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    Walmart cashes out of Russian retail

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    American retail giant Walmart finally closed its representative office in Moscow yesterday after failing to cash in on the booming Russian market.

    American retail giant Walmart finally closed its representative office in Moscow yesterday after failing to cash in on the booming Russian market.

    The company saw acquisition of a local retailer as central to its entry strategy for Russia, Walmart International CEO Doug McMillon said on December 13, 2010 - the day the firm announced its plans to leave Russia, and a week after it missed out on a deal to acquire Kopeika, one of Russia's largest discount grocery chains.

    Kopeika was finally bought in December 2010 by Russia's largest grocery retailer X5, in a 51.5 billion ruble ($1.65 billion) deal. A successful takeover of either Kopeika or Lenta, another store chain, would have given Walmart a strong entry point into the Russian market, with Kopeika seen as the favorite.

    "Since we have decided to enter the market through acquisition, not green-field development, and since there is no clear acquisition partner in the near term, there is not a business reason to continue our Moscow representative office," McMillon said.

    Some think Walmart did not have a strong enough presence to manage its entry into Russian retail and were too slow off the mark.

    "I think Walmart overslept. With their decision-making processes and management from the United States (an eight hour time difference), they didn't have a chance," a source close to Walmart's attempts to enter the Russian market told Russia Profile.

    Galina Maliborskaya, the director of the Retail Department at the Moscow office of commercial real estate firm Colliers International, said it is hard to say why Walmart pulled out without a full understanding of the company's global strategy, but she did offer some theories.

    "Perhaps one reason could have been land prices," Maliborskaya said. "Land here is very expensive, and maybe they counted on it getting significantly cheaper during the crisis. But the crisis was relatively short and during that time prices did not become very low."

    Maliborskaya also pointed to the difficulties of finding a suitable acquisition target. "Walmart has very specific branding and image. It needs certain features, such as plenty of parking, and not all chains that are already operating in Russia have a similar concept."

    For some in the industry, Walmart failed to get in early. Rumors have been circling since 2002 that the American company was looking for a way to enter the Russian market, but the representative office only opened in April 2008.

    "They just weren't in a position to be competitive. Real, Auchan, OKEY, Globus and Metro had snapped everything up. What is more, they were probably already in Russia when it was still possible to be competitive, before the Germans and then the French entered the market," a source close to Walmart's attempts to enter the Russian market told Russia Profile. "In terms of smaller shops, Sedmoy Kontinent, Azbuka Vkusa and little stores like Kopeika, Spar and Perekryostok were well established. Walmart started looking at development too late."

    The company also seemed unsure about which store format was right for Russia. "At the beginning of 2009 Walmart launched a tender to design two prototype shops: one a medium-sized hypermarket, similar to a Real store, and the other a large format hypermarket, similar to a large Auchan," the source said. A year later, however, the company had changed its requirements. "In August 2010 there was another tender, to design a prototype for a much smaller development, something like a local neighborhood store."

    Walmart is not the only major international retailer to pull out of Russia in recent years after failing to establish a viable business in the country. In October 2009, French retail giant Carrefour announced it was pulling out after opening just one shop in Moscow and another in the southern city of Krasnodar.

    A Carrefour statement on the pull-out reads similar to Walmart's complaints: "Carrefour has decided to sell its activities in Russia and pull out of the market, given the absence of sufficient organic-growth prospects and acquisition opportunities in the short-and medium-term that would have allowed Carrefour to attain a position of leadership," the firm said.

    Retreating when a suitable acquisition target is not available could be a wise strategy for discount retailers looking to enter Russia, however. Buying an existing chain for discount retailers is the safest bet in the acquisition versus starting-from-scratch debate, Maliborskaya said. "It's the best way to get a large sales area quickly and sell a big enough volume of stock to keep margins down - essential in discount retail."

    That's not to say that today's lack of suitable acquisition targets will keep the likes of Carrefour and Walmart out of Russia for ever, something about which Maliborskaya remains optimistic.

    "The Russian market is very big, there are a lot of people here and the sector in which Walmart operates - discount retail - is severely underrepresented. There are only two international hypermarket chains, Auchan and Real, operating in this sector, so the market is certainly not saturated".

    Walmart agrees. "The Russian market is a compelling retail opportunity and we believe that Russian consumers could benefit from Walmart's value proposition. We will continue to pursue market entry opportunities," McMillon said.

     

    MOSCOW, March 3 (Rosemary Griffin, Russia Profile)

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