By  on May 5, 2008

The retailer is exploring opportunities in a largely untapped and fertile market.

MOSCOW — For Maria Zhalnina, like many in this city, doing the shopping means schlepping from store to store.

The 29-year-old blonde artist gets clothes at an underground, fake-Italian mall by the Kremlin and buys fruits and vegetables from Azeri and Uzbek traders at a covered market. Meat and fish come from a shop near her local subway station. It's all a little exhausting, not to say risky.

"I got food poisoning from sushi in a store near my apartment and ended up in hospital," Zhalnina said ruefully. "My stomach hasn't been right ever since."

News that Wal-Mart may be entering the Russian market — the retailer announced that it has appointed an executive to explore opportunities here — has piqued the curiosity of tired shoppers like Zhalnina. Although all-in-one superstores aren't new to Russia, there aren't many, and they are on a smaller scale than those in the U.S.

Russia would seem a prime location for Wal-Mart. Outside Moscow and Saint Petersburg, supermarket chains have a tiny presence. The market is dominated by Soviet-style kiosks and small stores — the five leading retail companies control only 5 to 6 percent of the market, according to a March report by professional services firm PricewaterhouseCoopers.

Analysts are bullish and say Wal-Mart shouldn't waste any more time.

"Moving into Russia is a good move for Wal-Mart," said Joseph Feldman, an analyst with Telsey Advisory Group in New York. "You hear a lot about the Russian high-end consumer and the way they spend, but that's a small percentage of the population."

However, there are intractable difficulties when it comes to operating here, most notably corruption. In a 2007 survey by Swiss Realty Group of almost 1,000 real estate companies and private investors working in Russia, 32 percent said corruption eats up more than half their net profits, and more than 50 percent said corruption consumes 25 to 50 percent of their profits.

Nonetheless, untapped opportunity seems to be the key phrase in every Russian retail sector. A 2007 report by management consultancy AT Kearney that identified the most promising emerging economies for retailers ranked Russia second among 30 countries. It was edged only by India, and was ahead of China. Foreign brands are increasingly taking notice.In the luxury sector, Stella McCartney recently opened a Moscow boutique, joining a host of other major brands, and Versace is planning a new flagship. Auction houses Christie's and Sotheby's set up offices here last year — and Russians have been dropping millions on the art market. Tom Ford, meanwhile, will unveil two shops this year.

"The growth of high-net-worth luxury consumers is staggering," Ford said, confirming the accepted wisdom on Russia. "This emerging market is among the biggest spenders on high-end luxury goods, behind the U.S., Japan and China."

It's at the lower end of the market, however, where the most dramatic changes in retail are taking place, as Russian shopping habits shift from a preference for markets to an embrace of malls and superstores. Ikea has 10 Russian stores in Moscow, Saint Petersburg and regional cities such as Kazan and Novosibirsk. Each of them anchors out-of-town shopping malls built by the company. Other tenants include Finnish department store Stockmann and sports retailers such as Adidas and Nike.

Zara and Topshop, meanwhile, are the vanguard of a European fast-fashion invasion. Both are following up debuts in Moscow by moving into the regions.

Food retail is booming, too. McDonald's might have become an established presence — it opened in 1990 — but Moscow is now seeing a surge in the popularity of the coffee culture. British coffee shop Costa Coffee opened on central Moscow's Pushkin Square in March and intends to open 200 more outlets, while Starbucks now has two cafes in Moscow.

"There is one coffeehouse for every 3,187 people" in Moscow, noted a Starbucks spokeswoman, "while in New York the figure is 365, and in Paris it's 126....We think there is definitely a place for a newcomer in the Russian coffee market."

Prospects could be equally bright for Wal-Mart if the world's largest retailer chooses to set up shop here. The share of the modern food retail sector in Russia's grocery market is forecast by AT Kearney to grow from 31 percent in 2006 to 48 percent in 2011, as younger generations of Russians, born under capitalism, reach adulthood. The share of Soviet-style grocery stores, where customers wait at counters while salespeople fetch their produce, is predicted to fall from 21 percent to 11 percent.French retail giants Auchan and Carrefour already are cashing in. The latter is initially sidestepping Moscow to focus on underdeveloped second-tier cities such as Tyumen, Krasnodar and Rostov-on-Don. And British brand Tesco, in addition to trying to crack the U.S. market, is said to be considering Russia. A Tesco spokesman declined to comment on the company's plans, but Yekaterina Prokopova, a spokeswoman for real estate firm CB Richard Ellis in Moscow, said her firm had heard about Tesco's interest in entering the Russian market.

As for Wal-Mart, Russia would fit well into its roster of foreign ventures. It is the only country among the Brazil, Russia, India and China economies in which Wal-Mart does not have or has not announced stores. And it would not present the challenges of developed economies such as Germany and South Korea. Wal-Mart withdrew from both after encountering tough competition.

A Wal-Mart spokesman would not comment on the chain's plans for Russia, except to refer to a press release announcing that Stephan Fanderl, a former supermarket executive at a German retailer, has been appointed to explore opportunities here.

But Russian newspapers have been speculating since mid-2007 about how and when Wal-Mart would enter the market.

Should the retail giant come, there is major opportunity for expansion. Even Moscow, the most crowded market, has only a few high-end chains, Azbuka Vkusa and Sedmoi Kontinent, and scattered midrange supermarkets and discounters. In the regions, there are even fewer.

"People think of Russia oftentimes as only Moscow," said Jeff Kershaw, head of the retail department at CB Richard Ellis in Moscow. "The competition in Moscow is great, to be sure, but in a country with over 50 cities that have over 500,000 inhabitants, we are a long way from saturated. Competition for modern hypermarkets east of the Ural Mountains is simply nonexistent. Beyond the Siberian regions, into the Far East, the markets have not even begun to be penetrated."

The Wal-Mart model — vast shops selling everything from apparel to groceries and pharmaceuticals — should also be popular, judging by the success of similar chains, including Aushan and Russia's Perekryostok, albeit on a smaller scale. Wal-Mart's drive to beat competitors' price points is likely to appeal, with the average wage in Russia still only just topping $500 a month, according to government figures.And the size of Wal-Mart's larger outlets would make them well suited to Russia's idiosyncratic real estate market — rents can vary to almost ludicrous extremes, to the disadvantage of smaller stores.

"An anchor tenant in a shopping mall can pay from $250 to $300 per square meter to up to $1,000," said Ilya Shershnev, a development director at Swiss Realty Group in Moscow. "For large tenants, it could be $500 to $2,000 per square meter. And small tenants pay from $2,000 to $5,000."

But the difficulties of operating in Russia, as other retailers have discovered, are legion.

In November, an Ikea mall in Nizhniy Novgorod was closed for the holiday season after authorities said they discovered 887 fire-code violations. The local press, however, hinted that officials might simply have been looking for bribes.

Whether or not that was the case, corruption is widespread. Transparency International ranked Russia 143rd in a 2007 survey measuring perceptions of public-sector corruption in 179 countries — on a level with Togo and Gambia.

Construction costs, meanwhile, are high, and analysts suggest that Wal-Mart should consider buying into a Russian chain to avoid them. To build a Moscow supermarket, the outlay is typically $1,000 a square meter, Shershnev said. That can climb to $2,000 or $3,000 a square meter including the price of land.

"The challenge for Wal-Mart will be the cost of the real estate against the Wal-Mart business model," said Kershaw of CB Richard Ellis.

A final worry is that the growth in Russian retail is linked to the boost the country's economy has received from record oil and gas profits. Should the price of oil and gas fall, retailers may not find the country such a profitable market.

And if Wal-Mart enters Russia, there could be an unintended consequence, Kershaw suggested: The company might contribute to an improvement in Russia's legendary bad customer service.

"I think that competition will bring better things to the market, especially from the customer's perspective," he said. "Hopefully the days of the surly shop assistant or cashier will be forced to come to an end."

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