Russia’s largest grocer, X5 Retail Group has revealed a change to its expansion strategy and will now be targeting small cities and towns with populations of more than 50,000 inhabitants.

Russia’s largest grocer, X5 Retail Group has revealed a change to its expansion strategy and will now be targeting small cities and towns with populations of more than 50,000 inhabitants. The company’s chief executive Lev Khasis said the retailer had already opened 50 stores in different regions in the past three months.

To date, X5 has focused the development of its network of stores in major urban areas of Moscow and St Petersburg, whose inhabitants, on average, enjoy higher levels of income than the rest of the country.

X5 plans to develop in the new regions via its successful low-price format Pyaterochka, initially targeting towns in regions where it has a strong existing logistics presence such as Tver, Yaroslav and Ryazan in central Russia.

The change follows a set of full-year 2010 results, which despite showing like-for-like sales growth of 7%, were outstripped by X5’s main rival, Magnit, which posted like-for-like sales growth of more than 15% in its hypermarket division and nearly 9% in supermarkets. Magnit’s net revenues soared 39% in 2010, whereas X5 reported 24% growth.

The results have proved something of a wake-up call for X5, whose supremacy in the country had previously remained relatively unchallenged in recent years. The change of approach to expansion can be seen as taking the battle for leadership directly to Magnit, the second largest grocer in Russia, which has expanded predominately in towns and cities with fewer than 500,000 inhabitants where competition is very low.

X5 said late last year it expected to achieve 40% growth in 2011, mainly thanks to its recent acquisition of rival Kopeika. It plans to open up to 545 new stores, while increasing capital expenditures by more than 60% to $100m (£62.1m). Magnit said late last year it also planned to continue its expansion drive, targeting 8,000 neighbourhood stores and 500 hypermarkets by 2020.

Nevertheless, Planet Retail expects X5 to retain and possibly increase its lead in the market, more than doubling its share from 5.3% to 11.7% by 2015, while Magnit is expected to grow from 3.7% to 5.9%. With such a relatively low share of the market held by the leading players, there is still room for potential newcomers like Walmart and Tesco to build a presence organically in the country, although the renewed vigour of the two local players is rapidly closing the opportunity for a new entrant to gain a quick market lead.

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Matthew Stych, research director, Planet Retail. For more information contact us on:

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