Russian supermarket chain Lenta has big plans for the next five years. The third-largest chain in Russia, the company says that it intends to double in size to earn at least $13bn in revenues in the next five years by opening hundreds of small format stores and buying up smaller rivals.
Lenta had a very good 2020. The coronacrisis was bad most business in Russia but it was relatively benign for retailers. In an interview with bne IntelliNews on March 18 the management team said it had amassed a war chest of cash that it intends to deploy to grow its business, both organically and though mergers and acquisitions.
“The [organised retail] sector has reached the consolidation stage,” chief strategy officer Anastasia Volokhova told bne IntelliNews. “And Lenta intends to take advantage of that by rolling out more stores and buying smaller rivals.”
Lenta built its business through opening hypermarkets in urban centres and that remains its core business, with stores in over 115 locations. However, the central location of most of these stores means it can easily and cheaply roll out a bigger online business and some of its cash will be used to open new small format shops. Lenta boasts that a fifth of its customers can already walk to their stores.
“The goal is to capture market share,” Lenta’s chief executive officer Vladimir Sorokin told bne IntelliNews at the same online meeting. “We are not just a hypermarket company. We can definitely developer further. The COVID epidemic presented a unique opportunity.”
The company presented its new five-year strategy that aims to double revenues and maintain an EBITDA margin of at least 8%, making it one of the most profitable in the sector, as well as generate industry-leading shareholder dividend payments, hopefully from next year.
“Lenta will shift its focus from hypermarkets to smaller formats and online operations to boost growth. The company should adopt a dividend policy this year, with the first payments coming in 2022. The company’s mid-term goals suggest significant upside to our and consensus forecasts. We view the strategy as sensible, although we see some risks associated with the company’s business transformation,” Sova Capital commented later on at the company’s capital markets day where it presented its strategy to analysts.
While hypermarkets remain the bread and butter business, “online is going to be the locomotive of growth,” says chief financial officer Rud Pedersen.
As bne IntelliNews has reported, Russia’s online economy is booming. Lenta is going to use its hypermarket chain to develop its online sales by using part of the hypermarket building as a “dark store” with no physical customers or fulfilment centre for online orders, which analysts say would be “capex-light” and efficient.
So far the online share of the store’s business was 4% in 2020 – one of the highest shares amongst the publically traded retail companies – but the company expects that to increase to 5% in 2021, climbing to 10% by 2025.
“This implies c. RUB90bn in online revenue (based on INFOLine’s forecast), or c.9% of Lenta’s expected total sales in 2025,” Sova Capital calculates.
The biggest advantage of the online sales drive is that it will allow Lenta to grow its customer base from the 70mn loyal customers it already has.
“We have the best-in-class loyalty programme,” says Sorokin,” and we are the most profitable company in the sector, so that puts us in a strong position.”
Small and mini format
Lenta is responding to changes in the Russian retail business. As the economy develops the consumer has become more demanding, and one of the things they want is “better quality service, at cheaper prices and more convenience,” says Volokhova. “The consumer is becoming more interested in things like cooking, a healthy lifestyle and above all, convenience.”
This has been an industry-wide phenomenon and the coronacrisis has only catalysed it, as during last spring’s lockdown shoppers were limited to a small circle of shops in the immediate vicinity of their homes.
In general, real estate developers have been building smaller, more specialised stores that are closer to the homes of shoppers. Lenta’s traditional focus of siting its hypermarkets in the hearts of urban centres means it is already well positioned to cater to this demand.
In addition to Lenta’s 90 supermarkets, the retailer operates 49 “Lenta Mini” stores with an average selling space of 580 square metres. These stores are profitable and generate sales densities of RUB340,000-460,000 (calculated for 2H19-1H20) across various regions, which is better than the competition, according to the company’s data.
The expansion plans for 2021 call for the rapid roll-out of new smaller format supermarkets and mini-stores in a “proximity format” that can get much deeper into the woodwork of an urban community.
In the guidance for this year, Lenta aims to increase its selling space c. 6.7% year on year, generate an EBITDA margin of at least 8% and allocate up to 5% of sales to capex. Lenta is targeting having a 10% share of the e-grocery market by 2025 and an EBITDA margin of at least 8% in the mid-term.
“Lenta plans to speed up its organic expansion into regions where it has a strong market share and brand recognition. Its supermarkets and proximity stores (Lenta Mini) will drive the expansion of the retailer’s selling space, as Lenta plans to double its selling space and add another 1.5mn square metres by 2025,” Sova Capital reports. “At the same time, the company does not rule out sizeable M&As in other regions, which could be financed through debt or an SPO.”
CFO Pedersen says that a final decision on the SPO has not been made and will depend on how the business goes, but it definitely an option the company is considering and preparing for.
M&A & cash
The company has ambitious expectations from all these changes. Sales from the existing businesses are expected to double to RUB1 trillion ($13.5bn) by 2025, which means a revenue compound average growth rate (CAGR) of 17.6% during the next five years, according to Sova Capital’s calculations. The management say that half of these new sales will come from developing the company’s existing business and half will come from new business.
The fall in turnover last year meant that smaller stores and companies lost business to their bigger rivals and now many are willing to sell up. Like in developed markets, the biggest players are snapping up their smaller rivals and the business is being concentrated into the hands of a few very large market leaders.
This is a big change from the last two decades, where the name of the game was simply to open as many stores as possible and capture the virgin territory. That process is over and the coronacrisis has accelerated the consolidation process that had already begun.
Dividends and debt
The management are also intending to return some of the company’s profits to shareholders by improving the dividend payment policy.
The management team said Lenta wants to be an industry leader in terms of total shareholder returns. The board chairman, Alexey Mordashov, mentioned several times during the capital markets day that good companies pay out dividends, and Lenta intends to adopt a dividend policy this year and start to pay out dividends in 2022.
So far, the company has not paid dividends, as it has used its profits to pay down debt, which has been reduced to 1.5x debt to EBITDA ratio – the preferred level, according to Pedersen.
“We paid down debt in 2020 and that gives us the financial firepower to allow for a rapid expansion both at the federal and regional levels, says Pedersen. “Provided we can keep the debt to this level and there are no obvious investment calls on profits then we will pay out the excess in dividends.”