Anna Buylakova: ‘The consumer is under pressure from high inflation’

Analyst of Finam FG — about the challenges and prospects of the Russian food sector

In the near future, Russian food retailers will focus on the struggle for the assortment, the development of their own brands and the replacement of missing Western goods with imports from “friendly countries”. In the long term, interesting opportunities await the industry, says Anna Buylakova, an analyst at Finam. In the author's column for Realnoe Vremya, the expert writes about the challenges and prospects of the Russian food sector.

Russian retail has shown itself to be a strong side

Food retail in Russia is forcibly but still quickly adapting to the challenges of recent months. To the extent of the specifics of the retail relationship between sellers and buyers, the first necessary to do is to ensure the availability of goods on the shelves to preserve vital activity. The withdrawal of some suppliers, changes in manufacturers' product mixes, changes in logistics chains forced Russian retail to look for new suppliers. In this regard, the Russian food trade has shown itself to be on the strong side, compensating for supply gaps from alternative channels.

In the near future, the struggle for the assortment is likely to continue. Retailers can focus more on the development of their own private labels to fill in the dropped product categories. The expansion of the private label supply may be interesting from the point of view of strengthening the market position. Competent positioning of products under private labels allows retailers to systematically differentiate from competitors. It is also likely to develop imports from “friendly” countries to replace those goods that cannot be produced in Russia.

The long-term prospects of Russian retail are quite interesting. We must pay tribute to the representatives of the industry: retailers have come a long way, presented interesting solutions (for example, self-service ticket offices), followed the changes in customer preferences (the development of the “near the house” format), and are developing delivery services. However, world practices are stepping forward, providing Russian players with food for thought. Large networks that can justify investments in technology or automation due to scale can continue to be the main innovators of Russian retail.

“Face payment”, online orders and express delivery

The struggle for the buyer is carried out not only due to the variety of assortment and prices, but also due to speed, convenience and service. These key components depend on the myriad operational processes that the networks will continue to work on. Foodtech is one of the hottest topics in the global food retail. The experience of foreign companies provides ideas to Russian players, makes us ask the question: how can we apply it? For example, “face payment” — the technology began to gain popularity in China already in 2019. In Russia, these are X5 and Magnit who are testing this technology.

The largest retailers pilot ideas by implementing ideas in several points, evaluate the results of the “experiment” and then scale the solution. Thus, we can expect further development of retail services that have already taken root in some regions. At the moment, we can single out online order delivery and express delivery, which have proven themselves well in Moscow and St. Petersburg. Scaling of delivery service can be carried out both through the construction of darkstores and using existing retail stores, which, by the way, can be very beneficial to large federal chains due to their wide geographical presence.

Speaking of financial results, in the first quarter we saw that multi-format federal giants with a bias towards “shop near the house” Magnit and X5 Retail Group were in demand among retailers, the networks became beneficiaries of purchases for the future, increasing both the average receipt and traffic. But the traffic of OKEY and Lenta hypermarket chains decreased in the first quarter. Some of the retailers noted the normalisation of demand in April, but we will see more informative data in July, when retailers will disclose operational data for the second quarter.

The reports for the second quarter will reflect increased consumer inflation, which puts pressure on purchasing power. Probably, companies can share information about changes in customer behaviour, for example, the shift of expenses from non-food category to food products, as it was noted in the reports of Western companies. The shift in food costs in the second quarter in the Russian Federation will also contribute to the formed stocks of household chemicals purchased in February-March. The change in the composition of the shopping basket makes it very difficult to predict the results, but in general, the second quarter could become very testing for retail.

Not giving up in the fight for the client

As for the expenditure side, we expect an increase in the cost of production due to a growth of world food prices and the extreme volatility of the ruble in the second quarter, the restriction of margins on a number of socially significant goods will put pressure on the reduction of gross margin. The growth of administrative and commercial expenses is likely to be affected by the need to restructure operational activities, establish work with new counterparties. We can expect an increase in debt servicing costs due to an increase in the key rate.

In short, the second quarter of the food retail was active, we expect to see the results of their activities first-hand in July, when the largest companies disclose operating results. Retailers have not given up in the fight for the customer, we have heard from industry representatives about efforts to replace “dropped out” products, whether it is a reorientation to suppliers from other regions or the withdrawal of private labels in such a category. In the short term, it should be noted that the consumer is under pressure from high consumer inflation, which is likely to lead to a redistribution of costs and savings. However, retailers retain long-term development prospects due to technology, process optimisation, and cost reduction.

Anna Buylakova

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The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.

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