May 14, 2018 / 1:52 PM / 6 months ago

O'Key aims to emulate Lidl to fill Russian retail niche

MOSCOW (Reuters) - O’Key (OKEYq.L) hopes its Russian discounters can mirror the rise in Europe of German-owned chains Lidl and Aldi as Russian consumers count their pennies, its chief executive said.

Miodrag Borojevic, Chief Executive of Russian food retailer O'Key Group, speaks during an interview with Reuters in Moscow, Russia April 5, 2018. Picture taken April 5, 2018. REUTERS/Sergei Karpukhin

Russia’s economy has returned to growth after two consecutive years of recession sparked by a drop in oil prices and sanctions, but shoppers are watching prices closely.

“Price starts to be more important, but this is part of education and development of clients, not because they have less money,” Miodrag Borojevic told Reuters in a recent interview.

O’Key launched its discounter business in 2015 while taking a cautious stance on expanding hypermarkets, its core business. Last year it sold its supermarkets to market leader X5 (PJPq.L).

The company plans to open 30 discounters Da! (which stands for Yes!) this year, accelerating expansion in 2019 and beyond. It had 67 Da! stores as of the end of the first quarter.

“In one moment in which Da! starts to be profitable, it’s possible maybe to go with an IPO of Da! and make an escalation of investments and expansion,” Borojevic said.

The company may also consider attracting private investment as an alternative to the public offering.

“We will see which variant is for us better but definitely we will not stop ... with the expansion of Da! We are close to breakeven with discounters and expect to bring this format in profitable numbers in the next 12-18 months,” Borojevic added.

O’Key expects that the discounters’ sales contribution will be as significant as that of its hypermarket business in the next 5-10 years, Borojevic said. However, hypermarkets currently account for a dominant 94 percent of total sales.

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LEARNING CURVE

Borojevic said the lower cost of running a discounter business would help it to keep prices competitive vis-a-vis Russia’s popular price-cutting supermarkets.

Discounters have a much tighter assortment of products and many items are displayed in crates and boxes, allowing saving on sales area and staff.

Besides, a large share of a discounter’s range are private label products on which it makes a much bigger margin compared with branded goods.

“Our process will give us (a) possibility to be more aggressive than our competition,” Borojevic said.

Discount supermarkets including Lidl and Aldi have been the driving force of the European retail market in past two decades, winning customers over from traditional chains thanks to their low prices and own brand products.

The format is still largely untapped in Russia where X5’s Pyaterochka and Magnit (MGNT.MM) have fought a fierce battle for shoppers by dotting vast territories with thousands of well-stocked supermarkets embroiled in price wars.

The strategy has proved profit-diluting. X5 said this month it needed a fresh look at Pyaterochka business as the unit’s head quit due to disagreements over strategy.

Borojevic said he saw a huge potential for discounters in Russia but added that some consumers were still reluctant to use low-cost stores.

“Can you imagine a Russian client who uses Maybach or Mercedes to go to Pyaterochka? Go to Germany and you will see Porsche or Maybach or S class Mercedes on a Lidl parking and Aldi parking (lot), it’s a normal thing, it’s a usual behavior of clients.”

“This will come in Russia, too. People will start thinking more pragmatically.”

Reporting by Maria Kiselyova and Olga Sichkar; Editing by Keith Weir

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