Russia’s Largest Food Retailers Unaffected By Food Import Ban – Fitch Ratings…….Of Course Not

Posted: November 19, 2014 in Econ 101, Sanctions on Russia Meaningless


Fitch: Russia’s Largest Food Retailers Unaffected By Food Import Ban; Smaller Formats Outperform

Tue Nov 18, 2014 4:00am EST

(The following statement was released by the rating agency)

MOSCOW, November 18 Fitch Ratings says Russian food retail chains continue to demonstrate healthy like-for like (LFL) sales growth, despite the food import ban imposed in August against the EU, US and certain other countries, based on the 3Q14 operating results of Russia’s five largest public food retailers. Most of the Russian food retailers analysed by Fitch have managed to adapt to the food import sanction by substituting the imported categories with food from other countries, keeping the mix of food products on the shelves little changed. Based on 9M14 financial results by Russia’s three large public food retailers (Magnit, X5 Retail Group, O’Key Group), operating margins are unaffected for now as retailers have been able to pass on the increased costs of some products to customers without altering the product mix materially. Increasing prices for some food categories (certain fish, dairy products, fruits and vegetables) as a result of the food import ban is likely to cause customers to seek out lower price substitutes and, in turn, lower sales of non-essentials.

These trends are also likely to be reinforced by the overall subdued consumer sentiment in Russia. Nevertheless, continued rouble depreciation (-30% over the last 12 months relative to USD) and increasing inflation should support growth of average ticket over the medium term and thus LFL top-line growth. In 2015 we expect the operating environment for retailers to become more challenging. The rouble devaluation and rising domestic inflation will have full impact on the cost base next year, particularly rents, transportation and staff costs. In addition, to protect customer traffic, which is becoming even more price-sensitive in light of increasing inflation, we expect many retailers will be forced to make additional margin sacrifice. The largest market players, with strong bargaining power over suppliers, should remain better placed to withstand any pressure on profitability relative to smaller players, who still control the food retail market in Russia. Currently food retail chains cover only 22% of the Russian overall retail market and 26% in the food and tobacco segment, according to Rosstat. The latest quarterly results show LFL revenue growth ranging from 9% yoy for Lenta Group to 17% yoy for Magnit, driven by strong average ticket and traffic growth. Larger store formats, such as hypermarkets and supermarkets, posted slower LFL sales growth in 9M14 compared with smaller formats, as they witnessed some customers trading down to cheaper products and, in some chains, low or even negative traffic growth. We expect retailers with convenience store and discounter formats to remain somewhat insulated from weaker consumer sentiment, as consumers trade down or reduce their shopping basket by buying more frequently close to their homes instead of driving to big stores.

O’key Group S.A. (B+/Positive), the seventh-largest Russian food retailer operating largely in the hypermarket format, registered a 2% yoy decline in LFL sales in 3Q14 and only a modest 2% yoy growth for 9M14. The retailer’s performance is being affected partly by cannibalisation as a large portion of its new store openings over the last 12 months were within the same cities where it is already present. O’Key is also the retailer most affected by the Russian import food ban, resulting in a reduced range of food categories in-store and diminished traffic. The weak interim LFL performance relative to other Russian peers and slow store expansion is also affected by an ongoing review of strategy and operations by its new management. However a sustained weaker operating performance and credit ratios than expected could lead to the Outlook being revised to Stable. Russia’s two largest retailers, Magnit and X5 Retail Group, reported slightly accelerated growth in LFL average ticket in 3Q14 and 8% growth for 9M14, slightly above inflation for the same period (7.2% according to Rosstat or Federal State Statistic Service). Both retailers reported improved operating margin for 9M14, but we see limited scope for further material improvement next year as companies may accept some margin sacrifice to maintain market share in an increasingly competitive environment. For example, Magnit which showed a high EBITDA margin (11.2% for 9M14) against Fitch-rated retail peers should be in a strong position to manoeuver between fighting for traffic while still maintaining profitability at healthy levels.

We expect the retail chains to continue expanding their market share at the expense of traditional single-store retailers and market traders. This is illustrated by total net revenue of the five largest food retailers having grown 24% yoy in 9M14 in absolute terms vs. only 0.2% yoy growth for overall food retail sales in Russia. In particular we expect the large retailers to maintain a high pace of store expansion next year, financing it with internally generated cash flows and credit funds, but smaller players may experience reduced access to bank financing and are likely to scale back store openings to protect cash generation. We also see increased M&A activity in the sector next year. Overall, the challenging operating environment will accelerate the trend of Russia’s retail market consolidation, driving out non-chain retailers.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s