Russia (officially known as both Russia and the Russian Federation) is the largest country in the world by area and is also the ninth most populous nation with around 146 million people.
It has vast natural resources and a highly educated workforce. There are fifteen cities with over a million in population. After many years of consumers having virtually no choice, Russia has become a nation of fashion followers. It offers a large market for retail goods and services. The Russian retail market is the largest in Europe by future pipeline and is the second largest after France by existing stock. In spite of the fact that the retail market now has to face challenging conditions there is still a potential for further development.
|Private Consumption Growth||-9.5||-4.6||2.6||2.0||2.9|
|Unemployment rate (%)||5.6||5.9||5.9||5.6||5.1|
|Interest rates Short Term (%)||14.8||11.3||8.6||6.7||6.3|
|Interest rates 10-year (%)||11.1||9.0||8.3||7.3||6.9|
NOTE: *annual % growth rate unless otherwise indicated. E estimate F forecast
Source: RenCap-NES Macro Monitor, 19 March 2012
|Population||146.5 MILLION (2016)|
|GDP||US$ 1,953 billion (2012)|
|Public sector balance||10% of GDP (2012)|
|Parliament||Presidential Federal Republic|
|Head of State||Vladimir Putin|
|Election date||March 2018|
|RETAIL SALES GROWTH: % CHANGE ON PREVIOUS YEAR|
|LARGEST CITIES (2010)|
MAJOR DOMESTIC FOOD RETAILERS
X5 Retail Group (Perekrestok, Pyaterochka, Karusel), Sedmoy Kontinent, Dixi, O’key, Lenta, Magnit, Monetka, Vester, Verny.
MAJOR DOMESTIC NON-FOOD RETAILERS
Detskiy mir, O’stin, Gloria Jeans, Kari, Centro, oodji, Zolla, Lady & Gentleman, Snezhnaya Koroleva, Eldorado, M’Video, Svyaznoy, Sportmaster, Metrika, Tvoy Dom, Domocenter.
INTERNATIONAL RETAILERS IN RUSSIA (a selection)
Prada, Gucci, Chanel, CK, Hermes, Zara, GAP, Next, Banana Republic, Marks & Spencer, Mango, Uniqlo, New Yorker, H&M, Calzedonia, Adidas, Nike, Puma, Auchan, Metro Group, MediaMarkt, IKEA, Castorama, OBI, Leroy Merlin.
FOOD & BEVERAGE OPERATORS
McDonald’s, Burger King, KFC, Starbucks, TGI Fridays, Dunkin’ Donuts, Subway, Costa Coffee, Il Patio, Planeta Sushi, Sbarro, Shokoladnitsa, Teremok, Kroshka-kartoshka, Wokker, Krispy Kreme.
|SHOPPING CENTERS||STREET RETAIL||SUPERMARKETS|
|10/11:00 - 22/23:00||10/11:00 - 22/23:00||10/11:00 - 22/23:00|
While modern retail only arriving in Russia 15 years ago, shopping has become a cultural pastime for many. Over the last two decades, the country has gone through a major cultural change, leaving behind many old habits and traditions. As a result, consumer behavior is still forming, thus retailers face structural changes in consumer habits.
After several years of active economic development, the market situation has changed. Current financial and economic instability in Russia means the retail market is to face challenging conditions: weakened demand, rising vacancy rate and changing leasing terms. However according to the official forecasts, retail turnover and disposable income are expected to stabilize and start gradually growing in the coming years.
The total existing quality retail stock in Russia totaled 18.7 mn sq m GLA or 180 sq m per 1000 inhabitants, twice below the European average of 368 sq m. The majority of quality projects are located in large cities, though recently the activity has also grown in cities with populations less than 500,000 people.
2014 was a record year for new construction in Russia with the delivery of several large-scale schemes (such as Aviapark with GLA of 230,000 sq m in Moscow, the largest shopping center in Europe). In 2015 in excess of 1.7 mn sq m was added to the market. Development activity was spread across the country with Moscow welcoming 30% of new shopping centre space.
In the period of economic turndown consumer behavior has changed and footfall has shown a slight decrease. However established shopping centres maintain relatively high occupancy levels.
Although the delivery of new projects is uncertain and demand is not as high as several years ago, Russia still dominates the development pipeline among European countries for 2016-2017. The Russian retail market is still under-saturated.
There is a limited number of streets suitable for international brands which is why the majority of them prefer to open their stores in shopping centres. High street retail is mostly represented in Moscow and St. Petersburg. The high street market is unsophisticated and non-transparent, although signs of improvement are being seen. The climate also restricts footfall. Though in many cities with a population less than 500,000 people street retail and non-quality retail formats still dominate due to the lack of alternative opportunities.
The Retail Outlet format is yet not widely presented in Russia. Now there are three outlet centers in Moscow (the first one was opened in 2012) and one has opened in St. Petersburg. Developers are planning projects due to retailer demand for this new format.
In 2009-2013 retail turnover in the e-commerce sector showed active growth by 40% on average each year. In 2014 the growth was less, about 30% and by the end of 2015 indicators remained stable. Currently the share of e-commerce in total retail turnover in Russia is only 3% or around 12 bn USD. Only half of internet users do shopping online, and the developing logistic infrastructure of large retail chains has positive impact on customers’ activity in this sector, so there is huge potential for this sector.
It is possible to enter the Russian market directly, though one of common routes is via franchise. One challenge faced by brands, other than real estate, is finding and selecting a local partner. There are numerous groups with multiple international brands and varying experience and capability to choose from.
Big box retailers such as IKEA, OBI, and Auchan entered directly. Large gallery retailers such as H&M, Inditex, Uniqlo and Mango generally have direct operations. A recent trend shows that brands, especially in the luxury market are breaking away from their local partners, examples include Chanel, Prada, Hermes and Swatch Group.
NEW ENTRANTS TO THE MARKET
|Crate & Barrel||Prenatal||Forever 21||Lefties||Laduree|
|Monki||Sinsay||Disney||John Varvatos||Shake Shack|
|NAME||CITY||SIZE (GLA SQM)||YEAR OPENED|
|Golden Babylon Rostokino||Moscow||170,000||2009|
|MEGA Tyoplyy Stan||Moscow||149,591||2002|
|MEGA - Omsk||Omsk||127,300||2009|
|MEGA Belaya Dacha||Moscow||120,913||2006|
|SBS Megamall 1 Phase||Krasnodar||120,600||2009|
|Vegas Crocus City||Moscow||116,700||2011|
|KEY FEATURES OF LEASE|
|Lease Terms||Standard lease terms are between 3-5 years with some up to 10-25 years for anchors. A standard lease agreement is not supposed to include break option.|
|Rental Payment||Rents are typically payable monthly or quarterly in advance. Compound rental rates (fixed rent and a percentage of turnover) are almost always used in shopping centers. Normally, the percentage of turnover varies between 3-7% for anchor tenants of retail gallery, 12-15% for retail gallery operators, 10-15% for food-court operators and restaurants, 1-3% for large anchor tenants (hypermarkets). The rent deposit required in quality shopping centers is typically 1-2 months rent equivalent (bank guarantee optional).|
|Rent Review||After the financial crisis, rent reviews have become more popular.|
|Service Charges, Repairs and Insurance||A service charge is usually payable in multi-tenanted buildings and covers management fees, security, cleaning, landscaping, internal maintenance of common parts, external maintenance and insurance, servicing of elevators, water, heating, air conditioning, management fees and property taxes. It includes internal maintenance and insurance of rented accommodation, as well as utility charges and VAT. Tenants are mainly responsible for internal repairs and maintenance, while landlords are responsible for common areas (cosmetic repairs generally) and structural repairs. Service charge is payable by tenants at either an “open book” basis or as a fixed cost. Utilities payments are often included in the service charges, but it depends on the landlord and different types of projects. Building insurance is normally charged back to the tenant via service charge.|
|Property Taxes and other costs||On rents and service charges VAT is payable (currently 18%). Local property taxes are not paid separately, they are generally included in the service charges.|
|Disposal of a Lease||Sub-letting is usually not common under the terms of the lease.|
|Legislation||Relations with tenants are regulated by contracts, which should answer general statements of the civil law, no special legislative acts are issued.|
Ekaterina ZemskayaPartner, Head of Retail
Ducat Place III 6th Floor;
Gasheka St. 6; Moscow, Russia 125047
Tel +7 919 105 2101