already see from improved sales following store renovation.
Today, hypermarkets generate 80% of the Group’s revenue, while discounters make up 20%. Out of the 80% delivered by O’KEY, 3–3.5% come from online sales. We see growth across all our segments, and that is extremely important. In the discounter segment, improvement is much faster than in hypermarkets, and we expect the discounter momentum to account for 40–50% of our total revenue over the next couple of years.
As for e-commerce, it is now increasingly part of everyday life, and we as a retailer treat it as a major additional sales channel. Currently, it is part of our business, with an in-house e-commerce department in place within the Group. It is possible that at some point e-commerce might evolve into a separate line of business and a standalone company.
How is the European discounter model different from the Russian one? How easy is it to adjust this format to the Russian market?
There is no major gap between a good European discounter and a good Russian one. A discounter’s key goal is to keep costs down and offer consumers all benefits made possible by lower prices. This is the principle that underlies pricing at any discounter. The next step is the quality of goods. We are proud to have half of our product range represented by private labels. For customers, this is what makes us stand out in terms of the quality we offer. Aligned with those of European discounters, our core principle is to offer high quality at the market’s most affordable prices.
If we talk about problems that from time to time arise both in Russia and in Europe, you need to constantly monitor the quality of your private labels. Our job is to find the most reliable manufacturers to deliver precisely what we and our customers expect.
Do you have plans to launch DA! discounters in St Petersburg?
The DA! discounter format is perfectly suitable for the whole of Russia. Obviously, St Petersburg as one of the nation’s major cities will also be an important step for our discounter chain going forward. It is too early to talk about specific timing, but one day DA! will definitely open its doors in St Petersburg.
In its hypermarkets, O’KEY presented a shelf with wines selected by a sommelier. Are you expecting this area of operations to gradually evolve into a separate business? Will your company have its own liquor store chain?
This market already has plenty of players, so we have no plans for a standalone business line here. We view it as part of our retail business, and our key focus is to carefully select products in the category in order to offer the best value for money that you can find in Russia. In Russia, online retail sales of alcohol are prohibited. Over the past several years, we have transformed our selection of wines and other liquors, which by the way recently brought us an industry award. It is one of the categories that helps us to attract additional customers, ramp up sales, and get a competitive edge.
Globalisation had been on the upswing for a long time until 2020, when all of a sudden we were locked down within our countries. What was the impact of this on business operations? Can we expect a bounce-back in the interrupted globalisation trend when the pandemic ends?
What the pandemic changed a lot was the global supply flows. First, goods were simply unavailable in the Far East, in China. The international delivery transportation system was disrupted, the rates of transporting products from China, Vietnam and several other countries grew, which impacted imports heavily. This will automatically lead to more competitive production of Russian goods. Being a Russian retail company, we are happy with this state of affairs, as we would like to purchase and offer more goods made locally. This will also help avoid delays and any other supply-related risks. We found reliable vendors as far back as years ago. We would like to see more local goods on our shelves, following fruits, vegetables and some other items, slowly but steadily making it to the stores. It is more of a positive trend for Russia.
Is there anything specific about managing a Russian company?
I worked in quite a number of different countries, but I have spent the longest time in Russia: 15 years in retail management. The employer’s attitude towards employees is substantially better here than in many countries I happened to work in. A retailer often needs to change certain approaches quickly, and in this context, Russian employees show flexibility and loyalty to the company. Naturally, there is some degree of bureaucracy here as well, but this “trend” can be commonly found in any country of the world. In brief, I really enjoy the working environment in a Russian company.
How can the retail market change in the near term?
More and more customers will opt for sustainable consumption and search for the best value for money, therefore, the discount store format is set to grow, since discounters are able to satisfy these needs. On the other hand, the share of fresh products in consumption is going to expand, while the non-food segment will continue going increasingly online.
The major part of the Russian retail market is divided up by three large players (X5 Group, Magnit, and Red & White). How comfortable is O`KEY developing in such conditions? Can such a landscape be compared with the European market?
In Europe, the food retail market is much more consolidated than it is in Russia. In Germany, for instance, top five players account for about 60% of the market, in Poland — about 45%, while in Russia top five food retailers hold less than 30% of the market. The Russian market remains fragmented, in terms of both formats and geography. When I came from Europe to work in Russia, I was amazed by the size of the country, its territory.
Our task on the level of the Group is to be the best on the market in the formats we operate in. As I’ve mentioned, our unique business model includes formats covering all customer segments and needs. This combination enables the company to remain highly competitive, follow the newest consumer trends and capture value. In the Group, we consider each format as an indispensable part of our business model. This approach has already proved effective; it enables us to develop and benefit from the synergies of our formats, such as economy of scale, joint product development and procurement system, private labels expertise, partnership with the best suppliers and direct imports.
Have you ever faced staff shortage?
We have, and it was particularly acute in the summer. There are two reasons for that. First, the pandemic has caused a shortage of foreign labour in Russia. On the other hand, e-commerce is very demanding in terms of personnel recruitment. We did face this problem, but we managed to solve it, as we have a good reputation on the labour market. We have been building our employer image and our corporate culture for 20 years; we adjust our salaries and incentive programme on a regular basis.
O`KEY Group: Placing a Bet on the European Discounter Model
The DA! discount chain, developed by O`KEY Group, is showing all-time high growth rates. In 1H 2021 alone, DA!’s profit increased almost 24%, with EBITDA rising 46%. This put the discounter’s share of Group profits at just short of 18%. Over the next four years, this share is expected to reach 50% on the back of explosive growth in the discount segment’s revenue. Let us zoom in on what is behind the success of this concept, and how exactly the European discounter model works.
The core growth driver
O`KEY Group is one of Russia’s top 10 FMCG retailers, with over 20 years in the market and 195 stores across the country; it is currently focused on 2 store formats, hypermarkets and discounters, as well as on an online store.
The discounter format, branded as DA!, was launched in 2015, and its share of total Group income has already reached 18% in 2021. The chain operates 130 stores across six regions of the Central Federal District and is one of the fastest growing in the Russian market.
Armin Burger, CEO of O`KEY Group, explained that DA! has been steadily growing at a CAGR of over 30%. Retail revenue increased 45.3% in 2020, mainly due to a 27.8% increase in LFL revenue, with a 25.1% growth in average ticket and a 2.2% growth in LFL traffic. The chain was actually the only public food retailer in Russia to post an increase in LFL traffic in 2020.
These impressive figures continued into 2021. “DA! is still outpacing market growth,” said Mr Burger. “In 1H 2021, the chain’s revenue grew almost 24%, showing an impressive 10% increase in LFL revenue. Profitability is increasing, driven by new store openings, among other reasons. We expect that the discount chain’s profits will continue to grow, accounting for half of O`KEY Group’s total revenue within four years.”
Why a discounter?
The discounter format is still the leader of the food retail market in terms of volumes and growth rates; this is not a Russian-only phenomenon, but a global trend. Inflation and technological innovations have set the scene for the format’s growth. On the one hand, food prices are rising; on the other, there is a global shift towards streamlining and cutting the costs of business processes. According to Nielsen IQ, over 30,000 discounters are currently operating in Russia, and the segment is growing at about 8.5%, which places it significantly ahead of the FMCG market. This trend is set to continue, with growth being both quantitative and qualitative, according to Nielsen IQ’s team of analysts.
Some experts even predict that 80% of Russian stores will be discounters of different formats by 2050. Qualitative development means segments will further differentiate. The Russian market is currently seeing the rise of both hard discounters and soft discounters, which feature a broader product assortment. Only time will tell which format will win out.
Taking a look at European retail, where this format has already captured the market, then we can assume that in Russia, it will not trend towards being seen as a “cheap store”, but rather a “store with quality goods at affordable prices”. This European discounter concept is exactly what DA! embodies.
The DA! concept lies in convenience, quality and everyday low prices
DA! stores can be found both in shopping centres and near residential areas within city boundaries and on major highways leading into the city. The average store floor measures 700 sq. m with a product assortment of 2,800 SKUs, including the most in-demand essential goods and a large selection of fresh products. “Our stores’ convenient locations, high service standards, modern equipment and spacious store floors are designed to leave a pleasant impression on our customers,” said Armin Burger.
The bulk of our product assortment consists of private labels. The philosophy behind our private labels is offering the best value for money. In order to maintain consistent quality, the Company carefully handpicks suppliers and carries out strict product control. “Consumer demand is shifting towards rational consumption, driven by broader macroeconomic factors,” explained Armin Burger. “Consumers are looking for high-quality products, but at more attractive prices than those of well-known brands. Therefore, one of our key priorities is to develop a range of private label goods. These goods are priced 20%–30% lower than branded goods of a comparable quality, which is especially important for the rational shopper. When I moved to Russia in 2013, consumers associated the term ‘private label’ with low quality and fairly high prices, but this attitude has now changed – shoppers are increasingly choosing chains’ own brands.”
DA!’s range of private labels encompasses more than 1,100 SKUs across 91 own brands and drives more than 50% of the chain’s revenue.
An expanded assortment of fresh products. “When developing the concept, we took into account the Russian consumer’s eating preferences,” highlighted Armin Burger. “In Russia, customers like to eat fresh products – cheese and dairy products, deli meat, fresh bakery, vegetables and fruits; this category currently makes up 40% of sales at DA! and continues to grow.”
We ensure freshness through direct imports and daily deliveries of fruit and vegetables to all stores.
Our fresh assortment also covers private label products, some of them coming under the Farmers Collection brand, which features natural products from local producers based in unpolluted areas of the country.
Fresh-baked goods are another distinctive offering from our DA! stores, now extending to more than 50 different items.
“Everyday low prices” is the chain’s core pillar, and means that we have turned away from regular promotions and sales.
How to optimise prices
Affordable prices are unlocked by fully centralising logistics, cutting operating costs (including for advertising and marketing) and boosting labour productivity. We ensure fast turnover through SKU optimisation and balanced product mix for everyday eating, supported by competitive pricing.
The chain has its own 60,000 sq. m distribution centre in Stupino in the south of the Moscow Region.
Store assistants are trained to shift roles, e.g. working the floor or the checkout, thus boosting productivity and reducing payroll costs.
The system of ensuring a supply of fresh, high-quality products is constantly being improved and a variety of innovations are always being introduced. For this reason, a number of steps were taken to improve logistics in 2020, such as the opening of an additional warehouse for frozen products to reduce fluctuations in demand and the impact of seasonality. On top of this, we have optimised standard planogram designs for customer convenience, improved the devices that dispense bulk confectionery and frozen foods, and added nuts and dried fruits to our product assortment. To improve our product offering, we have tested dairy products offered locally and signed partnerships with selected local suppliers.
To boost productivity, DA! uses cutting-edge IT solutions; for example, in 2020, a data warehouse was set up to rapidly access and retrieve data; our communication channels were updated; our ERP, BI and POS systems were finetuned; and our cloud presence was strengthened.
O`KEY Group’s key priority remains dynamically growing its discount chain. Between 35 and 40 new stores are slated for opening in Moscow and its neighbouring regions in 2021. The Group plans to up this pace, with 50–60 DA! store openings each year starting from 2022. All new locations are very carefully selected.
We also plan to further develop the everyday low prices concept, continue to optimise pricing without compromising on quality, and expand the range of products in the fresh and ultra-fresh categories, as well as our private labels.
We will develop our private labels by improving their recipes and packaging, increasing their share of our product assortment and sales volumes, as well as by carefully selecting manufacturers to ensure the highest possible levels of quality.
Armin Burger, CEO of O`KEY Group, tells how the Group manages to combine both hypermarket and discounter formats and which one is seen as its main revenue driverArmin Burger, CEO of O`KEY Group, tells how the Group manages to combine both hypermarket and discounter formats and which one is seen as its main revenue driver
When O`KEY Group decided that it needed more than hypermarkets, Armin Burger was able to capitalise on his experience with Aldi, one of the largest international discounter chains. He led the development of DA! discounters for five years until September 2018, when he was appointed CEO of the whole company. The discounter chain demonstrates dramatic growth, with the Group simultaneously transforming its O’KEY hypermarkets in line with the new concept aimed at shifting the focus on "fresh" and "ultra fresh" products, reducing the range of non-food goods and downsizing the selling space. The first redesigned hypermarket opened in Rostokino in September 2020. The Group also develops its online store: Mr Burger expects two-digit growth in online sales in the coming years but believes that offline retail will continue to play the leading role.
On 14 December 2020, O’KEY Group successfully listed its GDRs on the Moscow Exchange. The Group’s GDRs have traded on the London Stock Exchange since 2009. In his interview, Mr Burger explains why the company wants to be present on a Russian exchange as well, and tells about plans to develop both of the Group’s chains.
– Why has the company decided to list on the Moscow Exchange?
– As one of the largest food retailers in Russia, we would like to be present on the Russian stock market in addition to the London Stock Exchange, where our stock is currently traded. We expect the listing on the Moscow Exchange to boost our liquidity, give Russian investors access to our stock and have a positive effect on our valuation. We would like to see a more objective valuation of O’KEY stock (O’KEY Group), as we do believe that the company’s current valuation is not quite correct.
– Have you fully copied the western discount supermarket format in creating the DA! chain or introduced some specifically Russian features?
– Naturally, we have factored in food preferences of our Russian customers. For example, Russian customers have a habit of consuming “fresh” products, such as fruit and vegetables, on a daily basis. Accordingly, this category accounts for 40% of DA! sales.
I had 20 years of experience in the discounter segment, in particular, with Aldi Group. When I came to Russia in 2013, consumers perceived private labels as synonymous with low quality and relatively high prices. Today, customers are gradually shifting towards private labels owned by retail chains. There are clear criteria defining a discounter. Firstly, it is a store that always relies on private labels. They account for nearly 50% of the DA! product range and are 20–30% cheaper than branded goods of comparable quality. Secondly, it’s low prices every day – not during promotions or clearance sales, but all the time – achieved through high operating efficiency and low operating expenses, including advertising and marketing costs, a limited number of SKUs, and higher turnovers.
We have spent years to optimise our product offering at DA! discounters and succeeded in creating a strong product range based on unique own brands and “fresh” products. Last year, DA! discounters demonstrated a nearly 50% revenue increase (with ca. 20% contributed by selling space growth and 30% by like-for-like (LFL) growth). It was the most impressive LFL performance among public retail chains.
– How many DA! discounters do you have already? How many more do you plan to open and by when?
– At the end of 2020, our chain included 118 discounters in Moscow and the Moscow Region. We plan to open from 30 to 40 stores this year and up to 200 stores by 2024. The total amount of additional investments into DA! is preliminary estimated at around RUB 10 billion by 2024.
– What is your assessment of the Group’s growth potential?
– DA! discounters will remain the key revenue growth driver for the Group in the medium term. In 2020, online sales rose by nearly 30%, and we can safely expect more impressive growth in the next few years. The situation in the hypermarket segment is a bit more complicated. We do realise that non-food sales are gradually shifting to the online channel and respond to this trend accordingly, by transforming our hypermarkets. In particular, we have launched a new hypermarket concept with a stronger focus on “fresh” and “ultra-fresh” product portfolios. We have also increased sales density by reducing the selling space (in some cases, by half) and cut down the non-food product range by 80% because we believe that in future this category will be sold online, following the trend that is currently observed throughout the world.
As a result, our retail chain includes both discounters with some 2,800 SKUs and hypermarkets with the broadest possible product range of nearly 30,000 SKUs. Our customers can go to our discounters for their daily shopping and shop in our hypermarkets on weekends. Similarly, our online platform can satisfy any customer needs and demands.
– How does the Rostokino hypermarket perform? Does its performance differ from the results of old-format hypermarkets?
– In the first few months of its operations, the store doubled its sales revenue per 1 sq m of selling space. Sales of “fresh” products also increased.
– The company has revealed the intent to open another five to seven new-concept hypermarkets this year. Do these plans still stand? Will these stores be opened in Moscow only or in St Petersburg as well?
– We have a schedule of store renovation, and all stores will be opened in the new format. First of all, we will open our hypermarkets in Moscow and St Petersburg as the key regions of our presence. Our near-term plans include two renovations in Moscow and two to four renovations in St Petersburg.
Speaking about O’KEY Group’s contribution to green economy, Armin Burger said, “It is exactly a year since we became the first Russian food retailer to fully stop selling primary oil plastic bags and replace them with biodegradable corn starch and 100%-recycled plastic bags. We also offered our customers a number of reusable packaging options varying in capacity and price. Thus, our customers have a choice – we do not deny them the option of buying disposable bags but promote a progressive idea of shifting to reusable ones. As you know, primary oil plastic bags take hundreds of years to decompose, therefore leading to incessant pollution. We continue to develop and improve our packaging solutions in cooperation with packaging suppliers who share our views.
– What are your plans for increasing the share of the online channel in the Group’s sales?
– O’KEY develops own online delivery business only in Moscow and St Petersburg, the two key cities of our presence. In 2020, the share of online sales rose to 3.7% in Moscow and 2.1% in St Petersburg. We develop our regional presence through partnership with various operators, in particular, iGooods and SberMarket. Our joint projects will enable long-term growth of our online sales in line with the general trend in online trade development. In the next couple of years, we expect two-digit growth of our online segment, driven by growing consumer demand. Still, it does not mean that we no longer believe in offline sales as the most reliable and sustainable shopping format in the long term. Brick-and-mortar stores will remain our key sales channel.
– What share of future revenue do you plan for hypermarkets, considering the expected growth of both the discounter chain and online sales?
– We expect that hypermarkets will remain the core of the Group’s business in the next few years and continue to demonstrate revenue growth, in particular, as a result of better market positioning, as I have already mentioned.
– Do you plan to open new distribution centres (DCs) in other regions to boost regional expansion?
– The whole discounter model is based on the concept of cost minimisation; therefore, expansion to new regions is justified only when the efficiency of the existing chain of stores is at its maximum. Naturally, we will go to other regional markets when we are satisfied with the density of our retail chain coverage in Moscow and the Moscow Region. We already have our own 60,000 sq m distribution centre for Da! in Stupino, in the south of the Moscow Region, and plan to open another DC of a similar size, also in the Moscow Region, by 2024.
At the same time, in October 2020, we launched a new distribution centre for O’KEY stores with a floor area of more than 20,000 sq m in Litvinovo, which is in the north of the Moscow Region. The launch of the new DC increased O’KEY warehouse capacity in the Moscow Region by a third.
– What regions are you targeting?
– St Petersburg, which we are quite familiar with, as well as Yekaterinburg and the south of Russia. We’d like to surprise our competition. But we will focus on developing our business in Moscow, the Moscow Region, and the neighbouring regions, at least in the next two to four years. Further expansion would make no sense: first, we need to increase brand recognition and coverage density in the region [where we are mainly operating now].
The stock market usually favours issuers from the retail sector. On 14 December, the Moscow Stock Exchange started trading O`KEY Group GDRs. The Group took two strategic decisions ahead of the placement – to actively develop its omnichannel proposition and to transform its hypermarkets to improve the format’s competitiveness.
While the omnichannel approach falls in line with market trends, the transformation of hypermarkets is a response to a key business challenge of our time – competition from convenience stores and online retailers. “The format is losing popularity all over the world,” states Eugene Belashchenko, partner at Bain & Company. “The rhythm of life has accelerated so much that many customers are reluctant to spend a few hours on a Saturday or Sunday doing their weekly shop.”
The first renovated O`KEY hypermarket opened in Moscow’s Europolis shopping mall. The company sees it as a pilot site to test different solutions, with the most successful ones to be put at the core of the new concept. “We seek to boost the sales performance of every square metre, but we also want to make trips to our hypermarkets worth the time invested,” says Armin Burger, CEO of O`KEY Group. The stakes are quite high: although the group is also developing the Da! discount chain and an online platform, hypermarkets have so far accounted for almost 85% of total revenue.
A fresh solution
Analysts predict that hypermarkets will see the biggest changes over the coming years; however, Mikhail Burmistrov, CEO of INFOLine Analytics, believes that the situation in the Russian market will not be as dramatic as, for example, in the United States: “Stores there have been faced with a more serious customer churn problem, as most locations are a few kilometres away from major cities. In Russia, operators have preferred renting space in large shopping centres, which secured additional foot traffic. But they will still have to consider options to reboot the format as customer traffic levels are unlikely to be the same as before.”
What does the format lose out on? Modern consumers prefer to go online to shop for non-food items, which make up almost half of the format’s product assortment. A wide selection of fast-moving consumer goods (FMCG) is sold at convenience stores, which have done a great job of offering reasonable prices. So, the first thing the O`KEY chain did was to review its product matrix. Turning the tide on the powerful trend of customers shopping for apparel, footwear or sporting goods at specialist retailers or online stores is impossible, therefore, a decision was taken to remove almost 80% of non-food items from sale – only products with the highest day-to-day demand were left in the product matrix. In contrast, some categories, such as household goods, children’s goods, personal care and seasonal products, have been expanded upon, with requirements reviewed for the brands supplied. “We have prioritised quality over quantity. The new goal is to fill our shelves with products that any housewife would want to buy to decorate her own home,” explains Armin Burger.
The fresh category has seen the most dramatic shake-up, with a focus placed on traffic-driving categories such as fresh, ultra-fresh and own production. The selling space to display these categories has been increased 1.5 times. As a result, more than 5,000 SKUs of chilled meat, poultry, fish, seafood, cheese, and fruit and vegetables can now be purchased at O`KEY hypermarkets. The group strongly believes that offering a wide selection of fresh produce that no other convenience store can match provides the consumer with a compelling reason to choose them. Even the world’s leading online retailers mostly sell this category offline, as many people would much prefer to choose a steak or fish in a physical retail environment rather than on a computer screen. “Handling fresh products requires open display solutions with attractive layouts at all times. Combining this with affordable prices would be a very attractive value proposition,” says Eugene Belashchenko.
Customers will also be invited to use in-store value-added services: in addition to fish scaling and cheese or meat slicing, the store also offers a cook- and bake-to-order service. Business processes have been set up to make sure almost any customer order can be fulfilled. “We don’t use products from the store shelves to prepare our meals. The own production team has its own pool of suppliers,” says Armin Burger. Not just lovers of restaurant-quality food, but also wine connoisseurs are in for a treat. The store’s wine selection was handpicked by the company’s in-house expert, who holds an international Master of Wine qualification. The goal was to meet customers’ various demands, be it a good wine for a regular family dinner or something special for a festive occasion. To make the process of choosing easier for the customer, the hypermarket has launched a digital sommelier service. All you need to do is to hold a barcode up to a scanner, and the system will display the full details of the selected wine – grape variety, region of origin, optimal serving temperature, and food pairing.
A cosy atmosphere
Downsizing is a common trend for hypermarkets, and at 5,500 sq m instead of the previous 11,000 sq m, the new O`KEY store is no exception. At the same time, the selling space has changed dramatically.
The design was commissioned from Italy’s Paolo Lucchetta + RetailDesign, to create a cosy, informal environment. The colour scheme is based on warm beige shades, while for finishing materials, the designers chose wood décor, original prints and colourful information banners. The selling area was divided into several separate product areas, the design of which conveys key messages around the products offered to customers. The fruit and vegetables section imitates a farmers’ market, while the children’s goods department looks like a playroom, and the household goods section features product collections. “Shop-in-shop is a strong conceptual solution unlocking new opportunities to make the best use of available areas,” said Mikhail Burmistrov. Our product display principles have also changed, with related product groups now placed together within a single compact area. For example, the steak section now offers not just various spices and wines to go with the steaks, but also frying pans and tableware, saving time for shoppers.
The emotional experience is an important aspect for today’s consumers. Some chains try to entertain their customers by showcasing the cooking process, but O`KEY has chosen to add to a positive gastronomic experience. An in-store café at the renovated hypermarket’s entrance features pastries, sandwiches and beverages on display in a glass-fronted counter. The space was designed so as to leave enough room for a few seats for those wishing to have a bite to eat on the spot. The effectiveness of this design solution is yet to be tested, but it is already clear that the café has attracted a whole new audience – staff from other stores and the shopping mall itself. The restaurant area in the deli section has been significantly expanded, with visitors now able not only to purchase meals to take home but also to taste them right in the store. A microwave and charging stations for gadgets were also installed in the seating area.
A wide range
Russian investors have given O`KEY a vote of confidence: the trading volume on the Moscow Exchange was around 2.5 million GDRs on the first day of trading, or 40 times the three-month average daily trading volume for the same securities on the London Stock Exchange.
The group posted net retail revenue growth of 5.8% to almost RUB 124 billion for January–September 2020, so it can really afford to make some serious transformation investments. More than RUB 300 million were invested in the Europolis O`KEY hypermarket, with revenue per square metre and average ticket size growing markedly in the very first weeks since reopening. Five to seven new concept hypermarkets are planned for launch over the course of the next year, but the renovation budget for each of them will be more modest, at around RUB 100–200 million. “I suppose we will refine some concepts. The need for a flexible approach should also be kept in mind, as retail is always about meeting the demands of a specific audience and the competitive environment,” says Armin Burger.
During the pandemic, hypermarkets gained a tactical advantage: in response to health and safety concerns, consumers chose to shop in spacious stores, fully compliant with hygiene protocols and offering a queue-free experience provided by portable scanners and self-service checkouts for contactless, fast payments. In addition, hypermarkets were able to reaffirm their “generic distinction” to us – more choice enabled by a wide assortment, which is an important consideration for a family or individual shopping in bulk for products that should last for extended periods of time. In the first nine months of 2020, net revenue generated by O`KEY hypermarkets increased by 0.8% to RUB 105 billion. The group’s strategic goal now is to create long-term advantages, and this cannot be achieved without a strong online business. O`KEY was the first food retailer in Russia to launch its own online delivery service, okeydostavka.ru, to deliver groceries both to homes and to pick-up points in hypermarkets. The service is now available to consumers in Moscow and St Petersburg (currently generating 3.6% and 1.9% of the chain’s total net revenue in these cities, respectively). O`KEY Group signed a grocery delivery contract this year with the online services SberMarket and iGooods to offer a fast delivery service to customers in other regions.
According to Armin Burger, the group’s financial stability rests on the combination and development of O`KEY’s three formats. The group’s online business posted a 30% growth in sales for the first nine months of 2020, while the Da! discount chain saw a 46.6% increase. “Today’s consumers value choice, and the more shopping formats we offer, the easier it will be for us to maintain our competitiveness,” sums up O`KEY’s CEO.
With the lockdown imposed this spring, many retailers became concerned with the future of offline sales, while the quickest ones began to adapt their operations to the new market demands. However, practice has shown that urban dwellers are far from ready to shift all their shopping online, and convenience stores are often unable to meet all customer needs. The hypermarket format is a convenient way to stock up on products, albeit in need of a number of updates to maintain its popularity and competitive edge in the future.
The last ten years have seen an explosive growth in smaller convenience stores, inevitably leading to adjustments in the food retail market. But following an initial explosive growth in popularity, retail chains slowed down over time, with customers often disappointed by retailers’ growing tendency to offer attractive prices only during promotions. The issue of limited total floor space and, accordingly, selling space at convenience stores has also become particularly evident in recent years, growing simply unacceptable during the pandemic. On the other hand, customers now have access to discounters modelled after European convenience stores: case in point being the DA! discount chain developed by O`KEY Group since 2015.
“DA!’s competitive advantages include the industry’s best value-for-money ratio, effectively serving as a benchmark for the entire segment. Our discounters offer close to 2,800 SKUs with a focus on our private label fresh produce that generates about 50% of DA!’s revenue. Since 2018, DA!’s revenue CAGR exceeded 35%, with the revenue growth for 9M 2020 up 46.6% year-on-year. The discount chain was the only food brand among public companies that increased LFL traffic in its stores», - said ARMIN BURGER, Chief Executive Officer of O`KEY Group.
On the other hand, the hypermarket format remains highly competitive thanks to its significantly wider product mix and enhanced customer experience, out of reach for supermarkets, convenience stores and online services. However, while it always remains in demand, the hypermarket format (big-box stores) that we all know and that requires half a day to visit, is gradually becoming a thing of the past. Customers rely on convenience stores for their daily shopping and mostly go to a specialty store or online to shop for apparel or footwear.
“Today, luring customers back to hypermarkets requires a fundamentally new product mix and service level to show consumers that a trip to a hypermarket is worth their time and effort. This is why we have launched and are implementing a transformation programme across our chain, driven by a new concept already piloted in one of our stores. Our key goals consist of consolidating O`KEY’s position in the market and making sure selling space is used as effectively as possible. To achieve these goals, we focus on offering a wide and balanced mix of fresh and ultra-fresh products; competitive prices, mainly through the new capabilities of our loyalty programme; value-added services and a great shopping experience,” said Chief Executive Officer of O`KEY Group Armin Burger.
The new concept expands the fresh and ultra-fresh categories (chilled fish, poultry, meat, dairy, cakes, fruit, vegetables and other perishables) to 5,000 SKUs, with the number of our own-production meals growing to more than 500 SKUs. The store’s selling space for fresh and ultra-fresh products has been boosted by almost 50%. According to Armin Burger, expanding O`KEY’s product mix in these categories will fully meet customer needs, while the new hypermarket will allocate more space for these departments as opposed to smaller stores and other retail formats.
On the other hand, the approach to non-food categories has also changed. For example, the non-food area of O`KEY’s new format store opened in Moscow was reduced by almost 80% and replaced with top-selling everyday products – children’s goods, household goods, cosmetics and personal care, and seasonal products. The updated format also offers a non-food product mix of a markedly higher quality and implements new in-store zoning, visual and display principles.
As far as services are concerned, the more of them a hypermarket offers, the more attractive it becomes to customers as a place to shop. According to Armin Burger, another effective move can include expanding the café area, where customers can try pastries and the retailer’s own-production meals. Of particular interest among O`KEY’s value-added services are the opportunities to order plates of sliced cheese or meat, have fish scaled and meat cut, as well as the online order pick-up point. Another feature that makes shopping much easier are counters with related products, which save time for shoppers. For example, the steak department at the renovated O`KEY hypermarket offers not just meat, but complementary spices, wine to go with the dish, and the necessary utensils – frying pans, grills, pot holders, etc.
The new hypermarket concept also reflects the overall trend towards the digitisation of all processes. This has been achieved through a number of innovative IT solutions, including the digital sommelier, which displays detailed information on the chosen wine – from the grape variety to a recommendation on dishes to go with the wine – helping customers who are not wine connoisseurs to make an informed choice without wasting time trying to understand the label information.
“When deciding on our wine selection, we rely on the Company’s many years of experience – we even have an international expert with a Master of Wine qualification,” said Armin Burger. “Thus, we can make an optimal offering of attractively-priced wines from the world’s best wineries under our O’KEY Selection brand.”
Customers can also take advantage of O’KEY-scan, an innovative customer self-scan solution, introduced in 2018 and integrated with the chain’s loyalty programme. The solution enables customers to see a running total of their shopping and any personal discounts in real time. Practice has shown that this solution can boost the average ticket size by between 10% and 15%. A further advantage of the system is that customers can immediately pay for their purchases at self-checkouts – fast, contactlessly and without queuing.