Thomas White Global Investing
Russia Stamp
October 30, 2009
A Postcard from Europe
Russia: Retail Struggles Intensify

Russia supermarket

The Russian economy climbed out of recession in the July-September quarter, and retailers are hoping that a modest rise in August retail sales would set the trend for the rest of the year.

It was literally a bolt from the blue, a decision that took everyone by surprise. In a low-key announcement, Carrefour, the French retailing giant, said that it would pull out from what seems like an extremely promising and exciting market – the Russian retail space.

It is not without irony that Carrefour translates into crossroads in English. For, indeed, in Russia it is precisely at the crossroads that the world’s second largest retailer found itself. Carrefour cited the ‘absence of sufficient organic-growth prospects and acquisition opportunities’ as its main reason to pull out of the Russian market. After opening its first hypermarket in June, Carrefour had launched its second Russian center in Krasnodar just last month. The retail behemoth said it would be unable to reach a ‘leadership’ position in the competitive Russian market, especially in the saturated Moscow region.

Just how worrisome is the Russian retail industry scenario? After its surprising decision to exit operations in Russia, questions are being raised not only about Carrefour’s international strategy, but more importantly it throws Russia’s struggling retail industry into sharp focus. Retail sales in Russia were down 9.8% in August compared to last year, and unemployment stood at around 8.4%. Sales had begun dropping in February for the first time since 1999 as a weak ruble and the gloom of the recession curbed Russian spending. The recession also prompted Russians to put almost 17% of their income in savings accounts last quarter, and dire statistics forecast almost one-third of the country’s clothing retailers will shutter their shops by the end of this year.

What appears to be a major stumbling block is corruption. Western retailers typically find themselves having to wade through bureaucracy and red tape, which pushes up hidden costs, and makes Russia an expensive and bothersome destination. Sales prospects are also concentrated in the higher income Moscow hub, with Russians still making the transition from street markets and family-owned local shops to larger retail superstores.

Yet this is a country with a population of 143 million, and despite the recent recessionary blues, Russia still remains poised to be one of the top performers in the BRIC bracket. According to the AT Kearney Global Retail Index, Russian is the second most-favored destination for global retailers. Although recent spending power has been low, the country is still one of the world’s largest oil and natural gas producers, and Russian wallets are only going to grow in the future. Compared to sickly markets in recession-plagued Western Europe, Russia perhaps offers some of the brightest avenues for investors and retailers alike. There may be difficulties this year, but it appears that the long-term growth story of Russia is intact. Carrefour’s exit may just be another’s gain in a $558 billion retail market.

* Disclaimer: As of October 30, 2009, Thomas White International, Ltd. does not hold any securities of Carrefour mentioned above in any of the portfolios managed by the firm.


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