As sector develops, chains are looking beyond Kyiv
“Retail is the most dynamically developing business field right now,” says Andriy Blyznyuk, director of the National Association for Development of Trade and Service, a union of retail chains.
“National chains are working on maximum expansion,” he says, adding that mergers will be the main tendency in the supermarket chain sector for the next few years.
The facts seem to support his optimism. Supermarket chains, most of which started up in Ukraine five or six years ago, have already outgrown their childhoods, and have accumulated the capital and the managerial potential to go further. And now that they’re established in Kyiv, they’re looking toward the regions, declaring their presence not only in Ukraine’s major cities but also in smaller regional centers.
Going beyond
“The results exceeded our plans,” says Volodymyr Costelman of Fozzy Group, Ukraine’s leading supermarket chain. He says that Fozzy will have sold twice as much volume by year’s end as it did in 2004, and the company will have opened 18 new supermarkets too. The new stores are largely slated for the regions.
Around the country, Fozzy now owns 65 Silpo supermarkets, 3 Fozzi hypermarkets, and 30 Fora discount stores. It also has 13 smaller Dnipryanka stores in Kyiv.
Fozzy’s growth has been big: three more Silpo stores will open in Kyiv by year’s end, with other branches opening in Ivano-Frankivsk, Cherkasy, Odessa, Uzhgorod, Khmelnytsky, Kryvyi Rih, Zaporizhya, and elsewhere. Meanwhile, two new hypermarkets will open in Kharkiv and Kyiv. Projections for 2006 have sales volumes doubling again.
The grocery giant eventually plans to go beyond Ukraine, after going public. “We’ll go European and maybe Asian,” Costelman says.
Velyka Kyshenya, another Kyiv-based supermarket chain, is also looking toward the regions, having opened two Kharkiv stores this year. Roman Lunin, head of the supervisory board at Kviza Trade, which owns the Velyka Kyshenya chain, says they are planning to open new stores in Ivano-Frankivsk, Dnipropetrovsk and Mykolaiv. They will be hypermarkets, unlike the Kyiv stores, because space is cheaper and easier to come by in the regions. By the new year, the company will have 24 stores up and running, with 15 projected to open in 2006.
Despite local competition, the people behind the chains say they feel quite comfortable outside their home base of Kyiv. They say they’ll be offering lower prices, and being associated with Kyiv adds cachet.
“Even now in some regions” says Blyznyuk, “a supermarket chain from the capital is a brand in itself.”
Lunin says that regional retailers charge higher prices simply because they often hold monopolies in their respective areas, adding that his chain will help bring prices down. To win local customers, he says, Velyka Kyshenya stores make sure that 10-15 percent of its stock consists of locally recognized brands.
Not all of Ukraine is attractive to supermarket chains, of course. But industry strategists are already thinking beyond cities with populations of more than a million, as well as smaller places.
“It’s not very profitable yet, but we’re trying,” says Costelman about Silpo’s plans for smaller cities.
The strategy, says Blyznyuk, is “to claim a spot” as soon as possible. That will allow competition with aggressively developing regional chains like the Dnipropetrovsk-based ATB, with its string of 120 discount stores throughout southeast Ukraine; and the Lutsk-based Pakko Corporation. The latter is represented in all of western Ukraine’s major cities by its V-Pack supermarkets and Pakko cash-and-carry stores.
In addition, Pakko is opening a 10,000-square meter hypermarket called Tam-Tam in Lutsk within a month.
But Pakko has no plans to give in easily. “We as a regional chain know our customers better,” says the company’s trade vice president Oleh Kryzhanivsky. Pakko now has plans to expand to Kyiv and establish a presence elsewhere.
Western Invasion
One reason for the high energy level in the industry is the expectation that European retail giants will soon come to Ukraine, as they have to other countries in Eastern Europe. Experts say that if the foreigners are going to come, however, they have to do so soon.
“If foreign companies don’t come here within one and one and a half years in a serious way, it won’t make sense for them to come any later,” says Blyznyuk. That’s because local chains will be too well-established by then. He says a foreign firm’s best bet is to buy a local chain, so that it doesn’t have to start from scratch in an alien environment.
Velyka Kyshenya’s Lunin says it’s already hard for foreign companies to compete here, and predicts no major foreign expansion in the next three years.
His own company’s owners “are located right here, so decisions required by the market are made much faster.” Billa supermarkets are owned by the Austrian company Reva, which he says “vaguely” understand the Ukrainian market. “Foreign companies will end up developing less actively than they declare they will,” he says.
Fozzy’s Costelman, on the other hand, expects foreigners to come, and his company to withstand the competition.
“It won’t be the case that there will be no Auchan, no Carefour, no strong activity from Metro Cash & Carry.” He says the market will simply be divided up.
Russians coming
Russia’s role in the Ukrainian supermarket business, meanwhile, is complicated. Several successful Russian chains such as Pyaterochka, Paterson and Perekrestok have tried to enter Ukraine, but so far haven’t made a splash. Experts believe it will be hard for them to compete with Ukrainian market leaders.
“When Russian companies talk about expanding in Ukraine, they exaggerate their potential,” says Lunin. “I heard the Russian Pyaterochka is planning to build seven Karusel hypermarkets in Kyiv. I’d be fascinated to see at least one piece of land where they could build it. It will be a success for them to find at least two sites. Seven is a huge task. Maybe they can work in a way we can’t.”
Aleksandr Panas, head of the Perekrestok-Ukraine supervisory board, sees the Ukrainian market picture in brighter colors. His company has plans to invest about $250 to $300 million over the next five years in supermarkets in Kyiv and other major Ukrainian cities, such as Kharkiv, Donetsk, Dnipropetrovsk and Odessa. Having already bought the Spar chain of supermarkets, they’ve got their eye on others.
As for projected difficulties, he says every place has its complications.“If corruption and protectionism flourish, than people entering the market will have a hard time,” he says. “No one needs such a market. We hope the current chains don’t lobby deputies with their money.”
