STANDING in front of a bank of display screens in Krasnodar, Alexander Barsukov, an executive at the Russian grocery chain Magnit, can see that a hypermarket in Nizhnekamsk, a town of 230,000 people 1,900km (1,200 miles) away, is running low on “Group A” products–ones such as bread and milk that account for 20% of stock but 80% of sales. Mr Barsukov has the store manager notified to restock the shelves; a “control call” will follow up in 40 minutes. The point is to “catch mistakes fast,” he says.
It is this combination of advanced IT systems and efficient logistics that has propelled Magnit to the top of the Russian food-retail industry, a fast-growing, $300-billion-a-year market that is now Europe’s largest. In April, for the first time in its 15-year history, Magnit bested its competitors by posting $4.3 billion in quarterly sales. Long the underdog, Magnit has become an investors’ favourite: its share price has nearly doubled over the past 12 months.
The company’s success is largely an expression of the obsessive attention to detail of its 45-year-old founder and chief executive, Sergei Galitsky. He has made his $8-billion personal fortune by catering to the needs of price-sensitive shoppers in the country’s regions. That makes him not only the rare Russian oligarch whose wealth has nothing to do with natural resources, but also the only one who does not make his home in Moscow or in one of Europe’s fancier cities but in Krasnodar, a regional capital in south-western Russia. That food retailing is an unglamorous low-margin business that requires constant attention may have helped Magnit avoid the unwelcome intrusions of rapacious Russian bureaucrats.
For his focus on smaller, less prosperous markets, Mr Galitsky is often compared to Sam Walton, the late founder of Walmart, who built a business empire selling to budget-minded Americans. Yet in one way Magnit has beaten Walmart, at least on its own turf. The American giant opened an exploratory office in Russia in 2008, only to pull out of the country two years later without opening any stores.
Mr Galitsky has his roots in logistics–or what Justin Leverenz of Oppenheimer Funds (which owns around 4% of Magnit and is its largest minority shareholder) calls the vitally important but “unsexy back end” of the retail business. The Rubik’s Cube challenge of moving goods around a huge and unforgiving country, says Mr Galitsky, suits his personality of always wanting to “make things a bit better, a bit more perfect.”
In the 1990s he started out as a shuttle trader, importing cosmetics and cleaning products from Dubai. Later he and his partners became the sole regional distributors for Procter & Gamble. In 1998, at the height of Russia’s financial crisis, he opened his first retail location. Magnit grew organically, with Mr Galitsky opening up one new store at a time and building up the company’s in-house IT system and logistics network at each stage of growth. As Mikhail Terentiev of Otkritie Capital says, that meant Magnit has had “no need to catch up with its size” even as it opened new and bigger stores. In its early years Magnit largely stayed out of Moscow and St Petersburg. Instead it expanded in the provinces, where sites were plentiful, modern retail was often nonexistent, and the lack of competitors meant it was relatively easy to develop presence and loyalty.
This strategy contrasts with that of Magnit’s largest competitor, the X5 group, owned by a banking magnate, Mikhail Fridman. Over the past decade X5 has gone after consumers in Russia’s largest cities, where incomes may be higher, but attractive locations are hard to find and competition is tight. At the same time, X5 sought to grow through mergers and acquisitions, which may have pleased investors for much of the mid-2000s but allowed inefficiency to build up in its operations.
By 2010, when X5 bought the Kopeika chain, adding 700 outlets and 20% to its size, it was struggling to manage ordering and distribution across its network of stores. Natalia Smirnova of Deutsche Bank says X5 failed to consolidate its portfolio of brands, and is now left with “a bunch of separate chains that never actually integrated.” Among other things, that means X5’s IT systems are disjointed or even nonexistent–some of its stores do not have bar codes on their shelves. Magnit, in contrast, has had its tills hooked up to its distribution centres for a decade.
Magnit is also rolling out more nuanced uses of technology. After executives noticed that cashiers were getting sick in winter months, Magnit put temperature sensors near the exits of its hypermarkets that give warning if it is too cold at the checkouts. Air-quality monitors, meanwhile, check for bacteria near the meat aisle and tell store managers if it needs cleaning.
To Russia with lorries
Although it has an attractive and growing consumer market, Russia can be an unforgiving place for retailers. The country is notable for its huge distances, low population density and horrible roads. Options for outsourcing logistics are scarce, so like Zambeef (see earlier story) Magnit has had no choice but to do much of the work itself. It has a fleet of almost 4,500 lorries, making it Russia’s largest shipping company.
Despite rising wages, the average Russian consumer still puts 40% of the household budget towards food costs, double the EU average. That makes shoppers highly price-sensitive. Mr Galitsky says that when Magnit lowered the price of bananas by one rouble ($0.03), it sold 100 tonnes more each day. Then again, the chain’s focus on everyday basics is helping to insulate Magnit from Russia’s current slowdown.
Magnit still has plenty of room to grow. It has just 6% of the Russian food market, far less than, for example, Tesco’s 30% share in Britain. Modern grocers have only about half of Russia’s food-retailing sales; open-air markets and neighbourhood produkty shops make up the rest. Mr Galitsky says he wants to have 17,150 shops by 2018, up from around 7,100 today.
One day Magnit will have to think about other revenue streams, whether from online ordering, loyalty cards or supplementary businesses such as credit and insurance. It will also need to expand its non-food offerings–now less than 10% of its business–and do more to make shopping in its stores enjoyable. But those decisions are five years off, if not more.
Mr Galitsky is a football fan and owns a local team, FC Krasnodar. He has invested in a gleaming new youth-football academy to develop a new generation of players for the squad. In football, as in retailing, Mr Galitsky favours organic growth: he has no interest in buying high-priced stars; rather, his dream is to field a championship team made up of youngsters who came up through his academy.
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