Russian retailer Perekrestok is investing in online and food-to-go as it seeks differentiation in a challenging marketplace. Ben Webb met Vladislav Kurbatov, the retailer’s general director. This article first appeared in ESM Issue 1 2020.
Vladislav Kurbatov, general director of Perekrestok, has the animated energy of a man who loves his job. The Russian grocery sector is a tough place – especially since the economy has stagnated – but consumers are still willing to spend their roubles if the proposition is right.
Perekrestok, the high-quality supermarket arm of the immense X5 Retail Group, is on a roll.
“We have had 15 consecutive quarters of increases in like-for-like traffic,” Kurbatov says, fresh from a presentation to investors in London. Yes, the Russian market is going through an uncomfortable phase of consolidation, and those investors need reassurance, but Kurbatov knows that he has a good story to tell.
“We enjoyed an 18.8% increase in year-on-year revenue in Q3 last year,” he adds, “and a 35% rise in loyal customers.”
Building A Brand
Kurbatov appears confident, but it has been hard work ensuring that the banner is producing such good numbers. When X5 Retail Group was launched in 1995, the objective was clear: post-communist Russia’s untapped demand for a choice of products on the grocery shelf ensured that the sector was defined by a race for space.
In the solid tradition of Jack Cohen, the Tesco founder, the strategy was to ‘pile ’em high and sell ’em cheap’.
The strategy has served X5 well. In 2018, it had total revenues of RUB 1.53 trillion (€22.5 billion) – up from just under RUB 1.3 trillion (€19 billion) a year earlier – with more than 4.5 billion customer visits. Like-for-like sales were up 1.5%, and market share rose from 9.5% to 10.7%.
X5 Retail Group has three banners. Perekrestok offers a premium shopping experience in central city locations and traffic hubs, where it has a focus on high-quality, fresh, exotic and unique products. It has 811 stores (as of 30 September 2019) and accounts for 15% of X5’s sales.
Pyaterochka – the largest of the three, with 14,850 stores – accounts for 80% of X5 sales. Karusel, its third main banner, is a hypermarket operator offering a wide selection of both food and non-food goods. Of the latter’s 91 stores, 34 are slated to join the Perekrestok brand.
Positive Opinion
The figures continue to be positive because the group has made the transformational switch to competing for each customer.
At Perekrestok, as with X5’s other brands, the customer is now, unquestionably, king.
“Now everyone understands that the customer is at the top of the company, rather than the CEO,” Kurbatov says with a smile.
He has evidence to support the numbers. Perekrestok has been transformed from an unpopular brand to one with rapidly growing loyalty.
“Our biggest achievement is to have turned around the customer’s opinion of us as a chain,” he says. “Five years ago, we were very negatively perceived. Our Net Promoter Score – NPS – was -20. In other words, people actively discouraged other people from visiting us. Today, our NPS is +20 and rising.”
Stores have been upgraded and the layouts redesigned to reduce the time taken to make a purchase. Promotions, increasingly powered by Big Data and customer insights, reward loyalty.
On shelf, the assortment is being expanded with an emphasis on fresh food, ready-to-eat products, and other high-quality produce. Digital technology has been embraced. European trends are being tracked.
“In Russia, the mistake that many retailers still make is to believe that if you give the customer some attractive prices, then it doesn’t matter what the store looks and feels like,” Kurbatov says, “but today they have a real choice.”
Optimised Layout
Perekrestok is well positioned in the supermarket sector, which accounts for around 23% of Russian food retail, and it is expected to grow by 5.4%, in value terms, by 2022. Hypermarkets are having to fight hard to prevent customers from voting with their feet, however; with money tight, smaller baskets are popular. Supermarket prices, too, are increasingly attractive.
“Shelf prices are gradually converging between supermarkets and hypermarkets, so hypermarkets have to invest more in promotions to attract consumers and make travelling to these stores worthwhile,” Kurbatov says.
“The share of promotions in hypermarkets is increasing every year and now accounts for more than 50% of total sales.”
Self-checkout and click-and-collect counters, as well as the digitisation of selling space, are helping to cut consumer time in store. The layout of some city stores is also changing, to help customers to shop more efficiently and save time.
Traditionally, stores were designed to ensure that customers had to pass as many SKUs as possible before finding what they wanted. This has now been reversed, with the shopper journey geared around the stock-up mission and the fresh or food-to-go shopper.
Customer Perspective
“We used to try to force our customers to buy things, but now we are trying to understand the customer and their perspective,” Kurbatov explains. “Why would you want to go through the whole store to buy a sandwich? We try to understand what our customers really want.”
Perekrestok is “continuously making changes” based on customer feedback, Kurbatov says, with a new concept gradually taking shape. The retailer is trying to build a more emotional relationship with customers by creating a more convivial atmosphere in store, creating a series of “gastro-markets” (according to Kurbatov) in the process.
More selling space is devoted to fresh produce and fruit and vegetables, while the ready-to-eat proposition is also being enhanced – expect open kitchens, and even in-house sausage shops or smokehouses.
“The 2020 store is very different from the 2015 store,” Kurbatov says.
The Future Of Delivery
In addition, online is expected to grow faster than the overall market. Perekrestok.ru is receiving a push in Moscow and St Petersburg, as the brand bids to become the market leader in online food retail by 2020. Like all grocers, the retailer is still trying to overcome the economic challenges of delivery and the cost of the last mile, but it is committed to the journey.
“Stores that don’t become a tech company online will be left lagging behind,” Kurbatov says. “ It’s pivotal that we test all the time. If we don’t do it right now, then we will end up making the last mile not viable, but we are making a lot of savings compared to the competition, as Moscow is well covered with a network of our stores. Everyone is within a 15-minute walk of one of our stores.”
In addition to home delivery, shoppers are also moving towards ready-to-eat food products, which account for 6% to 7% of turnover at Perekrestok at present, but which are expected to double in the next two years.
“It will be a huge trend,” Kurbatov says. “Mobile phones were once a novelty, and we didn’t know what to do with them, but now everyone uses them. In the next ten years, the store assortment will be ready-to-eat food, rather than groceries.”
Smart Kitchen
With this mind, Perekrestok has launched Smart Kitchen, a ready-meal facility that will produce 120 tonnes of food a day, with a range of about 600 SKUs.
“As trust has gone up, so [customers] are more interested in buying our pre-packed, ready-to-eat food,” says Kurbatov. “Shoppers know we have made each meal at our factory, with full compliance and using fresh ingredients.”
In a market that is incredibly price-sensitive, it is no surprise that Perekrestok is keen to enhance its private-label proposition. The overall strategy is to increase its ready-to-eat sales from about 9% to 20%.
“Consumers are getting poorer,” Kurbatov says, matter-of-factly. “Incomes are getting worse, so they are driven by price, but they are also more demanding.
“They don’t want to admit that they can only afford a cheaper product, and they also want to maintain a certain lifestyle. They expect quality and ingredients. Private label can help.”
It is early days, but Perekrestok is building towards a good-better-best structure. Given the retailer’s target to become the number-one choice for consumers in fruit and vegetables, healthy food, and ready-to-eat offerings, it is also no surprise that it is also building its private-label offer in these categories. It is also working on a number of premium offerings, including tea.
“We believe that it will help us differentiate from the competition,” Kurbatov adds. “We have private label that helps us build the first price point, at entry level. It ensures that we don’t compete with other brands, but we can still enter a particular category.
“We also have medium-price-point products, which are similar to the leading brands, but they are also a little cheaper and are often made by the same manufacturer.”
Driving Loyalty
Perekrestok’s loyalty programme – another plank of its strategy – has more than nine million active members, which is up 35% year on year, while its app has more than a million users. The more the merrier!
“Russia is a promotion-led country,” Kurbatov explains. “When you do a massive general promotion, everyone can take advantage, and you are basically buying traffic. Promotions targeted at loyal customers are brilliant at both retaining them and increasing spend. The next stage is to start developing personalised promotions.
Perekrestok is 25 years old this summer, and, as such, it is “interesting to see how we have changed with the Russian market,” Kurbatov adds, sitting back in his chair.
“Today, we are doing everything to be liked by our customers, and our results suggest that it is working. Like-for-like traffic numbers are positive, and we are also quite aggressively growing our market share. That’s what I take pride in.”
© 2020 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: European Supermarket Magazine
