Lenta of St. Petersburg, Russia

Presented by,Shriti Chhajed

GNOV09RM125

Russian Business Environment

Political and Macroeconomic Issues• 1990 – 2000: Russia struggled for survival

• 2400% inflation• Ruble loose 50% of its value

• 2000 – 2010: Putin’s Goal – 7% annual growth in GDP• Growth largely driven by high oil prices• 2004: SMEs contributed to 13% of GDP• Economic success contributed to larger cities

• Average monthly per capita income 350% & 40% above national average in Moscow & St. Petersburg

• St. Petersburg – 2nd largest city, 4.5m population

Russian Retail Environment

• Russia – Dynamic underdeveloped business environment

• Rising consumption levels• Fastest growing food market in Eastern Europe• Difficult labour laws – Soviet influences• Lack of work ethics

• Lack of loyalty to the employer• Unwillingness to work hard

• Government, the greatest barrier• Russian customers are not demanding

The company – Lenta

• 1992 - Oleg Zherebtsov founded Lenta as a wholesale candy business

• 1993 – 1st small cash & carry retail store• 1997 – 3 smalll retail stores• 1998 – ruble collapsed, layoff 75% of workforce, warehouse

cash & carry chain selling both grocery and selected non food items

• 2005 – 9 stores in St. Petersburg• Competitive Advantage

• Low prices• Smaller margin than competitors• Convenience of being 24 * 7 open

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The Store

“To give you what you want & need”

“Offer you the most value for your money”

Competition

Suppliers

• Direct relationships with multiple suppliers to keep the prices low

• No wholesaler in between• High purchasing power• No distribution warehouse, direct to store deliveries• 100-120 deliveries/ day• 10% imported products – problems with customs

Inventory Systems

• POS systems reading barcodes• Monitored using SAP computer system• Track fast & slow selling products• Monitor inventory levels to avoid stock outs & excess

inventory levels

• Analyze POS data for better decision making• Expansion becomes manageable

Government Relations

• Uninvolvement of Govt. in day to day operations to monitor safety

• No government Quality check authority• Random inspection by government agencies – closed

down alchohol aisles• Tax rate in St. Petersburg – 24%• Lenta established a tax reserve – "Yukos effect"

Financials

• Transaction in Rubles• Financial statements in USD• Lenta had 4 Americans on its Board of directors• Lenta was looking for loans from western financial

institutions

• Intense Financial Growth• Internal cash flows• Debt Financing

Lenta’s HR Challenges

• Hire 500 people, 20 for managerial roles• HR department – new in Russian market• Clash in Lenta's values and Russian market – customer

service • Lack of managerial talent in Russia• High attrition rate

• Profit sharing plan – to retain & motivate its managers

• Expansion of HR department – include T & D

Marketing & Advertising

• Marketing & Advertising - .35 to .38% of sales• First mega supermarket in St. Petersburg• Loyalty card program – discount to cardholders

• Personalised their communications with the customers

• Advertising promoted 3 key customer benefits• Low prices• Easy & fast shopping• Convenience of being 24 hours open

• Billboards, Radio & monthly shopping circulars• Metro Radio – 3m people daily• Advertising for new store opening

• Inform the public of the opening (2-3 weeks)• Promote the opening day celebration

Building a new store

• Land - Lease of 49 years frm local government• Approval of plan from loacal government – fire

marshalls, environmental agencies, construction agencies, sanitation department

• Conflicts between agencies• Corruption – approval on time• High cost to build - $ 20m• Buy extra land to sublet for complimentary

businesses

Lenta’s Strategy

• Lenta has 2 options:• Open more stores in St. Petersburg

+ Huge untapped potential+ No foreign players+ Existing Relationships with suppliers+ Established Brand name+ Relationships with government

• Open up stores in Moscow and then other high per capita cities+ Huge market potential+ Experience in similar markets+ Easy availability of infrastructure– High investment in reals estate– Different form of government

Recommendation

• Lenta should first expand in St. Petersburg, capture the untapped potential and once it has good financial status, it should enter into Moscow and later other Tier 2 cities

• It should select shopping areas in Moscow to open stores and not the undeveloped areas like in St. Petersburg

• It should look for some local financing options to avoid foreign exchange rate risks

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