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Consumer Demand
// Expansion
Growing income, with the accompanying higher demand and higher competition on the domestic market, paved the way for the large-scale expansion of Russian companies in the consumer sector. Realtors, cellular communications operators, ad agencies ad media bought up assets in the CIS, especially Ukraine. Their expansion abroad was one of the main reasons for them to seek out investment on the stock market.
Telecommunications
Wireless communications companies were the investment leaders abroad. The largest overseas deal ever in Russian business history occurred in 2005. Alfa Group acquired 13.2 percent of the stock in Turkey's largest cellular company, Turkcell, for $3.3 billion and received guarantees for increasing its package to 27 percent.
Strictly speaking, the expansion of Russian cellular operators in the CIS ad Baltic region has been going on for several years, but the process came to a head in 2005 as the industry's growth rate in Russia was going flat. iKS Consulting analysts estimate that the market in the CIS and Baltic region is about 100 million subscribers. Cellular companies are ready to go to battle with each other and with their shareholder for those subscribers. The Alfa Group consortium, the largest shareholder in VimpelCom with 32.9 percent of its stock, fought for the entry of the company onto the Ukrainian market, against the wishes of second largest shareholder (26.6 percent), the Norwegian holding Telenor. VimpelCom announced the purchase of Ukrainian Radiosystems for $254.5 million at the beginning of November. Telenor representatives on the VimpelCom board are still refusing approve the company's budget, which includes $500 million for the development of the Ukrainian company.
At the end of 2005, an even more enthralling conflict arose in Kyrgyzstan. On December 15, local law enforcement backed up by the special forces forcible occupied the building belonging to Bitel, Kyrgyzstan's only GSM operator. The police were enforcing a decision of the Supreme Court of Kyrgyzstan giving ownership rights to Bitel to the Russian ZAO Rezervspetsmet, which market insiders connect with Alfa Group. The Russian MTS had bought 51 percent of Bitel stock just days before the onslaught.
Analysts note that Russian telecom investors have about 20 million more subscribers waiting for them in Azerbaijan, Armenia, Georgia and Moldova.
Retailing
Russian retailers began to invest in foreign markets about two years ago, opening stores in the major cities in the CIS either independently or in franchises. There are Eldorado, Paterson and Pyaterochka stores in Ukraine. Pyaterochka also has several franchise stores in Kazakhstan. But the first really big deal for the purchase of foreign assets by a Russian retail chain took place this year when, experts estimate, Perekrestok paid $7 million for the five-store Spar chain in Kiev. Ramenka (operator of the Ramstor chain) followed hard on Perekrestok's tail with the announcement of its entry onto the Ukrainian market, as did the Ekaterinburg grocery chain Kirovsky.
Experts say that 2005 saw he beginning of Russian retail expansion and markets in the CIS and Baltic region will be the main battlefield for Russian retailers. “The interest of retailers in the CIS is absolutely predictable,” said Finam analyst Vladislav Kochetkov. “First, logistics are simpler in those countries. Second, real estate is a lot cheaper there than in Russian cities and regional centers. Third, population density in Ukraine and Belarus is many times higher than even in the central parts of Russia and therefore there are that many more potential shoppers. I think that the majority of the top 20 Russian retail chains will announce overseas campaigns.”
Advertising and the Media
Companies in two segments of the advertising industries, outdoor advertising and television advertising, were active this year. Video International group of companies, the television ad monopolist, established a new advertising agency in March in Belarus as a media seller. VI-Minsk Co. , substantially expanding its presence in that country every since. VI-Minsk sells advertising to the largest Belarusian television channels, such as ONT, STV, First Musical Channel and Russia. The new Media VI agency in Minsk, a subsidiary of Video International, has practically begun an advertising holding on the Belarusian market analogical to its Russian parent. Media VI plans to be one of the three top agencies in Belarus, taking up to 7-8 percent of the Belarusian television advertising market, which, experts estimate, was a $20-million market in 2005.
In the middle of April, the group opened an office in Georgia. The company followed a tried and true method. It made an exclusive contract on the exclusive ad sales of Imedi, one of the largest Georgian television channels, which belongs to prominent Georgian businessman Badri Patarkatsishvili. Experts estimate that both of the leading Georgian channels, Imedi and the state-controlled Rustavi-2, occupy approximately 40 percent of the television ad market of $9 million.
The leading Russian outdoor advertising agency, News Outdoor-Russia, also showed interest in CIS markets. In May, News Outdoor-Russia announced its purchase of a stock package in the SV Group, one of the top five largest operators on the Kiev outdoor advertising market. Experts estimate that that deal was worth no more than $10 million. News Outdoor-Russia stated that its presence in Ukraine will develop through acquisition of assets in other companies, among other things. The outdoor advertising market in Ukraine in 2005 was worth about $104 million, with Kiev accounting for 30-50 percent of it.
Russian publishers are striving to increase their presence abroad as well. “It is getting harder and harder to introduce new publications on the Russian market and more publishers are orienting themselves toward the CIS and Baltic region market,” said Konstantin Isakov, general director of the Mediamark marketing agency. “Presence on several markets raises their capitalization. Before 2005, Russian publishers had the advantage of licensed brands with world names. This year [2005], original Russian publications went abroad.” Notable examples were Ukrainian editions of Kommersant newspaper and Salon magazine and the purchase of a share in the weekly publication Antenna Kazakhstan by Ashet Filipaki Shkulev Publishing House.
The Food Industry
Companies in the food sector established themselves on foreign markets mainly by supplying their own products. The Kristall distillery bought a number of distributing companies in the United States and began supplying their White Gold brand on the American market. The Ukrainian market is considered the most promising. In 2005, Kristall began bottling Gzhelka vodka at the Agro Trade plant in Kharkov. The second largest company on the Russian market, Veda, began supplying Ukraine with its Russky Razmer brand at the end of the year.
Russian vodka producers began to talk about buying assets in the CIS and Baltic region in 2005. At present, the St. Petersburg Ladoga holding is in negotiations on the purchase of a liquor plants in Eastern Europe. Co-owner of the holding Veniamin Grabar said that the transaction should be completed within the next few months.
For some food producers, an overseas presence is mostly a matter of image and is tiny among such leading companies as Wimm-Bill-Dann. Its deliveries to the EU countries are no more than a few percent of its total production. There are a number of serious impediments to Russian producers on Western markets, the main one of which is that the EU is unwilling to allow foreign producers on its markets. Only four Russian meat-and-dairy enterprises were officially allowed to export its products to the EU. They were Altaikholod, the Lipetsky Cold Plant and Wimm-Bill-Dann members Lianozovo and Tsaritsyn Dairy Plants. “Dozens of Russian enterprises today are ready to export their produce to the EU,” said Russian Agriculture Supervision Service head Sergey Dankvert. “However, the EU countries are in no hurry to let them do that because they are concerned about the serious competition for local producers.”
Attracting Investment
Inexpensive long-term resources are needed by consumer companies for large-scale expansion. That was a major reason for their activity on the stock market last year. Large companies and those with turnover between $100,000 and $300,000 made initial public offerings. Those companies took inspiration from Lebedyansky, Russia's largest juice producer, whose IPO issue most analysts called super-successful. As a result of the stock placement and the subsequent rally, the company's capitalization came to $1.2 billion, 18 times more than its annual profit. The major retailer Pyaterochka also placed notes on the international market. Cherkizovsky, Russia's largest meat processor, has announced a 2006 IPO, as have ice-cream producer Inmarko, alternative operator Comstar United Telesystems, third-place diary goods producer Nutritek and Kopeika, Mosmart and Arbat Prestige retail stores.
Even such non-transparent industries as entertainment are going abroad. In particular, Ritzio Entertainment, owner of the Vulkan gain of gaming halls, has announced that it will make an IPO in 2006. “The company has had two sources of financing, stockholders and credits. Now they are both practically exhausted and they have no choice but to enter the capital market,” UFG analyst Alexey Krivoshapko commented. The number of companies planning to make initial public offerings this year exceeds the number doing so last year by 30 times.
by
The Consumer Market Department
All the Article in Russian as of Dec. 30, 2005
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