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VkusVill food retailer feeds off Russia’s appetite for healthy eating – Financial Times

30.03.2020

In just over 10 years, upstart Russian organic food retailer VkusVill has gone from selling dairy products in a dingy market on Moscow’s outskirts to aiming for omnipresence.

Andrei Krivenko started the company in 2009 with Rbs1m (then about $30,000) of his savings and has grown it to the point where it competes with Russia’s oligarch-owned supermarket leaders — all without resorting to debt finance.

The chain’s main innovation has been its wide assortment of cheap organic food. VkusVill works with more than 800 suppliers — Krivenko describes his company as a “platform for local producers” — to stock own-brand food without additives.

“On Friday we place our orders for Monday. On Monday the producers make it — they don’t store it anywhere — and take it to our cross-docking centre,” Krivenko says. “Overnight the goods are moved from one truck to another, on Tuesday morning they’re in the shop, and we sell 60 per cent on the first day. It’s good for everyone: the customer gets fresh produce, and neither we nor the supplier have to store it anywhere.”

Today, VkusVill operates more than 1,200 stores in 36 cities — all in European Russia — and sells its goods through nearly all of its competitors. Last year, it opened an average of two new stores a day. VkusVill says it has been profitable since its inception and generated revenues of $1.3bn in 2019, a fourfold rise on the 2016 total.

Krivenko is planning to take the company public on the New York Stock Exchange to fund expansion into everything from VkusVill-branded coffee shops and office canteens to children’s clothes and medical services. Early efforts to launch sales in Amsterdam and Paris are already under way.

“VkusVill is a disruptive food brand,” says the 44-year-old Krivenko. “We’re better set up than the other retailers because their model is sales-focused, and ours is brand-focused. And people associate the brand with healthy eating.”

Krivenko set up VkusVill’s predecessor, Izbyonka (“log cabin”), in 2009 after quitting his job at a seafood distributor. He posted his CV online in the hope of being offered a post as chief executive but found no takers. He decided to set up his own business and considered starting a dental clinic, a craft brewery and a car wash before settling on dairy products.

Supermarkets in Strogino, the neighbourhood on Moscow’s sleepy western outskirts where Krivenko lived, mostly stocked double-pasteurised dairy products with expiration dates a month ahead, while farmers’ markets were notorious for poor hygiene and unreliable quality. “We’d have fights with our [milk-selling] neighbours once a week. It was awful,” Krivenko says of Izbyonka’s first stall at a Strogino market, half a kilometre down the street from VkusVill’s current headquarters. “When we started making money, we were completely taken by surprise.”

Krivenko expanded Izbyonka’s dairy offering to 600 stalls in supermarkets and butchers’ shops through trial and error; by 2011, 300 profitable stalls remained. But when the company ordered a market research survey, Krivenko was horrified to discover that his customers associated Izbyonka with the poor-quality farm stalls he had set out to displace and largely shopped there out of necessity.

That pushed Krivenko to develop the two principles that would drive VkusVill’s success: a relentless focus on quality control and extended customer feedback. Izbyonka dropped its rustic branding for a renewed focus on additive-free food that Krivenko, inspired by a book about US grocery chain Trader Joe’s, decided could work more broadly.

The newly launched VkusVill chain struggled to get off the ground: with little word-of-mouth publicity, its first eight stores made losses that were covered by Izbyonka’s profits. Potential suppliers were reluctant to work with such a small network.

Things took a turn for the better in 2014 when Russia banned most western food imports in response to US and EU sanctions and the rouble halved in value against the dollar amid plunging oil prices. VkusVill’s focus on local producers meant it was much better placed to handle the financial crisis than its larger competitors. As supermarkets raised prices to cope with the weakened rouble, VkusVill offered discounts on staples such as milk, eggs and bread. Smaller shops and bank branches closed down, creating cheap retail space for the chain to expand. By the end of 2014, VkusVill was operating 100 stores, most of them on the outskirts of Moscow.

At the same time, VkusVill’s fortunes rose on the back of middle-class Russians’ growing health awareness. Life expectancy rose last year to a record of 73, five more years than in 2008; alcohol consumption halved over the same period. Fifty-eight per cent of Russians take health factors into account when buying groceries, according to market researcher GfK.

Many VkusVill customers appear to associate its brand with healthy eating in general, regardless of whether they are buying kale or sugary lemonade. Krivenko points to the chain’s sugar-free syrniki, a version of the Russian breakfast staple of cottage cheese fritters. “There’s really no demand for them,” he says. “We only keep them for the tiny number of people who want them — about 5 per cent [of customers]. We just keep them in stock to stop us getting swamped with negative comments on social media.”

Customer feedback can determine whether VkusVill orders more of an item or removes it from stores entirely. Its customers write 5m product reviews a month on VkusVill’s website and app. If an item scores lower than four stars out of five, VkusVill drops it from sale; a hotline answers all customer requests within 24 hours.

Krivenko says VkusVill’s constant communication with its customers helps it stay ahead of demand. This year, VkusVill plans to increase the number of self-service chiller cabinets in office centres from 200 to 900, and to launch separate shops selling frozen goods or steamed takeaway food. VkusVill also sells its private-label goods on most of Russia’s main ecommerce sites, as well as the Perekrestok supermarket chain. Though supermarkets still account for 98 per cent of VkusVill’s revenue, Krivenko says the experiments “will show how ready people are to see us in other places”.

“If it’s as successful as offline sales, then there will be tens of thousands of shops where a VkusVill fridge will appear, where people will come for the brand,” he says. “We’ll be competing with [French food group] Danone in the fridge next to it.”

Krivenko insists VkusVill’s growth is all sustainable and self-funded. He claims never to have taken a loan because they “make a company vulnerable” by “forcing them to always support the balance sheet” rather than focusing on growth. “We don’t even have a budget,” he adds.

VkusVill’s only disclosed investor is leading Russian private equity fund Baring Vostok, which bought a 12 per cent share in 2017. Krivenko is planning an initial public offering this year that would see the fund divest its stake. According to corporate records, Krivenko only owns 1.8 per cent of VkusVill directly, and transferred the ownership of Proekt Izbyonka, which owns the remaining 86 per cent, to a shell company. He declined to say who controls that company or whether VkusVill has investors beyond Baring Vostok before it goes public.

Krivenko wants to use its funds to expand into Europe, and has made preliminary examinations of the markets in Amsterdam and Paris. Krivenko says expansion abroad is necessary to continue VkusVill’s rapid growth without abandoning the short-shelf-life approach that helped it stand out.

Lower incomes in Russia’s regions, the difficulties of sending goods across the country from its suppliers near Moscow, and the lack of quality suppliers further afield mean VkusVill is unlikely to conquer Siberia.

“We could open in the Urals and Novosibirsk [in Siberia] or open in Paris. We think Paris is simpler: there are even more planes flying there [from Moscow],” Krivenko says.

Doing so would make VkusVill one of the first Russian retailers to find success in Europe. Krivenko is undaunted. “Everyone knows we’re piping gas. But Russian companies really have a huge chance to work with the world, rather than sit in a trench. We’re not just drinking cabbage soup out of boots, like lots of people seem to think.”

Max Seddon

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