Russian consumer market becoming more westernized

25/ 10/ 2006

MOSCOW. (RIA Novosti political commentator Alexander Yurov) - The Russian
market is quickly developing modern commercial methods.

Hypermarkets and supermarkets are springing up all over the country. It is
indicative that from 2003 to 2006 their number surged from 8,991 to 20,524.
Modern commercial outlets' share of the market is expected to triple by
2010, reaching 50%.

Several international retail chains are successfully operating in Russia,
including Auchan, AVA, Metro, Migros Turk, REWE, SPAR and Tengelman. The
Russian consumer market is becoming increasingly westernized, according to
the latest research by PriceWaterhouseCoopers (PWC). Merchants are offering
more and more luxury and premium goods and are implementing different
discount programs. Likewise, Russia's largest companies are actively
expanding into different countries and regions. Yet the world's leading
companies are still in no hurry to come to Russia: such giants as Carrefour,
Makro, Tesco and Wal-Mart are not there yet.

PWC conducted its survey in three developing regions: South America, Asia
and Eastern Europe. It showed that the biggest players on the international
consumer market have outlets in all three of them, but they do not even have
plans to open stores in Russia.

This is no surprise. Chris Skidrrow, a partner at PWC, says that money goes
where it is welcome and stays where it is taken care of. Investors are
comparing Russia with other emerging markets, such as China, India, Brazil,
and Argentina, he says. So far, a recession in GDP growth has been
compensated for by growing oil prices and personal incomes, as well as by
increasing consumption. However, a country's general business conditions are
also very important. In most cases, investors look at the pace of tax and
government reforms before putting their money in an economy. Brazil is the
leader in this respect, Skidrrow said.

Yet another important factor that concerns investors is demography. China
and India seem much more attractive for analysts. India's population grew by
15 million people, or about the population of Moscow, in one year alone.

Despite all these factors, the Russian market has been actively developing
for several years in a row. Over 80% of firms working in Russia have seen
their profits surge by over 10%, according to ACNielsen, which recently
published its outlook for the Russian consumer market. Most of these
companies intend to expand their activities. Looking at the Russian consumer
market, the share of hypermarkets and supermarkets grew by 45% in 2001, 41%
in 2002, 22% in 2003, 54% in 2004 and 25% in 2005. Despite a slowdown last
year, growth will continue this year.

The Russian government remains optimistic, despite last year's drop in
direct investment from $15.5 billion to $14.5 billion. This is nothing
extraordinary, confirm PWC analysts. Companies that have already invested in
Russia are now waiting for returns. By 2008, direct investment in the
Russian economy is expected to double. But even at this rate, the country
will not catch up with China, where direct investment has already exceeded
$79 billion.

The absence of the biggest retail players should make the Russian
authorities look for hidden factors discouraging them from entering the
market, Skidrrow says. One of them, in his opinion, could be the country's
relatively poor reputation...

Yet most probably, it is all much simpler than that. The best markets in
Russia were already occupied by local players, and it is becoming
increasingly difficult for foreign firms to enter these developed areas.
Last year many observers pointed to Wal-Mart's activities, but it did not
dare open a hypermarket in Russia.

Russia is the only country in the world where the onslaught of international
retail majors met with an immediate response from local players that were
quick to learn modern trade methods. At the same time, Russian companies are
expanding fast. The gap between large and small Russian firms is growing
quickly, especially in terms of profitability. This is why Russian companies
are now looking for new opportunities abroad. Russian money is more and more
often invested in other countries.

Today there are only three truly foreign firms among Russia's top ten
retailers, and even they are at the bottom of the list. Auchan is ranked
6th, Ramstor 9th and Germany's REWE 10th. Unlike in China, India and Brazil,
foreign companies encounter tough competition in Russia, which is typical
for well-developed markets.