Russia has been significantly impacted by the global financial crisis, sending shockwaves through the country's retail landscape                                                                                        From May 2009 By Milos Ryba Milos Ryba is a retail analyst for Planet Retail monitoring Central Eastern European markets

After a 10-year boom that saw real GDP grow by 8 percent, 2009 will see the Russian economy shrink by 5 to 10 percent, depending on the price of oil. The ruble has lost more than 30 percent of its value against the dollar, which has led to high food prices as a substantial amount of food is imported.

These economic difficulties have taken their toll on the Russian retail sector and have prompted the Cabinet's Commission for the Sustainable Development of the Russian Economy to endorse a list of 295 key organizations that are considered to be major contributors to the development of the market. Eight retail chains – X5 Retail Group, Magnit, Dixi, Lenta, Sedmoi Kontinent, Victoria, Pharmacy Chain 36.6 and Kopeika — were included. For the rest, however, the future is quite uncertain.

It is the small and medium-sized retailers that stand to lose the most from the current crisis, facing problems concerning debt refinancing, paying off loans and finding sufficient funds to expand.

Mosmart has not received financial support from the government and is now on the verge of bankruptcy. In 2008, the retailer sold its network of 50 Mosmartik convenience stores in Moscow, although none of the leading retailers showed much interest in the acquisition.

This critical situation is not restricted to Moscow. Alpi, the leading Siberian retailer, has already sold some hypermarkets and properties to pay off debts. Some retail chains are putting stakes in the business up for sale, although finding willing buyers will not be easy. Alpi was reportedly negotiating with Auchan about a possible acquisition, but no agreement was reached.

Shareholders of Lenta, one of the most financially viable retailers in Russia, put an 89 percent stake up for sale, attracting the likes of Wal-Mart, Carrefour and Agrokor. It subsequently withdrew the tender, however, stating that it was just not the right time to sell the business.

Acquisition drive of large retailers
For stronger players like X5 Retail Group and Magnit, as well as foreign retailers such as Auchan, Carrefour and Metro Group, the crisis presents an opportunity to acquire local players (with stores in prime locations and existing logistics networks) at a low price.

Carrefour has made an offer to acquire 75 percent of Sedmoi Kontinent, which would instantly make it one of the top 10 retailers in the country and allow it to set up stores in the Russian capital. Having completely rebranded the Ramenka stores it purchased, Auchan is on the lookout for further acquisitions to consolidate its leading position in the hypermarket sector. Wal-Mart also is actively looking to enter the market via acquisition.

Among the domestic players, X5 Retail Group was interested in acquiring Kopeika, but the supermarket chain's owner, UralSib bank, was unwilling to sell due to problems facing the Russian banking sector. The acquisition of price-oriented Kopeika would be an asset to X5, which is planning to focus on expanding its price-oriented Pyaterochka banner.

As a result of the current Russian retail situation, the leading domestic companies (X5 and Magnit) are likely to consolidate their market share, while the medium-sized players are likely to drop from the Top 15 altogether. The expansion of foreign retailers is likely to significantly increase, underpinned by M&A activity rather than organic growth.

Until now, foreign retailers have only been interested in acquiring hypermarket operators, even though supermarkets and neighborhood stores represent the leading channel in Russia, one that is expected to grow faster than hypermarkets in the medium term.

International retailers are focusing on hypermarket development because there are very few supermarket operators available for acquisition. Dixi and Kopeika may be the only two chains that could be purchased, as an acquisition of Magnit or X5 is unlikely given that they have been supported by huge loans from the government.