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Russian Supermarket Discounters
Join Andrew Grant and Darren A. Smith in the thirty-ninth episode of the Grocery Guru. They discuss the Russian Supermarket Discounters Opening Stores in the UK. How it will affect the UK’s supermarkets. Particularly Aldi and Lidl. Plus, supermarkets like the ‘X5 Retail Group’ and their innovative approach and different model.
You Can Read the Full Russian Supermarket Discounters Transcript Below:
Darren A. Smith:
Hello, and welcome to Grocery Guru. This is episode 39 and we are here with that grocery guru. Andrew, how are you?
Andrew Grant:
Morning Darren. Yes, very good. Thank you.
Darren A. Smith:
So, this week we’re going to talk about the introduction into the UK of the Russian supermarket discounters, and I’ve got some information here, but I probably haven’t got the experience you’ve got. What’s your recollection of Russian supermarket discounters coming to Britain?
Andrew Grant:
Well, they haven’t. So this is… Yeah, this is really interesting actually. They’re called Mere and they want to open 30 stores in the next year, sorry 300 stores in the UK in the next year. The first one is opening towards the end of this month.
Darren A. Smith:
Yes. Now, I do remember when discounters came before, and you probably do, Europe Tesco. What’s your recollection of that?
Andrew Grant:
Yeah, well this is the interesting thing, because I can remember being at Tesco, the first Aldi opened, and we’d already seen, I’d already seen Aldis in Germany and I still got this vivid recollection of going into an Aldi in Germany and in the chiller cabinet, the deli cabinet, there was a rusty knife hanging from a string and people were cutting their own lengths of salami. I’d never seen anything so unhygienic in my life.
And so, the minute we found out that the first Aldi was opening, we thought, there’s no way British shoppers are going to be picking knives up out of cabinets and cutting their own lengths of salami and sausage. They won’t shop in those sorts of conditions. And then of course, well everybody knows the history, Aldi and Lidl landed, just touched something within the British psyche for a quality bargain, and I think quality is the important thing, a quality bargain and together they’ve now got a share bigger than Asda and Sainsbury’s.
Darren A. Smith:
And I’ve got something similar on my recollection as a very junior buyer in, I think, it was the early 90s was, there was a guy called Tom Viner, who I think was probably CEO at the time. His initials were RTV, which I never quite understood, and then I realized his first name was Rudolph, but no one was allowed to call him Rudolph because they started doing red nose jokes.
Anyway, so Tom was at a conference at the front and he was saying, he read out this clip from newspaper. It said the discounters are coming. And his point was, we all went, “Yeah, that’s bad, Tom.” He went, “No, this was written in 1902.” He was trying to say to us that it comes every few years, it’s cyclical that the discounters come and not to worry, but actually I think he was wrong because to your point, they’ve got a hell of a market share.
Andrew Grant:
Yeah. But I think my take is that this is actually really good news for the likes of Tesco and Sainsbury’s, because it’s going to give Aldi and Lidl one major pain in the whatsit to have to sort out. So this Mere group, they’re planning to undercut Lidl and Aldi by 20% to 30%. I mean that is cheap, that is cheap as chips. But when you look at the pictures of the stores and anybody that’s interested should have a look, there’s an article of the Leipzig store that Mere recently opened.
I mean, their model is quite interesting. All the stores are leased. On the cheapest possible buildings that they can find as long as it’s near a main road. But the most interesting thing about the model is, suppliers own the stock until it’s sold to a customer. So suppliers deliver direct to store, the stock remains theirs until it goes through the till.
Darren A. Smith:
Wow.
Andrew Grant:
So basically the suppliers are responsible for total inventory.
Darren A. Smith:
Oh, I didn’t know that. That is a very different model. We don’t have that in the UK with any of our supermarkets, do we?
Andrew Grant:
Not that I know of, no. I mean, obviously I suppose you could argue that the retailers are quite good at extending their credit terms and not paying suppliers for 35, 42 days. So, technically the stock is still the suppliers, but no, this goes one whole step forward. And most of the food is… Well, it’s all delivered on pallets and it’s sold off pallets still in the shrink wrap. To save on refrigeration costs, there’s only one refrigerator, and it’s a room so that you go into a very cold room to pick up your yogurt and your milk and whatever.
Again, I’ve seen that operating in Europe and in Russia, and I’m not sure. I think it will give Aldi a little something to think about, because anything that cheap is going to corner a part of the market. And you only have to go around the UK post pandemic [inaudible 00:05:22] whatever the government’s leveling up agenda is, if anybody actually understands what that means, there’s some serious areas of [inaudible 00:05:32] around the country.
And I think if this Mere group targets those towns, the really marginalized coastal towns and some of the old industrial towns in the north and the Midlands and maybe the southwest and Wales, they will get a market. But it will be solely, I think solely at the expense of Aldi and Lidl. I can’t see shoppers migrating from a Tesco and a Sainsbury’s to that sort of super basic environment.
Darren A. Smith:
Okay. That’s interesting. Let me just share, for anyone who hasn’t got an understanding of the Russian market, just for a moment. So I’ve got here that the Russian market is made up of predominately eight supermarkets. Now the biggest one is the X5 Retail Group that has 12.8%, so let’s call it 13%, and then Magnit, the next one, 8.8%, then DKRB with 6.6. So we’ve got about eight players with X5 being the biggest. Now X5, I hadn’t realized this, the size of X5, they have a revenue of 28 billion. So, we’re talking about a very big player here with an operating income of 1.5 billion and nearly 350,000 employees.
Andrew Grant:
Yeah, but I think this Mere group is interesting, because obviously they’re Siberian, which is Russia in the refrigerator. It’s not like it’s Moscow or St. Petersburg. Yeah. This is a Siberian retailer. And we should probably steer away from any cultural humor, but when you look at that corporate website, I mean it is very Compare the Meerkat. It’s been translated from the Russian and it doesn’t quite translate to perfect English. I had a bit of a giggle, but I probably shouldn’t be allowed to say that.
But look, they clearly operate on zero cost. I mean, each of the stores is only going to have eight members of staff. Three filling the store, three filling the store and four on checkouts. Completely stripped down. But they’re operating all across Eastern Europe and they’re now in Germany and they obviously see the UK as opportunity. I think the first store is Preston. That’s right.
Darren A. Smith:
And do you think that this is the start of other supermarket brands coming over?Trying their hand in the UK market?
Andrew Grant:
We’ll wait and see. I do think back to, as we said right at the start of this, Aldi coming in. Everybody fobbed them off. “Oh, it’s not going to work. Hard discount isn’t right for the UK.” And we now eat our words odd 15, 20 years later. So never say never. If they’re determined enough, and the model is sufficiently different. It’s not like they use in a standard retail model and just hacking prices because anybody can do that and become massively unprofitable in the process. But if they’ve got a model where they’re effectively holding no stock and there’s no customer service. They make a point, almost Ryanair-ish, there is no customer service number, desk, or email. You want to complain, tough.
Darren A. Smith:
Let me just share a little bit more about these X5 guys, because they’re the ones, I think, we really need to be worried about. And I’ll tell you why. So I’m looking here and they have now launched pay with a glance bio-metrics at the checkout.
Andrew Grant:
What?
Darren A. Smith:
Just unbelievable. And what comes across from X5 is they are hugely innovative. 15,000 stores, okay? A lot of stores, of course. They seem to turn around their business in 2015 and became the market leader and are on a trajectory to absolutely dominate like Tesco. So that’s really, really good. And then we talked about the subleasing here. These guys are doing it, I think it’s what happened in 2015 that really turned these guys around, but the bit that really impressed me is they held a Russian version of Dragons’ Den and they invited a lot of small businesses to come along, 800 startups, and they’ve started working with a whole bunch on new innovations that no one’s ever seen before. So it’s a little bit like Tesco’s Red Door, yet I think these guys are ahead. They actually started it three years ago. [crosstalk 00:10:24] as a very respected, innovative business.
Andrew Grant:
Yeah. But having worked, or visited Russia a few times over the last 10 years, it still… Well, I don’t know. It looked, well when I visited it, it was at least 20 years behind the UK. So, it’s still almost virgin territory for retail. So, anybody that’s a good player, such as obviously X5 are, I think they will make hay for quite a long time. It’s a very different game trying to get into a market like the UK if you’re operating on the same principle model as effectively the world best in class leaders.
Darren A. Smith:
Yeah. Yeah, I get it. And what you said is they’re bringing in a different model, which might take its market share and it might take it from Aldi and Lidl. So if we roll forward five years, do you think Aldi and Lidl, what? They’ve lost a couple of points between them to Russian supermarkets like Mere?
Andrew Grant:
No. I think, yeah, they’ll probably have 150 stores, 200 stores, but they’ll just steal it away from corner shops, market stalls, freezer shops. There’s still lots of those, our version of hard discounters. I think they’ll probably steal them from them because the business model gives them an advantage over those more traditionally run hard discount stores.
Darren A. Smith:
Okay. So some of those freezer centers that we’ve seen, like Iceland have a big freezer center, I’ve forgotten the format, and Farm Foods, they might be stealing from those?
Andrew Grant:
Yeah. There’s Farm Foods. There’s a whole raft of small, semi-independent, quasi-hard discounters. And then you’ve got market stores, and you’ve got the vans that drive around offering cheap meat and vegetables and frozen stuff. I can see them stealing that, whether it’s enough for them to show on Kantar as a serious player, I’ll put my money on the line and say no. But I don’t think they’ll have more than 1% share. I think they’ll have less than 1% share in five years’ time.
Darren A. Smith:
Okay. Okay. All right. Fair enough. Fair enough. Okay. So, we’re talking about Russian supermarkets. We’ve got the big one, X5, followed by Magnit, then DKRB, they’re entering the UK market. Our grocery guru thinks they’ll have less than 1%, we’ll wait and see. Andrew, what’s our-
Andrew Grant:
In five years, yeah.
Darren A. Smith:
In five years. What’s our takeaway before we leave you?
Andrew Grant:
Well, as I said, whilst I’ve just made the prediction of this Mere group having less than 1% share in five years’ time, it is worth keeping an eye on them, I think. Have a look at their website. If you’re anywhere near Preston in the next few weeks, I think it’d be fun to pop in and see what it’s like, because if I’m wrong, then you will need to take notice of them.
Darren A. Smith:
All right. Andrew, we’ll let you get back to your Friday. Thank you very much and we’ll see you next week.
Andrew Grant:
Cheers.
Darren A. Smith:
Take care. Bye.
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