In its heyday, before the crisis of 2014 hit, Magnit was an investors’ darling. At one point international investors were 3% overweight in the benchmark MSCI Russia index and almost all of that overweight was in just one stock: Russian regional supermarket chain Magnit. The company could do no wrong.
But the chain fell from grace about five years ago and has been struggling to find its direction since. Retail in general has also been hit by the multiple economic shocks and also seven years of falling real incomes. New management was appointed two years ago and the new CEO,
The supermarket chain, founded by entrepreneur
Magnit's founder
Unusually the chain eschewed
Galitsky was also unusual, shunning the ritzy high life of Russia’s newly wealthy in
The store’s revenues grew to top
But things started to go wrong in about 2017 when the management team was riven by disagreements on where to take the company next.
“The decline started in the last two years before Galitsky left. He was tired and was not paying attention. He was looking for a successor and wanted to sell,” Dunning told bne IntelliNews speaking from his office in Krasnodar by video link.
In that same year Magnit’s rival
New broom
Dunning is a dyed-in-the-wool retail professional. He spent 10 years working for the German discount supermarket chain
As president he spent time touring some of the company’s 22,000 stores that stretch down into the towns and villages across Russia’s 11 time zones.
“It was a good experience, as while president I toured the stores and got to know how the business was run on the ground,” says Dunning.
After Galitsky left the company Dunning was asked to take over as President and CEO of the company in
“Since
Dunning has had to face multiple challengers since he took the helm. The company had already been knocked by its internal disputes over direction and was rocked again by various crises even before the 2020 coronacrisis hit.
Magnit has always done well by offering value for money. While it is not a discounter per se, it has always focused on keeping prices down and has built up a loyal following as a result.
The organised retail business has had to cope with Russia’s economic stagnation that began in 2013, when growth stalled and real incomes began to stagnate. While firms like X5 have built up their businesses in the biggest cities – like
Retail revolution
Already arguably one of the most modern parts of the Russian economy, organised retail is currently going through a revolution and e-commerce is booming, catalysed by the coronacrisis. Turning Magnit’s fortunes around is not just a question of fixing its problems but actively developing its business to take these new realities into account. The task is two-fold: digitise the business, but as Dunning points out, the backbone of the business remains running the thousands of physical stores spread across the country.
“It’s an asset you can’t ignore,” he says. “The future is digital, but we have reached a critical mass offline and the network is so big it has its own challenges. The stores are very important and how they are run, how shoppers make on the spot decisions, is key part of the business.”
Dunning admits that Magnit has been a bit slow in setting up its IT and getting into e-groceries, but its site was updated earlier this year and it is now getting its act together. Like everyone it has seen explosive online sales growth during the coronacrisis and over the last six months Dunning has introduced a slew of new services and innovations.
Online sales tripled from their January-February levels during the lockdown that started in May and the base went from a 100 orders a day to 3,000.
While at Lenta Dunning revamped the IT sector and claims that he had some of the best information on customers of any of the big retailers thanks to one of the most advanced systems. (Magnit attempted to buy
“The e-commerce has started but in the short term we are looking for customer insights. It’s what we need: to better understand our consumers,” says Dunning. “Magnit has no choice. We have to be digital and we need an e-commerce platform and by next year we will be an active e-commerce player.”
Amongst the first changes Dunning made was to introduce a customer loyalty card in
Dunning says that Magnit has always concentrated on the procurement to present the best customer value proposition. Now he wants to turn the relationship around and listen and learn from the customers for more insights on appealing prices, product ranges and private labels.
“It’s customer-centric thinking. We are not there yet but we are making progress,” says Dunning. “We have to re-orientate from procurement and fancy stores. We need to know what the customer wants, how to present it, and how they want to pick it up. That last part is new: there are more aspects to retail now as it is changing very fast. What used to take 20 years to change now changes in five years.”
Delivery options
One of the biggest changes in Russian retail in recent years is the possibility of having your groceries delivered to your home rather than trekking down to the store with an avoska, the string shopping bag everyone used to carry in Soviet times in case there was something to buy in the shops.
The company started with food deliveries in August and in September followed up with the launch of e-pharmacy and an e-grocers delivery service in partnership with e-commerce firms
The tie-up with
Like everyone else, Magnit is also investing in its own delivery and logistic system. In November the company launched the Magnit Dostavka (Delivery) app, which will support the e-commerce effort. Initially available in
Cosmetics is a first step to expanding deliveries from the company’s drogerie format. The e-pharmacy draws on over 100 pharmacies in
The company is also in the process of setting up “dark stores” that have no walk-in customers, as they are there to fulfil online orders quickly. But Dunning says that currently the main appeal of the online platforms is the insight they give into customers’ behaviour.
Magnit super App
The most recent addition to the family was the launch Magnit Pay on
Registered users can obtain a virtual card that can be used to pay for purchases both in-store and online. The card can be topped up via bank transfer and can also be used to send money to any Russian card.
Magnit Pay's functionality will be expanded in the first half of 2021, with users able to pay for third-party services (utilities, telecommunications and fines) and transfer funds to other Magnit Pay users. Magnit customers will be able to withdraw cash from VTB ATMs using only a QR code.
“We consider the development of a payment system as a promising niche considering Magnit's unmatched customer base. Similar systems have made a material contribution to EM and DM retailers. [Russian regional shoe retailer] Obuv Rossii has already had success with a similar scheme in the Russian retail space. That said, the take-up for the service could take some time, so we see no impact over the medium term,”
Discounter and Private label
Another new feature of Russia’s retail has been the rise of the hard discounters – another bricks and mortar business that is geared towards the impulse buy rather than the convenience of online sales.
Stagnant incomes have made punters a lot more price conscious and Russia’s new discount chains are flourishing, as bne IntelliNews featured in its profile of Fix Price. Indeed, they have been doing so well the discounters are starting to cut into the sales of the major chains and now the big boys are fighting back.
Magnit opened its first three Moya Tsena (My Price) discount stores in
“It has been very successful. The store has 1,500 stock keeping units (SKUs) and one item per need,” says Dunning, who adds that more stores will be rolled out in the New Year.
Keeping the costs under control is doubly important to discounts and like the other firms, Magnit is investing into production to produce its own private label goods for consumer commodities.
With the ruble’s devaluation in 2014 and the growing demand from domestic retailers Russia’s light manufacturing and food processing sectors have enjoyed a renaissance, as local firms strive to meet the demands of the domestic consumer using domestic producers who are now cheaper than
Magnit currently has 11 factories producing goods for its own in-store products, including things like pelmeni, pasta, chocolate, sweets and buns as well as a variety of common fruit and vegetables such as mushrooms and carrots, potatoes and onions.
“Russia’s doesn't grow bananas and coconuts but it is much more able to provide for its own needs,” says Dunning. “We still need international sources, but we can find things like plastics, textiles, seasonal goods on the Russian market. There are lots of quality suppliers. And the devaluation of the ruble and the sanctions have pushed industry to develop fast.”
Magnit stock rallies
Investors seem to approve of all the changes being made at the store, as the company’s stock price performance has come back to life.
After Galitsky sold his shares to
This year the story has reversed again. Both companies saw their shares crash in March, falling by over 40% in the worst of the panic selling, but since then Magnit’s shares have easily outperformed those of X5; they have returned 41.4% and 13.8% respectively since the start of year as of
This new enthusiasm is partly a result of the strong results that Magnit has put in. The pick-up in sales and lower costs in the last two quarters is due to the new executive team finding its stride, according to
Next year, VTBC says it expects the store rollout to resume, with 7% year-on-year higher selling space and a 6% top-line compound average growth rate (CAGR) for the next five years.
The Ebitda margin of 7% is at a comfortable level and the gross margin cushion is sufficient to offset cost expansion, the bank said in a note.
"The story now switches to careful capex allocation and working capital optimisation, which in our model returns a blended free cash flow (FCF) yield of 6% in 2021-2025," VTBC wrote.
Dunning is says that he is keen to restore investors’ confidence in the company’s stock and after income and EBITDA improved in the third quarter of this year he was happy to return cash to investors with a surprisingly generous dividend payment. Magnit offers a sector-leading dividend yield of 10%, with the higher-than-expected dividends for 9M20 and a total payment of
“The EBITDA has been good and the like-for-like (LFL) sales robust. We spent less on capex than we anticipated and so as there was free cash flow we decided we could return some money to the shareholders. It’s one of Magnit’s traditions that we will keep,” says Dunning. “But what we will really reward shareholders with is the results. We want to grow the value of the business.”
©2020 bne IntelliNews
, source