In the number of DIY stores, the St. Petersburg market is among the most saturated in Russia. More than 30 specialized chains with 150 housewares markets and 30 hypermarkets with home repair articles operate here. Nevertheless, growing personal incomes give hope to retailers that, in the next 3-5 years, demand for home improvement and repair goods will remain high. The city should expect 3-5 new hypermarkets to open every year. The share of retail outlets integrated into mixed-use complexes will also keep growing.
Self-made Market
DIY means do it yourself. The first self-service stores offering home repair and improvement goods in this format appeared in the West in the mid-1970s of the previous century and, in the mid-1990s, this format came to St. Petersburg, though initially it was mainly represented by open-air construction markets that offered a broad variety of repair articles and a limited choice of interior items. Among the pioneers of the DIY format were the Iskrasoft Domovoi, Maxidom and Stroymaster chains. “Civilized trading in home improvement goods has long been established in the Northern capital,” point out the managers of Castorama Rus. “Nine local DIY chains were already operating in the city in the early 2000s when foreign retailers entered this market.”
One of the first non-resident chains to enter the Petersburg market was the Swedish giant IKEA. The 30,000-sqm IKEA-Kudrovo store, worth about $45 million, opened in December 2003, followed by the Finnish chain K-Rauta (Rautakesko Co.), which purchased a local retail chain from Teks for $20 million in 2005. By the end of 2008, this Scandinavian retailer should be running 10 retail outlets located close to major thoroughfares and exits from the city. The company invests about 10 million euros in every hypermarket. In December 2005, the first store of the domestic chain Santa House opened its doors and, a year later, British Castorama came to the city on the Neva. According to Peter Partma, CEO Castorama Rus, altogether seven hypermarkets will operate in St. Petersburg and the company plans to invest about 20 million euros in each of them. Concurrently with the coming of Western players from 2003 to 2006, the Maxidom, Domovoi and Metrika chains were rapidly developing as well. German OBI was one of the last operators to enter the market of the Northern capital, late in 2006.
As reported by Astera Oncor St. Petersburg, at the present time, the five market leaders in terms of sales volume are Maxidom (7 hypermarkets), Metrika (8 hypermarkets), K-Rauta (7 stores), OBI (4 retail outlets) and Castorama (2 hypermarkets of housekeeping goods). The Start chain, with one hypermarket on Bukharestskaya Street, also plans to join the leaders in the future. In number of points of sale, Iskrasoft and Dom Laverna chains hold the lead. Maxidom is ahead of the others in terms of variety of goods, while the Domovoi chain has the greatest number of stores within shopping centers.
Competition Gets under Way
The Petersburg market of home improvement goods is one of the most dynamic in the country, opine the experts. In the words of Victor Adamov, executive director of the construction trading house Petrovich, the DIY market of St. Petersburg has been growing at an annual rate of at least 20%. In the middle of 2007, this market neared $2 billion in money terms,” says Ilya Shabson, development director of Domovoi chain. This view is shared by the top managers of Petrovich, who estimate the market at about 62 billion rubles ($2.5 billion).
Both analysts and retailers are positive that, while the DIY market is already highly competitive, it will develop dynamically for several more years. “The Petersburg market is still deemed attractive for expansion by all international players. Potentially, each of them can open several retail outlets in the city,” confides Dmitry Chumakov, general director of the marketing research agency Vector Market Research. “By the standards of average European cities, with one DIY store for about 50,000 residents, the Petersburg segment of home repair articles has a long way to go until it reaches the point of saturation, agrees development director of OBI Russia, Martin Hubman. Market participants believe competition is only getting under way. “It’s gratifying to note that, in the last two years, the DIY market has been shooting ahead, retaining tremendous potential. Because it is too early to talk of saturation, the coming of new players can be anticipated,” underscores Nick Peel, director of IKEA-Dybenko shop.
Among the factors in the growing demand for home improvement goods the experts point to the lack of fit-out in most of the new apartments delivered to the market. They do not expect market saturation sooner than in 3-5 years. For now, the market can easily absorb 3-5 specialty hypermarkets a year. “Saturation will lead to a widening assortment, the coming of new suppliers and more sophisticated technologies,” says Alexander Rudenko, CEO Stroymaster (that company manages K-Rauta hypermarkets in Russia).
Developer’s Dream
In the more distant future, toughening competition will push down profitability in the given sector of retail, which we already observe in the segment of grocery hypermarkets. But, for the time being, both retailers and developers are interested in the DIY format. Almost every new shopping center houses a DIY store and even grocery hypermarkets promote this commodity group in the hope of overcoming stagnation. “The rental rates are generally lower for DIY operators because they are considered ‘anchors’ and occupy large premises,” point out Astera Oncor experts. The average rental rate for such a tenant is $200 per sqm per year and DIY stores are rather promising as anchors. In view of growing rates of housing construction, DIY shoppers become an additional target group, providing for stable human traffic in a retail center. The attendance may reach 5,000-8,000 shoppers on workdays and up to 15,000 visitors on weekends, and these are people with a high purchasing capacity.
“In fact, developers are much more interested in attracting DIY operators than the latter need built-in premises. The market is so hot that they get their buyer even in a standalone ‘box,’ so they don’t need to be housed in a mall,” say the experts of Astera Oncor.
Large players prefer their own buildings of the right size, where it is easier to organize effective zoning and commodity traffic. “With an average land price of $500/sqm in the inner city, the erection of a new ‘box’ will cost at least $5 million and the typical recoupment period for a DIY hypermarket is 5-7 years. In our estimation, the aggregate space of standalone DIY hypermarkets nears 260,000 sqm in St. Petersburg,” opine Astera experts.
Retail centers mainly house DIY domestic chains, which take up 8,000-10,000 sqm or more on the first floor with storerooms accounting for about 30% of GLA. The ceiling height must be at least 6 m. and column grid approximately 9×9 m. Spacious parking at the entrance for 300-400 vehicles is another important requirement. Heavy-duty trucks must have ample turnaround space in front of such hypermarkets. Many operators prefer the presence of other large nearby retail properties, even if direct competitors, since this creates a synergy effect. Thus Karusel and Start adjoin each other on Bukharestskaya St and Raduga Mall houses stores of the OBI and Santa House chains.
Heading for Mixed-Use
In the next several years, the segment of built-in hypermarkets will show dynamic growth, and not only because developers are so eager to see traders in housekeeping articles among their anchor tenants.
“Emotional shopping is more typical of a large retail complex than of specialized standalone hypermarkets, so design and interior items and home repair supermarkets would better be integrated into large malls,” comments Arina Sender, in charge of retail properties at Knight Frank St. Petersburg.
“Retail development, including the DIY format, largely depends on consumer predilections,” states Yuri Borisov, managing partner of IB Group. As a result, an increasing number of players are trying to combine retail formats, increasing the share of interior and design articles. In the opinion of Tigran Gukasian, CEO Laventa (operating the Santa House chain), the DIY segment will see intensive development as the volumes of housing construction and personal incomes increase in the city. “Now the market is actually divided into two segments: DIY (home repair articles) and housekeeping (interior and design items meant to finish the already repaired dwelling). And while the DIY segment has long been on the rise, the interior and decor market is only taking off,” he asserts. “Our main goal is to satisfy the ‘housekeeping demands’ of the consumer who expects a full spectrum of goods and services at a retail center: from buying food to playing billiards to acquisition of home interior and decor items,” agrees Ilya Shabson. “The most convenient concept is ‘one-stop shopping’ implying all manner of purchases in one visit. But while OBI hypermarkets open at large mixed-use complexes, they are only partly built in, always having their own entrances and driveways. So, on the one hand, we stride human flows attracted by the big mall’s operators and offer professional clients an opportunity to use the convenient transport infrastructure for taking out their bulky purchases,” says Martin Huber. The Israeli chain Home Center, combining both home improvement formats, recently announced its entry onto the Petersburg market. “An increasing number of buyers try to make their homes nice, comfortable and functional, which means great opportunities for the Petersburg DIY market,” reasons Nick Peel. “Hypermarkets can be expected to account for 60% of the DIY market and to place greater emphasis on interior items,” adds Dmitry Chumakov.
Retail Globalization
The dynamics on the home improvement market reflects the transition of Petersburg retail to a new quality level. “Practically all retail formats find their consumer,” believes Mr. Borisov. “Yet a multitude of stores does not mean that new ones would be superfluous. The need for mixed-use retail complexes with a deliberate concept will be readily absorbed by the market,” opines Yuri Borisov. In his opinion, the future belongs to retail parks like Mega and Leto, which will certainly comprise DIY stores. St. Petersburg residents seek complex offers on the market, Mr. Chumakov recapitulates, and so large DIY and housewares retailers will aspire to participate in the projects of multipurpose malls.