Magnit-icent: Russia’s Sam Walton?

Via The Financial Times, an interesting look at a highly successful Russian retail leader who some compare to Sam Walton:

Most businessmen would be glad to be compared to Sam Walton, the US retail visionary who founded Walmart. Not Sergei Galitsky, the billionaire chairman and chief executive of Magnit, the Russian grocery chain. He thinks the flattery goes too far.

For a start, Magnit, although Russia’s biggest food retailer by stores and growing at breakneck speed, will never match Walmart in scope or size, he says. And Galitsky has no plans to follow the US multinational’s example and take his company global.

“Why would we when there is so much to be done in Russia?” he told beyondbrics, speaking in his oak-panelled office, in Krasnodar in southern Russia.

In some ways Galitsky and Walton are comparable. Both built their retail empires from scratch, starting in provincial towns – Galitsky in Krasnodar and Walton in Newport, Arkansas. And both, after a difficult start, became fabulously rich by selling discounted goods to the less well off.

It’s not difficult to understand why Galitsky, who is 45, wows investors. Magnit’s net profits surged by 142 per cent in the first half of this year, spurred by a rise in Russian consumer spending and a roll-out of new stores.

They reached a record $339.9m on revenues of $6.776bn, up 23.85 per cent. The group earned a net profit of $419m in full year 2011 on revenues of $11.42bn.

Shareholders are gloating over the 30 per cent rise in Magnit’s stock price this year that has boosted the London-listed company’s market capitalization above $15bn. “Magnit is doing a fantastic job,” says Alexei Evstrakenkov, retail analyst at Aton, the Moscow-based investment bank.

While other listed Russian food retailers including X5, Dixy and O’Key, have clung to wealthy areas around Moscow and St Petersburg, Magnit has soldiered out into the regions opening its trademark red and white stores in 1,800 towns and settlements across European Russia.

The company now has more than 5,720 outlets including hypermarkets, family and convenience stores as well as the new stand-alone Magnit Kosmetika stores. “We have got as far as the Urals. It was not easy to do. Russia is very big and very varied. People are different in different regions,” says Galitsky.

Even though it has been opening three new stores a day this year Magnit still only accounts for less than 5 per cent of Russia’s highly-fragmented retail food sales. Galitsky is thinking big, planning to boost Magnit’s capital spending to $1.8bn-$2bn next year from $1.4bn in 2012. He says he wants changes to Russian anti-monopoly laws that prevent individual companies from controlling more than 25 per cent of the market.

An economist by training, Galitsky went into business in the early 1990s distributing imported household cleaning materials and cosmetics that flooded into the market in the chaotic early years of Russian capitalism. Betting that food sales would remain buoyant despite the economic turmoil he switched to retail in 1998 and opened a food store in his home region of Krasnodar, 1,300km from Moscow. “The sector was wide open and did not take much capital to develop,” he says. “It was not like building a metallurgy factory.”

As Russia’s food market begins to mature the big question is how long can Magnit continue to deliver meteoric growth. “Probably not more than four or five years,” says Galitsky. “This is a special time in history. We have to seize the moment.”

Mergers and acquisitions that have helped X5 and Dixy to grow are not on Galitsky’s agenda for now. Russian assets, he says, are over-priced.

Instead Magnit will take on its rivals in the Moscow region where it has already opened 30 stores and push out further east in Russia. Siberia is next on the horizon although Russia’s remote, underpopulated far east may be a step too far.

So far Magnit has grown mainly by capturing business from outdoor markets and small stores that still account for three quarters of Russia’s $237bn annual retail food sales. But tougher competition is on the way as other big retailers expand beyond the Moscow region. Magnit is positioned to put up a good fight, says Evstrakenkov. “They have better logistics.”

If sales growth falters, Magnit may look at other areas including online food sales and agriculture. As a start the company recently launched €300m scheme to grow hothouse vegetables in Krasnodar for supply to Magnit stores. Galitsky plans to stick with the discounter format saying that (like customers in other emerging markets) most Russians will always scrimp spending on food.

Russia bears tend to exaggerate the risks in Russia: foreign companies can succeed in the retail sector. Auchan of France and Germany’s Metro Cash Carry are examples.

However, there is no longer room for big new players unless they have local know how and experience. It’s possible that an existing retailer might change hands, but foreign companies – like Walmart for instance – have so far baulked at the high cost of acquisitions.

Magnit, which now has a market capitalisation bigger than France’s Carrefour, is expensive even by international standards. In any case, the company is not for sale. Galitsky owns just under 42 per cent of Magnit and would ”take more, but not less”. He plans to run the business for the rest of his career.

With an estimated forunte of more than $6bn, Galitsky is the richest Russian businessman not to have made his money out of natural resources.

Galitsky spends his spare cash on a football club and school he has founded in Krasnodar but is against giving money to charities to fight poverty. “People who don’t get rich are lazy or just have other priorities.” Waltman who was renowned for his philanthropic activities might not agree with that.

This entry was posted on Thursday, September 13th, 2012 at 8:44 am and is filed under Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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