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Analysis & Opinion
22.06.09 On Foreign Territory
By Katya Kumkova

At the annual shareholders’ meeting in Fayetville, Arkansas, the chief executive officer of WalMart, the world’s largest retail chain, announced that the store will expand into Russia in the near future. After years of waffling, the superstore actually seems to be getting closer to taking action. Last January, WalMart joined the Russian Association of Retail Companies. In April, rumors floated that WalMart may buy the Russian grocery chain store Lenta. But if or when WalMart finally does come to Russia, it may also face the kind of corruption and red tape that foreign companies working on the local market have encountered in the past.

WalMart first began eyeing Russia back in 2004, when then-Chief Executive Officer Lee Scott announced that Russia and India were next on the company’s list for expansion. For a while everything went quiet after that, but since 2007 the retailer has regularly made statements about moving into Russia. Most recently, WalMart’s President Doug McMillon visited more than 30 stores in Moscow and St. Petersburg, finding that these stores’ sales of expired foods and under-stocked inventories have created a niche that WalMart could fit itself into.

WalMart, which has stores in 15 countries, now earns nearly a quarter of its profits outside the United States, while just ten years ago 95 percent of all its profits came from within the country. Unlike many other retailers, WalMart also continues to post growth in the midst of the global financial crisis, despite a seven percent drop last quarter due to a series of class action lawsuit settlements.

Naturally, Russia’s growing consumer market, which expanded by 28 percent last year, is attractive to WalMart. The company opened an exploratory office in Moscow in June. Like the French Carrefour, which launched its first Russian store this month, Britain’s Hamley’s, which is due to arrive next fall, and a slew of other foreign companies, from Ikea to H&M, WalMart wants a piece of the action in Russia. But opening foreign-owned chains has not always been easy in this country. From 1999 to 2004, Ikea fought a bitter battle with Moscow City Hall over its store in Khimki, a small town on Moscow’s northern outskirts. The argument, which focused largely on an overpass that supposedly blocked the view of a local monument, was resolved only when Ikea owner Ingvar Kamprad appealed for help to then-President Vladimir Putin, and only after the Moscow authorities foiled the store’s opening at the last minute due to what they said was a failed gas inspection.

Just last year, a mall built by the French supermarket chain Auchan stood idle for more than six months, costing the company $1.5 million per day in unmade sales. Again, the debate concerned construction permits, this time for on-ramps and a parking garage. Like Ikea’s owners, representatives of the French store insisted that the building violations with which they’d been charged were simply a way to extort bribes from Auchan.

Half the problem

Since taking office last May, President Dmitry Medvedev has declared corruption to be at the top of his agenda. In the year that followed, Medvedev issued several decrees, including those requiring public officials to make their tax declarations available online. But this May, Medvedev himself said that the fight against corruption has failed thus far.

According to Transparency International’s bribery index, released at the beginning of June, 28 percent of Russians polled said that they or a member of their family have given a bribe in the past year. The survey rated Russia’s public officials as the most corrupt sector of society. Among them is Russia’s border patrol, which has been known to seize goods unexpectedly — another threat to WalMart or any store dependent on imports. (In 2004, for example, the border patrol stopped 167,000 Motorola phones from entering the country, ostensibly for health reasons).

Still, the road to expansion has been outlined by the experiences of Ikea, Auchan and others. Like Carrefour, which bought the Sedmoy Kontinent chain store to enter the Russian market, WalMart is likely to take over an existing retailer, minimizing the amount of red tape to be dealt with when applying for permits for a brand-new retailer.

For now, WalMart officials are not commenting on their strategy. Most analysts, however, seem to agree that the chain really will open up soon in Russia. “They have been laying the groundwork,” said John Lawrence of Morgan Keegan Investment, who follows WalMart. “They have been doing their homework. I’d expect to see WalMart open a store in Russia in the next 12 months.”

Corruption, of course, is not the only problem that WalMart might face in getting its foot in the door. The store has not always done well in translating its employee handbook to other cultures. In 2006, WalMart shut down operations in Germany, in part because the employees balked at the company’s policies: they forbid romantic relationships between employees and require clerks to turn one another in when there’s a wrongdoing.

However, the store is thriving in China, Brazil and other countries. This month, WalMart opened its first store in India. And in the meantime, Russia’s market has surprised investors by showing the best performance of all world markets this May. Combined with a bust in construction and real estate, these figures might make for a favorable climate for WalMart. “For anyone who wants to buy retail in Russia, now’s a good time to do it,” said an analyst who wished to remain anonymous because he advises WalMart. “Everyone wants to sell.”

In the end, the niche that WalMart’s officials are aiming for on the Russian market may not be the one created by Russian retailers’ sales of expired milk and their un-stocked soap. Despite the threat of corruption and red tape, WalMart may end up coming to Russia because of the country’s need for cheap consumer goods during recession time.
The source
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