Russia’s M.video Uses Time Machine to Dodge Net Mistakes
As Russia’s biggest electronics retailer, M.video has thrived selling the latest computers, TVs, and appliances. Its real advantage, though, is what Chief Executive Officer Alexander Tynkovan calls his “time machine.”
“We can look at Europe to understand what to expect in Russia in two or three years,” Tynkovan said while sipping water in the lobby of a Moscow hotel. “One of the lessons we’ve learned is that traditional electronics retailers missed the coming of Internet rivals.”
M.video shares have more than doubled this decade as Germany’s Metro AG (MEO), the owner of Media Markt, its biggest publicly traded foreign rival in Russia, has almost halved in value. While Media Markt and its sister chain Saturn were slow to embrace Web retailing, M.video has had time to adapt in a country where the shift online trails the rest of Europe.
Founded in 1993 by Tynkovan at age 25, M.video has more than tripled sales over five years by focusing on a domestic market where local knowledge is key. Though most Russians still prefer to buy electronics in stores rather than online, Tynkovan says lessons learned from western Europe indicate he should prepare for more Internet sales.
“Retail isn’t only offline anymore,” said Tynkovan, 45. “But neither will it go fully online. There will be some balancing.”
M.video leads the 1.2 trillion ruble ($39 billion) Russian electronics market with a share of 11.2 percent, versus 8.9 percent for No. 2 Eldorado and 3.6 percent for Media Markt, according to Infoline, a researcher in St. Petersburg. It has 296 stores across the country, versus some 400 for Eldorado, owned since 2009 by Prague-based PPF Group, and 45 for Media Markt. Tynkovan plans to expand to 400 stores in the next three years, while spending as much as $50 million on a new system for online transactions.
The target “looks reasonable” and would enable M.video to cover all regions of Russia, said Natalya Kolupaeva, an analyst at ZAO Raiffeisenbank in Moscow.
Online retailing in Russia may take at least five years to catch up with western Europe, according to data gathered by St. Petersburg consultancy Training Institute-ARB Pro Group. Internet transactions represent 1.9 percent of retail sales in Russia, compared with 9 percent in western Europe, ARB Pro estimates.
Only about 3 percent of M.video’s 158 billion rubles ($5.2 billion) of revenue came from online sales last year. Dixons Retail Plc (DXNS), the U.K.’s largest consumer-electronics retailer, says about 80 percent of sales involve the Internet.
M.video has three distribution centers across Russia and uses more than 3,000 vehicles to deliver to stores and directly to customers. That offers an advantage as more Russians go online, with the country’s vast size presenting a particular challenge for deliveries.
Media Markt, which has no distribution centers of its own, relies on suppliers to get goods to its stores. The company is giving “a lot of attention to solve the logistics dilemma,” Bernd Guralczyk, CEO of Media-Saturn Russia, said in an e-mail.
M.video, based in Moscow, has learned from international peers that electronics retailers should focus on one market, Tynkovan said. Best Buy Co. (BBY) in 2011 closed its 11 U.K. stores less than two years after opening, while Metro announced this month that Media-Saturn would exit China after a two-year trial.
That’s not something the German company is contemplating in Russia, Guralczyk said. The country “has high potential,” he said, adding that Media Markt could open “hundreds of stores of different sizes there” to reach a scale comparable to Media-Saturn’s “most successful” European countries.
Saturn and Media Markt only started Web operations in Germany about a year ago, a decade after Amazon.com Inc. (AMZN) began eating into sales. Media-Saturn’s revenue in western Europe, excluding Germany, was “down considerably” in 2012, Metro said on Jan. 16. After a decline in 2011, the unit’s total revenue rose last year, led by Germany, Russia and Turkey.
M.video, which before last year sold online only in Moscow, made Internet ordering available in 16 cities in 2012 and plans to add at least 20 more this year.
M.Video shares have risen 109 percent since the end of 2009, yet the stock is still cheaper than other Russian retailers, trading at a multiple of 11 times estimated 2012 earnings, compared with 44 times for OAO Dixy Group (DIXY), 26 times for OAO Magnit and 18 times for X5 Retail (FIVE), according to data compiled by Bloomberg.
Analysts are almost unanimous that M.video’s gains aren’t over. Of 17 monitored by Bloomberg, 14 have a buy recommendation on the stock and none advise selling.
That’s good news for Tynkovan, whose Svece Ltd. still owns two-thirds of the shares after selling a 10 percent stake for about $146 million in September to increase the stock’s liquidity. Peering into the future, the CEO said he’s considering another sale in three years. By then, M.video may have stretched its lead over international competitors.
“Russian retailers have the advantage over foreign retailers now, which they didn’t have 20 years ago,” said Milos Ryba, a senior analyst at researcher Planet Retail in London. “They know much better how to deal with the specifics of the local market.”
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