RUSSI~S RETAIL GOLD RUSH MALLS ARE RISING ON A TIDE OF GROWING CONSUMER WEALTH By Bennett Voyles

URING THE COLD WAR, NIKITA KHRUSHCHEV

reportedly boasted that his Soviet Union would soon "bury" its geopolitical rivals

in the West. That did not happen. But today, a little over 50 years later, some

might wryly observe that Khrushchev's ghost must be off somewhere tittering up

his sleeve over the speed at which Russia is now building its shopping centers and

leaving the West behind.

Only two decades ago Russians shopped mostly at open-air markets or by

pointing to something hanging on the wall of some kiosk the size of a newsstand

- a little newsstand. Now huge shopping centers are rising all over Russia as devel­

opers try to cash in on the reality of an increasingly affluent Russian consumer. In

j the second quarter oflastyear alone, some 464,500 square meters {about 5 million ~

~ square feet} of new mall space opened in Russia, including the 152,360-square-~

~ meter OZ Mall, in Krasnodar, a city of 750,000 not far from the Black Sea. S? ~ And there will probably be much more where that came from. In Moscow ~

A PR I L 2 0 1 3 I seT 51

expected to rise to 422 ,000 square

meters from 334,000 square meters.

Growth will be even more abrupt in

Nizhny NovgoruJ, a ci ty of 1. '3 mi l­

lion some four hours fro m Moscow.

There, retail stock is expecteJ to

rise to 500,000 square meters frum

300,000 square meters by year-end.

As for the smaller cities (those with

population of about 300,000), get­

ting consumers accustomed to the

new malls can be difficult, Sokolov

says. In many cases regional shopping

centers cannot Jraw the chain and

thus end up with local shops instead.

Developers here see room for

continued growth. The level of retail

space per person in Russi a remains

far below the West European aver­

age, according to Cushman & W ake­

field. Russia has a little more than 100

square meters of retail space per 1,000

people, versus 250 square meters per

1,000 in Western Europe.

And Russian incomes continue to

rise. Per capita income is $13,543 yearly

at present, and that is climbing about 4

percent annually, after inflation, accord­

ing to Credit Suisse. Furthermore, con­

sumer access to credit is getting easier:

Russian credit<ard debt grew by 60 per­

cent in the first nine months of 2012, to

the equivalent of $19 billion, according

to government data.

What might the old-school commu­

nists say if they could see all this? SCT

APR I L 2 0 1 3 I SCT 53

alone, roughly 1 mill ion square me­

ters of shopping space is set to come

online over the next five years or so,

by Jones Lang LaSalle's .reckoning.

And for the period between first-half

2012 and first-half 2013, Russia in its

entirety is on track to see some 2 mil­

lion square meters of new shopping

center space, boosting the country's

total floor space by about 13 percent,

according to Cushman & W akefield.

By contrast, the shopping center

space pipeline in France is expected

to produce about half that amount

over the same time frame, while the

U.K. is anticipating only about a

third of the volume in France. (The

U.S. saw just 580,000 square meters

of new construction through the first

nine months of last year, according to

Colliers International.)

To look at the newspapers some

days, one might think the Cold War

is still on. But the old [ron C urtain

has long rusted into oblivion, for

foreign shopping center investors in

52 SCT I APR I L 2 0 I J

particular. In January 2012 Morgan

Stanley paid $1 billion for the 2-year­

old, 93,000-square-meter Galeria mall

in St. Petersburg. In recent months

the firm also bought the super-posh,

205,000-square-meter Metropolis

Shopping and Entertainment Mall,

just outside Moscow, the largest for­

eign acquisition of Russian real estate

to date, for $1.2 billion.

Western developers, too, are ac­

tive in Russia. Ikea Group operates

14 centers here. And last year Hous­

ton-based developer Hines opened

Russia's first factory outlet center,

the Outlet Village Belaya Dacha, in

suburban Moscow, in partnership

with local partner Belaya Dacha.

Hines attributes the center's success

in part to that partnership. "They

owned the land, which was contrib­

uted into the joint venture, and they

have worked alongside us on the

development, in particular in help­

ing to deliver approvals and working

on utility and infrastructure issues,"

said Andrew Muzzlewhite, Hines' de­

velopment manager for the project.

"They have been a real benefit to the

development, being both honest and

sophisticated people who know how

to work in a constructive and trans­

parent manner."

The new Russian malls comprise a

mix of formats, from razzle-dazzle me­

gam ails - such as Moscow's Vegas mall

- to factory outlets. Russian shoppers

like the outlet concept a lot, accord­

ing to Muzzlewhite. "Russians are very

brand-conscious and spend a relatively

large proportion of their income on

shopping," he said. "The outlet format

allows those who might not be able

to afford brands full-price access to

high-end products as well as providing

bargain hunters with opportunities to

purchase discounted brands."

To be sure, these shiny new shop­

ping centers are not in competition

against much of anything else. Even

in Moscow it remains difficult to find

a high-quality supermarket. Chains

are relatively few. "It takes quite a

long time for a new chain to enter the

market and to expand, and our mar­

ket is only 15 years old," said Denis

Sokolov, a Moscow-based analyst with

Cushman & Wakefield. One reason

is logistics: This is an inevitable chal­

lenge in a country so physically vast

that it comprises six time zones. Re­

tailers must therefore either wait un­

til distribution networks are able to

cover such an expanse or else bu ild

their own supply chains. In either

case, that takes time, Sokolov says.

Mall development is reaching

beyond just Moscow and St. Peters­

burg, spurring change in the habits

of shoppers in almost every city, large

and small, across the country. In No­

vosibirsk, Russia's third-largest city

and Siberia's largest (population 1.4

million), annual retail sales stand at

$10.4 billion. By the end of this year,

total retail tock in Novosibirsk is

expected to ri se to 422,000 square

meters from 334,000 square meters.

Growth will be even more abrupt in

Nizhny Novgorod, a city of 1.3 mil­

lion some four hours from Moscow.

There, retail stock is expected to

rise to 500,000 square meters from

300,000 square meters by year-end.

As for the smaller cities (those with

population of about 300,000), get­

ting consumers accustomed to the

new malls can be d ifficult, Sokolov

says. In many cases regional shopping

centers cannot draw the chains and

thus end up with local shops instead.

Developers here see room for

continued growth. The level of retail

space per person in Russia remains

far below the West European aver­

age, according to Cushman & Wake­

field. Russia has a little more than 100

square meters of retail space per 1,000

people, versus 250 square meters per

1,000 in Western Europe.

And Russian incomes continue to

rise. Per capita income is $13,543 yearly

at present, and that is climbing about 4

percent annually, after inflation, accord­

ing to Credit Suisse. Furthermore, con­

sumer access to credit is getting easier:

Russian credit-card debt grew by 60 per­

cent in the first nine months of20l2, to

the equivalent of $19 billion, according

to government data.

What might the old-school commu­

nists say if they could see all this? SCT

A PR I L 2 0 I 3 I SCT 53

'J>

iii 0: o ~ "" u i z 2-Q

o t­o ;:

alone, roughly 1 mill ion square me­

ters of shopping space is set to come

online over the next five years or so,

by Jones Lang LaSalle's .reckoning.

And for the period between first-half

2012 and first-half 2013, Russia in its

entirety is on track to see some 2 mil­

lion square meters of new shopping

center space, boosting the country's

total floor space by about 13 percent,

according to Cushman & W akefield.

By contrast, the shopping center

space pipeline in France is expected

to produce about half that amount

over the same time frame, while the

U.K. is anticipating only about a

third of the volume in France. (The

U.S. saw just 580,000 square meters

of new construction through the first

nine months of last year, according to

Colliers International.)

To look at the newspapers some

days, one might think the Cold War

is still on. But the old [ron C urtain

has long rusted into oblivion, for

foreign shopping center investors in

52 SCT I APR I L 2 0 I J

particular. In January 2012 Morgan

Stanley paid $1 billion for the 2-year­

old, 93,000-square-meter Galeria mall

in St. Petersburg. In recent months

the firm also bought the super-posh,

205,000-square-meter Metropolis

Shopping and Entertainment Mall,

just outside Moscow, the largest for­

eign acquisition of Russian real estate

to date, for $1.2 billion.

Western developers, too, are ac­

tive in Russia. Ikea Group operates

14 centers here. And last year Hous­

ton-based developer Hines opened

Russia's first factory outlet center,

the Outlet Village Belaya Dacha, in

suburban Moscow, in partnership

with local partner Belaya Dacha.

Hines attributes the center's success

in part to that partnership. "They

owned the land, which was contrib­

uted into the joint venture, and they

have worked alongside us on the

development, in particular in help­

ing to deliver approvals and working

on utility and infrastructure issues,"

said Andrew Muzzlewhite, Hines' de­

velopment manager for the project.

"They have been a real benefit to the

development, being both honest and

sophisticated people who know how

to work in a constructive and trans­

parent manner."

The new Russian malls comprise a

mix of formats, from razzle-dazzle me­

gam ails - such as Moscow's Vegas mall

- to factory outlets. Russian shoppers

like the outlet concept a lot, accord­

ing to Muzzlewhite. "Russians are very

brand-conscious and spend a relatively

large proportion of their income on

shopping," he said. "The outlet format

allows those who might not be able

to afford brands full-price access to

high-end products as well as providing

bargain hunters with opportunities to

purchase discounted brands."

To be sure, these shiny new shop­

ping centers are not in competition

against much of anything else. Even

in Moscow it remains difficult to find

a high-quality supermarket. Chains

are relatively few. "It takes quite a

long time for a new chain to enter the

market and to expand, and our mar­

ket is only 15 years old," said Denis

Sokolov, a Moscow-based analyst with

Cushman & Wakefield. One reason

is logistics: This is an inevitable chal­

lenge in a country so physically vast

that it comprises six time zones. Re­

tailers must therefore either wait un­

til distribution networks are able to

cover such an expanse or else bu ild

their own supply chains. In either

case, that takes time, Sokolov says.

Mall development is reaching

beyond just Moscow and St. Peters­

burg, spurring change in the habits

of shoppers in almost every city, large

and small, across the country. In No­

vosibirsk, Russia's third-largest city

and Siberia's largest (population 1.4

million), annual retail sales stand at

$10.4 billion. By the end of this year,

total retail tock in Novosibirsk is

expected to ri se to 422,000 square

meters from 334,000 square meters.

Growth will be even more abrupt in

Nizhny Novgorod, a city of 1.3 mil­

lion some four hours from Moscow.

There, retail stock is expected to

rise to 500,000 square meters from

300,000 square meters by year-end.

As for the smaller cities (those with

population of about 300,000), get­

ting consumers accustomed to the

new malls can be d ifficult, Sokolov

says. In many cases regional shopping

centers cannot draw the chains and

thus end up with local shops instead.

Developers here see room for

continued growth. The level of retail

space per person in Russia remains

far below the West European aver­

age, according to Cushman & Wake­

field. Russia has a little more than 100

square meters of retail space per 1,000

people, versus 250 square meters per

1,000 in Western Europe.

And Russian incomes continue to

rise. Per capita income is $13,543 yearly

at present, and that is climbing about 4

percent annually, after inflation, accord­

ing to Credit Suisse. Furthermore, con­

sumer access to credit is getting easier:

Russian credit-card debt grew by 60 per­

cent in the first nine months of20l2, to

the equivalent of $19 billion, according

to government data.

What might the old-school commu­

nists say if they could see all this? SCT

A PR I L 2 0 I 3 I SCT 53

'J>

iii 0: o ~ "" u i z 2-Q

o t­o ;: