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Homegrown food stores fend off foreigners
The top domestic players on the Ukrainian retail food market are embracing new retail formats and strengthening their positions, in an effort to prevent large foreign companies from grabbing a big share of the market, despite this, foreign retail chains have started casting a more interested eye on the Ukrainian retail food sector.
One of the engines that drives the retail industry is the increase in Ukrainian's purchasing power. According to the State Statistics Committee, the population's incomes grew by 30% in 2006, to UAH 475.2 billion, while the amount that Ukrainians spent on goods id services grew by 25%, to UAH 383 bil-n. Retail turnover statistics are also evi- dence that Ukrainians are spending ever more and more: in 2006, retail turnover was estimated at UAH 123.7 billion, which was 25.3% up on 2005. Market experts point out that spending on food accounted for about half of overall retail trade turnover.
Such a rise in incomes and the tendency towards an increase in purchasing power means that the local trade chains will continue developing briskly, while foreign players should place Ukraine at the top of their agenda.
HOMEGROWN HEROES
Last year, the position of the key players on Ukraine's food retail market was relalively unchanged compared to the previous year, but all managed to bolster their oositions to some degree. Among the leaders in food sales are local chains such as Fozzy Group, Furshet, Velyka Kyshenia, ATB-Market, and the two big foreign operators BILLA and METRO Cash&Carry Ukraine.
The Fozzy Group runs a chain of 108 Silpo outlets in Kyiv and the regions, 55 Fora discount stores, 3 Fozzy hypermarkets, 11 Dneprianka stores and 20 Bud Zdorov drug stores. Its turnover in 2006 was estimated at $1 billion.
The Velyka Kyshenia chain, owned by Kviza Trade, has 27 supermarkets in Kyiv and the regions, including stores in the Begemot trade chain, and eight hypermarkets. By the end of 2008, the company plans to raise UAH 1.25 billion to expand the chain, in particular, through the construction of around a dozen shopping and entertainment centers in Ukraine.
ATB-Market, which currently has over 170 ATB outlets, has announced plans to raise their number to 230 in 2007 and thus expand its coverage to 58 Ukrainian towns and cities.
Furshet is- also keeping pace with the development of its competitors and aims to raise the number of its supermarkets from 66 to 112 in 2007. In the longer term, Furshet plans to have 169 supermarkets in 2009. The company estimates its investment in the development of its supermarket chain in 2007 at about $100 million.
PROBLEMS AND TRENDS ON UKRAINIAN RETAIL MARKET
According to experts, the situation in the Ukrainian food retail market can be characterized as "the formation of competition." Nationwide, they point out, the market is not homogeneous, with the most saturated, and correspondingly most competitive market being that of Kyiv. The next most developed markets are in large cities with populations of over one million people - Odesa, Dnipropetro-vsk and Donetsk.
The regional disparity in the level of development is linked with the fact that the big city markets are naturally the most conducive to the development of large chains. At the same time, other regions are lagging behind in the development of food chains - there are few stores in those regions, and the local population is only beginning to appreciate the advantages and comfort of shopping at large outlets like hypermarkets and shopping and entertainment centers.
As a result, experts say that both the large retailers who have been working for some time on the Ukrainian market, and those who are at the stage of planning entry - both domestic and foreign companies - should see nurturing consumer culture in the regions as one of their most important priorities in the development of their businesses.
Some experts even forecast that if a player can take the opposite route - and start expanding from the regions to Ukraine's capital - that player would pose a real threat to the established chains, both local and foreign, especially if it has sufficient capital backing up its development.
UTILIZING FOREIGN EXPERIENCE
Meanwhile, Ukrainian operators say they see no reason to fear competition from the foreign market players. They believe that the interest in the market shown by international chains, including the big European ones, still remain just that - interest. Operators from Ukraine's close neighbor, Russia, have already experienced the pitfalls of penetrating the Ukrainian market, with fierce competition from domestic players derailing their ambitious expansion plans.
The two international players who have successfully managed to set up shop in the Ukrainian market are BILLA and METRO Cash&Carry Ukraine.
Both have been working in Ukraine for some time, and both had the advantage of arriving in the country when the domestic chains were only starting to develop.
METRO Cash&Carry Ukraine is part of Germany's METRO Group. Its turnover in 2006 hit EUR 615 million, which was 80% up on 2005. In Ukraine it operates 13 outlets, including 5 opened in 2006, in Kryvy Rih, Luhansk, Donetsk, Poltava and Dnipropetrovsk.
BILLA Ukraine, which is a subsidiary of the Austrian BILLA concern, has so far opened 8 supermarkets in Ukraine: three in Kyiv, two in Kharkivand Dnipropetrovsk each, and one in Zaporizhia. In 2007, it plans to invest about $80 million in the construction of new supermarkets in Kyiv, Dnipropetrovsk, Sumy and Odesa.
The Ukrainian food retail market currently has three Russian players - Pater-son, Perekrestok and Pyatyorochka. All have foundered in Ukraine for a combination of reasons, including management problems, underestimation of the competition, and a lack of awareness of the differences between Ukraine's market and that of Russia.
Some experts also say that the development of the Russian food retail outlets has been hampered by the fact that the Ukrainian domestic chains have better connections with their suppliers, and, importantly, closer relations with the local authorities.
UKRAINIAN RETAIL MARKET DIFFERS FROM RUSSIAN AND EUROPEAN ONES
One of the key differences between the food retail markets in Ukraine and those in Europe is the considerable consolidation on the European markets - in Europe it is normal for over 50% of the market to consolidated in the hands of three or four large chains. At the same time, comparing the Ukrainian and Russian markets, experts say that in Russia the level of consolidation is even lower than in Ukraine. However, market operators forecast that in three to five years, auout 50% of the Ukrainian market will be split between around five leading retail chains.
Another key difference is the considerably lower number of supermarkets and hypermarkets operating on the market, a symptom of the lower level of saturation of the Ukrainian market.
Experts also say consumer loyalty is muuii weaker in Ukraine than in other countries. Among the main factors influencing the consumer's choice is accessibility: the consumer will chose a supermarket closest to his or her work or home.
Among the major challenges faced by the food retailers is the lack of high-quality trading space for the development of retail chains.
Market operators complain that even newly built facilities lack enough trading space for development. The existing facilities are already split among the operators, therefore new players and for those who want to expand their chains are being forced to invest their own funds in the construction of brand new facilities.
Experts say that local operators are able solve such problems more easily than foreign chains, because the format of their chains in most cases is smaller than that of their foreign competitors, and they can open stores in old but refurbished industrial facilities, which the foreign chains would not consider for development.
Before opening a new facility, a retail operator also needs to find a plot of land, and immediately bumps up against the problem of land allocation. Here, local companies also have advantages over their foreign competitors: with closer relations to the local authorities, they can maneuver around the bureaucracy more easily.
Hiring qualified personnel, especially managers, is also a challenge. A frequent mistake made by foreign chains is to employ foreign managers to work in Ukraine, rather than local employees, which opens up the problem of management misunderstanding the situation on the Ukrainian market. At the same time, it is hardly an easy task to find a well-qualified Ukrainian employee with the required educational qualifications and experience: most of them already have a job.
AMBITIOUS PLANS
Experts forecast that in the next two or three years, Western operators will have little impact on the situation on the domestic food retail market, however, they agree that all of the Western operators currently working in Eastern Europe will in the not-too-distant future open up for business in Ukraine.
The Ukrainian players say that they regularly receive offers from foreign companies to merge or sell their outlets, as they are dynamically developing on a still un-
Local trade chains continue developing briskly, opening new stores saturated market. However, some clai that not all the chains that have made success of business in their home ma kets will necessarily be able to make Hi transition to success in Ukraine.
Polls conducted among Ukrainian ñø sumers indicate that they prefer to be their food at smaller supermarkets, whi hypermarkets, which are a major for for foreign chains along with disc stores, have yet to prove a hit with Ukrainian consumer.
Indeed, market experts say that the I permarket niche in the Ukrainian food i tail segment is practically empty, and | diet that foreign companies who atte to develop that niche may face logis problems in Ukraine.
Nevertheless, slowly but surely, new i ternational retailers are starting to en the Ukrainian market in 2007.
In February 2007, a large Western fo supermarket chain, Germany's Re which is part of the METRO Group, nounced plans to open in Ukraine, is one of Europe's largest food retaile with 318 stores in five countries, incli ing six in Russia. Its sales in 2005 we estimated at EUR 9.9 billion.
In March, France's Auchan announc it had struck a deal with Furshet to buys 20% stake in the Ukrainian chain.
However, retail giants like Tesco, Wa Mart and Carrefour have yet to set foot in the Ukrainian market. Meanwhile, com- j petition among Ukraine's homegrown chains is heating up, and as the big domestic players battle it out, the only sure winner is the Ukrainian shopper.
Source URL: Business Ukraine
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