09 December 2003 12:24
Russia is Served
Russia is Served
Ñ hain companies define the consumer service market in Russia. Only these companies have the strength to cope with high costs and moderate profitability.
Lilia Moskalenko
Today, it’s difficult to imagine a neighborhood in Moscow without gambling machines, fast-food cafes, a supermarket and a beauty parlor. Recently, this standard set has increased thanks to the new services like “Italian” dry cleaners, laundry services, repair shops and rental agencies opening everywhere. In the last two years, the consumer service market has expanded by 30% a year, and some companies have managed to increase their turnover by 400-500%.
No one expected the market to grow so rapidly. The service industry is one of the most backward sectors of the Russian consumer market. Until the late 1990s, Soviet-style municipal laundries, rental agencies, small shoe repair shops, and tailors provided more than 95% of services. Their quality was so low that they turned off most customers. Though new market enterprises, offering new kinds of services like house cleaning and appliance repair, or updated traditional services like dry cleaning and laundry emerged in Russia almost ten years ago, they didn’t play a crucial role in the market and their share didn’t exceed 3-5%. Moreover, very few of the new market-based companies managed to exist for more than a year.
But those who did manage to survive currently control more than 10% of the Russian consumer service market. The increasing demand for consumer services both from corporate customers – banks, office and retail centers – and from individual consumers has led to their rapid development. However, the optimistic results of companies providing consumer services in the market can be misleading. Experts believe that the rapid growth may come to a halt in the next 1-2 years, as the market will experience limited demand. According to data from Bauman Innovation, no more than 10-15% of Russia’s population has access to quality consumer services. In addition, several dozen new players enter the market every year, and more severe competition here is imminent. To hold onto their positions, companies providing consumer services will need both efficient business decisions and competent management. Here, most enterprises encounter problems. Experts believe that only two business models – the sideline model and the chain –will keep companies competitive.
Close to the brand
Companies, for which consumer services are a sideline enhancing competitive advantages of the principal business, develop using the first model. This relates, above all, to post-sale service centers for household appliances set up by retail chains like Partia, M.Video and Eldorado. In the mid-90s, many retailers didn’t take this business seriously – the demand for services was expected to decline gradually as the appliance market expanded. In other words, as their prosperity increases, consumers think it simpler to buy a new appliance than to repair an old one. But Russian consumers did not live up to these expectations and willingly repair old things. Growth rates of these sideline businesses are no less than those of the principal business.
Today, sideline service companies have the most secure position on the market. They have left their rivals – independent service companies – far behind. There are two factors that help post-sale service retailers promote their business. First they benefit from household appliance retailers’ brand names, and secondly, by operating as part of a retail chain, companies are able to minimize their costs and provide comprehensive services loners cannot afford.
Chains clean up
Companies, which have set up their own chains, are operating under the second efficient business model. Among them today are both companies that have expanded due to their own investments (Diana, Ronova-cleaning and Prokat.ru), and companies with foreign capital (Primex and Sodexho). All chain companies are developing either by setting up branches or by franchising. These chains are developing not only in Moscow but also in a number of large cities, such as St. Petersburg, Nizny Novgorod, and Samara.
The most representative chains are in cleaning, the fastest-growing sector of the consumer services market. All the major companies – Ronova-cleaning, Primex, Premier-service and Sodexho – are currently operating in this sector. Despite the fact that cleaning services have the highest costs on the consumer services market (requiring at least half a million dollars for equipment and personnel training alone), this sector is expanding by 50% a year and as many as 20 new companies enter it annually. Currently, experts estimate the capacity of the cleaning market at $130 million, and it will increase to at least $800 million. “The cleaning market will grow rapidly as long as the construction boom in Moscow continues. This market has begun to grow rapidly in the regions as well, first and foremost in cities with more than a million inhabitants, where office and retail construction has just taken off,” says Pyotr Greiding, General Director of the International Association of Cleaning Companies.
The cleaning chains have succeeded in creating a steadily growing demand for their services, services new to the Russian market. Over the last two years, many office and retail businesses have turned away from homegrown cleaning services and are turning to specialists. Constant diversification has also contributed to the rapid growth of cleaning companies. “The moderate profitability of the service industry and the abundance of smaller players have caused us to expand the spectrum of our services every year,” Margarita Avdeyeva, General Director of Renova-cleaning, relates. “In addition to primary janitorial services, every year we offer our customers new special services as well: catering, landscape design, drinking water supplies etc. This has increased our profitability from 5% up to 15%.”
Moscow cleaning chains have also managed to increase their turnovers due to an expanding customer base and the diversification of their business. However, expansion to the regions has become the decisive factor – today, all market leaders have branches outside of Moscow.
Thanks to these factors, the major chains win control over 2-3% more of the cleaning market a year from dozens of small players. These smaller companies have no choice but to seek out unoccupied market niches, for example, specialized services for airlines, hospitals, and other organizations. This demands special skills and abilities from a clean company. Some see their salvation in small orders, cleaning small offices or apartments.
Taken to the cleaners
The only saturated sector in the expanding market from consumer services where the supply has practically matched demand is dry cleaners and laundries. The only way to deal with competition from the numerous separate, small dry cleaners and laundries, which increase by 10-15% every year, is to set up a chain. Meanwhile, chain companies in the dry cleaning and laundry sector are few and far between. It is more difficult to set up chains here than in the cleaning sector, and turnover is 1.5-2 times less than that of cleaning companies. Moderate turnovers are a consequence of dry cleaners and laundries’ customer base, which consists predominantly of individuals rather than corporations. The costs in this business are also quite high and according to some companies in this segment, the simplest equipment designed to treat clothing at a small dry cleaners costs at least $60,000. Setting up a factory requires at least $100,000. It takes quite a long time – as long as 5 years – for dry cleaners and laundries to see a return on this investment. It is therefore hard to attract investors, and companies have to rely on their own resources.
Old rentals
The chain business model enables players not only to battle the competition, but also to create new sectors of the consumer service market, just like Prokat.ru did. Just a year ago, there was practically no rental market in Russia at all. As few as 5% of Russians have used rental services over the last decade. Supply was limited to municipal rental stations, which were small and dilapidated and provided cheap, old equipment and vehicles. Once again, the market saw the emergence of the companies trying to offer services in a more refined way by offering new equipment and longer rental periods than state-run rental agencies. They emerged only in narrow specialized niches, though. For example, Linia Prokata (or Line of Hire) was the first market rental agency in Russia to offer construction equipment on lease. It was followed by rental agencies offering toys, household appliances, cars, and so on. However, over 90% of the rental agencies close within the very first months of operations. In experts’ opinion, they were unable to create a system that would ensure safe return of rental items. The first and only professional company providing consumer rental services to date emerged in Russia as recently as a year ago, Prokat.ru. It was founded by Andrei Ozolin, the owner of the well-known tourist agency Magazin Goryashchikh Putyovok (The Hot Trip Shop). According to Ozolin, the new business owed its emergence to his own common sense rather than a market survey. “We didn’t carry out special market studies,” Mr. Ozolin says. “But we very clearly grasped the trend: under present circumstances, renting is convenient and saves money. There are a host of things consumers would like to use at least once in their lives but do not need to own, things like a camera for underwater photography, a Santa Claus suit, a karaoke machine, or a wedding dress.”
As opposed to other rental agencies on the market, Prokat.ru decided to adhere strictly to the principle that there should be only new items straight from the manufacturer in the rental store. At the first sign of wear-and-tear, items go to the secondary retail market.
[Expert] |
RUSSIA IN FACTS
