Main logistics challenges in retail & FMCG in Russia

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2008, June 11th, Brussels
Conference : “Logistics in Russia:
Outlook, challenges & solutions”,
organized by Ahlers

Published in: Business, Travel

Main logistics challenges in retail & FMCG in Russia

  1. 1. 1 Outlook, challenges & solutions Logistics in Russia: 11th June, 2008 Brussels MAIN CHALLENGES IN RETAIL & FMCG
  2. 2. Serge Rivet Logistics in Russia 2   Graduated from the Bordeaux Management School (France).   Started his career in Russia, in 1997.   Has been working for foreign and Russian companies in the area of logistics and supply-chain management.  Worked for international logistics operators such as FM Logistic and Kuehne & Nagel.   Conducted projects in large companies, such as Eldorado, and Mosmart (retailers).   Animated a "Pooling" project from Moscow to the regions for ECR Russia   Created Conseo CIS in summer 2007 in Moscow   Consulting, Project Management, Interim   in Logistics and Supply Chain
  3. 3. Professional Track record Logistics in Russia 3 10+ years of experience in logistics in CIS
  4. 4. 4 INTRODUCTION
  5. 5. What is talking about … Logistics in Russia 5 …Retail & FMCG in Russia ?
  6. 6. 1/ Drivers of logistics Logistics in Russia 6 FMCG and Retail drive logistics today
  7. 7. Logistics in Russia 2/ Ambitious project 7
  8. 8. Logistics 8 in Russia Summary
  9. 9. 9 FACTS : RETAIL IN RUSSIA
  10. 10. Logistics in Russia Fact 1 : A young market History of Retail in Russia 1994 : 1998 : 2001 : 2004 : First retail Russia’s coming of 1st Visible Soviet Style chains Default big foreign Regional Retail appearing Retailers Retail in Moscow Expansion • 1% Of the Moscow Retail Great impact onto retail • The Relationship between • Retails becomes a real economic • State Monopoly • 0% of Russian Retail market the retailers and suppliers sector, with its rules, trends and players • Recurrent deficit • Great part of imported • Re-orientation towards turn to retailers advantage • Retail becomes a consumption habit • Small assortment products discounter format • Did not accelerate the on federal level • No import • Expensive Prices • Re-orientation towards coming of foreign retailers • Small Formats • Sadko Arkada ‘s National Products • Metro, Auchan, Remarks : • Specialized margins = 100 – (development of foods product Formats Ramstore, Ikea, • The entry ticket to the retail market 200 % industry) • Almost no Self Service • No Tesco, No gets more and more expensive for new • As a result, in 2000, most of Carrefour, No retailers, as big players has already • Foreign companies take over Eastern Europe Retail the today’s big players and Casino, No Ahold, come and developed infrastructure Market but do not touch formats are already created No WalMart (Specialists, Logistics, Regional Russia • Moscow shows • Appearing of local regional Network, etc..) mainly super and operators (magnit, MDM, • The next solutions to enter are mainly : hypermarket Edelweiss, …) • Development of new formats, development underdeveloped in Russia • ST Petersburg shows • Acquisition of existing mainly discounters networks (Federal or Regional) • Franchising Source : Renaissance Capital
  11. 11. Fact 2 : A small market Logistics in Russia 11   Russia remains undersupplied in terms of modern retail space,   only 150 m2 of shopping- centre space per 1,000 inhabitants in Moscow and St Petersburg,   and as low as 40 m2 per 1,000 in Novosibirsk. (end of 2006)
  12. 12. Fact 3 : Small Players Logistics in Russia 12 FY ’06 Net Sales Russian Food Retail Market Evolution Company USD mln 1 X5 Retail 3,551 Top-10 Other modern formats USD 449 bln 2 Metro 2,544 The rest 30% 3 Magnit 2,504 Total Russian food retail market estimated 4 Auchan 2,016 CAGR of 10% 5 Dixi 1,080 USD 280 bln 10% 10% 6 Lenta 1,060 9% 7 Kopeyka 980 8 7 Continent 958 9 Victoria 900 10 Ramstore 635 Total Top-10 16,228 In UK the top 4 of retailers represent 85% of the market In Germany the top 4 of retailers represent 80% of the market Source : Pricewaterhouse Coopers and Datamonitor
  13. 13. Logistics in Russia Fact 4 : 13 A Large geographical scope Russian Regions Real Estate Markets in 2007 Knight Frank
  14. 14. Logistics in Russia Fact 5 : Modern retail is complex 14   One hypermarket   From 700 to 1500 suppliers   From 100 to 250 orders a day   More drivers in store   Up to 50,000 sku’s than clients !!!   One convenience store   High transport cost   From 150 to 450 suppliers   From 40 to 100 orders a day (last mile)   Up to 10,000 sku’s
  15. 15. Fact 6 : A High Speed Market Logistics in Russia 15 Windows of opportunity Analysis (Based on GRDI ranking for 1995 – 2006)
  16. 16. Fact 6 : A High Speed Market Logistics in Russia Windows of opportunity Analysis (Based on GRDI ranking for 2008)
  17. 17. Logistics in Russia Fact 6 : A High Speed Market A very important European market 17   4th largest retail market in Europe   (kingsturge)   The largest in Eastern Europe   (Retail and Consumer Worlds – PWC - January 2008)
  18. 18. Logistics in Russia Fact 7 : Poor Suppliers service 18   Assortment is a   Poor supplier key to success service   thisis a supplier market 20,00% 18,00% Out of Shelve 17,70% 16,00% ??? 14,00% 12,00% 10,00% 8,30% 8,60% 7,90% 8,00% 6,00% 4,00% 2,00% 0,00% All countries European North Russia Union America Source: Roland Berger / ECR Europe
  19. 19. Retail in Russia Logistics in Russia 19   A great opportunity for Western Investment :   Differentiation through know how to the market   Really effort-worth opportunities   A fast moving market
  20. 20. 20 FACTS : LOGISTICS IN RUSSIA
  21. 21. Logistics in Russia Foreword : History of WW Logistics IT Revolution Modern Military Retail Logistics WW II Industry Globalization Operational Revolution Researches Revolution Caesar -> 1939 1939 -> 1945 1945 -> 1970 1960 -> 1980 1980 - 2000 Future • Supply lines • Speed of supply • MRP • Managing • Distribution • Global • Warehouses (transport, cross • Planning thousands of center Networks positioning docking)) SKUs • Outsourcing • Supply Chain • First • Logistics Preparation • Just in Time • Globalization of Management Logisticians • Standardization (pallets, • TQM flows • Reverse jerrycans) • Cross Docking Logistics • E-commerce • Role of IT See : See : See : See : See : • Van Creveld • Overlord • Forrester (MIT) : • M. Ohno works • ECR Industrial Dynamics (1962)
  22. 22. Logistics Fact 1 : A specific history of in Russia Logistics in Russia IT Revolution Modern Industry Operational Revolution Researches Military 60 years Retail WW II Globalization Logistics ? Revolution Caesar -> 1939 1939 -> 1945 2000 - Future 22
  23. 23. Logistics in Russia Fact 2 : The Infrastructure issue 23 Infrastructure barriers • Lack of retail space and rising prices for retail space in large cities. especially critical in Moscow • Lack of warehouse facilities: This is a common issue faced by retailers in all of Russia’s largest regions. Many overcome this problem by constructing their own distribution centers; • Limited transportation infrastructure: Retailers face the problem of deliveries delay and longer transit periods due to poor roads and heavy traffic. The situation   45% of retail executive is forecast to worsen in the next two to three years; consider that problems with infrastructure influence their • Lack of electricity and poor lines of business communications in the regions   Third factor
  24. 24. Logistics in Russia Sea In eastern Russia at the Pacific Ocean, the capacity of the seaports has not met the rising demand for years.   size of the ships has steadily increased over the past decades, but much of the equipment in these ports has remained the same restricting handling capacities.   scarcity of Russian ships,   poor integration of ports into the railway system.   Russia’s neighboring countries profit from Russian capacity problems,   Finland   Baltic States   Ukraine,. most freight needs to be shipped from west to east or vice versa. However, Russian waterways flow mostly from south to north.   the inland waterways’ share of total transportation fell from 3.6% in 1991 to 1.6 % in 2005 (in ton/km) (Rosstat, 24 2005).
  25. 25. Logistics Air in Russia Parallel to the economic growth in Russia, air freight prices are rising and capacity utilization is at its limit due to a poor infrastructure :   1302 airports in 1992 vs approximately 421 in 2003.   About 50% of all civil aircrafts are more than 15 years old.   620 to 820 new aircrafts will be needed in the next few years in Russia, not counting regional airlines (estimates by Russian Ministry of Transport 2003, Economist 2005, Boeing and Airbus)   Most ground handling equipment is technically outdated and   56% of all air cargo is handled via the three Moscow airports (Domodedovo, Sheremetievo and Vnukovo). Of these, only Domodedovo has been renovated and fully 25 meets western requirements.
  26. 26. Logistics in Russia Roadway  940,000 km of roads in 1995 / 871,000 km today  (France = 891,290 km) approximately 85% only of the roads are hard   surface weight restriction for about one third of the total   network; consequently its use by trucks is limited Russian roads remain dangerous; approximately   35,000 Russians are killed every year in road traffic  Furthermore, low speed limits in Russia, constant traffic jams in and Moscow, as well as the c’ by the Russian police, hamper transportation..  prefered transportation up to 1,500 km. This fact contributes to the high importance of road haulage in distribution logistics in Russia. 26
  27. 27. Logistics in Russia Railway The Russian railway accounts for 75.4 % (or US$ 29.6 billion) of the entire revenues of the freight industry, –  (importance for the transportation of natural resources) Largest railway network in Europe with 87,000 km (USA = 226,605) in regular use, –  10 % of railways are defective in some way (the Economist) –  half of the system needs urgent modernization (the Economist) . –  Only 50 % of the network used In common carrier service Is electric. The major player on this market is the national railway operator, JSC Russian Railways (RZhD), –  By 2010, the company shall be privatized –  The investments made are marginal, with a growth of just 8.5% in 2006. not enough to reach western standards. –  Due to the railway’s significant importance as the backbone of transportation, the poor condition of the 27 Russian railway network could have a negative impact on economic growth.
  28. 28. Logistics in Russia Warehousing significant growth of the Russian economy caused the warehousing prices in Moscow to increase dramatically. The price per square meter in 2005 was just below the level in London: up to USS 135 per square meter (JonesLangLassalle 2006). demand exceeds supply, storage, cross-docking areas for commissioning. Logistics can not be assured, in particular for perishable or sensible goods. It is expected by specialists that the warehouse market will be growing during the next 10 years Strong fragmentation of LSP - No Market leader in Russia   Even not the Russian Post   Only pioneers : FM Logistics and NLK Low level of service   Lack of experience   Heavy documentation rules in Russia 28
  29. 29. Logistics in Russia Infrastructure 29 Warehouses Vacancy Rates 12% 10% 8% 6% 4% 10% 5-7% 1,5% 2% % Quality Warehouse Space 0% USA Europe Russia 80% 70% 60% 50% 40% 30% 67% 11% 22% 20% 10% 0% Москва и МО Санкт Петербург Регионы
  30. 30. Logistics in Russia Transport availability 30   In the future, 20t trucks Will transport logistics in Russia pose a challenge for fleet will increase at ca. FMCG sector development? 9-11%, but trucks Market studyMoscow May 2007 shortage risks remains
  31. 31. 31 CHALLENGES
  32. 32. Logistics in Russia Challenge #1 : Rare federal operators 32   Logistics companies in Russia:   4000 - 6000   Around 100 companies can be rated as logistics service providers.   The market share of LSPs in 2006 :   Top 20 LSP in Russia = 9 %   Top 10 LSP In Germany = 12 %   Russia’s logistics market is very fragmented, DEVELOPMENT STRATEGIES OF LOGISTICS Industrial, Warehouses and Land Department SERVICE PROVIDERS IN RUSSIA 2007 Actuals Frank Straube, Peter Franke Knight Frank - October 2007 Berlin Institute of Technology -2008
  33. 33. Logistics in Russia Challenge #1 : 33 Rare federal operators Responses to Logistics Tender no answer   19 LSP contacted 10% 16% no space   Would be 5 to 6 in Europe 37% no resource 37% or limited range of services in scope
  34. 34. Logistics in Russia Challenge #1 : 34 Rare federal operators   The difference between   The winner has no the 2 top offerts > coeff space 1,5 !   Some respondents have been at the limit of politeness   The market is till not stabilized   The entrepreneurial spirit is missing on this market   Tender process delayed by 1 month   Answer rate = 10%   Would have been be 80% in Europe
  35. 35. Logistics in Russia Challenge #2 : The “3S” challenge 35
  36. 36. Logistics in Russia Challenge #2 : 36 The “3S” challenge   High control culture   Best Practice   Control vs efficiency Security Speed Smartness Security Speed
  37. 37. Logistics in Russia Challenge #2 : The “3S” challenge 37 What we want What we do
  38. 38. Challenge #3 : Network Management 38
  39. 39. Challenge #3 : Network Management 39
  40. 40. Challenge #3 : Network Management ????? 40
  41. 41. executives expressed that within the next 10 years, they expect a shift of the center of logistics activity towards Nizhny Novgorod and Ekaterinburg Source : Dynamic Supply Chains ion Russia Christopher Jahns - Inga-Lena Darkow - Tobias Weigi 41 German Logistics Association - 2006
  42. 42. Is it a reason for panicking ?
  43. 43. 43 THE KEYS TO SUCCESS
  44. 44. Logistics Key to success #1 : A reactive government : in Russia Undertaken Measures 44 the Russian government ignited several Sea programs among :   The government plans to double the   the federal program “Modernization of the capacity of the existing 43 seaports by Transport System in Russia (2002-2010)” 2010.   the “Transportation Strategy of the Russian Federation” (2005 – 2020) Railways   “To create the conditions necessary for a   By 2010, JSC Russian Railways (RZhD), shall new development model in a global be privatized economy, transportation is the instrument for realizing Russia’s national interests Roadways and providing a suitable place for the   The Russian government initiated several country in the world economy.” roadways projects :   an investment fund in 2006 of US$ 2.5   “stimulate the creation of Russian multi- modal transit operators.” billion to improve and extend the roadway network by 27,000 km by 2010.   public-private-partnerships to improve the Air network by using.   Logistics centers already are being created at   Since Moscow is the major bottleneck for airports in Moscow, Novosibirsk and transport in Russia, the Moscow city Krasnoyarsk. government agreed upon one of the largest   the government is creating the conditions to projects in June 2005: an orbital motorway attract private capital from both Russian and with 8 lanes and a total length of 500 km foreign investors. will be built around the city. This urgently   For instance the Krasnoyarsk airport, the needed project should be finished by 2015. Swiss company Swiss Port,
  45. 45. Logistics Key to success #2 : A reactive business community : in Russia Unlocked strategic possibilities Logistics Operator of the 90’s FM Logistic, NLK, Molkom Foreign FMCG outsourcing of the 90’s Unilever, Eldorado, etc Russian Traditional New Trend Vertical Integration of the 90’s on the market Kuehne + Nagel Producers Distributers Owning Clients the Product Operating 3PL – Logistics Operator Logistics Developing Logistics Developers Infrastructure Financing Logistics $$$ Pension Funds Infrastructure
  46. 46. Logistics Key to success #2 : Privatization & Professionalisation in Russia Changes in the Russian Logistics Market Structure 46 • FM Logistic • NLK • Cat Logistics is a new comer on the market • Ahlers • DHL • DHL and Relogix operating in Pushkino Operating • Relogix Logistics • Excel • FM Logsitcs renting out facilities in the regions • Kuehne + Nagel • Cat Logistics • Schenker • PLE • Multinational Logistics Partnership announces the construction of 1 000 • Multinational Logistics Partnership 000 m2 in CIS • Kulon Espro • Rosevrodevelopment announces the construction of warehouses in • Ros Evro Development biggest regional centers • Giffels (Canada) • Giffels (Canada) Preparing about 550,000 square meters of Class A Developing • A.M.G. Group (US) space. Logistics • Megalogiix Eurasia is planning to bring to the market anywhere between 1.0-1.2 million Infrastructure • Eurasia square meters of warehousing space within the next 2-3 years. • Ghelamco • Capital Partners preparing 500,000-600,000 square meters to market • Aig Lincoln within the next couple of years. • Belaya Datcha • A.M.G. Group (US), Plans the development of a chain of specialty • Bouygues warehouse facilities throughout Russia for 250,000-350,000 square meters to the market within the next 2-3 years. • Hypo Real Estate International financed MLP for the construction of two • Hypo Real Estate warehouse complexes at a cost of $300 Mln. • International Financing • AIG European Real • The AIG European Real Estate Fund has acquired the FM Logistics Logistics Infrastructure • Estate Fund complex, located in the town of Khimki and offering approximately 65,000 sq m of warehouse space, for over $60 million. First sale and leaseback • Raven Russia Limited investment transaction between foreign companies in the warehouse sector of the Moscow market.
  47. 47. Logistics Key to success #3 : in Russia Channels in-depth evolution Distributor Supplier Retailer (Wholesaler) Supplier Supplier Retailer Retailer
  48. 48. Logistics Key to success #3 : in Russia Channels in-depth evolution Supplier Supplier Retailer Retailer Key account Logistics Bonus management Consolidation & Cross Docking Strategies Barycentric Barycentric reviews reviews Outsourcing Outsourcing
  49. 49. Logistics in Russia Key to success #3 : Channels in-depth evolution Wholesalers turn 3PLs   Avalon (Tea)   Alidi (Procter&Gamble’s wholesaler)   “Ulkom“ – (Krokus Cosmetics)   Bee logistics (Perfume Group)   Direct Logistics (Food FMCG Wholesaler)
  50. 50. Logistics in Russia Key to success #4 : 50 Focus onto the right issue Looking at western business Looking at Russian Business   Stagnant demand : master plans   Durable double-digit growth, namely in the conducted with constant volumes regions   Tougher competition : higher standards   Providing everyday reliable service is an with reduced margins everyday challenge   Doing better than standard 97/98% is a   Focusing onto capacity is the challenge costly and risky bet
  51. 51. Logistics Key to success #5 : in Russia Avoid the Copy/Paste syndrome Adaptation of your solutions Парад неудачников // “Черная Грязь. Белые В 2007 году российская компания ООО "Метро перчатки” Вэрхаус Ногинск" начнет строительство в Ногинском районе Московской области (…) Один из крупнейших международных логистического центра - объекта складского девелоперов – американская компания назначения. Основной функциональной ProLogis – был вынужден отказаться от задачей комплекса является центральное строительства в Подмосковье складского складирование и распределение товаров по терминала и свернул бизнес в России. (…) складам-магазинам. Автор: Милена Бахвалова (См. в Яндексе) Источник: ''Компания‘’
  52. 52. Key to success #6 : PEOPLE Logistics in Russia   The real issue may be PEOPLE !
  53. 53. Logistics in Russia   real need 1,000+ logistics specialists per annum.   currently talent pool available 100 logistics specialists per annum 53
  54. 54. 5 High leverage opportunities Logistics in Russia 54 1.  People and knowledge 2.  Business partners 3.  Stock deployment Alain Katz, 4.  Capex Metis consulting 05th June 2008, Moscow, Freight 2008 Conference 5.  Top Management buy-in
  55. 55. 55 CONCLUSION
  56. 56. Logistics in Russia The gain is worth the effort 56   The largest new floorspace pipeline,   (kingsturge)   Retail sector growing 30% per annum   (Economist Intelligence Unit – Feb 2007) FY 2007 Retail Revenue Growth   Food retail sales are rising 45% per annum   (Economist Intelligence Unit – Feb 2007)   by 2010, it is expected to exceed the UK, France or Germany.   (Retail and Consumer Worlds – PWC - January 2008) Source: Companies’ Data
  57. 57. Logistics Relative problems for absolute successes : in Russia It is not a matter of keeping patient 57 It is taking 5-7 years in Russia, to do what took 20-30 years to happen in Europe
  58. 58. Portrait of a winner Logistics in Russia 58
  59. 59. Questions & Answers 59
  60. 60. Thank You for attention! Serge Rivet ООО «Conseo» s_rivet@conseo-cis.com + 7 916 453 30 55 www.conseo-cis.com Skype : rivetmoscow

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