Convenience in Russia – Food to Go Opens the Door to Expansion
Russian retail – some unique characteristics
Modern retail in Russia is still quite new and developing especially in the regions, but today I can say that it is quite unique compared to other countries. Big grocery retailers are the kings here. The top 10 retailers took almost 50% of the market and reached the maximum possible share in many regions which complies with anti-monopoly law.
This top 10 are X5 Retail group (the Pyaterochka, Perekrestok, Karusel brands) with more than 16,000 stores, Magnit with different formats and almost 21, 000 stores, Kranoye (Red and White) alcohol convenience shops and 13,500 stores, Lenta super and hypermarkets with 380 stores, Dixy convenience, supermarket, hypermarkets with 2,500 shops, Auchan convenience, hypermarkets with 315 stores, METRO hypermarkets with 94 stores, OK discounters, hypermarkets with 178 stores, Globus hypermarkets with 17 stores and Monetka convenience with 1,555 stores.
Moscow, Saint Petersburg and other big cities are occupied by Pyaterochka, Magnit and Dixy. You’ll find one of their stores literally everywhere. For example, Magnit declares that they opens store so close that they should be within same catchment area to fight with all competitors in that area.
The key difference with traditional convenience is pricing. Usually, you expect higher prices in convenience shops compared to other formats, but not here in Russia. At present, there is no big difference in pricing compared to other formats and many products will actually be cheaper than everywhere. When it started, Pyaterochka called its’ model “soft discounter”.
So, when you have “soft discounters” everywhere, not more than 400 meters from your home which open from early morning, until late evening, or even 24hr, then there is no space for traditional convenience shops with assortment and high prices. Yes, there are still customers there, but their mission is not everyday shopping, rather distress purchases.
Fuel companies are not in good position here in Russia. Advantages which exist in Europe are not advantages here. 24 hours shop – well, you can find them everywhere. Convenient location – yes, on the way from your home to the office, but at the same time you’ll have a shop in your building, or next to it. Prices – here is the main challenge.
People are ready to pay premium for convenience, but they are not ready to pay 2x – 3x more than in other shops.
The point is that fuel retailers can’t really adopt a low pricing model. Total revenues are very small compared to big retail chains and this leads to very big difference in commercial conditions.
In some cases, purchasing prices for fuel retailers could be just couple percent less than shelf price at biggest chains. That’s why there is no success story of opening full-scale convenience shops at fuel site yet. But major fuel companies have still found their niche. Food-to-go really has become the core mission and margin generator.
Fuel retail market summary
There are around 15,000 Fuel sites across Russia. A smaller proportion (around 40%) belongs to vertically integrated oil companies like Rosneft, Gazpromneft, Lukoil and others. The remaining 60% are owned by local companies. These could be big chains like PTK, Trans-AZS, Faeton, NNK, but a huge number of others are typically independent chains of 1-10 sites.
However, if we will look at fuel sales the situation is the opposite – integrated companies sell more than 60% of the fuel in Russia. The question of fuel quality has always been very important for Russian customers. Counterfeit products, cheating in fuel volumes and product availability are still uppermost in customer minds.
In fact, until recently, there were no diesel cars away from big cities – the quality of diesel fuel was very low. That’s why people trust the big brands more. And these big brands are fighting for customer loyalty now – they are investing in refineries, site infrastructure, customer offer and loyalty programs. The fuel quality at the sites which belong to vertically integrated companies is not an issue anymore. In 2016, most of them converted production to EURO-5 standard and now they started to produce EURO-6 fuels.
Most of these businesses are local – there are just a few foreign brands in the market. BP, Shell, Neste and Circle K. BP is now owned and operated by Rosneft so it can be considered more local now. Others remain independent.
Shell is the only foreign brand which is being expanded nationwide, while others have remained in one region. These companies don’t have any fuel production facilities and that’s why they are heavily affected by any sudden price changes and freezing (in certain periods fuel margins can be negative) and they must keep full control on their margins trying to optimize operations and bring in extra margin from services. That’s why non-fuel convenience retailing became the number one priority.
Developing the roadside retail offer beyond fuel
Extra services at the fuel sites are not new for Russia. Since 1950-1960 they started to appear mainly at highway sites.
You can see them in very popular Soviet movies like “Queen of the Gas Station”.
That station had a café, car servicing and truck parking. By comparison sites in the cities usually only had fuel. Everything changed in 1990 and BP provided a great example: big sites at premium locations in Moscow, with store and café. BP became extremely popular and the convenience race began.
I don’t know of any company which is not investing into convenience retail and café. Big national and international players made stores and café as one of very important parts of their CVP. But also, small players are offering something more than fuel to become more interesting for customers.
As of today, shops at fuel sites are not competing with grocery retail chains – you’ll find a relatively small offer of non-alcoholic beverages, snacks and other products. Usually, it consists of top selling brands only. There is no alcohol on sites. Big companies also try to add something extra to differentiate. There are 2 categories where you can’t make any mistakes – and they are similar to Europe. Tobacco is extremely demanded by customers, but with a very low profit category. As prices are the same across the market – convenience is a key here. Running out of fuel and cigarettes? Bingo! You’ll purchase both at fuel site.
The second is coffee. Black gold with its aura of a Western way of living came to Russia and became king here. A very high margin product – fuel players must really focus and get their offer right here.
The other point of differentiation is in private labeled products and companies do actively invest into this. Shell and Gazpromneft already have a wide range of private labels in food and non- food categories available on sites.
Today the share of convenience retail at fuel sites is very different. For example, PTK (local company from Saint Petersburg) declares 10%. Shell already declared 33%. And all players say that share of café in sales in bigger than all other categories. Big players are not saying anything about total shares, but Rosneft planned to sell 45 million cups of coffee and Gazpromneft 30 million cups of coffee in 2018.
Also fuel retailers are actively testing the ‘co-locator’ concept. This can be sublease model or franchise operations. It can be placed inside (clip-in), or outside the main site building. You can find McDonalds, Burger king, KFC, Pizza hut among co-locators as well as local chains. Besides food operators, companies are seeking for other offers such as Pharmacy, Dry cleaning, Delivery lockers, Health Testing Stations and many others. A good co-locator can bring additional traffic to the site. McDonalds immediately makes your site the most popular in the area and increases fuel traffic by several times.
Food offer at fuel sites.
As I wrote earlier, fuel players found their niche at food-to go and actively develop their offer. For many years there was only coffee and hot dogs , with the same offer at every site, regardless of brand. Almost all companies work with the Sybilla hot dog concept and have a similar assortment with 1-2 exclusive products. The only player to do this differently is Circle K.
The next thing which appeared on sites was bakery. This started first in BP and appeared at many sites. Now Shell is making a big difference here too with a large, very balanced assortment at a good price offer. Many sites also sell sandwiches – defrosted triangle sandwiches – 365 days life in frozen and 3 weeks in chilled. It was the only option, if you didn’t want a hot dog. And many sites still sell these.
Over recent years big players are trying to find new products which will differentiate their offer and could be popular among customers. For instance, during the SOCHI2014 Olympics, Rosneft collaborated with Italian Autogrill and opened 5 sites with the Autogrill concept and brand in the Sochi area. Later they also added a few sites in Moscow. Fresh prepared-on-site sandwiches in baguettes and chiabattas, plus an extended range of desserts.
This concept was very popular in Sochi, but after the Olympics with much lower traffic, complex operations and high wastage they decided to close this format.
Gazpromneft also tested many concepts. First, they changed the old triangle sandwiches to new ones developed together with the food company which operates Le Pain Quotidien brand in Russia. Still frozen but tastier. They also tested fresh sandwiches concept and full-scale café with soups, main dishes at highway sites. But none of them was scaled.
Neste collaborated with a local production company and are offering a big range of Fresh pre-packed products – sandwiches, salads, desserts, breakfasts and many more. Everything is 2-4 days shelf life. They scaled this offer across their network so I can say they consider the offer as successful.
Shell is always serious about its café offer. Several years ago, together with re-branding to Deli by Shell they also introduced a very wide range of pre-packed fresh products developed together with Le Pain Quotidien company. Shell invested hard into shop redesign and new offer advertising and that worked. Shell said that new offer is very successful, and they expanded it to every site. 2 years ago, Shell announced a collaboration with Azbuka Vkusa – the Russian premium grocery supermarket chain with an excellent offer of ready-to eat dishes. This collaboration with Azbuka Vkusa allowed Shell to extend offer even more and add “food for tonight” range. Today Shell offers the widest range of high-quality food on their sites.
The Future of roadside retail in Russia
Comparing Russia with European markets, especially the UK or Netherlands, there is still huge room for development.
In Russia customers and fuel companies are still very fuel-focused, limiting investments into non-fuel retail. In a world, where fuel margins are declining, engines consume less and less fuel and share of electric cars is growing, you need to be ready for these changes to survive. You need to invest in this future and these investments will pay off.
Today all big fuel retailers in Russia say that they are serious about the non-fuel business and have plans to double it, to grow it to European levels, to make profits which will compensate 100% of site operational costs. But, as a customer, you’ll still see fuel advertising outdoors, on the internet or on radio much more often than any non-fuel promotion!
My view is that operators should become more and more professional in non-fuel retailing or roadside retail as it is now described. This starts with professional category management and clear business processes, supported by an automation at each level. IT solutions both for head office and sites, automatic ordering systems, professional pricing tools, customer data analytics, site-specific merchandising, professional site equipment with remote control and more. Grocery retailers made this change many years ago.
Now it is the turn for fuel retailers in Russia. Many elements are still missing today and the company who will implement most of this list could become the clear leader in the future.
Russian native, Alexey Pronin, is a convenience and retail expert based in Moscow, spanning 17 years his retail career includes roles with IKEA, Metro Cash and Carry, PWC and during his time with Shell held both operational and strategic roles in Moscow and London.
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