Retail acquisition frenzy boosts market consolidation

Russia’s second biggest retail chain Magnit announced Tuesday it was buying the country’s fifth-biggest grocery chain, Diksi. Two days later, retailer Lenta acquired the country's network of Billa stores, allowed their owners - German supermarket chain Rewe - to exit Russia. Magnit and fellow leading retailer X5, are now far ahead of the competition in a fast-growing market.

Magnit paid 93.4 billion rubles ($1.2 billion) for Diksi’s 2,600 stores, while Lenta spent 19.2 billion rubles for 161 Billa supermarkets. Both Magnit and Lenta are big chains that once operated mainly in the provinces and then muscled into the Moscow market.

• Diksi and Bila were long-standing players in Russian retail. Diksi was one of Russia’s first retail chains and grew rapidly after the 1998 financial crisis — however, it fell behind its rivals in the mid-2000s. Tobacco tycoon Igor Kesayev bought the chain in 2007, but could not revive its fortunes and, since the mid-2010s, Diksi has been in crisis. In 2017, its market capitalization dropped below the value of its 2007 IPO and the company de-listed from the stock exchange.
• Rewe, which operated Billa, came to Russia in 2004 in partnership with Grossmart chain owner Georgy Trefilov, who took a 25 percent stake in Russian Billa. In 2007, Trefilov’s retail empire, which included Billa, was ranked Russia’s 12th largest grocery retailer. But within a year, the partners fell out. Trefilov accused Rewe of taking over the business, only to find himself named in a 2010 lawsuit. Eventually he fled to London. Like Diksi, Billa was hit by financial problems.
• Two such big retail deals in the same week inevitably led to talk of market consolidation. In reality, this process has been on-going since the late 2000s. The market share of the top 10 players on the grocery market has almost doubled since 2010, from 17.4 percent in 2011 to 33 percent in 2019. Amid the pandemic, there was another big jump and the top 10 saw their share of the market reach 37 percent last year, according to Infoline analytics. Infoline attributes this to the big chains’ ability to hold prices lower for longer — delaying the impact of inflation and providing some defense against the growing popularity of online grocery shopping.
• And consolidation is likely to continue. There are other companies that look ripe for a takeover: for example, O’Key, Russia’s 8th biggest retailer, has been seeking a buyer for five years, while the Russian operation of Auchan has been suffering a slow-burning financial crisis since the mid 2010s.

What’s next?

This week’s developments reveal that Russian retail assets are relatively expensive: both Diksi and Billa were sold at good multiples, especially considering their financial problems. And in the near future we could see new stock market listings. Retailer Vkusville, for example, has long been considering an IPO, and Lenta told investors in March it might go for a secondary placement.