Assessing Wal-Mart’s Russian Prospects

Wal-Mart’s $100 billion international business may only account for one-quarter of the company’s sales, but as an individual unit it would be the fourth-largest retailer in the world.

Wal-Mart, like peers Carrefour and Tesco, is significantly ramping up overseas expansion efforts to offset slowed growth in its domestic market. Planet Retail predicts that by 2015, Wal-Mart’s international sales will have doubled to $200 billion.

There is plenty of room for growth in lucrative markets like China and Brazil, where Wal-Mart already has a strong presence. The fragmented nature of these markets means that Wal-Mart is almost guaranteed to acquire smaller, regional chains; as we saw last year in Chile and most recently in the U.K., Wal-Mart isn’t averse to acquisitions if it fits its strategy.

But can Wal-Mart crack every market? Doug McMillon, CEO of Wal-Mart International, recently noted that acquisition might be the best way to enter Russia, a market notoriously difficult for foreign retailers due to political and legal barriers and poor infrastructure. The retailer has had an exploratory office with 30 employees in Moscow since 2008 and has been in acquisition talks with local companies, according to McMillon.

Carrefour traded in Russia for all of three months before exiting, and Germany’s Edeka and Turkey’s Ramenka found it equally difficult. Long-term opportunities could outweigh the barriers, however: With 142 million inhabitants, Russia is by far the largest consumer market in Central & Eastern Europe and could serve as a springboard into neighboring markets like Ukraine.

Without a doubt, there will be further consolidation in the Russian market. X5 Retail Group, which currently holds 9 percent market share, plans to double its sales every three years for the next decade. Opportunities for growth in the country are bountiful.

Growth through aquisition
X5 and Wal-Mart are seeking possible targets among retailers that have a strong local position. X5 acquired Moscow-based supermarket chain Paterson this year, improving its already strong position in Moscow and enhancing its market share in St. Petersburg.

Another opportunity has recently arisen in Moscow, where Kopeika plans to sell about 30 percent of its share through an IPO this fall. Kopeika operates more than 500 small price-oriented supermarkets in Moscow and central Russia. The retailer is deeply in debt and, as a result, is now partly owned by state bank Uralsib. Wal-Mart and X5 are reported to have made unsuccessful attempts to acquire Kopeika.

Although Wal-Mart is holding its cards close to the vest, the most obvious acquisition would be St. Petersburg-based Lenta, a chain of 36 hypermarkets that generates $2 billion in sales. Wal-Mart had already negotiated with Lenta’s owners but failed to secure a deal. Disputes between the main shareholders over strategic development resulted in Lenta losing market share St. Petersburg to rivals O’Key and X5.

The financial crisis played into the hands of strong retailers, namely X5 and Magnit, further widening the gap between them and medium-sized retailers like Dixy Group, Kopeika and Victoria Group. Acquiring a medium-sized retailer means Wal-Mart would gain a strong local position but underdeveloped logistics and poor store efficiency.

Wal-Mart has stated that it continues to consider organic expansion, but such a strategy would be risky and unlikely to return immediate rewards. Retailers already present in Russia have taken most of the attractive sites for hypermarkets in Moscow, St. Petersburg and other large cities. Wal-Mart may look to develop a smaller format that would make sites easier to come by, but this would require the retailer to build up a strong relationship with local authorities – a process that could take years.

France’s Auchan has been one of the few foreign retailers to find success in Russia – it took the company five years to open 18 stores, and Auchan only really established after it acquired 14 Ramenka hypermarkets from Turkish company Migros Türk. In the end, Wal-Mart might find the general pace of organic expansion too slow for it to attain a market-leading position in Russia.