March 11, 2014

German retailers keep their cool in Russia

Rewe's Billa supermarket in Moscow (photo: Rewe Group)
End of the party? A Rewe Group "Billa" supermarket in Moscow
As the political situation deteriorates in the Ukraine, have German retailers a plan B for their investments in Russia? For years, we have been used to hearing at roadshows and Annual General Meetings: "Yes, business is hard in eastern Europe, but sales are booming in Russia."

If tensions increase with the European Union and the USA over the sovereignity of the Crimea, will they jeopardize hitherto generally flourishing revenues at "Globus" hypermarkets, "Billa" supermarkets, "Obi" DIY stores, and "Metro" Cash & Carries? And how will the political impasse affect German suppliers and global food prices?

Dr. Eckhard Cordes, Chairman of the influential Committee on Eastern European Relations, warns of an "escalating spiral of mutual economic sanctions". The former Metro Group CEO finds it particularly alarming that the Russian Federation Council is even considering passing a law that would allow the expropriation of foreign companies.

Meanwhile, like many others in the German trade, Otto Group board member Alexander Birken is hoping for a diplomatic resolution to the conflict. With annual revenues of around half a billion euros, Russia is one of the mail order giant's most important foreign markets.

Metro Group, whose 60-odd Russian entertainment electronics stores under the "Media-Saturn" logo post more than €1bn in annual revenues, "is not discussing any withdrawal from the country".

To Russia with love

Hypermarket pioneer Globus, whose eight stores in the Greater Moscow Region will soon hit €1bn in annual sales, intends to open ten new outlets within the next three years. "The Russians are happy we're here," says owner & CEO Thomas Bruch.

The entrepreneur also talks politics and believes that "the Russian standpoint has its justification". He points to Russian fears at the prospect of having Nato on its doorstep. As a native of the German Federal State of Saarland, which held a referendum as to whether it wished to belong to France or Germany after the Second World War, Bruch considers it self-evident that voters in the Crimea should be allowed to decide their national identity.

Irrespective of sanctions, the decline in the rouble by around 20 per cent even in the twelve months prior to the crisis is a further cause for concern. An analysis by Commerzbank underlines concerns that Russia could introduce financial controls. These would, for instance, make it harder for Metro Group to transfer money from the planned IPO of part of its local Cash & Carry subsidiary.

Again, however, Thomas Bruch refuses to worry. He doesn't regard exchange rate depreciation as a risk because all payment transactions, including the funding of real estate, are now made within the rouble currency zone. However, Bruch does admit that this will increase the price of goods imported from the West.

Price shock

Any such scenario will surely trouble brand manufacturers such as PepsiCo, Nestlé or Ferrero who have already invested considerable sums in this huge market of more than 140m consumers. "We see a growing exchange rate risk which in a worst-case scenario could affect prices," says Olaf Wilcke, International Business Director at German chocolate maker Ritter.

The Crimean crisis will also hit those suppliers who don't deliver to either Russia or the Ukraine. Only last week, there were big jumps in the price of wheat and other agricultural products on the commodity exchanges in Chicago and Paris. The Federation of German Food & Drink Industries has confirmed that there will be further "tensions on agricultural commodity markets", and FAO expert Abdolreza Abbassian sees a "price shock in the very short term".

Understandably, the Ukrainian Ministry of Agriculture in Kiev wishes to reassure the market as regards grain exports, but obviously cannot stop politics influencing prices. "If the conflict escalates, it will not only affect Russia and the Ukraine, but also other export nations in the region such as Kazakhstan," says Oleksandr Perkhozhuk, an expert at the Leibniz Insitute of Agricultural Development in Transition Economies (IAMO).

Given that "the three countries account for more than a quarter of global grain exports", blessed indeed are the peacemakers.


Related article in German:
Lebensmittel Zeitung, Nr. 11, 14.03.2014, von Bernd Biehl, Mathias Vogel, Manuela Ohs, Jens Holst, Iris Tietze & Dirk Lenders


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