The HSE's First Vice Rector and Head of the Laboratory for Economic and Social Research Vadim Radaev presented the paper 'Retail Revolution in Russia' as part of a programme co-organized by the HSE's Banking Institute and the Institute for Industrial and Market Studies for potential investors from Singapore.
About five years ago, Russia adopted a controversial law on trade. Some of its declared objectives were to limit the monopoly and expansion of retail chains, lower the prices on socially significant goods, and protect small businesses. The law was also expected to regulate the relationship between retail chains and their suppliers, since the latter complained about unfair contractual terms and inflated 'market-entry fees'. The law prohibited retail chains from charging bonus fees from suppliers and fixed the limit of deferred payment for goods. In addition, government regulation of retail prices on socially significant goods was introduced. Currently, the Federal Antimonopoly Service (FAS) is drafting yet another set of amendments to the trade law to limit the retail chain monopoly.
So why is the government trying to control retail? It is not about concerns over small businesses or end-consumers. As Radaev noted earlier in his article Who Has Benefited from the New Trade Law?, in contrast to the U.S. and other developed countries, small traders in Russia have had no noticeable role in 'anti-retail chain' campaigns. Similarly, end-consumers have not been involved either – in fact, their interests have hardly been affected by the trade law, except that the government is now allowed to impose caps on certain consumer prices. "It is much more likely that major industry players, in particular agricultural producers whose interests have been aggressively lobbied by the Ministry of Agriculture, are the campaign's main driving force. They were seriously affected by the shift in market power towards retailers back in the 2000s”, says Radaev.
Besides, retail has become so prominent in the Russian economy over the past two decades – that may be another reason it’s on the government’s radar.
According to Rosstat, the share of trade in Russia's GDP was 5.6% in 1990. In 2010, it increased to 18.3%, and in the 2000s, the Russian retail turnover was growing twice as fast as the country's GDP. As a result, turnover in the retail industry increased tenfold between 2000 and 2010.
Graph 1. Retail turnover growth
Source: Radaev's presentation based on Rosstat data
Throughout this period, domestic and foreign retail chains were expanding from the western to the eastern part of Russia. Domestic retailers focused on renting retail space and capitalizing on the traditional low-end supermarket model, while the global chains entering Russia's market were constructing their own facilities and opted for larger formats such as hypermarkets.
Radaev notes that in 2000, none of the retailers made it into the Expert-400 annual ranking of Russia's biggest companies. Things changed in 2004, with 17 retailers on the list of the top 400 biggest companies and four in the top 100. In 2011, 17 and 12 retailers made it into the top400 and top100, respectively, and four found themselves among Russia's 50 biggest companies. The four included two domestic retailersX5 Retail Group (17th) and Magnet (25th), and two international chainsAuchan (31st) and Metro Cash & Carry (40th).
Graph 2. Retail Market Leaders
Source: Radaev's presentation
Russia's retail has good prospects for further consolidation and development facilitatedby the availability of unoccupied niches in the market, Radaev says. Modern chain stores are scarce in Russia; the country's five largest retail chains account for 5% of total retail sales.
Radaev predicts that the industry leaders will continue to expand, but with a particular focus on efficiency, gradually squeezing out local stores and open-air markets whose market share has been going down anyway. Besides, domestic Russian chains, unlike East European retailers, will hold on to their markets and compete with global retailers.
What is the role of government in facilitating trade? Current evidence indicates that trade legislation will further change amidst ongoing debates between retail chains and suppliers, and overall regulatory activity. Research suggests, however, that the government has yet been unable to make a positive difference for the retail industry. It is hard to say who has benefitted from the trade law. According to Radaev, bigger suppliers have lost some important tools for promoting their products, while the majority of smaller suppliers cannot gain access to retail chains anyway, and their overall market position has not improved.
A survey of retail market practitioners and experts conducted by the HSE's Laboratory for Economic and Social Research in 2010 revealed that neither chain retailers nor suppliers found their contractual relations getting any easier. Just 5% of the suppliers reported that making contracts with major partners had become easier for them, while 75% noticed no change, and 20% found their contractual relations had become more complicated since the new trade law came into force.