October 4, 2018

Siberian discounter plans German entry

Arctic snow scene (photo: Shchipkova Elena/stock.adobe.com)
From Russia with love: German consumers could soon enjoy super-cool prices (photo: Shchipkova Elena/stock.adobe.com)
Talk about audacity! Russian discounter Torgservis plans to enter Germany via Berlin-based subsidiary TS Markt. The retailer from Krasnoyarsk in Siberia wants to rent "more than 100" stores with sales areas of 800m² to 1,200m² and 30 to 40 parking spaces. Expansion is planned in both Northern and Eastern Germany, including Berlin and the federal states of Mecklenburg-Western Pomerania, Saxony, Saxony-Anhalt, Thuringia, and Brandenburg.

TS Markt is already advertising online for Category and Business Development Managers on its German website ts-markt.de.

At first blush this looks very much like carrying coals to Newcastle. After all, Germany is the international home of discounting. You can find discount stores on any local High Street, LZ Retailytics counts nearly 16,100 of them. Working on the basis that "poor people must save, rich ones like to", powerful giants such as Aldi and Lidl have carried their no-frills, low-price message with invariable success to nearly 50 countries world-wide over the last 60-odd years.

So have the Russians gone suicidal or mad? Or do they know something we don't?

A Torgservis store in Russia (photo: LZ Retailytics)
A Torgservis store in Russia (photo: LZ Retailytics)
Well we certainly won't gain any clues directly from the horse's, or should we say, reindeer's mouth. In fine discounter tradition Torgservis did not reply to our request for more information about its plans in Germany. Fortunately, however, LZ Retailytics analyst Sebastian Rennack was able to put together some basic facts about this secretive retailer which we are happy to share with a curious world.

Torgservis was founded in 2009 by Valentina Shnayder, who still owns more than 60 per cent of the company, and minority investors including Andrey Veykulaynen. It is little known in western Europe because most of its "Svetofor" (traffic light) and "Mayak" (lighthouse) stores are in rural conurbations of around 15,000 inhabitants east of the Urals.

A minimalist concept

A Torgservis store in Russia (photo: LZ Retailytics)
Rough, but apparently ready for Germany (photo: LZ Retailytics)
The few photos we have of the concept convey something pretty rough and ready. The stores look more like warehouses, and the merchandise seems to have been dumped on pallets and racks. Apparently even the heating is minimal, but this might not worry the Siberian clientele or their pet huskies.

The assortment carries 1,500 to 2,000 SKUs, including food and non-food, nearly all of which (90-95 per cent) are own label. The main USP seems to be average prices which are 5 to 20 per cent lower than those of local competitors.

A Torgservis store in Russia (photo: LZ Retailytics)
More warehouse than store (photo: LZ Retailytics)
But to portray Torgservis as some ruffian from the East is to do it less than justice. The company has certainly learned the first lesson in retailing: Get your costs in order. Torgservis is said to have reduced average store opening costs to only 1m roubles (around €13,130). Rents are said to be half those of leading Russian multiples Magnit and X5. Torgservis is also regarded as a highly competent logistics operator having gained its spurs as an alcohol wholesaler.

Very unusually for a discounter, Torgservis is believed to operate a franchise model where each outlet is a unique legal identity. This has helped to fuel the rapid expansion of the store base.

The economic crisis in Russia since 2014 has also been a blessing for the company because there are many more customers who now appreciate low prices.

A Torgservis store in Russia (photo: LZ Retailytics)
Predominantly own label, but German brands are already stocked on Siberian shelves (photo: LZ Retailytics)
Over the last four years, Torgservis has gone into overdrive with the store count growing nearly fivefold to 731 and external revenues tripling to €1.3bn. The company began to expand to the Moscow region in 2017 and is said to have entered Kazakhstan, China and White Russia. Apparently there are also plans to enter Rumania and to open eight stores in Poland by the end of this year.

Back to the roots

But this impressive growth still doesn't explain why Torgservis feels that it is strong enough to survive on the German market of all places. Those who claim to know the company say that there is at least method to this apparent madness. The Russians are clearly aware that Germany's largest discounters (Lidl, Aldi South, Aldi North) have undergone a big trading-up over the last five years or so. Torgservis therefore seems to believe that this has created a growing niche in which a no-frills, no-nonsense concept like their own could thrive.

If this is indeed the thinking behind the venture, then it would seem to be very similar to that of Sir Stelios Haji-Ioannou at EasyFood in the UK. There is more than a grain of truth in this. Whatever Aldi and Lidl may say to the contrary, better stores and increasingly demanding assortments, which even include organic food, have increased both complexity and cost. Despite all their advertising, the average customer ticket has increased in price, if only because more expensive lines are on offer, which were never there to tempt thrifty shoppers before.

A Torgservis store in Russia (photo: LZ Retailytics)
Lack of store orientation and signage. Clearly the low prices must speak for themselves (photo: LZ Retailytics)
If you add to this more than one million economic refugees who fled to Germany in 2015 alone, and a surprisingly large population of Russian and Eastern European immigrants who might appreciate a more ethnic proposition, then there could be a potential market for a back-to-the-roots discounter even in a generally very prosperous country. This would explain why Torgservis is primarily looking for sites in the former communist states of eastern Germany where spending power is relatively low.

But this logic is surely still flawed for a number of reasons. Torgservis will quickly find that costs from sites to staff are far higher in Germany. Legislative demands on food quality are also extremely exacting and presumably considerably more so than in Siberia. Torgservis will also be up against the most efficient discounters in the world who can buy locally in massive volume and who rigorously check food quality along the whole food chain.

Top Discounters in Germany (source: LZ Retailytics)
A hard act to follow: Top discounters in Germany ranked by gross annual revenues and store count
Then the Russians might do well to remember that Aldi and Lidl have traded-up for a reason. They have to cater for time-stressed German consumers who increasingly demand one-stop shopping. Aldi and Lidl are also such massive forces in Germany that their trading-up has shaped local consumer expectations. Customers now expect virtually A-brand quality even from discounters.

In this context it is worth recalling the fate of Metro hypermarket subsidiary "real,-" when it undercut Aldi and Lidl on a number of commodity items. The company only succeeded in crippling its margins and dismally failed to wow customers. Discount "made in Germany" is obviously a lot sexier than many people seem to think...

Podcast microphone (photo: Gerhard Seybert-Fotolia)
Gerhard Seybert-Fotolia

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Lebensmittel Zeitung with digital sister (photo: LZ)
photo: LZ
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German
: 'Russischer Discounter will in Deutschland landen' by international editor Mike Dawson & CEE correspondent Sebastian Rennack on page 10 and 'Angriff von unten' by retail news editor Hans Jürgen Schulz on page 2 of Lebensmittel Zeitung, no. 40, 05.10.2018

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  1. Florin Frasineanu
    Created 5 October, 2018 11:11 | Permanent link

    Torgservis' expansion plans in Romania and Poland

    Torgservis is also looking at the Romanian market. They started few months ago in a small apartment in northern Bucharest. Initially, they announced 105 hard discount stores in our country. But, after one or two months, they reduced this scenario to 16 stores by the end of this year. After, two years they will make a final analysis. If they are satisfied with the results, they will continue.

    They aren't building, are are only looking for spaces to rent.

    Romania is still on their list, but with a big delay. The first opening, which they had announced for the first half of September, was postponed without comment.

    You can learn more about their Romanian strategy in our magazine (sorry, our article is in Romanian):

    Interested readers can also take a look at their website: http://mere.ws/en/. One can also see their requirements in the "SUPPLY" section.

    Poland was also part of their expansion strategy, but they cancelled everything in August.

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