Hot retail market gets new player

| Kyiv Post
The race to satisfy Ukraine’s demand for hypermarkets continues to heat up, with France’s Auchan Group announcing what could be the first Western presence in the country’s promising retail niche.

The race to satisfy Ukraine’s demand for hypermarkets continues to heat up, with France’s Auchan Group announcing what could be the first Western presence in the country’s promising retail niche.

Industry insiders say total investment will amount to hundreds of millions of dollars, as Auchan, a world leader in the retail business, plans to open 10 new hypermarkets throughout the country within the next two years.

And to beef up the impact of its invasion, Auchan has joined forces with Ukraine’s second largest supermarket chain, Furshet, in a deal that will give Auchan a healthy share in a major domestic retailer.

Auchan’s announcement follows on the heels of similar intentions voiced by other foreign retailers, such as Germany’s METRO Group and Russia’s O’key, which have yet to establish a presence in Ukraine’s hypermarket niche.

Earlier this week, Auchan, which operates hundreds of hypermarkets in Europe, Asia and the Middle East, announced it would open its first Ukrainian hypermarket in Kyiv by January 2008. The new hypermarket will boast 10,000 to 14,000 square meters of space.

Within the next two years, the French group plans to open another nine hypermarkets throughout the country. Auchan is still tight-lipped about what will be the cost of its Ukrainian expansion, but market watchers say each store will cost about $20 million to launch, not including the surging price of the land.

Teaming up with Auchan, the world’s 10th largest retail group with almost 400 hypermarkets and over 700 supermarkets in 12 countries across the globe, is the Kyiv-based Furshet supermarket chain, which boasts 69 stores in Ukraine and one in Moldova.

On March 13, the two retailers inked a deal that will create two new companies: one to operate Auchan’s future chain in Ukraine, and the other to develop Ukrainian shopping malls, which will include either an Auchan hypermarket or a Furshet supermarket.

According to the deal, Auchan will hold a 66 percent stake in the company promoting its brand, with Furshet Group getting 19 percent, and Furshet owner Igor Balenko the rest. Each shopping mall will be 50 percent owned by Auchan, 40 percent by Balenko and 10 percent by investors, the French group reported.

Additionally, Auchan will acquire a 20 percent capital stake in Furshet, which will continue to be managed by Balenko’s team.

With 175,000 employees worldwide, Auchan posted revenues of $45 billion in 2005. Furshet, Ukraine’s second largest retailer, reported 2006 income of $481 million, a 38 percent rise year-on-year, and plans to increase its store portfolio in Ukraine to 106 and in Moldova to 4 by the end of 2007.

Furshet, which currently controls less than 5 percent of the fast-growing Ukrainian market, announced plans earlier this year to attract loans from the European Bank for Reconstruction and Development. Kyiv-based investment bank Dragon Capital helped Furshet float a 7 percent stake on the Frankfurt Stock Exchange as depository receipts last year. The flotation helped prop up the value of the company, increasing its market capitalization from about $500 million to its current $565 million. The Ukrainian supermarket chain operator also plans to tap into additional financing by floating its shares on a Western market through an IPO in 2009.

According to Mykhaylo Dudnik, vice president for marketing at Fozzy Group, Ukraine’s current retail leader and largest supermarket in terms of number of stores, Auchan’s presence will be positive, as the hypermarket niche is largely unfilled.

“I think within the next two to three years domestic retailers will pay a lot of attention to quantitative expansion,” he said.

Fozzy Group operates 114 Silpo supermarkets and 61 Fora discount markets across the country, reporting $700 million in turnover in 2005.

Auchan could also be perceived as a threat to Germany’s METRO Group, which had been considering the introduction of its Real hypermarket brand in Ukraine. METRO Cash & Carry, the group’s wholesale arm, has expanded with lightning speed since entering Ukraine three years ago, pumping more than 250 million euros into 13 massive wholesale centers across the country.

In addition, Russia’s O’Key is reportedly planning to launch a similar expansion from its stronghold in the St. Petersburg region of Russia, where they operate 10 hypermarkets.

According to the State Statistics Committee, retail sales jumped 25 percent to $24.5 billion in 2006. The cities of Kyiv, Dnipropetrovsk and Donetsk accounted for the largest growth percentages. Since 2004, three Russian hypermarket operators, including Perekryostok, Pyatyorochka and Paterson, have announced aggressive expansion plans for Ukraine. Their achievements to date, however, have been modest.

Ukraine’s retail sector is so promising, that even the country’s richest man, Donetsk industrialist Rinat Akhmetov, who has significant holdings in media, telecoms, mining and metals, is said to be considering opening a retail chain.

After inking a deal last month to sell TAS-Komemrzbank to Scandanavian banking group Swedbank for nearly $1 billion, banking tycoon Serhiy Tigipko said he was also considering investing some of his new fortune into Ukraine’s hot retail market.