Oleg Zherebtsov, General Director of Cash & Carry in St Petersburg, considers customers his key business resource. He intends to make this resource long-term through a rare combination of low prices and a friendly environment

Anastasia Matveyeva

In 2003, the global giant Metro opened its first outlet in St Petersburg and stole some of Lenta’s customers. However, Lenta is still holding its ground as market leader. Its turnover increased by several times over the last several years, with sales reaching nearly half a billion dollars this year. Until recently the company opened an average of a retail complex a year. Today, it intends to speed up expansion. With a $30 million loan from the EBRD, Lenta plans to expand its existing network of six stores by adding six more in the next couple of years. The company is also considering expanding to other regions in Russia.

Savings to the people!

- Where did the idea to establish a Cash & Carry chain come from?
- At the intersection of two trends. If you remember, in early 1990s everyone was keen on imports, since Russia produced virtually nothing and 90% of goods on shelves were of Polish, Czech, Finnish and Swedish origins. Yet, wholesaling is very chaotic: it can bring tremendous results one day and nothing the next. In 1993, I concluded we should take to something more solid that would guarantee us stable distribution channels.
On the other hand, you remember those outdoor wholesale markets where people walked through the rain from stall to stall. Of course, prices were lower than in stores where the markup was at least 50%. Observing people, you could understand that they didn’t like the following combination: high prices at shops and the inconvenience and lack of guarantees at the market. I got the idea to set up a store where low prices would be combine with a dry enclosed area and high-quality goods. I rented 400 square meters, installed a cash register, and named the place Cash & Carry. Basically, it was a warehouse shop. In 1994-1995, Lenta’s business focused on those who re-sell goods or use them for business purposes – for offices, small outlets, kiosks, and market stalls.
- But the format changed afterwards, didn’t it?
- Today, we are moving toward classical retail and selling goods to retail customers rather than professionals. The thing is that there are no as many small businesses in Russia as, say, in the US or European economic model. In Russia, small business accounts for as little as 11% of the GDP, while everywhere else it makes up 60-65%. So, we cannot build a trade model based solely on small vendors. However, there are families who can afford to buy large quantity of goods for the week or even the month. And we are indeed changing our format little by little but we still retain the spirit of the wholesale trade: low prices at low cost.
- Who is your customer: a person who has  to save or who wants to save?
- Both. There are pragmatic people who are well-to-do. They are educated to an extent that they understand that many stores use their floor spaces inefficiently and have excessive numbers of employees. Naturally, they don’t want to pay 10-20% more for inefficient labor. Therefore, they deliberately go to our stores. And some people need to count every kopeck and ruble. As a matter of fact, these folks are in the majority. In any case, we believe that giving people an opportunity to save is the most important thing we can do and, of course, giving the quality goods.
- The consumers are gradually changing. People’s incomes are rising. Do you think they will turn to supermarkets and stop shopping at discount warehouses?
- People will always be eager to save. Therefore, our company’s mission – to sell more goods at cheaper prices – will always be in demand. As for supermarkets, they may feel hurt but I don’t fear competition from them that much. Let them get their costs down to our level or improve their technology. Let them try and have an office like ours – its staff numbers just over a hundred people and not three or four hundred like in many companies. It’s a question of efficiency, and I believe that they don’t reflect much on it. Therefore, supermarkets don’t pose a great threat.
At present, I can see only large formats – hypermarkets and Cash & Carry complexes – flourishing. They are most efficient, although rates of growth in the retail industry are higher than in other industries of the economy. Any retail company can increase turnover by 40-50% or even double it. So, probably, supermarkets will expand as well.

The two-second scale

- Did you intuitively understand which format the stores should have or did you it somewhere abroad? 
- Many people ask whether Lenta has copied someone. Of course, we visited 300-400 trade complexes all over the world. When I was abroad, I was struck, first of all, by the minimal number of employees. They optimize costs at all stages of receiving and selling goods; they make investments in IT and, as a result, the human factor in the handling of goods is reduced. Lenta is a compilation of all these observations. Ideas should be absorbed. We should take the best, and I have no illusions that we could do without this. However, taking a separate format and transferring it as is to Russia has never worked.
As a matter of fact, one chain is not like another. I always tell my staff, “Retail is detail.” And there are thousand and thousand details in the trade business. We have honed every operation to cut costs. For example, we searched for cash registers that could print out a receipt in one second instead of three. The idea of pneumatic system allowing cashiers to transfer money along the tube, is of the same sort. We spied this in the banking business and found it very efficient: our cashiers no longer walk through the store with pouches of cash now. And there are a host of examples of optimization.
- You are talking about costs optimization, but many shops with low prices, both Western and domestic, have everything arranged in a more utilitarian way. As a rule, these stores look like a warehouse or hangar, while your centers are noticeably more comfortable: they have a sort of charm, both inside and out. Apparently, you have tried some special approaches that required extra costs, right?
- There is an optimization limit: to save money, we could light the shop floor minimally or turn out the lights altogether. So, it’s a balance of a variety of interests and assumptions. After all, people would like everything inside a shop to be beautiful and convenient; lighting and information about goods to be sufficient and personnel to be polite. In this sense, we are flexible; we can do things the way people like them. In this aspect, we differ favorably from Western chains. Western companies bring their own standards. Believe me that a Metro or Auchan, whether in Moscow or in St Petersburg, is absolutely the same as the one recently built in Hungary or Poland. They will not allow changes specific to Russian consumers, whereas our outlets are livelier and friendlier.

Tougher relations with suppliers

- How does Lenta manage relations with suppliers?
- Oh, it’s such a struggle, and it has been going on for the decade of our existence and is still going on. Civilized trade demands a lot of things from suppliers. We are still struggling for delivery of all goods on wooden pallets. Somebody is too stingy to pay 5 euros for a pallet. However, we argue for efficiency: you unload goods faster and we receive them faster. Nobody has to handle them manually and pay loaders. There are other examples as well. We repeatedly demand that cardboard boxes be of certain density to  reduce losses. We demand that boxes be perforate so that they can be opened faster. We also demand that lids are closed to prevent leaks. These are the kind of things we have to demand of suppliers.
- Is it difficult to get prices from suppliers in line with your pricing policy?
- Regrettably, today manufacturers are not in a competitive environment, in the end. Regarding many products, concentration is extremely high… For example, Mars has a 90-percent share in the pet food market. Who does the company compete with? No one. They can do whatever they want. And they have always criticized Lenta’s low price. We haven’t dealt with Danone for two years: they didn’t give us good prices. And as soon as they do, we will immediately put their products on sale at low prices.
- You didn’t carry these  popular products?
- We still don’t carry some popular brands in our outlets, particularly because manufacturers don’t want to deal with us directly. For example, Procter & Gamble sells Ariel detergent through its distributors. And what does a distributor do? They simply makes money for nothing. They receive goods and dispatch them to Lenta. But we can receive goods by ourselves. We don’t need an intermediary. And having abandoned intermediaries, we are able to reduce prices. Consumers are happy.
- Doesn’t the absence of well-known brands have an adverse impact on your business?
- Of course, it does. But it’s better to be tough with manufacturers than to listen to everything they say. You see, manufacturers are slightly spoiled. All the time they whine that  production is real business and trade is for speculators. But who will sell goods they produce? What will be available to consumers, at what prices and quality ultimately depends on trade. The newspaper Vedomosti has counted that there are 308,000 wholesale companies and 138,000 retail companies operating in Russia. The number of reloading and re-sales in the chain is so high that the aggregate markup is twice as much as anywhere else in the world. It’s enough to make you crazy. No one is interested in efficiency. We conducted a careful analysis of the prime cost of many goods by breaking it down into the cost of a product itself and the cost of its packaging. As for the package, we counted the entire chain: cost of plastic, the lid, the label etc. The result turned out to be about five times lower than the current wholesale prices. All the rest includes huge advertising and commercial expenses as well as promotion and distribution services. Excessive pathos costs dearly. Many brands exist only thanks to this, but I’m an opponent of this.
- Do you charge suppliers for access to your shelves?
- We didn’t charge in the past but now we are trying to. When you have 50,000 customers a day, you can put any product on the shelf and it will find a buyer.
- Could the entry fee become a barrier to new promising goods?
- The rate is differentiated. It doesn’t apply to some goods at all. We urge everyone to make a more interesting product that will sell like hotcakes. If a product is interesting and is in demand, we apply a flexible approach.
We are honest and we don’t promise anyone a rose garden. The market is increasingly tough and severe. Customers will be more demanding, and we’ll be equally demanding. We have changed everything over the past few years. In the past, the manufacturer was a king, and could say, “I’ve made a product and it’s your business to sell it.” Today, everything is quite the contrary. Consumers want something, and we meet their wishes.

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