Rising inflation gives discount retailers a boost in Russia



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Svetlana Mozhaeva, general manager of the discount clothing chain Familia, pulls a ski helmet from one of the shelves in a store in central Moscow and displays the price of 1,500 rubles ($ 20).

“Look at this, it’s an 85% discount! “, she says.

As she checks prices on everything from jeans and shirts to handbags and sportswear while inspecting one of its 81 stores in the Russian capital, Mozhaeva’s approach echoes that of customers. she calls “treasure hunters” – shoppers who spend hours browsing the shelves of designer clothes for the bargain-priced dream item.

After seven years of economic crises and contraction household income is a role that more and more Russians have been forced to take on – trying to maintain a comfortable standard of living as their wages and purchasing power decline.

This dynamic has proven to be a boon for stores like Familia, a discount clothing retailer with a business model similar to that of the American chain TJ Maxx. Both buy wholesale end-of-season stocks from the big fashion houses and resell them at a significant drop.

“It sounds cynical, but our efficiency actually increases during an economic downturn,” Mozhaeva told the Moscow Times. “Our figures show that the greater the decline, the greater the economic efficiency of our company. However, it is important to add that we are well positioned to prosper in any economic cycle. ”

Now with inflation exceeding 8% and independent polls showing Rising prices are the number one concern of Russians, discount retailers like Familia looking to capitalize on another round of belt tightening and say they are better placed than their more expensive competitors to weather a period of accelerating costs .

“In times of volatility there are a lot of product offerings for us, as many traditional retailers make mistakes – first and foremost in forecasting, leaving a lot of surplus stock and at a good price for us. “said Mozhaeva. “Additionally, customers rationalize their spending when times get tough and we’re seeing an influx of traffic from the higher price segments. “

Familia said revenues were up 31% in the first nine months of 2021 from pre-coronavirus levels, and the chain has opened more than 57 new stores so far this year.

‘Last resort’

Mozhaeva’s optimism is shared by Dmitry Kirsanov, managing director of Fix Price, another discount store that sells a range of household items including food, toys and cleaning supplies.

“In general, I agree. Fix Price’s flexible business model means that we do well in times of crisis, when the economy is not doing so well, when there is inflation or other economic problems, ”he said. he told the Moscow Times, saying that the company’s approach is to have “maximum stability and comfort in any macroeconomic situation – crisis or growth.”

Earlier this year, Fix Price staging a $ 1.7 billion IPO on the London Stock Exchange (LSE) in the largest initial public offering (IPO) ever for a Russian retail company. Analysts pointed out that the pressure on Russian households was one of the main drivers of the chain’s rapid growth.

The chain has opened the equivalent of more than 10 new stores per week in Russia so far this year. Revenue is up 63% from 2019.

Rather than being a potential downside, Familia and Fix Price say their clear focus on price helps them outperform their rivals at a time when inflation is faster than at any point in the past six. years.

“We are doing everything possible not to increase the prices on the shelves. If we realize that we cannot sell the current product at its current price, we first work to change the packaging, color, design or size, ”Kirsanov said. About 75% of the products sold in Fix Price cost less than 100 rubles ($ 1.35).

“Raising the price of a good is a last resort. We have a reputation for being the last retailer on the market to raise prices.

Russian company Fix Price follows a business model similar to that of US dollar stores, selling a range of household items at ultra low prices.
Alexandre Ryumin / TASS

While DIYing products or downsizing is an option for Fix Price, which works directly with producers, clothing retailer Familia, which is not involved in making the products it ultimately sells, claims that the rise in market prices increases its competitive advantage.

“Inflation has only a small effect on us. Sometimes in times of explosive inflation we benefit because our prices are not based on costs, but on market prices, ”said Mozhaeva. “If a traditional retailer raises prices, it helps us become even more price competitive because we buy goods a little earlier in the cycle. “

Familia has generally performed “well” during times of high inflation, she said, highlighting the economic slowdown of 2015-16 and the devaluation of the Russian ruble. She doesn’t expect any difference this time around.

“Our costs are certainly increasing, but the costs of traditional retailers are increasing even faster. “

Fix Price’s Kirsanov said that Russians’ buying behavior had already adjusted to the era of high inflation – a not unheard of feature of the Russian economy, which experienced hyperinflation in the 1990s and the annual price increase rate reached 17% in 2015.

“At the start of the year, we saw a negative reaction to price increases, not only at Fix Price, but across the market. Now that the first shock of inflation has passed, customers have been able to study the market and have started to get used to the higher prices.

When prices first accelerated rapidly earlier this year, the share of essentials in Fix Price’s sales mix soared. But as customers adjusted, demand started to return across the board, he added.

“Economic disaster”

Russia’s official inflation rate has doubled in the past year and currently stands at 8.1%. But perceptions of inflation are even higher than statistical reality, especially for poorer Russians who spend a higher share of their income on food, which has been particularly volatile. Data from the Central Bank shows that households without savings – the majority – believe that prices are increasing at an annual rate of 18%.

The regulator has responded aggressively, by rapidly raising interest rates in an attempt to kill an “inflationary cycle”. Governor Elvira Nabiullina said earlier this week that rising costs were “an economic disaster that impoverishes people.”

Almost two-thirds of Russians cited inflation as the country’s biggest problem in a recent Levada Center poll – ahead of coronavirus, healthcare, corruption, education and a host of other burning issues.

Economists say inflation is just one of the factors undermining the momentum of the Russian economy after a strong recovery after the first impact of the coronavirus.

In a recent research note, VTB Capital chief economist Alexander Isakov pointed to rising interest rates on credit cards and consumer loans, slowing wage growth – which ” is focused in particular sectors, rather than expanding “- and the President’s fading effect Vladimir Putin’s pre-election cash giveaways in September are already weighing on Russia’s consumer economy.

The extension of restrictions on coronaviruses and vaccine passports for entry to malls and non-essential stores are also expected to hit the Russian economy more in the last months of 2021 and next year.

But Fix Price’s Kirsanov sees opportunities amid the downturn.

“We strive to make any economic situation beneficial for our buyers and for the company. For example, real estate market conditions have become more attractive now, with fewer businesses looking for new premises. This gives us more options to choose better locations to help new stores increase sales and perform better. “

Fix Price only makes limited online sales, while Familia has no e-commerce presence except for in-store gift card sales – another way the two discount retailers have weathered the trends. broader Russian retail sector, which has seen explosive digital growth from the start. of the coronavirus pandemic.

But both say that despite short-term hurdles like a new round of anti-coronavirus measures, they are being put in place to succeed during a period of stagflation – low growth and high inflation – that could beset the Russian economy.

“As people save more or cut spending, they come to us,” Mozhaeva said.

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