How is life going for Ukrainian retailers and what they are going to do next?

Having overcome hard times, Ukrainian retail market started growing fast. Though, today’s success lies not only in quantitative but in qualitative growth as well.

Due to demand increase, retailers are opening new shops

Ukrainian retail recovers from two years of depression: thanks to a decrease in inflation as well as salaries’ increase commodities turnover went up as well - 7,1% in Kyiv and up to 9,5% throughout Ukraine.

Positive trends became a call-to-action for retailers who started to expand their activities strategically rather than sporadically. Major players opened several shops in places with the highest concentration of the brand’s target audience. The purchase of 9 hypermarkets “Karavan” by the Auchan Group became the biggest deal on the market. Rumors go that the value of the transaction is around 10-15 million USD.  Inditex (Zara, Bershka, Stradivarius) has expanded their retail networks by opening 6 new shops in Lavin Mall shopping center. Polish retailer LPP, Turkish – LC Waikiki, Ukrainian – ARGO, Russian “Sportmaster” and O’stin also joined the trend. Newcomers - Saucony, Liu Jo, Superdry, PINKO, Skoth & Soda, BraBraBra, Hanro, Adidas Originals also contributed to the increase in competition on the market. The toughest period for the clothing retailers is over, which is confirmed by the increase in a number of shops as well as by the approaching arrival of H&M and other famous international brands to Ukraine.

All methods are good at war for the consumer

Due to the decrease of Ukrainian consumers’ revenues, retailers fiercely fight for every customer.  They try to adapt their products to the needs of the as larger as possible amount of clients capable of paying. For example, they open outlet shops where they sell less popular goods with big discounts which are so attractive that during the sales period one can buy branded clothing even cheaper than “no-name” products at the market.

At the same time, trademark retailers occupy only around 30% of the retail market in terms of sales value. Other 70% pertain to no-name shops, markets, stocks, and second-hands which continue to appear in great numbers throughout the country.

The number of spots for new shops decreases while their price goes up

Thanks to the retail market revival the number of free spots in Kyiv shopping centers decreased from 11% to 6,7%. Furthermore, by the end of this year, this amount may further decrease down to 4,5%-5%. The absence of new offers from property developers further complicates the situation: in 2016 the record amount of new shopping spaces were opened but then the market went on standby mode. Only 1 shopping center «Academ City» was opened in Kyiv in 2017 with the first part of «Auchan Rive Gauche» mall to open later this year. Due to the lack of free shopping space the rent prices increase – they started to grow last year and continued in 2017. The price of 1 square meter in popular shopping centers costs 60-86 USD per month, while in less popular 30-45 USD per month. Nevertheless, the situation should improve in 2018-2020 as the construction of around 530 000 square meters of shopping spaces is planned.

Local players contribute to the growth of food retail market in the regions

The affordable price of small-scale retail networks as well as their flexibility and capacity to quickly adapt to the demand of local consumers attract big companies. For instance, ATB bought “Barvinok” network shops, “Silpo” acquired “AMSTOR”, and “VARUS” bought a share of “Perekrestok” assets. At the same time owners of local retail networks don’t want to lose money and try at least to return their initial investments. That’s why assets are currently overpriced. The property may cost 500 000 USD, while its real market value will not exceed 200 000 USD.

Small-scale retailers are particularly active – “Brusnichka”, “Kopiika”, “Nash Krai” opened new shops, while the largest discounter – ATB – is now present in new cities – Lviv and Odessa. Fozzy Group even decided to compete with ATB for the share of the discount market where it’s represented by “Thrash!” shops. WOG is also actively developing its network of “shops next-door”.

Development of retail networks resulted in increase of competition for customers

Retailers try to reach their customers everywhere by opening their shops in places not yet occupied by competitors. Though due to the poor economic situation in the country the price remains the main competitive advantage – in order to attract new customers, retailers are ready to lose revenues on essential commodities.

The lost profit is then replenished through the sales of meat and dairy products consumed majorly by the middle class. Though, not all retailers have equal chances to win price wars. Thanks to the large volume of sales as well as the support of the parental companies foreign retailers can work with lower profit margin than national companies. Nevertheless, despite positions of players, markets always win – there is no fixed price tag with VAT and one can bargain there. Producers respond with the depreciation of goods through downgrading the quality of raw materials and packaging.

The situation in the DIY sector of constructions materials is the same

DIY sector overcame a tough 2015 when the market faced 20-30% decrease and then showed 30-40% increase in 2016. Currently, it came across the same issues as other retail sectors: customers search for qualitative goods but at a lower price. The client is ready to dump brand for practicality – there is no sense in paying extra for the product which you will use once per year.

The unofficial trade also complicates the situation as it occupies at least 50% share of DIY construction materials market.

Retailers want to know their customers

Retailers return to the good old business model which exists since the beginning of the 20th century when sellers knew all their customers by names and bought relevant amount of products ordered by particular customers. In order to restore this tradition retailers create databases of clients where they record all information. They analyze customers’ purchasing history and then make offers based on this analysis. Some retailers even started to attach customers’ discount cards to their accounts in social networks, phone numbers, and IMEIs.

In such a way retailers create an effective CRM-system enabling them to collect data via different loyalty programs. Such systems are integrated into IT network of companies. As a result, companies get effective ERP systems able to manage customers’ preferences, the stock of goods, discount programs and sales. Furthermore, the role of SMS in the implementation of these approaches to the management of customers’ relations is already replaced by messengers and social networks. They also ensure the exchange of feedbacks between the company and customer.

Retail networks should become friends with customers

Any retail brand should become an expert, adviser, and assistant to its customer. This should be the basis of brands’ promotion and positioning strategies. The advertisement should be helpful for customers. It will increase retailer’s credibility and loyalty of clients. At the same time, it should be catchy, non-intrusive but informative. Video content featuring companies’ employees explaining opportunities and peculiarities of particular products will be the most popular. Retail networks will transform into “corporate media” supplying their customers with valuable information about their products, instructions on its application as well as most convenient ways of interaction with the company.

Concentration on particular groups of products will become another way of growth. Improvement of cooperation, as well as an increase of goods turnover with suppliers, will result in a decrease of buying prices as well as cuts in logistics expenses.

In general, retailers should clearly understand who they are for their customers. That’s why they will have to pay particular attention to what and to whom they sell, plan their sells as well as monitor the sales of competitors.

Furthermore, a simple decrease of expenses won’t be enough for the further growth. Retailers will also have to invest in staff development concentrating on the non-material remuneration of managers in particular.

Internet will become a trading platform for small business and a service for big companies

Online trade will continue to take over the retail market and push out real shops from the market. Only the scale of business activities, as well as ways of usage of opportunities offered by the Internet, will differ. For small companies, the offline trade will be replaced by online. All traditional processes, including logistics as well as recruitment of staff and contracting of suppliers, will endure only slight changes. For corporations, online trade will become an additional service which will help to make customers’ life easier. At the same time, big retailers will keep their “offline” shops.

Furthermore, small business will be oriented towards particular niches of the market: shops will be opened to sell a particular type or brand of cosmetics, souvenirs, elite chocolate, or rare sorts of coffee. The effectiveness of such business model will be ensured by big volumes of sales to particular customers, who will be reached through online marketing. Even though small companies’ sales volumes won’t be comparable with large competitors, they will still remain profitable.

New formats of shops will appear soon and cheap ones will dominate

Because of the current economic situation, the “middle -” segment players will open more and more shops with fixed prices for products. These will be “American type” 500-1000 square meters shops. Retailers working in “middle +” segment will concentrate on small shops where customers will be able to see and try the product and then order its delivery straight to home. New concepts of shops combining online and offline trade will also emerge. “Middle +” segment players are expected to be frontrunners in this regard. Later they will be followed by “middle” segment companies.

Retail trade overcame the crises and is currently on the rise, even though the purchasing capacity of customers is still constrained. Due to this, more and more fixed-price shops will appear. In order to boost sales, companies attract customers with discounts and special offers while trying to personalize their propositions through profiling of clients.

Further development of the retail industry is tightly connected with online trade as well as efforts companies will put into integrating it into their business models. Development of a mutually beneficial partnership with clients and suppliers is also something worth investing time, efforts and money in. All these attempts to attract consumers, among others, will result in the appearance of new formats of shops.