In 2015, trends were set up that determine development of food retail in the medium term.
It is obvious that income of buyers is decreasing, and this process will not end in the next two tears. The labor market shows vacancy deficit and excess of supply, the compensation level in many spheres has already gone down by the start of 2016. All of that points to the fact that a new crisis began, and its key feature that it will be lingering. One should not wait for a quick rebound as it was in 2010–2011. There also such factors as cost of borrowing increase and results of the food embargo.
Scenarios for food chain retailing development
Combination of the listed factors forces retail representatives to change their development strategy for coming years. It should be noted that the chaining FMCG retail feels much better than non-chaining, which is due to advantages of business models for trade chains and customer retention that increased over the last years.
The modern chaining retail is gradually becoming a market fot the buyer, not the seller, as it was in years of economic prosperity. Price competition is becoming the most essential form of contest between FMCG chains again. From the viewpoint of price strategy, Russian chains will use elements of the H/L P (High/Low Price) strategy that assumes a mixed approach to pricing. In this case, they support low prices for certain commodity groups, at that others are sold with a higher trade markup.
Savings resource of Russian people that supported the retail for a long time, had been almost depleted by 2014, and in 2015 situation worsened. At that, low increase of income against the background of household debt load increase gives no ground to wait for the situation improvement in the retail sector without efforts of retailers and their margin reduction. We observe an increase of trade chains revenue, but figures of gross and net profit are decreasing, as the primecost of goods and transport costs is growing. Experts estimate that in 2015–2016 prices for goods will continue to grow, at that income of buyers will decrease, which may lead to agflation.
In the perception of RBC.research, there are two possible scenarios for development of the FMCG market, prepared based on the Ministry of Economic Development and Trade forecasts, forecasts and results of January–July of 2015 by trade chains revenue and new objects establishment, and also based on expert appraisals.
The first scenario, conservative, anticipates the sector dynamics slow-up to 20% in 2015 and further slow-up to 16% in 2016 due to deterioration of the economic conditions and degradation of the geopolitical situation. Growth rates will be recovered to the level of 2015 in 2017.
The second scenario, pessimistic, anticipates a heavier slow-up of rates in food retail chaining in 2015 (16%) and continuation of the trend in 2016 (11%). However, the dynamics will be recovered according to the second scenario in 2017 again.
Realization of such scenario is possible in case of further introduction of economic sanctions against Russia, deterioration of the political situation, further weakening of the exchange-value of ruble and absence of access to western borrowings.
Real rates of increase of the food retail chaining, taking into account the consumer inflation forecast, will amount to about 4% in 2015 at the level of inflation of 15.7%. If the pessimistic scenario is realized, real rates of increase for the retail chaining will be null at the level of inflation of 15.7%.
It should be pointed out, that the gap between the top 10 of FMCG chains and other market players in 2015 became wider: the ten of the biggest chains shows nominal increase rate 20–26% on the average, other players — 3–5% or lower (according to the preliminary estimate).
The revision of the supply geography, connected with the food embargo imposition, has dramatically changed the goods assortment and the supply logistics, and the commodity composition of revenue has changed accordingly. By the present moment, retailers had replaced the basic mass of goods from the sanction list, but growing factory prices stimulate to search for new suppliers and enhance the own production, including creation of greenhouse facilities and farm enterprises by retailers. Like during the crisis of 2008–2009, the share of goods under own trademarks is increasing, but the difference is that retailers had to refuse to cooperate with a number of European manufacturers.
Goods under the house brand
Beginning from 2007, the direction of own trademarks started growing, and during the crisis began one of the most attractive in the assortment policy of chains. At the present day, there are goods under own trademarks in assortments of most retailers, including specialized chains. It is just thanks to goods under own trademarks retailers increase the margin in the recent years, when the growth of retail prices for many commodity groups shows outstripping rate up.
According to appraisal of RBC.research, the average share of sales under own trademarks in global and federal chains amounted to 12.2% of the consolidated revenues of companies in 2014 (2013: 14.4%). Notify that many federal and global retailers did not disclose their data on the share of goods under own trademarks in revenue for 2014.
As for price segmentation, from 2010 we see an increase in number of goods under own trademarks in mid-price and premium segments. However, imposition of the food embargo changed the strategy of house brand development for many chains, because retailers introduced to product assortment house brand goods from the sanction list produced in Italy, Spain, Germany and other countries. These were mainly cheese, seafood and other goods. Eventually, companies had to exclude these goods from assortment or search for Russian producers.
In the medium term, house brand goods market will continue its growth, which is connected with replacement of sanction products and decreasing income of consumers against the outrunning growth of prices for branded goods. In the estimation of RBC.research analysts, in 2015 the segment of house brand goods in trade chains increased by 30–32%.
The segment of house brand goods is mostly developed in discount stores and hypermarkets, which can be explained by a business mode of these trade formats. Supermarkets show a smaller share of house brand goods, but now this trend is changing and in the nearest future the number of house brand goods in supermarkets will grow. The share of house brand goods in the revenue of neighborhood retailers is also increasing.
Forecast for format development for 2015–2017
In the short term, the structure of the retail chaining revenue, segmented by trade formats, will change, which is connected with the Russian consumption model adjustment. The main trend is reduction of the large-format retail share against the increase of the discount and neighborhood stores share at the expense of decrease of the average purchase size primarily in large-format stores.
The share of discounters in 2015–2016 will fluctuate between 34% and 36%, a more significant increase is possible in case of escalation of negative trends in the economy and sharp transition to different consumption model.
Escalation of negative trends in the economy followed by demand compression determined the growth of popularity of discount trade formats. These include discount stores, economic supermarkets and partly hypermarkets. Development of these formats will pass nonuniformly, but in the medium term discounters will retain their positions, gradually increasing the market share.
Under the influence of the crisis, the trend for development of different formats may both slow down or speed up, but economy formats with medium markup and improved assortment will have the advantage. Other formats in the short term will gain about 7–8% of the chaining retail turnover. It should be noted, that the omni-channel strategy (1), that is gradually entering the FMCG retail market as well, will also exert its influence on the format structure.
A trend to adopt a multi-format development strategy became of the key ones at the Russian market. In conditions of the aggravating economy, such strategy can be the most winning one to develop business for large retailers, which is proved by opinions of experts interviewed by RBC.research. However, to develop a multi-format chain, one needs a more significant resources than for a one-format enterprise, which can be a problem over the medium term.
In conclusion, we can list key trend that determine development of FMCG retail chaining in 2016–2018:
- Strengthening of trend for multi-format chains at the expense of discount format introduction, including re-formatting or re-styling of existing stores,
- Growth of the Russian goods share in assortment (by 40–50% on the average) and revenue of trade chains, acceleration of import substitution by key commodities, development of the own production (greenhouse units, farms, etc.),
- Growth of the popularity of discount trade formats similarly to the crisis of 2008–2009,
- Compression of consumer demand, transition of the Russian people to a more restrained consumer model, cautious attitude to expenditure and strengthening of price influence over selection of goods,
- Changing of business models and the chain development strategy due to changes of the market situation and high cost of borrowings, decrease of LFL figures,
- Reduction of store installation plans,
- Reduction of construction volume for distribution centers and storage locations of class A and B, including with the built-to-suit scheme, hereupon a possible deficit of storage areas in some regions,
- Change in the supply geography and related transformation in trade chaining logistics, large-scale redivision of the food distribution market due to the imposed embargo and focus on import substitution,
- Activation of M&A deals in the food retail sector, significant strengthening of the market consolidation at the expense of depletion of small and partly medium revenue position players from the market,
- Substantial strengthening of the role of the state in the branch regulation, increasing of the tax burden on the business community.