Russian Retailers Retreating from Ukraine

Politically divided and severely impacted by the global economic crisis, Ukraine has seen several Russian retailers leave the country.

The combination of difficulties in their home market and the lower profitability of Ukrainian units effectively left them with no choice but to pull out.

On the other hand, Western European companies like Metro and Rewe are looking to invest in Ukraine. Nevertheless, over the next five-plus years, the Ukrainian retail scene is likely to remain fragmented and dominated by domestic players.

During the Eastern European economic boom earlier this decade, many Russian retailers started to expand into regional areas of their own country, as well as into ex-Soviet countries like Kazakhstan, Belarus and Ukraine. Ukraine, in particular, seemed to be one of the most attractive markets because of its large population (45 million) and strong economic growth.

Between 2002 and 2008, five of the leading Russian retailers — X5 Retail Group, Mosmart, O’Key, Paterson and Vester — expanded to Ukraine, mainly in the eastern regions where there is a large population of Russians. Now, however, X5 is the only Russian retailer remaining, and it operates just a few Perekrestok stores.

Divestment from Ukraine actually began in advance of the economic crisis. Russian retailers realized they should concentrate on expansion in their home market, where profit margins were higher. In 2007, X5 terminated a contract with a Pyaterochka franchisee, while St. Petersburg-based O’Key sold its hypermarket before it had even opened. A year later, Paterson sold its supermarkets there.

Vester was the latest Russian casualty, divesting from Ukraine largely as a result of the economic crisis. Facing financial difficulties in Russia, it sold its three Vester Hyper outlets after less than two years. Meanwhile, Mosmart entered Ukraine via a joint venture agreement, but failed to open even one store after experiencing difficulties financing its business in Russia.

European retailers cautious
In contrast to their Russian counterparts, Western European companies like Metro and Rewe view Ukraine as a market with significant long-term potential. Still, while the Metro cash & carry format has been highly successful, the German retailer is more wary about growing its network of Real hypermarkets. Twice postponed, the first Real hypermarket is scheduled to open this month in Odessa.

Metro Group continues to examine market opportunities for its hypermarket format — a wise strategy, considering gaining first-mover advantage in an economy as unstable as Ukraine can lead to significant initial losses.

France’s Auchan entered Ukraine in 2007 with plans to develop hypermarkets with a joint venture partner. Despite cooperating with Furshet, a leading Ukrainian retailer, Auchan has opened only three stores. Further investment has been put on hold due to Furshet’s financial difficulties.

Germany’s Rewe has also been rather slow to expand in the country. The retailer first entered Ukraine in 2000, but has only managed to open nine Billa supermarkets. The company recently revised its strategy for the market, stating that it plans to open approximately 10 new stores each year. This strategy could be highly ambitious and costly; it could also bear fruit in the medium to long term.

Domestic players
For the next five years, the Ukrainian retail scene is likely to remain in the hands of domestic companies, resulting in a slower pace of development for modern grocery formats.
Expansion of modern formats outside domestic retailers’ key regions has been put on hold due to lack of funds: Unlike Russia, the Ukrainian government has not offered any financial help to key market players.

Apart from Fozzy Group, there are no major domestic retail chains, but there are several strong regional players.

X5 has recently stated that the company is monitoring expansion opportunities in Ukraine. Having given up on the development of its own stores and expansion through franchising, M&A activity could be the fastest and most efficient way for the retailer to establish itself in the country. Because of X5’s difficult financial situation in its home market, however, a merger is more likely than an acquisition.