The Marta Holding, the leading grocery chain in Moscow, Kazan, and St. Petersburg, has ended its partnership with the Dutch retailer Spar. Instead, the company plans to develop the Bill brand together with the German REWE Group.

Anastasia Matveeva

Until recently, the Marta Holding was promoting the retail grocery chain Spar in Moscow as part of a sub-franchise agreement. Yet on July 8, in front of the Russian president and the German chancellor, the head of Marta, Georgy Trefilov, signed an agreement to found a joint venture with the REWE Group, the second largest grocery retailer (after Metro) in Germany and the forth largest in Europe. REWE will hold 75% of the stock in the new company. The German partners plan to invest $500 million over the next three to five years to set up a chain of supermarkets under its Bill trademark.
This means that Marta will now longer be Spar’s partner. Spar will not only lose 15 stores to its former Russian partner, but will also face a huge setback on the Russian market. This is the price the Dutch company has paid for its strategy.

Marta will not wait

Marta has not been in retail very long. In 2001, the holding, which formerly produced and distributed construction materials and hardware, diversified its business and bought a sub-franchise in Spar Retail, the general Spar franchise in Moscow and Moscow Province. This move was connected to some very ambitious plans. Beginning by reequipping several hardware stores to sell groceries in 2003, Marta developed a very aggressive strategy. The company planned to expand to 40 stores by 2006, in part by expanding in Russia’s regions. The company was even willing to build a logistics center to speed up its expansion by attracting new sub-franchisers.
The idea behind the Spar chain’s expansion is the services offered to stores belonging to the chain that allow them to cut costs. One of these services is a centralized, large selection of goods at a single logistics center. However, in practice, Spar does not rush to build these centers, but waits until the chain accumulates “a sufficient number of stores.”
Marta did not want to wait. It decided to act like all the other leading market players. In recent years, grocery retailers have competed to increase turnover rates and the number of stores, increasing both by several times a year. Marta made a risky move, planning to invest $150 million, of which $110 million would be loans, by 2006 in its expansion. Impexbank agreed to make the loan. The bank saw it as a kind of venture project. By the way, Impexbank also acted as financial consultant for the REWE-Marta project. Apparently, the bank’s venture project has turned into an investment project.
Marta was prevented from expanding by its undefined position as sub-franchiser. First of all, the controlling stake in Spar Retail belonged to Delta Capital Management, administered by the Russia-US Investment Fund. As investment funds are wont to do, at some point in the future the fund would sell its stake in Spar Retail to a strategic investor, who would have the right to change sub-franchise conditions. Secondly, and most importantly, many decisions about how to develop the Spar trademark had to be approved by the general shareholder.
At some point, Marta decided to take charge of Spar in Russia and planned to buy Delta Capital’s stake in Spar Retail. In mid-August 2003, the purchase was announced by both sides as a done deal (see Expert 32, 2003). Imagine observers’ shock when a month later Delta refused to make the planned sale. The reason given for this decision did not explain much: “in connection with the fact that Spar Retail was able to reach a decision with new financial partners.”

Conservatism first

Delta Capital’s decision to refuse to sell to Marta was only explained in more detail this year at a July 6 press conference devoted to promoting Spar in Russia. “We have to think about our reputation as an investor. This means that projects we invest in have to develop successfully and only then can we withdraw. From this point of view the conservative strategy of a group of private investors seemed more attractive,” stated Kirill Dimitriev, Executive Director of Delta Capital.
Dmitri Budakov,a representative of the private investors now owning more than 75% of Spar Retail, agreed with the conservative approach. Spar Retail’s new owners believed that if the chain develops too quickly it will become impossible to manage, which is why it should expand at a more moderate pace. Thus, they already had their sights set on eight new sites for stores. In 2005, they plan to invest $40-50 million in the chain. In terms of plans for this year, Spar Retail would grow to 30 stores (including two existing stores, two more belonging directly to Spar that will open soon, Marta’s stores, and those of a new suburban Moscow sub-franchiser SVA Trading). The Spar chain would earn $180 million in 2004.
Two days later, it became clear that these conservative plans were destined to fall through, due to Marta’s new alliance. Even worse, the development of the Spar brand name in Russia is now in danger.
It makes more sense to blame Spar’s conservative strategy than run-away Marta for this crisis. Since 2000, Spar Retail could only boast two stores of its own and until recently had only one sub-franchiser. A second only appeared this year and only then did Spar manage to make one of the chain’s most significant advantages a reality by acting as a purchasing cooperative. In other words, the chain was finally able to coordinate discount supplies to its stores by purchasing goods in large quantities. Regarding the next stage, the logistics center Marta dreamed of, Spar Retail still thinks that the chain has yet to achieve the financial results that would justify such a center.
Spar acted even more conservatively outside of Moscow. Earlier this year, Delta Capital sold it share in Spar-Srednyaya Volga, Spar’s general franchise in the Volga region, to the Moscow chain Perekrestok. Dmitriev explained that “from a portfolio investor’s point of view, the regional project had run its course.” This means that Delta Capital did not foresee rapid retail growth in the region, or in other words foresaw the exact opposite of what all the other retailers on the market expect. It is more than likely that the Spar brand name will cease to exist in the Volga region, as Perekrestok will naturally rebrand the stores.
What Spar’s shareholders are calling conservative strategy could also be called something else, playing it safe. From the very start, Spar stuck to their practice in other parts of the world and focused exclusively on franchising, while refusing to examine the specifics of the Russian market. Yet shareholders overestimated the brand’s potential. Spar was not sufficiently well-known in Russia to get independent retailers standing in line for a sub-franchise. At the same time, the business approach offered as part of a franchise deal proved too expensive for small chains and individual stores, as they first had to invest in reequipping their retail outlets. And franchises never got access to a centralized and less expensive supply source, the main advantage of joining a chain like Spar. Paul Price, Vice President of Delta Capital Management, when discussing the deal that fell through with Marta, admitted that sub-franchise development had begun too early and without proper deliberation.
One would think that in such a situation, it would be necessary to take some risks. Who should have taken these risks? Either the Spar central office, by increasing its support for the brand in Russia; the general franchisers, by changing their business model as was done in the UK where stores and equipment are leased to independent traders; or the investment fund, by rejecting the stereotypical moves of the portfolio investor and managing Spar’s business in Russia more actively. At the very least, they could have let Marta take the risk by selling the company the general franchise.

A justified risk

Meanwhile, Marta, undaunted by last year’s disappointments, continued to grow rapidly and act independently. Stores in Kazan were opened without the senior partner’s approval. Some of Marta’s stores were not opened under the Spar name. Not long before the deal with Delta Capital fell through, Marta acquired the six-store Stolitsa chain which kept its previous name. By signing the agreement with Marta, REWE got a chain of 21 stores and yearly revenue of $97.3 million. In REWE Marta now has a partner earning 40 billion euro a year (while Spar earns only 27 billion). REWE Group is actively promoting its stores in Eastern Europe and its motives for coming to Russia are obvious: Russia’s economic growth has excited many foreign investors. By the end of 2004, the Bill chain will have 40 supermarkets, including the stores Marta already owns. Their total revenue is projected to reach $250 million dollars. This growth is more than Marta had planned as part of Spar. Marta hopes to finish rebranding its stores by October 1.

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