Russian Grocery Retail in the Times of Coronavirus
In the last few weeks, we have witnessed unprecedented events and have faced challenges brought on by the current global coronavirus crisis - challenges across the markets, industries, borders and, on a personal level, in the lives of every human being on this planet. In this current crisis however, one industry stands apart, and that is grocery retail, a previously unsung hero of our times, who is now bearing the brunt of the epidemic while also getting a wide, and well deserved, appreciation by the public on par with the healthcare workers and the first responders. In ordinary times, any retailer would love to see a surge in demand, but this extraordinary time has strained the grocery industry almost to the breaking point.
For the first two months of the year, grocery retailers in Russia were enjoying a healthy demand and a 4.7% YoY sales growth (2.8% MoM growth)* in February 2020. The full scale coronavirus epidemic came to Russia a few weeks later than to other major markets. However, in late March the boom went bust as the coronavirus took root here, resulting in massive mall and store closures in major cities across Russia with only essential retailers, like grocery stores and pharmacies, open in many places. The potential impact of coronavirus on the retail economy is as of yet unfathomable, as shoppers turn to survival mode. One thing clear however: grocery retail experiences an unprecedented surge in demand, especially for long shelf life items, such as dry and canned goods, frozen produce, sanitary and disinfectant products. To wit, canned meat sales in Russia grew 38 times as compared to “normal” demand, frozen goods - 30 times, vegetables - 29 times, dry goods - 25.5 times, sugar - 24.6 times, salt - 19.7 times**. An easy conclusion would be that the high demand is great. But let’s look at the current predicament in more detail.
Panicked shoppers have emptied grocery shelves, and the available staff haven’t been able to keep up. In response, Magnit famously announced on March 26 that it will hire at least 2 600 employees from Burger King, KFC and Shokoladnitsa restaurants. Other retailers will most likely follow suit. Warehousing facilities experience a similar hike in demand from grocery retailers with 58% YoY growth in square footage being rented. In other words, together with the current growth in sales, retailers also experience higher costs of doing business. And the new hires and square footage are only the tip of the iceberg. Consider the costs of observing the new sanitary requirements or the tendency of the key suppliers to raise prices for the most “strategic” products, such as buckwheat (27%) and rice (30%): part of these price increases will have to be absorbed by the retailers.
As another example of growing costs, Magnit has reported that they have boosted the warehouse shipments 20 to 30% depending on the product category. The retail chain cited the necessity to maintain a stable on-shelf availability as the key reason for this measure. The company has also invested heavily in creating extra inventory stocks, both at their stores and at their 38 distribution centers, in response to the growing consumer demand due to the coronavirus epidemic.
And if those extra costs were not enough, the retail companies, just like any other business, are also struggling to keep their personnel as far away from their crowded offices as possible. In the 12th week of the year (March 16th to 22nd), all major grocery retailers in Russia started transferring their office employees to work-from-home mode. Magnit is planning to send home up to 50% of its office workforce, and X5 Retail Group has already sent 17 000 employees (82% of their entire office-based workforce) to home “offices” and is ultimately planning to transfer up to 95% of their desk jobs to WFH. The IT departments of the said retailers have been working 24/7 in order to provide every transferred employee with a fully equipped computer and ensure the same standard of information safety while working from home as under “normal” conditions.
And while every grocery retailer is struggling to keep up with demand under the coronavirus, retailers in large cities, need to prepare for an unplanned explosion in online sales after the pandemic subsides. Let’s look at some numbers. Overall, the COVID-19 pandemic caused the largest growth in grocery retail sales since the beginning of this year. In the 11th week (March 9th to 15th), the sales growth in traditional retail accelerated a whopping 150% as compared to the previous week. In the same week, online grocery sales grew 81% week-on-week.
The traditional retailers however seem to be in good shape to take advantage of the growing share of online. Most major retailers report growing sales in their online channel, and many struggle to catch up with the demand. One interesting solution has been implemented by Dixy retail chain, who launched their own online store on Ozon marketplace. By going online with probably the most experienced e-commerce operator in Russia, Dixy is taking advantage of Ozon’s mature infrastructure of logistics and fulfillment centers, while also reaching customers in all regions of the country, even those where Dixy has no physical presence. To date, Dixy has been offering 200 products, mainly in the dry and canned goods, confectionary, tea and coffee, and household chemicals categories, through their Ozon store, and is planning to start selling baby food, pet food, cosmetics and products under Dixy’s own private label.
As stated in a research note by Bernstein investment analysts, “Getting consumers to trial out a new service is always the hardest first step. Right now, most of the world are doing their first grocery e-commerce [shopping].” This sentiment, although related to the U.S. shopping landscape, is very much applicable to Russia’s big cities population, where historically the adoption rate of the Internet and e-commerce has been higher than in many other countries.
And herein, amid current uncertainty and fear, lies a source of optimism for retail tech companies, such as OSA HP: as this grim prediction for the traditional retail comes to pass, the brick-and-mortar outfits will have to struggle even more for their share of the average household grocery bill, and that in turn means that working towards higher shopper satisfaction, more sales and lower costs will be on the forefront of their post-pandemic agenda - good for consumers, good for OSA.
With all that said, while grocery retail stands tall and will sure bounce back once the crisis is over, the industry landscape will change forever, with online grocery shopping as the new normal, multiple changes to lifestyle choices and shopping patterns, and the whole new economic reality we will wake up to. We at OSA are closely watching the developments and are tirelessly working to adapt our products to be able to better support the grocery retail industry and our FMCG clients.
Russia YoY Retail Sales Report
, Trading Economics.
** X5 Analysed Consumer Demand in the Times of Coronavirus , March 26, 2020.