Mamas & Papas has become the latest UK retailer to unveil expansion plans for Russia, attracted by the scale of opportunity. But building a business in the country is not always straightforward.
Mamas & Papas intends to open 25 stores across Russia. The country’s scale makes its appeal obvious, but it also has a uniquely challenging business culture. And factoring in both in any expansion strategy is imperative.
With a population of 145 million, the majority of inhabitants living in cities, more than 13 cities with populations above 1 million, and a generally healthy economic outlook because of its oil and gas resources, Russia has been on retailers’ horizon for more than a decade.
According to figures from global retail analyst Planet Retail, total retail sales are predicted to reach $636.8bn in 2012, and the forecast for 2015 is $847.4bn.
Key international players present already include DIY group Kingfisher, Auchan, Metro, Rewe, Finnish retailer Kesko and Ikea, which last year revealed plans to invest €180m (£154m) to open three new stores in the country.
Fashion retailers already operating in Russia, often through franchised stores, include Marks & Spencer, Arcadia, H&M, Inditex, Next and Gap, which opened its first franchised Banana Republic store in Moscow last September.
Foreign retailers are mostly in markets such as groceries, clothing and footwear, consumer electronics and DIY, according to Russian retail analyst PMR. The fashion sector is still comparatively undeveloped, but is growing as consumer incomes rise.
Grocery has performed particularly well over the past decade, and accounts for almost 50& of all sales, according to Planet Retail. According to IGD analysis further, Russia will be among the top five grocery markets worldwide by 2015.
However, entering the Russian market, whether through organic expansion, mergers and acquisitions, joint ventures or franchising, also brings particular challenges. Adapting strategy to the Russian business culture is vital, says Milos Ryba, senior retail analyst at Planet Retail. “Red tape and corruption is a major problem,” he warns.
Retailers must work hard to avoid such problems and develop a good local network of contacts. “You must be well connected to local authorities in order to open a store in a reasonable time frame,” he says.
Other challenges include poor infrastructure outside Moscow and St Petersburg, long distances between cities, low consumer spending in small towns and a lack of loyal middle management, he adds.
As markets such as Moscow and St Petersburg become increasingly saturated, new players might also struggle to secure space for organic expansion, so Ryba recommends any retailer should try to enter through mergers and acquisitions.
Entering the Russian market can end in failure. International retailers to have beat the retreat include Carrefour and Migros Turk. Walmart has had difficulties getting any venture off the ground there.
However, Ryba says: “I would certainly encourage any retailer to consider Russia as a market. It’s a massive market and it’s got great potential”.