Russian Food-Store Tsar Rings Up Billions as Wal-Mart Wavers

One by one, from the southeastern corner of the continent, Sergey Galitskiy is beating the biggest supermarket chains in Europe.

In February, the Russian retailer he founded near the Black Sea, OAO Magnit, surged past Metro AG of Germany in market value, then overtook Royal Ahold NV of Holland and Carrefour SA of France two months later to become the region’s No. 2 after England’s Tesco Plc.

“Investors have gone crazy!” Galitskiy tweeted in June as Magnit rallied toward its record $15.8 billion valuation Aug. 6.

From a 400-square-meter shop Galitskiy started in his native Krasnodar, the former Procter & Gamble Co. cosmetics distributor has built the country’s biggest network of food stores -- and its most valuable retailer by far.

Today, the 45-year-old entrepreneur may be facing his toughest challenge yet as Wal-Mart Stores Inc. prepares a renewed assault on a market where it has failed to gain a foothold after at least five years of trying.

Galitskiy’s response to the plans of the world’s largest retailer: “So what?” he said, gesturing actively over tea.

For four years, as Wal-Mart failed to open a single outlet, Galitskiy has opened one about every nine hours. He’s on pace to open No. 6,000 next month and has no intention of slowing down.

“When there’s growth opportunity, the entrepreneur will take advantage of it,” Galitskiy said at his headquarters in Krasnodar on Aug. 17 and by e-mail Sept. 4.

Tomatoes, Cucumbers

Magnit’s stock has advanced 49 percent this year and 325 percent in the past four, more than any other company in Russia’s Micex Index of 30 shares. That has swelled Galitskiy’s personal fortune to about $6 billion, based on his 38.7 percent stake in the company, making him the richest person in this formerly communist country whose wealth isn’t tied to extracting natural resources.

Magnit increased 3.5 percent at 4,373.80 rubles at the close of trading in Moscow. The company’s London-listed global depositary receipts jumped 6.2 percent to $34.23, the highest level since the stock started trading in April 2008. Five GDRs equal one share.

His road to billions began in November 1998, when he opened his first outlet just three months after Russia’s debt default plunged markets into chaos, paving the way for Vladimir Putin’s rise to power with a pledge to end the oligarchs “as a class.” Now he runs an empire that spans three time zones, employs 150,000 workers, operates a fleet of 4,100 trucks and can afford to spend $450 million to grow his own tomatoes and cucumbers, as well as about $40 million a year on his soccer club, Krasnodar.

Russia’s Walton

“Galitskiy has done a phenomenal job,” said Mattias Westman, who helps manage about $4 billion including Magnit shares at Prosperity Capital, the investment company he founded. “He is extremely focused on detail and has web cameras located on every construction site to make sure that everything is going according to plan,” Westman, who served on Magnit’s board from 2006 to 2009, said by phone. “He’s definitely Russia’s answer to Sam Walton.”

Walton, who founded Wal-Mart in Arkansas in the 1960s, died in 1992, leaving four heirs with a collective fortune of more than $110 billion, according to the Bloomberg Billionaires Index. Galitskiy, the only one of the top 25 Russians on the Forbes rich list who doesn’t live in Moscow, London or Monaco, said that while he admires Walton’s savvy he isn’t intimidated by the company Walton built.

‘Ghost Story’

“I don’t see anything Wal-Mart can do that other retailers can’t,” Galitskiy said. “It’s more of a ghost story to scare the little kids: eek, Wal-Mart is coming. In 1949, a U.S. general jumped out a window screaming ‘the Russians are coming,’ but nothing happened,” he said. “People, not brands, make the business.”

Wal-Mart registered its main trademark in Russia in 2001 and opened an office in Moscow in 2008, only to close it down in 2010 after failing to establish a joint venture with oil producer TNK-BP billionaire Mikhail Fridman’s X5 Retail Group NV. It’s also been outbid for smaller retailers Lenta, Mosmart and Kopeyka, according to newspapers Vedomosti and Kommersant.

Wal-Mart hired former X5 Chief Executive Officer Lev Khasis last year to steer its entry into the country, which Khasis said on state television in February might take two years. Khasis declined to comment to Bloomberg on Wal-Mart’s plans for Russia.

At stake is a share of a booming retail food market that by some estimates overtook Germany last year as Europe’s largest. Russia’s 143 million people outspent Germany’s 81 million in dollar terms $313 billion to $274 billion in 2011, according to data compiled by Alfa Bank. The market has grown 17 percent on average in Russia since 2007, 14 times faster than in Germany, Alfa analyst Andrei Nikitin said by phone from Moscow, where the bank, partly owned by Fridman, is based.

Auchan, Metro

Galitskiy said he hasn’t been impressed either by the performance of his two biggest foreign competitors -- France’s Groupe Auchan SA and Metro. The two food chains are third and fourth in Russia by sales, with $7 billion and $5.4 billion last year, respectively, according to an X5 presentation. X5 and Magnit were Nos. 1 and 2, with $15.4 billion and $11.4 billion.

“Given their financial power, Auchan and Metro should be No. 1 and No. 2, but that’s not the case,” said Galitskiy.

With Magnit’s market value already more than double X5’s -- $15.3 billion versus $5.6 billion at the close of trading in London yesterday -- Galitskiy’s now focused on gaining a bigger chunk of the market. And unlike X5, which has expanded mainly through acquisitions, he prefers to build from scratch. Any discussion about his success “should be postponed for 15 or 20 years,” he said.

Happy Investors

“Investors are fond of Magnit as it has always met growth targets announced by management, while X5 has had problems with implementing its plans and integrating the different chains it acquired,” said Mikhail Terentiev, a retail analyst at Otkritie Capital in Moscow.

The biggest of those investors is Justin Leverenz, who oversees about $25 billion for OppenheimerFunds Inc. and runs the Oppenheimer Developing Markets Fund, which owns about 5 percent of Magnit, the largest holding after Galitskiy. Leverenz said he was “completely charmed” by Galitskiy when he first met him in Krasnodar in 2008 and bought shares that year, when “nobody wanted to look” at Magnit because it was too small.

“He is a real operator, not a banker,” Leverenz said by phone from New York. “His character is very much logistics and trading. And a part of that is that he is the guy from southern Russia who doesn’t consider Moscow to be the center of everything.”

Fridman Who?

Leverenz said he was having dinner in with Galitskiy in Moscow when his biggest competitor, Fridman, walked into the restaurant and Galitskiy didn’t recognize him. Fridman, though, the world’s 54th richest person according to the Bloomberg Billionaires Index, recognized Galitskiy and walked over to their table to introduce himself.

Fridman’s X5 emerged as the country’s largest food retailer in 2006, after his Perekriostok chain acquired Pyaterochka Holding NV for $1.2 billion. X5 then bought the Karusel chain of hypermarkets for $940 million in 2008 and discount network Kopeyka for $1.65 billion in 2010.

“We are constantly looking at acquisition opportunities, but we won’t buy anything until these exaggerated price tags go down,” Galitskiy said. Magnit plans to open about 850 food stores this year and a similar amount next year without selling shares and relying mainly on bank loans, though details of its strategy won’t be announced until the fourth quarter, he said.

The Russian supermarket industry may be ripe for consolidation. The five largest operators by revenue -- X5, Magnit, Auchan, Metro and OAO Dixy -- have just 13 percent of the market combined, compared with 72 percent for the top five in Germany and 25 percent in Poland, according to X5.

‘Running Fast’

Even after years of frenzied growth, Magnit still has less than 5 percent of the market, meaning it could be five or even 10 times bigger than it is now, Prosperity’s Westman said.

The pace of growth in the industry as a whole also shows no signs of slowing, said Ivan Kushch, an analyst in Moscow at VTB Capital. VTB expects retail food sales to increase 62 percent to

14.7 trillion rubles ($460 billion) a year by 2016 as the economy expands, wages and pensions rise and chains replace open-air markets and kiosks, Kushch said.

It’s the possibilities for profit from that kind of growth that’s got Galitskiy focused on the domestic market.

“Why should I go to other markets?” Galitskiy said. “Magnit only has 4 percent in Russia, which leaves us plenty of opportunities to expand. Are there new opportunities? Yes, but we are already running very fast.”

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