The Russian retail digital revolution of the X5 supermarket chain

The Russian retail digital revolution of the X5 supermarket chain
X5 is the biggest supermarket operator in Russia and is going through a radical digitisation of its business
By Ben Aris in Berlin October 29, 2020

It's been on the Kremlin’s agenda for years, but now the Russian economy is finally being rapidly digitalised. The coronacrisis has accelerated the process after everyone was locked up at home in the summer and forced to buy their groceries online, but the pandemic didn't create a new trend; it only made the existing ones move faster.

“There [are] no new trends or revolution to the existing trends. All that happened is the trends that existed before the coronavirus have just become a lot stronger. That has led to new opportunities. (I don't want to say benefits),” Vladimir Salakhutdinov, the head of strategy at X5 Retail Group told bne IntelliNews in an exclusive interview.

For years the leading supermarket chains were growing as fast as they could in a race to capture market share while it was still up for grabs. However, that process has come to an end as the market reaches maturity and the leading companies have started to focus more on profitability than expansion.

X5 overtook its rival Magnit about two years ago to become the market leader in terms of turnover and just announced a radical transformation at its capital markets day on October 27 that will put the customer at the centre of its focus.

“We understand that TV ads used to be the number [one] place where people got information about food but now there are all sorts of new variants: a food blog, interest in healthy food, what the celebrities are eating, etc. The customer only goes to the store after taking all this in. Their journey starts a long time before they go to the store. We are at the end of that journey and we want to be at the beginning of the journey,” Salakhutdinov said in a video call with bne IntelliNews.

X5 has already been digitising its process, but now that process has accelerated as it strives to defend its market share and maintain its profit margins and revenues. The company has already become an investors’ darling and saw its share price double in 2017 as the equity market recovery got under way. This year the leading dollar-denominated Russia Trading System (RTS) index is down 26% YTD, but X5’s shares are up 32% in the same period as of October 28 as investors use the current crisis as a buying opportunity to get into their favourite blue chips on the cheap.

E-commerce is booming and the barriers for entry into the e-grocery business have come down. X5 is fighting back and amongst other things has announced it was setting up its own “hard discount” chain called Chizhik (English: Sparrow) at its capital markets day to compete with the explosive growth in discount stores.

But that is only half the battle. More important is increasing efficiency and that means a root and branch rethink of X5’s business.

Logistics

The coronavirus (COVID-19) epidemic has actually been a boon for food retailers. They were already investing heavily into digitisation before the epidemic hit and were half ready when the demand for home delivery went through the roof. The emerging battle between the online majors like Sber (formerly Sberbank), Ozon Holdings, Yandex and Wildberries who are all rushing to create online ecosystems has spread to the leading traditional retailers as they become increasingly agnostic about which channel they use to get their goods to the punter.

Its telling that the third biggest e-commerce player in Russia is already the leading electronics chain M.Video, which has been selling tellies and stereos from shops for over two decades, but just reported 25% revenue growth in the third quarter, the epidemic notwithstanding, while overall retail turnover is down 5% year on year in same period.

X5 had launched its Express Delivery service in January that promised to get your shopping to your front doors within 60 minutes after you click “buy” on your phone and the company’s existing online services were almost overwhelmed by the surge in demand.

"Some areas of retail have been negatively affected by the epidemic, but not food retail," Salakhutdinov relates. "When the restrictions were most severe in the spring the food stores were still open. And there was a huge surge in digital delivery. So there was no real impact on our business. We saw very strong growth and while the digital delivery market doubled, our growth increased several times faster."

Logistics has been the key to building a successful e-commerce business in a country as vast as Russia. X5 had set up five "dark stores", or warehouses that are used to assemble orders from its online supermarket Perekrestok.Vprok, while express delivery orders are assembled in local stores or at one of seven regular stores that have been repurposed to support this service, meaning the company was well placed to meet the increase in demand for online groceries.

“Before corona we were making 600 express deliveries orders a day. Now we are making 22,000 deliveries a day and it is still growing. We were already projecting 70% growth in digital retail before corona hit. Now the virus is still here and the e-grocery market might double or treble this year. It is hard to say exactly how it will play out, as every month things change,” says Salakhutdinov.

In food, and many other kinds of retail, e-commerce is not a disruptor but a complementary business, as it turns out that X5’s network of 17,300 outlets is a boon, not a hindrance. That network needs the same logistical support, which Salakhutdinov says is now on a par with the Russian Post Office’s system. And having a store brings added opportunities in terms of pick-up services and additional selling opportunities.

Efficiency

But how to grow the business from here is not obvious. However, all of Russia’s leading retailers seem to have come to the same conclusion: increasingly sophisticated digitisation and standardised, automated processes are the way forward.

All the retail companies bne IntelliNews has interviewed recently have emphasised the huge importance of IT and have invested heavily in expensive and powerful systems.

X5 already has 500 people working on dozens of big data projects and a total of 2,000 digital technicians in-house. But the company doesn't have an IT department. The technicians are an integral part of the various product group teams and answer to the product owner in the company, as IT solutions are now an integral part of the sales and marketing process.

 “You can’t create this intellectually. You must try the concept and observe its impact. It also affects the way we work. The corporate chain of command doesn't work well here, where an idea is discussed, approved and implemented. We need to do 20-50 small things and [see] what works and what not,” Salakhutdinov said.

But the IT goes way beyond just getting packs of pasta or blocks of cheese to the store on time. In the past food retail was an operational challenge of sourcing and delivering a product to a store where a customer could come and buy it. As organised retail that offered a wide selection of goods was a new thing to post-Communist Russia, getting the punters to come was not hard.

But things have changed now, as when the customer arrives with his or her shopping list they have already made most of their purchasing decisions and the store doesn't really “sell” anything, but simply acts as a fulfilment centre. The goal of the new strategy is to go back to the beginning of the process where those purchasing decisions are made and be present at all stages on that journey in some form.

“Our approach to the customer is changing. Retail focuses on the customer fulfilment. Now we are re-engineering all our frontline processes to turn them to the customer’s point of view,” says Salakhutdinov. “That means we are opening new channels to reach the customers and not organise this centrally. We used to have 15 channels that we could use to reach the customer, with TV being the most important one to provide information about food. Today there are a lot more, using social media and the like.”

And Salakhutdinov says they have already made a lot of progress. The “transformation,” as X5 dubbed its new strategy, is not traditional retailing. It is a new way of thinking about customers and Salakhutdinov claims the Russian companies already have had some ideas and made some innovations that Western European companies can learn from.

Targets

At the moment X5’s on- and offline businesses are separate businesses, albeit the biggest in their respective niches. Over the next few years these two channels will be integrated into a complete “ecosystem,” which is rapidly becoming a buzzword in the industry.

Despite being the dominant player in the market Salakhutdinov says there is still a lot of growing room left. “The market is still not consolidated. We are the market leader but we still only have 11.5% market share and the top five players’ share is less than 25%. If you compared that to the leading international markets then the top five players often have more than 50% of the market and the leader will command between 20% and 25% market share. It means there is still a lot more growth available,” says Salakhutdinov.

The X5 group already own several retailers targeting different types of shopper. The Pyaterochka chain is a “proximity” retail of smaller shops that are close to home, whereas Perekrestok are bigger supermarket you have to drive to. Both these businesses are expected to expand over the next three years, but the fastest growth will be with the online business, up from RUB145bn ($1.9bn) this year to RUB605bn by 2023, according to estimates from the market research company Infoline. At the same time the digitisation effort is expected to add RUB20bn ($250mn) to the company's EBITDA by 2023.

 

X5’s main online services:

Perekrestok Vprok:  an online supermarket with its own “dark stores”, or mini-warehouses, where orders are assembled for delivery by X5’s own fleet of trucks.

Express Delivery: a unique express delivery service where orders are assembled at local Pyaterochka and Perekrestok stores. It was initially launched for select Pyaterochka stores in Moscow in January, and was handling around 600 orders a day in February. After adding Perekrestok supermarkets and expanding to 10 regions in the last few months, X5 was handling around 22,000 express delivery orders by September. 

Okolo: X5’s hyper-local delivery aggregator that powers express delivery from Pyaterochka and Perekrestok. In addition, X5 is starting to pilot deliveries from other businesses and will soon include deliveries from local restaurants and cafes as part of building a food ecosystem.

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