As little as three or four years ago Moscow, with its population of over 10 million, had only two reasonable sized shopping centres: the State Department Square (GUM) on Red Square and tbe nearby Central Department Store (TsUM). This situation is changing very rapidly with around a dozen new malls already in operation. One of the biggest developments yet, the City Star complex at the Kursky railway station, is due to open later this year and will combine a hypermarket with approximately 75 shops, a food court and unprecedented leisure facilities including a multi-screen cinema and bowling alley.

A number of the major accomplishments in the retail market belong to foreign operators. The first of these were the Russian/Turkish Ramstore hypermarkets incorporating shopping malls and food courts. The Turkish operator has now invested $150m in its Russian store building projects and has three hypermarkets and six supermarkets with plans for 10 hypermarkets and about 20 supermarkets within five years. Metro plans to invest $112m in the construction of six cash and carry stores this year and another German firm AVA recently laid the cornerstone for its first hypermarket, an $18m complex set to o pen next spring in south-east Moscow. The Spar supermarket chain also has a pilot project with its local partner, Rusmed, a consumer goods and food distributor. This investment is estimated to be between $70-80 million and there is talk of the company opening 30 budget supermarkets within three years. IKEA is building a large shopping centre around its first site, the $100m retail outlet in the suburb of Khimki, and plans 5 more stores around Moscow.

New Russian supermarket chains such as Perekrestok and Seventh Continent are opening stores almost every month. Seventh Continent which has stores in prestigious central locations such as the Arbat and Lubyanka Square is said to be investing around $40 m of its own funds in extending its network to 10 stores this year after turnover grew by 70% to $130m in 2000. Perekrestok, which has mainly concentrated on the vast and previously neglected residential areas on the outskirts of the city, has expanded rapidly and now has 31 outlets, including discount stores.

Average salaries in Moscow are approximately five times that of other Russian cities: $2,400 p.a. on average with 35% of the capital's population, or 4 million people, earning over $1,943 p.a.. 47% of income is spent on food and alcohol. To put it differently, 75% is spent in shops and only 25% left for savings/other out goings. Disposable incomes may not be comparable to those in Western European cities but this still represents a huge market. Last year Moscow accounted for 30% or $22 billion of Russia's total retail turnover.

Total shopping space in Moscow currently stands at about 381,000 sq m, an increase of 32% from the end of 1999. 111,000-sq. m of new shopping space is expected to open this year. Occupancy rates have risen to 95%, about 16% higher than a year ago and the difference in prestigious locations such as the Manezh is clearly visible. There is a great deal of scope for further development: 70% of shopping in the capital is still at 'street level' with money spent in open markets and kiosks rather than modern style retail outlets. The outdoor markets continue to be driven indoors and under the City Government's 20-year Plan $3 billion will be invested in overhauling existing shopping facilities. Approximately 1million m� of retail space will need to be replaced as a result of decrees by Mayor Yury Luzhkov to clean up the city and increase control over taxes (he issued a decree to drastically reduce the number of kiosks operating in the capital in 1996 and another to close 100 of the capital's 190 open air markets in 1998).

Moscow already has two ring roads and a third is being built. The outer ring or MKAD is 126km (far longer than ring roads in Paris and other European cities) and there are 15 radial roads with 50-80,000 cars passing by each day. Car ownership, although still low compared to Western European countries, has grown from 600,000 to 1,800,000 over the past 8 years. 8 million people use the metro every day, compared to around 2 million in London and 3 million in Paris. All this means great prospects for well-located businesses.

The sheer size of the Russian market cannot be stressed often enough. Apart from Moscow and St Petersburg, there are 13 cities with a population over 1 million and 33 with populations over 1/2m. Across Russia there are 4,500 markets and almost a million kiosks and similar small retail points but the densely populated suburbs have yet to benefit from modern outlets.

THE RUSSIAN FOOD MARKET

Background

The disruption caused by the break up of the Soviet Union and the collapse of the command economy had a devastating effect on Russia's food industry. Moreover, privatisation in the early 1990s failed to result in major investment and modernisation of the industry. Most managers in the sector had come from engineering backgrounds: they had a poor appreciation of the dynamics of a market economy and were geared to volume of output rather than improvements in quality or other innovations. State subsidies were diverted to the industrial sector and there was a failure to implement reforms in agriculture. Drought and the failure of grain crops further increased the problems for farmers and livestock was simply slaughtered to save on food grains. Russia's food production halved between 1990 and 1996, and by 1997 domestically produced goods met less than 70% of demand.

The economic crisis of August 1998 gave the domestic industry a major boost as imported products became too expensive for most Russians. Food processing (especially sugar, baby food, soft drinks and beer) is now one of the leading industries in Russia with a growth rate of around 10%. Distribution companies are also operating increasingly comprehensive networks (see separate note on retailing). Demand for products with an extended shelf life is increasing and interest in health foods and food for specialised diets is growing. A number of foreign firms (for example Cadburys and Heinz) have adapted to the new conditions and set up production facilities within Russia.

Food imports

Although the impact of the financial crisis and health concerns about the safety of imported foods have resulted in some shift in consumer preference towards goods produced at home, imports today still constitute over 40% of overall food consumption in Russia and more than 50% in large cities. Annual spending on food imports reached R225bn last year and this trend has continued in the first quarter of 2001 with domestic output continuing to fall but food sales increasing by 5.7% due to the import of nearly $8m of foodstuffs. Compared to the same period last year, the import of meat products rose by 190% (340% in the case of poultry), vegetable oil by 32%, alcoholic beverages by nearly 35% and non-alcoholic drinks by 9%.

Prices

The general level of personal incomes in Russia is very low with nearly one third of the population living below the official poverty level. However, the past year has seen a gradual increase in incomes and a drop in the number of poor. Consumer expenditure has been growing more or less steadily since September last year. Overall in 1999 prices for food and drink rose 35.9%, only a little less than consumer goods as a whole. Fish and sea products rose by 33.7% and meat and chicken by 33.3%. In the first quarter of 2000 retail trade turnover showed a strong increase, up 25-33% on 1999.

Regional differences are very great. At the end of December, the average per capita cost of a basket of 25 essential basic foodstuffs was R563.8. In Magadan in Russia's Far East the same food basket cost R938.9. At R426.3 it was least expensive in Ulyanovsk where there are still heavy subsidies for essential foodstuffs. In Moscow the figure was R744.6.