From Russia with love
The world’s largest country is becoming a retail hotbed
Tourists disembarking to strains of the song from the 007 Bond movie, fresh off the planes from Moscow’s Sheremetyevo, Domodedovo and Vnukovo Airports, will no doubt have bags full of goodies for their loved ones, comparable with the best in the world. But that wasn’t always the case. The Russian Revolution of 1917, one of the defining moments of the First World War, created a schism between Russia and the rest of Europe. Fast forward 25 years, and the Soviet Union suffered the greatest loss of life following Hitler’s Operation Barbarossa, at which time Germany invaded the country in the Second World War. Even though that war saw the Soviet Union join the United States and Great Britain as allies, the seeds of mistrust had begun to be sowed, when it became clear that a Herculean battle of ideologies would emerge that pitted the capitalist West against the communist East.
From Stettin in the Baltic to Trieste in the Adriatic, declared Winston Churchill in 1946, an iron curtain had descended across Europe, splitting the continent in two. For more than 40 years during the Cold War, Eastern Europe and the Soviet Union were shrouded in secrecy and mystery. The launch of Sputnik in 1957 and Yuri Gargarin’s foray into space in 1961 further added to the uncertainty around Russia, with the Americans believing them to be militarily and technologically superior to the United States. By the time the Afghan War began in 1980, when the US used subterfuge and military support for Afghanistan to bankrupt the Soviets (and unwittingly set in motion the events that would precipitate 9/11), it became obvious that the once-great Soviet Union, like the façade created for Catherine the Great at Yekaterinburg, was an empty shell of a superpower.
The collapse of the Soviet Union and the emergence of Russia in the post-Cold War phase in 1991 reinforced the legacy of the fallen state. With this came the new country’s designation as developing, not developed. The hideously contrived Brandt Line had formerly split the world into three categories: the First World, which included all developed Western nations; the Second World, which included all the Warsaw Pact/Soviet Bloc nations; and the Third World for the rest. After the fall of the Soviet empire, Russia was left out in the cold. The airing of the dirty laundry showed a nation that was propped up by the propaganda of communism, which had failed the country economically.
But it’s very hard to ignore a place that big, with such an enormous legacy behind it. The emerged Russia, although ailing from its Soviet past, had one thing going for it: as the largest country in the world (by far), this vast land stretching over 11 time zones had virtually unfettered natural resources, including coal, oil, gas and minerals. Some sources suggest that almost one third of the world’s natural resources are based in the country. The Russians, with their oligarchs and mafia, took to capitalism rapidly, and it didn’t take long for them to shake off the images of the proletariat standing in lines buying food off of empty shelves, from farms that had been part of the collective. This quickly manifest itself in huge amounts of wealth, and Moscow has grown into one of the richest cities in the world, with a healthy dose of billionaires — 69 in fact — more than London, though behind New York’s 103, Hong Kong’s 93 and San Francisco’s 74.
The numbers around Russia boggle. With the recent BRICS Summit in Johannesburg, the five member states were once again drawn into the limelight, and it became clear just how enormous the country is, in all spheres, when compared with South Africa. Russia’s 17 million km2 land mass is almost twice the size of Canada, the world’s second-largest country. SA’s 1.2 million km2, though large by world standards, would make up a mere province of Russia. As populations go, Russia’s 143 million people, almost three times the official SA population of 56 million, make up a hefty market for retail. Where GDP is concerned, Russia has the 12th-largest economy in the world, worth some US$1.6 trillion, compared to SA’s US$400 billion. Per capita income in Russia is also higher, at close to US$11,000 per annum (the highest of all BRICS nations), compared to SA’s US$6,000 per annum. And as megacities go, Johannesburg’s population of 10 million still has a way to catch up with Moscow’s 17 million (although the Russian capital is hundreds of years older).
Of course, much of this wealth has also been translated into the retail industry. Hot on the heels of the 2018 FIFA World Cup which was held in the world’s largest country, it is clear that Russia is cooking — and it’s not just borscht or vodka on the boil. Russian spending power is undisputed, and while their economy may not yet be at the same level as their former arch nemesis the United States, there can be no denying that they have money to spend — coupled with a level of sophistication that is on par with the West. Phuket in Thailand, for example, is feverishly popular with young Russians, who love the 24/7 vibe of the place, the large shopping centres and the endless tourist attractions — and rightly so, since these are the creature comforts that they are now used to back home, thanks to the modernisation of Russia. The country has managed to achieve in under 30 years what Stalin’s succession of five-year plans failed to do some 80 years ago — bring Mother Russia up to speed, and make it competitive with the West.
Moscow was always famous for its GUM department store on Red Square — today filled to the brim with Western upmarket stores from Prada to Gucci and everything in between. The store enjoys frontage of almost 250m directly onto the square, while the ornate glass ceiling harks back to yesteryear and is reminiscent of the Galleria Vittoria Emanuelle in Milan, the Schönbrunn in Vienna or Crystal Palace in London. Although sources conflict, Moscow’s Aviapark, with 230,000m2 of GLA, appears to be the largest shopping centre in the country (compare this with the 170,000m2 at Menlyn and the proposed 175,000m2 at Fourways Mall, set to open in 2019 — SA’s two largest centres currently). Anchors include French retail chain Auchan, home improvement chain OBI, Media Markt (although indications are that this German electronics chain may be pulling out of the Russian market), Stockmann, and Russian cinema operator Karo, with 17 screens, one of the largest in Russia — and on par with the 18 screens at SA’s biggest cinema complex, Gateway. The centre opened in November 2014 and spans 6 levels, with the tallest cylindrical aquarium in the world, as recognised by Guinness World Records.
The largest centre that opened in Moscow in 2017 was Vegas Kuntsevo, a super-regional with a GLA of 113,400m2, but a decline in the number of centres being completed in the Russian capital (brought on in part by an economic slowdown between 2014 and 2016) has meant a drop in the vacancy rate to a mere 6.2% overall. In the past five years, the number of international retailers opening their doors in Russia has been impressive, with some 249 stores beginning trade. Even with the slowdown in centre completions and openings, Moscow is still likely to see an additional 150,000m2 of GLA come online this year.
That Russia has a voracious appetite for retail is clear. As Russian investments go, in 2017, shopping centres outperformed offices in terms of ROI. Sources suggest that Russians spend 60% of their pre-tax income shopping. The reason they can afford to, is that many of them own their homes, obviating the need to put income away for a bond. This is because property was privatised after the state-owned housing under the old Soviet economy passed to its citizens, with the emergence of Russia from the old Soviet state. But the stellar numbers do not apply to Russia alone. Central and Eastern Europe, formerly part of the Soviet Bloc, has also blossomed in the almost 30 years since the fall of communism. The area is defined as the 14 countries that make up the region, which include Russia, Ukraine, Poland, Latvia, Lithuania, Estonia, Serbia, Croatia, Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Austria. That the region is the current land of milk and honey is apparent from a GDP growth averaging 4% in 2017. Romania had the highest GDP growth at just under 4.5%, with Poland in second place at over 3.5%, while Russia’s was the lowest at 1.5%. GDP growth had a distinct impact on retail growth: Poland and Romania experienced the highest growth rates in retail in 2017, hovering around 7% apiece, with Russia on a mere 1%. However, in real terms, this still translates into a €3,000 per capita retail spend in Russia in 2017 — higher than Romania and Bulgaria, slightly lower than the Baltic countries (Latvia, Lithuania, Estonia) and the Czech Republic, and on par with Poland, Hungary and Slovakia.
As a snapshot In terms of size, the average GLA for a Polish centre is 34,000m2, for the Czech Republic it is 24,000m2, while in Slovakia it is just under 20,000m2. As a further snapshot between two countries that were once united and have since unbundled to become separate geographic entities, it is interesting to see the similarities between the Czech Republic and Slovakia: while centres are similarly sized, so are the average turnovers per m2 per annum, hovering at between €2,100 and €2,200. Rent to sales ratios are 9.5% in the Czech Republic and 10.6% in Slovakia, while average vacancy rates are 4.2% in the Czech Republic and 2–3% in Slovakia. Bratislava, capital and largest city in Slovakia, is a mere 80km or one hour away from Vienna, while it is also a mere 328km or three-and-a-half hours from Prague, showing how close the capitals of Europe really are. This may also explain some of the similarities in the data: the porous borders of the EuroZone mean that a shopping trip to another European capital could easily be a one-day affair.
Like SA, it is also apparent that Russia has become quite an advanced retail market. The programme for Russian Retail Week, held in Moscow from 6–10 June this year, reads very similarly to that of the SACSC annual Congress, to be held in Durban in September this year. Topics include small formats of trade (possibly similar in scope to the less formal retail sector locally); tendencies, changes and practices in the governmental regulation of retail trade; banks as part of the retail ecosystem; human resource management in modern retail (a critically important element of the SA retail scene); wine in the modern retail business; ‘retailtainment’ as a new vector for the development of shopping centres; safety of trading spaces; the digital transformation of retail; the retail business within the construct of the new economy; legal practices for retail; global healthcare and wellbeing, and its effect on retail; the increasing tight-knit relationship between Russia and China (both part of BRICS); strategies for retail development; lease relations; trends in the FMCG market; tax-free shopping; and the protection of customer information.
Finally, and also fittingly, despite the lekker laidback lifestyle of braaivleis, boerewors, sunny skies and rugby, the local shopping centre industry, it seems, has been working very hard to conquer these once foreign lands. As such, South African investors continue to be competitive across Central and Eastern Europe, suggests Anthony Selman, Head of CEE Investment for CBRE. The retail investment volume by South Africans was 32% in 2017 — much higher than Russia’s 13% or the US and UK at 9% each — again showing just how savvy the SA shopping centre and retail industry is. All of this makes sense — with slowing growth rates down south, the boykies back home have been easily seduced by the sexy numbers in Eastern Europe, including European Russia. Prime shopping centre yields in 2017 were as high as 13% in Slovakia and 10% in Russia, while prime high street yields were over 11% in Russia and over 8% in Romania. Prime rentals are a whopping €308/m2 on the high street and €123/m2 in shopping centres in Russia — on par with Austria (which is a traditional Western market). Says Walter Wölfler, Head of Retail Austria & CEE at CBRE, “… growth rates are still substantially above Western European levels… professional owners are constantly improving the quality of their shopping centres. They are setting the bar when it comes to consumer, retailer and investor expectations. In our daily work we feel an increasing pressure on shopping centre owners to create prime locations in order to stay in the game.” SA deserves a bit of credit for their part in putting the pressure on in Eastern Europe. Chalk another one up to the boys (and girls) back home.
Sources: CBRE, Europa Property, Wikipedia, Charlie Wilson’s War, CNBC, The Citizen, JLL, Knight Frank, Russian Retail Week