Upbeat trends in Ukraine

Retail prospects in Ukraine remain buoyant following a faster-than-expected economic recovery since 2000. Stable economic growth and a middle class possessing higher buying power entice foreign retailers to establish an early presence in the Ukraine.
Elsevier Food International, Vol. 7 Number 3, September 2004
Raphael Moreau

Since 2000, the Ukrainian economy has recovered at a fast pace, following the prolonged recession prevalent throughout most of the 1990s. The Ukraine currently has one of the fastest growing economies among Eastern European countries, with a GDP increasing by more than nine per cent last year.
However, the Ukraine is still undergoing a period of radical social upheaval in the wake of the collapse of the Soviet Union in 1991, with important implications for business. Despite recent economic improvements and an expansion of household incomes, real household incomes remain lower than in the early 1990s. A significant portion of the population has income below the poverty line, with only enough money to spend on essential items, such as food and clothing.
Further price growth was slowed down by government interference that attempted to stabilise prices. As a result there was a deflation in August (1.7 per cent). This happened because of season price decrease on potatoes, vegetables, and fruits.
The need for more price liberalisation, with less government intervention to curb price rises, will lead to further increases in the cost of essential items, and more social disruption can be expected during the medium term as a result of long-overdue industrial restructuring.
However, it should be noted that comparative data on living standards before and after independence fail to account for either the pervasive rationing that characterised the late Soviet era, as well as the significant incomes currently derived from Ukraine’s vast grey economy. The latest research would suggest therefore that current living standards and levels of consumer expenditure are likely to be higher than official figures indicate.

Retail boom
According to Euromonitor’s latest report, “Retailing in the Ukraine” (published August 2004), the Ukraine’s retail market continued to grow strongly between 1999 and 2003, helped by rising personal incomes and greater consumer confidence. The Ukraine’s GDP growth over the last five years stimulated constant growth of consumer demand. Retail sales grew by more than 80 percent in current terms during that time.
As the economic recovery continued, consumer spending of Ukraine’s small but growing middle class increased further, contributing to the double-digit annual increases in retail sales.
Nevertheless, the Ukraine’s retail market remained relatively small compared to that of other Eastern European countries, as a result of the population’s low average incomes.

Rapid changes
Euromonitor’s latest research has found that a series of dramatic changes have occurred in the retail environment in the Ukraine, since the start of the country’s economic recovery in 2000. In the wake of the ongoing privatisation of stateowned businesses since the collapse of the Soviet Union, the share of state-controlled retail outlets declined, as they were reopened under private or collective ownership.
Private enterprises rapidly gained ground, although they still account for under 12 per cent of all retail sales. Collective retailers dominate, accounting for over 76 per cent of total sales. In Kiev and other major cities, most of the Gastronom outlets have now been privatised or reopened under collective ownership. In small towns, the situation is different, as local authority and state ownership still dominate, due to lack of local financial resources to allow the development of the private sector.

Biggest winners
Western-style distribution networks have burgeoned rapidly since 1999, with the emergence of supermarket chain stores. A number of Universam stores (large Soviet-style self-service food outlets) have been renovated into supermarkets, for example by some of the Furshet and Silpo outlets. One of the main criteria for consumers to choose their shopping destination is location.
Proximity is paramount, since the majority of Ukrainian shoppers use public transport.
Hence, out-of-town shopping remains marginal, and the vast majority of retail outlets are located in city centres or edge-of-town areas.
Universam, which was by far the leading distribution channel in 1999, has since declined rapidly, in the face of strong competition from supermarket formats. Supermarkets and hypermarkets have become increasingly popular, reaching 15 per cent and five per cent of total retail sales respectively, as a result of a growing number of outlets conveniently located in town centres or on the edge of town sites.
These stores also offer large retail sales areas and a wide range of goods available at reasonable prices. Consumers are increasingly seeking better quality products and are being lured away from traditional channels such as Universam and outdoor markets.
Another major development in the Ukrainian retail landscape in recent years has been the introduction of discounters, following the creation of the Fora chain by the Fozzy Group, which also controls the Silpo supermarket chain.

Popular formats
Euromonitor research showed that department stores suffered a period of declining importance until 2002, losing out to outdoor markets and bazaars.
Their share of retailing has since recovered slightly and remains high at around 14 per cent. The prime location of these outlets, easily accessible by public transport in major cities, where purchasing power is the highest, as well as a successful transition to private ownership, has underpinned their status.
Bazaars (open markets) and kiosks also retain key importance in Ukrainian retailing, especially in small cities and villages, due to their presence in most public spaces. They continue to offer a huge variety of goods at low prices, including a majority of food products, as well as cosmetics, clothing, footwear, household goods, personal care and sports goods. This continues to ensure their strong popularity among consumers with below average income, though more affluent consumers also visit them occasionally to  purchase fresh fruits and vegetables and dairy products. The prevalence of unofficial retailing means that sales in this channel are likely to be significantly higher than accounted for in national statistics.
Internet retailing remains in its infancy, as only a minority of consumers has regular access to the Internet. Although the leading supermarket chain Furshet has opened an online supermarket service, the bulk of Internet sales derives from non-food products such as consumer electronics and CDs.

Fragmented industry
Information on Ukrainian-owned retail companies remained sparse in the review period (1999 2003), despite moves towards greater transparency. Retailing in Ukraine remained highly fragmented, and leading retailers only have a small share of total sales. For example, the country’s leading retailer, XXI-VEK, operates only ten department stores. The company’s success is based on having managed to appeal to young customers and middle class consumers who opted to shop in department stores as an alternative to outdoor markets or bazaars.
The second largest retailer, the Fozzy Group, operates a larger network of outlets, including a total of 78 supermarkets under the Dnepryanka and Silpo fascias, and four discounters under the Fora name. Thanks to the variety of its outlets targeted at households from various income groups, Fozzy has managed to win over a larger customer base than its main rivals. The company’s share of the retail market also grew rapidly in 2003 as a result of major advertising campaigns and innovative loyalty schemes.
The third leading retailer, Anthousa, operates a chain of 25 supermarkets under the name of Furshet, of which 18 in the Kiev area, whose surfaces range from 1,200 m2 to 5,000 m2, and which sell over 25,000 items. Its presence was strengthened by the opening of stores within ornear housing estates, thus benefiting from the proximity of regular consumers. Furshet innovated by being among the first retail chain to offer private label goods, including confectionery and bakery products.
Rainford Group is a significant player in grocery distribution through its cash and carry outlets.
The company is currently expanding into convenience retailing through its network of Korzinka (shopping bag) outlets with an average retail area of 30 m².

Western pioneers
A more favourable investment climate in terms of legislation and growing consumer demand has encouraged foreign companies’ ambitions to penetrate the  Ukrainian market. The main multinational retailers to have established a presence in Ukraine to date include REWE, Spar and Metro.
In 2000, the German retailing giant REWE was a pioneer in establishing its Billa fascia in Kiev. Planning authorities have granted permissions to build 13 hypermarkets totalling a surface area of 58,800 m² between 2001 and 2010 around the Kiev metropolitan area. After starting to open outlets in the capital, major international grocery chains extended their presence to the main cities throughout the country. Spar opened its first two supermarkets in May 2002 in Kiev, and has since increased its presence by opening eight extra outlets, as well as by controlling a franchised network of petrol station outlets. Spar demonstrated a growing confidence in the market by opening two Interspar hypermarkets with a surface area of more than 3,000 m2 at the end of 2003. The increasing presence of Western European multiples, especially in the Kiev area, was illustrated by the opening of the first Metro cash and carry store in August 2003 in the southern suburb of the capital, which has been a major success. Metro plans to open five additional stores in and around Kiev before the end of 2004. The company announced in July 2004 that it would invest more than twice as much as initially planned in the country, due to improving prospects for the Ukrainian economy.
Despite growing interest from Western European retailers to invest in Ukraine, however, foreign companies wishing to set up businesses in Ukraine face a difficult political ,and legal situation. Euromonitor suggests that risks of political instability and social unrest are significant, and excessive bureaucracy and red tape remain important concerns. The administration is often inefficient and vested interests dominate both the public and private sectors, while corruption remains widespread and reportedly reaches the highest levels of government. Despite considerable official rhetoric in support of deregulation, the state continues to play an excessive role in regulating private  businesses, and policies generally lack transparency.

Upbeat outlook
Euromonitor predicts that retail sales will achieve record double-digit growth rates over the next five years, driven by robust economic growth, fuelling a growing middle class with higher disposable incomes. According to the State Statistics Committee, retail sales were up by more than 22 per cent during the first five months of 2004, which indicates that the recovery of the economy, far from slowing down, is gathering pace. The expected strength of the economy may also bring fast growth in sales of consumer durables, electronic goods and computers.
The popularity of supermarkets and hypermarkets is expected to continue to increase rapidly between 2004 and 2008, as the government and local authorities grant planning permission for more outlets to be built, and as a result of consumers turning away from markets. Discounters, introduced at the end of Euromonitor’s review period (1999-2003), may expand their presence dramatically, as they would offer goods at competitive prices that can rival those from markets.
Following the example of Metro, Euromonitor also expects other leading multinationals to enter the fray during the first half of the forecast period, as companies will seek to rapidly strengthen their presence to gain a significant share of the growing retail pie.
However, demographic changes may have a significant negative impact on the retail environment. The post-independence period has seen dramatic population decline, falling by around two million between 1999 and 2003, but the population structure became increasingly dominated by older age groups, as a consequence of a fall in the birth rate and large-scale permanent or semi-permanent emigration of the country’s youth. The older population, despite increasing in numbers, may command relatively little purchasing power and creates pressure on the state budget as the number of pensioners increase relative to the size of the population of working age.
Changes to the regulatory environment should take place gradually, and become less arbitrary and more consultative in nature, though domestic interests may continue to impede progress towards reducing subsidies and tax exemptions.