Thomas White Global Investing
Emerging Leaders

Emerging Leaders

November 2012

Sergei Galitskiy, Founder & CEO, Magnit OAO, Russia


Sergei Galitskiy

Image Credit: Magnit OAO

“You can do business here (in Russia). There are certain problems but I don’t know a single country where there are none …”

— Sergei Galitskiy, quoted in a Reuters news report


Sergei Galitskiy, the founder and chief executive of leading food retailer Magnit OAO, is Russia’s answer to Sam Walton, the pioneering entrepreneur who redefined the way small-town America shopped. If Newport, Arkansas was the Wal-Mart patriarch’s playground, Galitskiy tested the waters in his home town of Krasnodar.

After serving his mandatory military service, Galitskiy graduated with a degree in economics and briefly worked in the banking sector. Meanwhile, the disintegration of the Soviet Union and the resulting chaos had provided enough elbow room for the manipulative “oligarchs” to corner some of the country’s prized natural resources companies. Ambitious businessmen thronged the corridors of power in Moscow, leaving the likes of Galitskiy out in the cold.

Bound by the rationed state-sponsored supply of essential goods for more than six decades, anything labeled “foreign” instantly appealed to the sensibility of Russians living in the countryside. TransAsia, founded along with his partners, was Galitskiy’s first entrepreneurial venture. The business involved the distribution of perfumes and cosmetics manufactured by the likes of Procter & Gamble, Johnson & Johnson, and Avon. After running the distribution business for some years, Galitskiy moved into food retailing in 1998 by setting up his first shop in Krasnodar, 1,300 km from Moscow.

Galitskiy’s business model was simple: selling food items to the low and middle-income sections of the population through convenience stores located mainly in Russia’s suburbs and small towns with populations of less than 500,000 people. With 6000 stores now, Magnit’s scorching pace of growth is testimony to a strategy that has yielded rich dividends not only to its promoter but to millions company shareholders who have shared Galitskiy’s vision since the company went public in 2006.

The choice of retailing also worked to Galitskiy’s advantage as it was not as capital intensive as the metallurgy or oil and gas sectors. And the playing field was wide open with few competitors in sight. Galitskiy was convinced that irrespective of the economic situation, the country’s 140-million strong population would open their wallets for something as basic as food. Above all, the crucial factor that fueled Magnit’s meteoric pace of growth was the rise of a middle class with purchasing power and an insatiable urge to enjoy the good things in life.

Driven by ideals of self-reliance and entrepreneurialism rather than by “connections,” Magnit’s ubiquitous red and white hypermarkets and discount groceries have rewritten the rules of retailing in Russia. Magnit’s phenomenal growth over the years has also pushed up Galitskiy’s personal fortune, estimated at about $6 billion based on his 39% stake in the company, making him the richest Russian outside the natural resources sector.

Admirably, the success — Magnit opens three new stores a day — has not gone to his head as Galitskiy details his plans to expand further into the far-flung regions of Russia, including Siberia. Galitskiy’s development plans have a clear purpose in mind: to increase market share in a highly fragmented sector. The fact that the top five retailers combined account for just 13% of the market is an indicator that the battle still has a long way to go. Magnit itself has just a 4% market share despite its presence in 1,800 towns and settlements across the vast country. Interestingly, Magnit has a negligible presence in Moscow, with only 32 stores, a fallout of Galitskiy’s overemphasis on regional markets. However, realizing that the company’s revenues may suffer without a significant presence in the capital city, Galitskiy has now focused his attention on the big urban market.

Magnit has grown rapidly by capturing business from small neighborhood stores and outdoor markets that still account for a majority of Russia’s annual retail food sales. Though Magnit still may have the first-mover advantage, the outcome of the race has become unpredictable as big retailers too set their sights on growth outside Moscow. Gearing up for the competition, Magnit said it has boosted capital spending to open even more stores, hypermarkets, and cosmetic stores than planned earlier.

Clearly, what Galitskiy has accomplished in the Russian market is a triumph for entrepreneurialism in a country that thirsts for business heroes. And Russian consumers, from small towns like Krasnodar and urban hubs such as Moscow, will raise their glasses to that.

 

 

 

 

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