Pyaterochka CEO sees growing demand for convenience in a post-COVID world

Pyaterochka CEO sees growing demand for convenience in a post-COVID world
With more than 17,600 stores across the country, convenience retail chain Pyaterochka has continued growing throughout the pandemic. Photo credit: X5 Group.
By Theo Normanton in Moscow October 29, 2021

As consolidation continues apace in the Russian food retail market, a dramatic shift in consumer behaviour is keeping sector leaders on their toes. A confluence of socio-economic factors, compounded by a spate of COVID-19 lockdowns, has driven up demand for innovative shopping solutions which necessitate digitisation, automation and increased choice. For retailers, 

Sergei Goncharov, CEO of Pyaterochka (photo credit: X5 Group)

 

Sergei Goncharov, CEO of Pyaterochka (photo credit: X5 Group)

this has meant upheaval as they scramble to implement new models which will capture customers in this morphing market structure.

One change in consumer habits with particularly weighty implications for the retail sector is a growing preference for shopping locally at so-called proximity stores. To effectively meet this demand for conveniently located local shops, large retailers are re-structuring their physical networks, investing heavily in local tailoring and re-imagining their approach to customer experience.

Pyaterochka, the proximity format of Russia’s largest grocery retailer X5 Group, has been particularly successful in this endeavour. It became Russia’s favourite brand during the pandemic and has maintained that position in 2021. In an exclusive interview with bne IntelliNews, Pyaterochka’s CEO Sergei Goncharov discusses some of the factors driving this revolution in the food retail ecosystem and how vendors are responding to them.

 

Local appeal

Pyaterochka is Russia’s largest retail chain, with more than 17,600 stores across the country. That figure is 8% greater than it was last year, an indication of Pyaterochka’s rapid expansion during the pandemic. Indeed, the chain claims to be the only nationwide food retailer in Russia which kept opening new stores throughout the coronacrisis.

“The pandemic has not only been a challenge for us, it also has become an opportunity to improve our leadership position,” Goncharov said. “Sales for last year amounted to close to RUB1.8 trillion (about $28bn). In nine months of this year we have reached sales of RUB1.3 trillion – an 11% increase year on year.”

Much of this may be down to the recent global trend which has seen shoppers spurn large hypermarkets in favour of corner shops and proximity stores. The pandemic has been a catalyst in this regard, with neighbourhood stores becoming increasingly popular among people reluctant to travel to busy shopping centres or those who are working from home. This phenomenon is not unique to Russia. Paul Martin, the UK head of retail at KPMG, wrote in a report on the industry that “the home really has become the hub… This will only further boost local high streets, with independent and convenience retailers well positioned to take advantage of suburban and town regional centres.”

Goncharov agrees: “I see proximity stores becoming increasingly more popular. Hypermarkets are not doing well in Russia – people don’t want to spend much time anymore on driving to hypermarkets, parking there, shopping and driving back.”

The growth of Pyaterochka and X5’s supermarket chain Perekrestok has now taken priority over the company’s hypermarket operations, in a direct response to this change in consumer preferences. “At X5, we have made the decision to transform that part of our business,” said Goncharov. “Proximity stores will become increasingly more popular, following the trend that food is coming even closer to our customers through food delivery, and we use Pyaterochka proximity stores as part of that offering.”

Store expansion

3Q20

4Q20

1Q21

2Q21

3Q21

y/y

# of stores, total

17,352

17,707

17,959

18,295

18,648

7.5%

Pyaterochka

16,385

16,709

16,960

17,268

17,600

7.4%

Perekrestok

910

933

940

968

980

7.7%

Karusel

57

56

49

40

34

-40.4%

Total Selling space, sqm

7,679,755

7,840,055

7,935,579

8,062,903

8,212,057

6.9%

Selling space (net added), sqm

169,494

160,300

95,524

127,324

149,154

-12.0%

Net # of stores

327

355

252

336

353

8.0%

Source: X5 Retail Group, BCS GM

Pyaterochka is also likely to have been helped by economic tailwinds. After a protracted period of stagnation, Russian real wages are beginning to rise, and consumer spending is growing accordingly. Spending is also encouraged by plunging interest rates in bank accounts, which make it less and less profitable to park money in one place.

Community kudos

While these factors may be enough to explain Russia’s retail boom, they do not account for Pyaterochka’s particular success. With 75mn unique customers per month, Pyaterochka has held on to the title of Russia’s favourite brand for the second year in a row in 2021, more popular even than ubiquitous tech giants like YouTube and Google.

“We have also increased the number of customers who trust us by more than 3mn this year, and this is a major accomplishment for us,” added Goncharov. “We’ve achieved this by focusing on key aspects of our customer value proposition: low prices, comfort in terms of store location, incredible convenience within the store, and care for the community.”

At Pyaterochka, care for the community has taken the form of a pilot project that transforms the network’s physical retail locations into de-facto community centres.

“We call Pyaterochka a community store,” Goncharov explained. “We launched a pilot project in 50 stores where we invite customers from the community to take part in projects, donate books, exhibit pictures on the walls. The idea is to maximise the potential to impact the community that we have around us.” These community centres could be rolled out further based on the results of the pilot, Goncharov added. Other community initiatives include the Basket of Kindness programme, where customers can donate non-perishable products to those in need, and a partnership with Liza Alert to help people who are lost find their way back home.

Community principles may become increasingly important as a way for retailers to set themselves apart in Russia’s highly competitive market. Nine out of the top ten biggest retailers in Russia in the first half of 2021 were Russian companies, as reported by bne IntelliNews.

Income of the top ten biggest retailers in the first half of 2021

X5 Retail Group

supermarkets

RUB1.05 trillion ($14.1bn)

Magnit

super markets

RUB801.6bn

Bristol and Krasnoe & Beloe

retail

RUB330bn

Wildberries

e-commerce

RUB241.3bn

DNS

retail

RUB227.2bn

Lenta

supermarkets

RUB214.9bn

M.Video Eldorado

consumer electronics

RUB212.8bn

Leroy Merlin

DIY

RUB207bn

Ozon

e-commerce

RUB141.9bn

Svetofor (Traffic Light)

discount retail

RUB120.5bn

Source: Infoline

 

The digital shift

Another major driver of the retail market transformation is the large-scale shift to everything digital, as reflected by the surge in online shopping. Russian e-commerce is booming, partly as a consequence of repeated lockdowns. In 2020 alone, the Russian e-commerce market expanded by 57% compared to the previous year to reach RUB2.7 trillion ($38.4bn), according to research by KPMG. In response, some Russian retailers have expanded their online offering and invested in logistics and infrastructure to enable faster order delivery.

As part of its digital transformation, Pyaterochka launched an express delivery service from its stores before the pandemic struck. “It was done at exactly the right time, as we learned later,” Goncharov explained. “We launched express delivery in February 2020 and the pandemic [in Russia] hit in March, and it helped us a lot in terms of growing demand for this service. Up to now we have fulfilled more than 9mn orders, and we operate in 20 different cities from 800 existing stores and 15 dark stores.”

In February 2020, the company was delivering around 300 orders a day; now it is delivering approximately 40,000 per day. With its ability to scale up quickly in response to changing market demands, Pyaterochka has become somewhat of a nucleus for parent company X5’s digital operations. “Pyaterochka is becoming a physical hub for X5 digital businesses by operating such things as pick-up points for 5Post – X5’s logistic delivery service – and assembling delivery orders from online-hypermarket Vprok.ru Perekrestok,” said Goncharov.

Greater digitisation has also helped the retailer get more feedback from customers.

Pyaterochka’s mobile app had almost 9mn monthly active users as of September this year, from whom the chain has collected more than 400mn product reviews as well as creating NPS scores for its individual stores. It has also used customer feedback to develop or improve more than 3,000 stock keeping units (SKUs) in Pyaterochka’s assortment.

Keeping pace

Meeting the seismic shifts in consumer behaviour is no small feat – especially in a country the size of Russia. Pyaterochka is the biggest employer in X5 Group, with stores in more than 3,300 cities spanning over 6,500 km of Russian territory (from Kaliningrad in the West to Irkutsk in the East, where the chain will be opening a store next month). Improving businesses efficiency across such a large area requires a complex mix of modern technology, automation and a nimble distribution network.

Goncharov’s description of improving efficiency at Pyaterochka brought home the scale of the operation: “We employ about 5,000 trucks that service our 34 distribution centres. We’ve spent a lot of time in the past few years focusing on the development of our IT systems, which track the movement of goods from distribution centres to stores. That also includes automated replenishment. We also launched a new demand forecasting system based on machine learning which helped us to improve forecast accuracy by 5-13%, depending on the region and category of goods.”

The rate of change over the past two years has clearly been staggering, but it is showing no signs of slowing. To retain loyal customers, retailers must keep pace. Pyaterochka is betting on a new format of store, focusing on fresh products and convenience.

“We launched our new format stores about two years ago and have already opened more than 4,000 stores,” Goncharov said. “Basically, the new format is the only format for us,” he added. “We’ve been using all the know-how that we’ve gathered over these past two years and our focus is on going farther into the regions of Russia, as well as optimising investment costs and capex in existing stores so that we can be present in more locations and bring prices down for our customers.”

A Pyaterochka store (photo credit: X5 Group)

A Pyaterochka store (photo credit: X5 Group)

 

As the economic reverberations of coronavirus (COVID-19) continue to have an impact on Russians’ mobility and spending habits, it is difficult to predict what is around the corner for food retailers. The current trends – e-groceries and proximity stores – are still far from reaching full market penetration, and the immediate goal for retailers will be capturing market share as these trends continue to catch on.

This means that analysis and improvement of services continues in earnest, driven by the potential for significant growth. As Goncharov explained: “The projects that will help us achieve our goals are focused on increasing our operational efficiency, optimising labour costs and improving our customer value proposition. A lot of thought and digital products are going into that, and that’s what excites me the most.”

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