With more than 20,000 stores, Russia's Magnit is an undisputed retail behemoth. But the bigger you are, the more potential there is for cracks to start to appear, and the business was recently forced to implement a turnaround plan. ESM spoke to CEO Jan Dunning.
There was a time when Russian grocery retail was all about the ‘race for space’ – opening as many stores as you could, in as many regions – was considered a benchmark for future prosperity. But times have changed.
Approximately two years ago, Magnit, which, for more than a decade, had pursued a blistering opening strategy – in the process making it Russia’s largest grocer – saw the wheels begin to fall off its expansion juggernaut.
Like-for-like sales began to slide as investors feared that the retailer was ‘on the wrong track’, sending the share price tumbling and necessitating a comprehensive management shake-up, including the departure of chief executive Olga Naumova.
Naumova’s replacement, former Lenta boss Jan Dunning, came into the role with a reputation for operational excellence and financial discipline – qualities that the group was eager to embrace. A year and a half into his tenure, it’s been a case of ‘so far, so good’ ... notwithstanding the COVID-19 crisis.
Return To Form
“We are trying to put this animal back on its feet,” Dunning tells ESM in a Zoom call, to coincide with the retailer’s second-quarter results. “That means paying a lot of attention to aspects of traditional retail.
”We started this process in July or August last year, when we noticed we were consistently losing customers. We were simply not accurate enough in planning and promotional adjustment, as well as in dealings with suppliers. So, the first part of the journey was around focusing on operational performance, and becoming more predictable with our offer.”
Total revenue was up 16.0% in Magnit’s first half, to RUB 763.4 billion (€8.53 billion), while like-for-like sales went up by 7.5%. In line with lockdown trends in other markets, the average basket value soared (+13.9%) while traffic was down (-5.6%).
While COVID-19 has muddied the waters somewhat, in terms of Magnit’s turnaround plan, Dunning believes that the momentum that the group achieved during the crisis has done it good service in recent months. Like-for-like sales have continued to accelerate since the half-year period ended, with July the second-strongest month of the year.
“What I see as a real opportunity is that we are being rewarded by the customer for our improved performance,” he says.
Magnit hasn’t completely halted new-store openings, of course – the group’s second-quarter store count of 20,894 is up 5.1% on the same period in the previous year – rather, the group is adopting a more measured approach, trialling new formats and investing in high-margin concepts.
In July, it announced the pilot of a new discounter format in Samara, Kamyshin (Volgograd) and Staraya Kulatka (Ulyanovsk), boasting 1,800 SKUs, fewer staff members, and an optimised layout. It has also trialled Magnit City, which is a grab-and-go format for high-traffic areas.
“When I came to Magnit, I noticed there was quite a lot of entrepreneurial spirit in the business, and that’s led to the introduction of these projects,” says Dunning. “Since converting three stores to our new discount format, they are performing better than they were before. Also, Magnit City has been quite successful, and we plan to roll that out a bit further and turn it into a sizeable business.”
Store refurbishments are also helping to drive growth. According to a recent briefing note from analyst Artur Galimov of Sova Capital, the retailer’s upgraded stores are showing an 8% to 10% increase in like-for-like sales, driven by higher average basket sizes. The retailer’s refurbished stores ‘mainly benefit from increased sales of mid-price and high-price products to higher-income customers, as well as increased spending by regular customers,’ Galimov noted.
In addition, Magnit has managed to ‘speed up’ the amount of time it takes to refurbish a store, from 20 days to between 10 and 12 days, ‘which enables the retailer to keep customers from switching to shopping at competitors.’
To date, around 5,000 convenience stores and 1,000 drugstores across its estate have been upgraded.
It’s a more targeted approach for a retailer that had previously set out to double its store count between 2018 and 2023, prior to Dunning’s appointment.
“I’m a strong believer in growth, but I believe in profitable growth, and in order to be profitable, you have to make sure that the existing base performs,” he says. “You don’t want to expand a format or concept that just doesn’t work, or is in trouble. When I started in the role last year, we were continually posting like-for-like sales declines, so by continuing to grow, we were making the problem even bigger.”
In order to address this, Dunning made a number of strategic management appointments in a bid to implement greater operational control and more closely analyse future growth opportunities.
“There’s a huge opportunity in the marketplace, but we need to get our existing business to perform better,” he says. “I don’t want to give the impression that everything’s perfect, as I think there’s still a lot to be done, but I think we know which direction we have to go in now, and how to push towards that.”
Supply chain discipline is also key to the group’s future success, Dunning believes, with shrinkage identified as a core sticking point in the retailer’s most recent full-year results.
“I’m happy to say that we’ve made big progress in reducing shrinkage,” he says. “That’s about addressing wastage, fine-tuning your forecasting, improving your storage capabilities, investing in temperature-controlled storage, and, most of all, setting different parameters in terms of acceptable quality. It’s one of the areas that has had the biggest contribution to our EBITDA improvement.”
The COVID Consumer
Russia has been one of the nations worst hit by the coronavirus crisis, with more than a million cases reported, and in the early stages of the pandemic, the retailer’s #MagnitZabota campaign teamed up with a number of suppliers to supply food packages to socially disadvantaged consumers.
“We’re seeing, clearly, that consumers are not shopping on the cheap – they’re focusing on value, and they’re focusing on health and wellness,” Dunning says. “I think that puts us in an excellent position because we’re not only a retailer, we’re also a producer. We have extensive agricultural projects and growing facilities – that’s one of the most underestimated strengths of Magnit. We haven’t communicated this as well as we could have, but the quality of our private label is how we define ourselves.”
Magnit commenced a loyalty programme last year, with 59 million cards having already been issued. The retailer is confident that the share of purchases made using the loyalty card will reach 80% to 85% in a few months, enabling Magnit to better understand its customers and their preferences, and further improve its proposition.
Embracing e-commerce is also on the agenda, with the business recently appointing a new digital transformation team. Some projects are already starting to bear fruit. The company is currently piloting grocery deliveries with a number of partners, including Yandex Lavka, which is already used by its drugstore chain.
Elsewhere, in August, it launched an express delivery service in Moscow alongside Delivery Club, with which it offered access to 5,000 SKUs from Magnit convenience stores, as well as an e-pharmacy pilot scheme, enabling shoppers in the Moscow region to click and collect drugstore products from more than 100 pharmacies.
“Before COVID, our focus was very much on restoring our traditional retail business, but since then, with people paying more attention to their health and potentially not leaving the house, digitalisation is one of those aspects that we have to anticipate becoming more and more important,” says Dunning.
“Online has traditionally been a small part of our business – we get the majority of our business from the traditional grocery trade – so having a competent team working to develop a digital agenda is the best thing to do, going forward.”
Despite the massive investment by Magnit and others in recent years, Russian grocery has not yet reached the same level of maturity as other European markets. Beyond population centres such as Moscow, St Petersburg and Krasnodar (where Magnit is based), the landscape is largely populated by mom-and-pop outlets.
According to Dunning, the market holds therefore untold opportunities, provided the conditions are right. In keeping with Magnit’s more pragmatic approach, the retailer needs to be “very convinced” that a particular location will reap positive returns before it considers expanding there. For example, it recently announced the acquisition of long-term leasehold rights for 89 stores currently operated by retailer Evroros, in the Murmansk region, with which it will seek to retain a locally run management structure.
“If you go more into the regions, you see this capacity opportunity,” he says. “Often, there are smaller players that simply do not work as efficiently as the larger operators, and there’s an opportunity to bring that efficiency – and, as such, lower prices – to these markets. I see growth for the business partly coming from organic growth, and partly coming from mergers and acquisitions.”
While Magnit may no longer be steamrolling its way across the Russian landscape at quite the same pace as it once did, Dunning and his team are confident that the road ahead will provide ample room for expansion – with or without a pandemic standing in its way.
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine