Russia’s Dixy to Spend $1.6 Billion Doubling Store Numbers

OAO Dixy Group, Russia’s third-largest food retailer, plans to spend as much as 50 billion rubles ($1.6 billion) over three years doubling its store numbers to capitalize on anticipated growth in demand.

Dixy has “vast room to grow,” Chief Executive Officer Ilya Yakubson said in an interview at the company’s Moscow headquarters. The retailer, controlled by Russian billionaire Igor Kesaev, is targeting 3,000 stores by the end of 2015, compared with almost 1,500 now, as it seeks to double annual revenue to about $10 billion, he said.

“In Russia, the top five retailers account for 17 percent of the market, it’s peanuts,” Yakubson said. In many European countries, that proportion is 50 percent, he said.

Russia’s food retail market rose 9 percent last year to the equivalent of $323 billion, according to the Federal Statistics Service, with the major retail chains growing even faster. The market will continue to grow at least 7 percent a year through 2016, according to Sberbank Investment Research.

Russia’s retail market will continue to consolidate as retail chains replace independent stores, markets and kiosks, according to the executive, who said Dixy will fund expansion with its own resources and debt.

Over the next two years, the retailer will focus on developing “neighborhood stores,” small outlets with an average selling space of about 275 square meters, Yakubson said. From late 2014 or 2015, it will accelerate the roll out of supermarkets under the Megamart brand, he said.

Profit Margins

Dixy is seeking to increase profit margins this year after costs associated with the 2011 acquisition of competitor Victoria Group weighed on profitability last year, the CEO said.

The retailer is targeting a margin on earnings before interest, taxes, depreciation and amortization of 7 percent to 8 percent in the next three years, he said. The margin was 5.6 percent in the third quarter.

Dixy may consider selling shares as its market value grows to help boost liquidity and reduce debt, Yakubson said, declining to elaborate on timing. Dixy rose 0.4 percent to 444.23 rubles per share at 12:56 p.m in Moscow, giving the company a market value of 55 billion rubles. The stock has risen 10 percent this year.

Russia’s industry leader, billionaire Sergey Galitskiy’s OAO Magnit, had an Ebitda margin of 10.6 percent last year.

While Yakubson’s store opening target looks achievable, the goal for profitability growth seems too optimistic given the intensity of competition, said Maria Kolbina, analyst at Moscow-based VTB Capital.

Dixy’s sales growth of 21 percent last year trailed Magnit’s 34 percent and O’Key Group SA’s 26 percent.

To differentiate from competitors, Dixy is following the example of Polish retailer Biedronka and Spain’s Mercadona SA by adding own-label products such as Bonduelle peas, the CEO said.

The Dixy CEO said January’s ban on selling beer in kiosks hasn’t led to any meaningful increase in store sales. Food retailers are now lobbying to sell over-the-counter drugs in their stores, challenging pharmacies, Yakubson said.