French retail giant Auchan announced last week it plans to open 10 new hypermarkets throughout the country within the next two years, with the first scheduled for January 2008 in Kiev. Local press reports the total investment in the country will amount to hundreds of millions of dollars, especially in light of the surging price of land and projected size of the developments.
Auchan, the 10th largest retailer in the world, has partnered with Ukraine's second biggest supermarket chain, Furshet, in a deal that will give Auchan a 20% stake in the domestic retailer. Kyiv-based Furshet owns 69 stores in Ukraine and one in Moldova.
According to the agreement, the two retailers will create two new companies. One will operate Auchan's future chain in Ukraine while the other will develop Ukrainian shopping malls designed to include either an Auchan or Furshet outlet.
Auchan's announcement echoes intentions voiced by other foreign retailers, such as Germany's Metro and Russia's O'key. Metro, who currently operates 13 wholesale outlets in the country, has been considering the introduction of its Real hypermarket brand in Ukraine.
The interest of major international hypermarket retailers in the Ukrainian market is not surprising. According to industry insiders, the market is still big enough for multiple players as the hypermarket niche remains largely unfilled.
The retail sector has experienced tremendous growth in recent years. According to Moody's, which performs financial research and analysis on commercial and government entities, the sector expanded by 25.3% in 2006, adding to the 23% recorded in 2005. The State Statistics Committee reported that total retail sales amounted to around $24.5bn in 2006, with Kiev, Dnipropetrovsk and Donetsk accounting for the largest growth.
With personal incomes gradually rising and easier access to bank loans, hypermarkets are not the only gainers. More Ukrainians are investing their earnings in the purchase of new cars. According to Gennady Ovcharuk, the general director of a Kiev-based distributor of Bentley automobiles, the Ukrainian new car market jumped 40% year-on-year in sales in 2006. "In 2005, 265,000 new cars were sold, and in 2006 that figure grew to 371,000," he said. In comparison, the Western European market grew by only 1%. Moreover, Ukrainians are increasingly inclined to buy mid-range foreign automobiles. Ovcharuk told OBG that Ukraine ranked 9th in the world in terms of imported car volumes. Ukrainian car dealerships posted $6.1bn in car sales last year, up from $3.6bn in 2005.
Another beneficiary of retail growth is the restaurant sector. Oleg Derevianko, the CEO of Ukraine's largest restaurant operator Kozyrna Karta told OBG that the growth is not just rapid, but the clientele is changing. "It is no longer just the wealthy who eat out... The restaurant business is growing across all segments. If restaurants in Ukraine fail, it is not because there is no market, but because they aren't delivering the right concept at the right place." The group currently operates 60 restaurants and plans 20 more projects.
Much like the hypermarket segment, the restaurant niche has thus far not had significant foreign investment. Market potential should lead to more foreign chains exploring possibilities in Ukraine.
The entry of foreign retailers such as Auchan and the expansion of domestic players is likely to continue as long as unemployment remains low, wages continue to grow and easy credit access helps growing an increasingly large middle class.
However, some structural challenges could hinder development of the sector, most significantly the limited availability of land. In Kiev, particularly, property prices have risen substantially, and plots suitable to large hypermarkets are difficult to find. Controls on the sale of agricultural land and bureaucratic hurdles exacerbate the problem. Swedish retailer IKEA has delayed entry into Kiev for three years due to its problems finding land suitable for its megastore. Insiders say that land issues have also been one of the barriers to the introduction of Metro's hypermarkets in the country.
IKEA originally planned to construct an outlet over 55-60 acres on the outskirts of Kiev near Borispil airport. The proposal amounted to between $350m and $400m of investment and envisioned construction of six stores across Ukraine, as well as the creation of parks and amusement complexes. Although this plan was rejected by city officials, the company recently agreed to purchase a 30 acre site in Kiev's suburbs, though several ownership issues remain unsettled.
All in all, 2006 proved a growth year for Ukraine's retailers in spite of higher costs for energy, political instability and strong inflationary pressures. Spending growth remained in double digits throughout the year.
2007 is expected to be another year of double-digit growth, as year on year growth for the first two months has exceeded the 2006 level. Moody's reports retail turnover came to UAH 10.11bn (US$2bn) in February, a 31.2% growth compared to February last year.