(Updates with CFO’s comment in final paragraph.)
By Ilya Khrennikov
Aug. 26 (Bloomberg) –- X5 Retail Group NV, Russia’s second-
largest food retailer, said the country’s recent ban on some
food imports makes it harder to source certain goods and drives
up prices on others, challenging the company’s nascent
“We have more work now,” Chief Financial Officer Sergey
Piven said in an interview at X5’s Moscow headquarters, citing
difficulty in finding large produce volumes to keep its more
than 4,000 Pyaterochka discount stores stocked. The ban is also
leading to “accelerated price inflation” on affected items.
After an effort to renovate and bolster its fresh-food
offering at Pyaterochka that started last year, X5 posted
second-quarter sales growth of 17 percent, the fastest pace in
more than two years, and a 23 percent advance in July. Then, on
Aug. 7, Russian President Vladimir Putin banned the imports of
meats, cheese, fruits, vegetables and dairy from the European
Union and the U.S.
Russian retailers urgently need to find alternative
providers for about $9.5 billion of food supplies affected by
the ban, according to an estimate by Capital Economics Ltd. Fish
is becoming more expensive, while French and Italian cheese is
disappearing from shelves, Piven said. Putin imposed the measure
to retaliate for sanctions against Russia for interference in
A new management team, including Chief Executive Officer
Stephan DuCharme, who began in 2013, is seeking to bring X5
“back to basics of retail,” Piven said. Sales growth was less
than 10 percent in 2012 and 2013 after a series of acquisitions,
leading the company to lose the title of Russia’s largest
retailer to billionaire Sergey Galitskiy’s OAO Magnit.
X5’s stock has risen 25 percent in 2014, on track for the
first gain in four years, giving the company a market value of
$5.68 billion in U.K. trading. The depositary receipts were
trading down 0.2 percent to $20.91 as of 3:12 p.m. in London.
Pyaterochka stores were refurbished last year with brighter
lighting, air conditioners and self-opening doors, Piven said.
The chain added more fresh categories and offered special
discounts to win back customers. This year, the effort will be
expanded to X5’s larger store formats, Perekrestok and Karusel.
X5 is spending as much as 40 billion rubles ($1.1 billion)
in 2014 to add stores and renovate existing ones. The gross
profit margin widened to 24.5 percent of revenue in the second
quarter from 23.6 percent a year earlier.
“The question is whether this growth and profit margins
will be sustainable,” said Natalya Kolupaeva, an analyst at ZAO
Raiffeisenbank in Moscow. “The recent food import ban is
putting it at risk.” The assortment of products that needs
replacing represents about 8 percent of sales, she said.
Billionaire Mikhail Fridman and his partners set up store
chain Perekrestok, which means “crossroads” in Russian, in
1995. It merged with Pyaterochka, Russian for “five,” in 2006
to create X5, later acquiring the Karusel hypermarkets and
Kopeyka discount chains. The company runs about 4,800 stores and
had sales of $16.8 billion last year.
X5 is replacing banned Norwegian salmon with fish from
Russia, the Faroe Islands and further destinations such as
Chile, where the long transportation required may either boost
prices or decrease quality, Piven said. The company is also
switching from Atlantic herring to inferior-quality Pacific
herring, he said, while X5 has been unable to find a replacement
for premium French and Italian cheeses.
For fruits and vegetables, X5 is switching to suppliers in
countries including Morocco, Israel, Serbia and Azerbaijan.
“Retailers can adapt to these challenges,” Piven said.
“I think customers will see some price increases for certain
categories.” Passing cost increases on to customers may hurt
sales as clients have fixed budgets for food, he said.
Russia’s tensions with the U.S. and Europe over Ukraine
have also inflated X5’s borrowing costs to about 9 percent,
Piven said on an Aug. 14 conference call. X5 has increased the
share of long-term debt to 81 percent of its portfolio from 55
percent a year earlier. The costs may rise further as the
company needs to refinance almost 9 billion rubles of debt by
year-end, according to Piven.
Russian retail sales advanced a modest 2.7 percent in the
first half, according to the state statistics service. Even so,
publicly traded nationwide retail chains posted growth of 12
percent to 38 percent as they added stores, eating up market
share from regional stores and open markets.
“Penetration of countrywide retail chains is growing every
month and so does their purchasing power,” Piven said.
“Regional chains may find it hard to compete and will choose to
sell their businesses. They are already trying to do so. Still
their price tags are often unrealistic.”
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X5 earnings graph: FIVE LI FA ISBAR
X5 divisional data: FIVE LI FA PROD
Top stories from Russia: TOP RUS
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Bloomberg Intelligence food & drug retailer data:
To contact the reporter on this story:
Ilya Khrennikov in Moscow at +7-495-771-7747 or
To contact the editors responsible for this story:
Celeste Perri at +31-20-589-8505 or
Tom Lavell, Thomas Mulier
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