Monday, 26 February 2007

Contestants line up for supermarket sweep

Financial News

Jason Corcoran

26 February 2007

Letter from Moscow

Shares in Russia’s listed supermarket chains are flying off the shelves as investors digest a rush of takeover rumours by foreign and domestic players.

Recent reports suggest the founder of upmarket Sedmoi Kontinent, Vladimir Gruzdev, is going to sell his 37% stake to a partner or Andrey Melnichenko, the founder of MDM Bank. Shares jumped by 7% in a day on the story.

The chain, which operates about 20 supermarkets and five hypermarkets, became the country’s first retail group to float on the Russian stock market in 2004.

Sedmoi, or Seventh Continent, is pitched towards Moscow’s higher spenders. A single avocado in a central store last week cost 300 roubles (€8.70) while five pre-packed tomatoes would have set you back 250 roubles.

Those prices are well beyond the pocket of the average Moscovite, who might be more inclined to buy vodka and beetroot at X5’s Perekrestok and Pyaterochka mid-priced chains.

The latest stories have London-listed X5 walking down the aisle with France’s Carrefour, US group Wal-Mart or even Tesco of the UK.

The group’s chief executive said it may develop joint projects with foreign companies but denied these plans include the sale of a stake in X5. However, X5’s big shareholder is conglomerate Alfa Group, run by billionaire investor Mikhail Fridman.

Alfa’s interests stretch from retail and institutional banking to oil and telecoms, and Fridman seems to nurture foreign investors like President Vladimir Putin cultivates western foes.

But if Fridman chooses to sell his stake it is possible his friend and fellow oligarch Vladimir Potanin could become involved.

With the Kremlin apparently eager to “renationalise” Potanin’s nickel group Norilsk Nickel, analysts say the billionaire could move into retail if he sells.

In a recent interview, Potanin said he did not see the possibility of the government buying back Norilsk shares as “a personal tragedy but as a change in the business climate”.

Another oligarch soon to be jobless is Anatoly Chubais, who is presiding over the break-up of the electricity monopoly. His long-held plan of introducing competition by bringing on board portfolio investors and foreign firms is on the rocks.

State-controlled Gazprom has emerged one of the favourites to carve up the country’s power production and form regional monopolies. It also announced plans to merge its electricity and coal assets with the Siberian Coal Energy Company.

Chubais, deputy prime minister under Boris Yeltsin, described the Siberian deal “a big mistake on the part of the government”.

Chubais’s plans are unclear but it is unlikely he will turn to grocery. The interest in the food sector illustrates investor appetite for anything not linked to the political vagaries that affect natural resources.

The segment is one of the country’s most fragmented and underdeveloped. Only 28% of food is bought in large, western-style stores, with the top five retailers controlling 8% of the market, according to a UBS report.

The remainder of Russia’s grocery shopping is conducted in kiosks, ubiquitous corner stores known as produktis, and open-air markets.

Foreign grocers operating in Russia include Turkey’s Ramstore, Germany’s Edeka and Rewe and France’s Auchan. A move by Tesco into Russia would come after UK regulators highlighted concerns about monopolism and the emergence of “Tesco towns”.

The Competition Commission is examining whether Tesco and other supermarkets have established monopolies to dictate prices and levels of service.

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