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Russia’s retail market set to EXPLODE with increased tourism

Hard times in Russia do teach happy economic lessons in sometimes-painful ways.

Not very long ago in Russia the towns with residents numbering over one million were the regional rough equivalent of Home Depot, Tedesco, Walmart and IKEA all rolled into one populated area. People would takes days off to travel from the outlying towns and villages to shop in the cities for just about everything that was simply unavailable to them locally.

This of course changed, and over time and throughout the first decade of this millennium the construction of hypermarkets and planned retail trade centers spread like a wildfire throughout the country. In most cases, the result was “cookie-cutter” retail. A hypermarket in Vladivostok, Ekaterinburg St. Petersburg, or Moscow contained pretty much the same retailers and stocks with prices varying to reflect shipping costs to deliver the goods to shelves.

This replication, or standardization, was seen not only cross-country, but also increasingly cross-town. Sameness and standardization allowed for reduced overheads on the one hand, but played into the strongest aspects and capabilities of e-commerce on the other hand – a conflict conundrum. Hypermarkets and malls became boring in the yes of many Russian consumers, and increasingly seen as inconvenient.

Trade and economic sanctions most certainly also had their effects, most notably in the 2014 – 2016 period when the buying power of the consumer’s ruble took a major hit. A further effect that is seen worldwide as well is the rapidly changing business of direct to buyer retail and the incredibly consistent and strong growth of e-commerce. Since the end of 2016 the retail spend through the internet in Russia is markedly stronger than retail footfall in stores.

Foot traffic in Russia’s key hypermarkets and Trade Center malls continues to stagnate, when compared to e-commerce equivalents. This despite a robust resurgence in Russian disposable incomes during Q1 and Q2 2018. Median wages today hover at the monthly US Dollar equivalent of $700, which is up from its three and 4-year depths of $400, but still below the pre-crisis $800.

The improvement in disposable incomes, which is what remains in your wallet after paying for food and utilities, has only emerged in the plus column since January 2018. It is still early days and in any event, it is doubtful that the over-the-top spending sprees seen by consumers here or their willingness to increase their retail debt exposure will increase anytime soon. After all, hard financial times do teach their economic lessons in sometimes-painful ways.

The trend in bricks and mortar retail is towards neighborhood specialty shops which are attempting to fine tune their offerings to occupy those niches e-commerce has trouble with such as short shelf life goods, and the daily consumer necessities that are more convenient to pick up next door, rather that hoofing it to a hypermarket or mall.

A further factor is that while the road infrastructure has improved beyond recognition, the use of personal vehicles has become less frequent due to increased prices for of fuel, and the cost/opportunity inconvenience from increasingly regulated parking.

One of the emerging industries which has benefitted from the deep changes in Russian retail besides import substitution are home delivery, courier services, as well as neighborhood pick-up centers, most of which are e-commerce spawned. The goal of course is to satisfy the customers need for speedy delivery gratification between their order, and the time they get their purchase in hand. They now employ significant and consistently increasing numbers of people, albeit at the lower end of the wage scale.

Changes are certainly afoot in market Russia, and while the country may never have gone through the “mom & pop” shops that defined the American retail experience up until the mall and superstore revolution, we may see a different equivalent emerge in Russia. Some observers see a strong possibility that the neighborhood specialized service shops will be franchise-friendly, enabling the small businessperson to participate in these new retail dimensions. This is especially relevant when linking to the strength of franchise advertising and marketing power.

Retail franchising, especially in the realm of small business is trending today in Russia. This is largely due to the fact that franchises tend to be more stable and get a bigger bang for the buck in exposure, recognition and marketing. Russian businesspersons looking to get involved and acquire tried and tested trade vehicles is increasing annually by 15-20% according to franchise sources.

At year end 2017 there were approximately 2,500 franchising enterprises in Russia. Nearly 900 of them are developing actively. The most popular franchises and highest volume are the small business models in the investment range of $15 000 – $150 000. Approximately 14% of entrepreneurs are ready to invest $150 000 – 500 000 and 4 – 6% have the wherewithal to invest over $500 000.

It is also worth considering that Russia in 2018 will host the FIFA World Cup. Matches will take place in 11 cities across Russia. The retail and services infrastructure that has been developed will remain after the games and will support those regions in attracting tourism long after the World Cup. According to the Russian Union of Travel Industry, inbound tourism to Russia in 2017 grew by 20% since 2010, and the domestic tourist flow increased by 85% since 2010. This trend looks verly likely to continue well into the future.

In short, this economic adventure continues to evolve at a quick rate and it certain to generate new and dynamic opportunities in Russia for both consumers as well as investors as the retail landscape continues evolving in quick-time.

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