France attacks: does Leroy Merlin challenges Epicenter K?

The Leroy Merlin construction hypermarkets chain resumes development after waiting three years. The fourth company outlet opened September, 7 in Kiev.

This is reported on the company official website, the retailer page in Facebook, as well as in advertising on Youtube. The brand new hypermarket that is part of Association of Mulliez family (which also including Auchan Holding) will be opened in Kiev, on 12, Koltsevaya road. Earlier the Prakriker chain store was working on this site, but in April it became known that the outlet was closed: the German brand, which in 2014 developed in Ukraine Kreston Guarantee Group Alexey Mechinsky, finally left the country.

Already then there were rumors that Leroy Merlin will open in the Prakriker place, but the official confirmation until recently was not. RAU figured out why the French decided to open a new store after pause three years, and whether this will change the situation in the DIY retail segment of Ukraine.

The versatile Auchan

It should be noted that the 2017th became the active development year of all Ukrainian divisions included in Association of Mulliez family. In Ukraine, the corporation develops several directions. The first is grocery retail, represented by super- and hypermarkets AUCHAN. Last year, the French chain took the fourth place in terms of turnover among FMCG operators of Ukraine with an indicator (by indirect data) of 11.5 billion UAH. Only ATB, Fozzy Group and Metro Cash & Carry Ukraine are ahead.

However, the next year AUCHAN Ukraine has every chance to break into the top three. In January there were rumors that the group plans to acquire Karavan hypermarkets chain, formerly owned by Sergei Khripkov and Alexei Gordienko. In June, the French officially announced the deal, instantly almost doubling their facilities number in Ukraine. It goes without saying that the chain indicators will grow significantly after the former Caravan markets integration into the AUCHAN Ukraine structure, and METRO Cash&Carry Ukraine will have to concede the third place in the retailers ranking in turnover to French colleagues.

In addition, the company said that it is ready to develop in Ukraine and the format “shops near the house”, which is now being tested in Western countries. The retailer has not discovered while no AUCHAN in this format, but the fact that this trend is carefully studied and planning is under way – there is no doubt.

The second direction that the corporation is actively developing in our country is the retail real estate development. The development unit Auchan Holding – Imoshan Ukraine realizes immediately two ambitious projects in addition to the already constructed shopping centers AUCHAN (in Kiev on Chernigov metro station, Petrovka and Belichi. The company confirmed a year ago that it intends to build the first retail-park-format object in Ukraine in Kiev on Petrovka. The opening announced date is the fourth quarter of 2017, and the complex is gradually filled with tenants.

Another landmark project for the group is the Rive Gauche shopping center on the Dnieper Left Bank in Kiev, near the Zdolbunovskaya street. The shopping center first phase with a 30,000 sq. total square must be put into operation before the year end. AUCHAN hypermarket on 15 000 sq., KFC, LC Waikiki, Eldorado and Miracle Island are among the anchor tenants. The SEC second turn is planned to be completed by 2019, after which the facility total square will reach 150,000 sq.

Anna Koryagina, the Imoshan Ukraine commercial director, told the RAU, the company plans are implementation another project in Odessa. But there is much less certainty about it: neither the object exact concept nor the construction beginning date is known. The French landed the land for a long time, but they froze the project for several years because of the difficult economic and political situation.

Sport and nails

Two other activity of Association of Mulliez family are much worse Ukrainians. In this year April it became known that the corporation intends to entry Ukraine the  sportswear Decathlon brand. It is expected that the trademark first store will begin work in late 2017 – early 2018 in the group owned Retail Park “Petrovka” in Kiev. The next one is in the SEC Rive Gauche, but the French still prefer not to spread further plans.

And, at last, one more Association of Mulliez family activity sphere is construction hypermarkets Leroy Merlin. The first information appeared back in 2007 about that the French are going to open retail outlets in Ukraine under this brand – the Kommersant newspaper wrote about it. The 2008-09 crises forced the company to reconsider its plans: the first Leroy Merlin appeared in our country only in 2010. The chain development can hardly be called stormy: until 2014, only three DIY hypermarkets were opened in Kiev, after which it took more than three years to wait for the new facility.

Why did the French just now decide to resume the brand development, and do they have a chance to gain a foothold in the Ukrainian market of building materials and goods for repairs?

The failure practice

This retail trade sector in Ukraine is almost completely controlled by the couple Gereg – Alexander and Galina – who own the largest country DIY-chain – Epicenter and the New Line. According to Delo edition, these chain total turnover in 2015 is almost 25 (!) times (almost UAH 26 billion versus UAH 1,140 billion) exceeds the Leroy Merlin revenue. On profit, it is also out of the competition – if the French chain finished 2015 with 113 million UAH loss, the Epicenter and the New Line brought Gereg more than UAH 2 billion net profit. So it’s unlikely that Leroy Merlin can be considered a full-fledged competitor to the domestic DIY market monopolists. The geographical scope and turnover of companies simply are not comparable Even after the fourth store opening.

Nevertheless, Ukrainian businessmen have already shown that they do not tolerate even hints of competition. First Epicenter absorbed the second-largest chain of New Line construction hypermarkets in Ukraine, then it took a de facto monopoly position in the market, and then it exerted a lot of effort to survive the country’s Praktiker chain.

The German retailer first store appeared in Ukraine in 2007. The company’s plans were to open seven hypermarkets, but only four sites were opened a few years – in Mykolayiv, Makeyevka, Lvov and Kiev. The business did not go as well as the management company expected and in early 2014 the outlets were sold to Kreston Guarantee Group, according to LIGA.net. The new owner opened one hypermarket in the Dnieper and closed two – in Makeyevka and Lvov’s SEC King Cross Leopolis.

Experts believe that the German retailer leaving is associated with a financial crisis and fierce competition with the Epicenter chain. “The growth of prices for building materials almost doubled in the last year, led to a 30-40% decrease in sales,” – Alexander Lanetsky, the consulting company Retainet managing partner,  commenting on LIGA.net. “The retailer had a relatively small stores number, and it’s very difficult to compete with the leader – Epicenter chain,” – added Alexey Raschupkin, the Atlas Advisors partner.

The specter of competition

Could Auchan Holding “throw the glove” Epicenter in the struggle for the Ukrainian consumer? The experts interviewed by the RAU do not exclude this. “According to our information, Leroy Merlin plans to open retail outlets in Ukraine in a new reduced format,” – a representative of one of the consulting companies in the commercial real estate field, who asked not to indicate his name, said. In his opinion, the French have already proved – at least with a deal with the Caravan chain purchase and the construction of Rive Gauche and Retail Park Petrovka – that they view Ukraine as a promising market, and are ready to invest money to gain a foothold on it.

“But the struggle with the monopolist is initially difficult, especially if its owners have a significant political influence, which in Ukraine means a lot, – it is necessary either to dump or invest considerable money in marketing and buying out the best locations,” – another RAU interlocutor considers. – On the other hand, Auchan Holding is one of the few players with sufficient funds for this (by the 2016 results, the group’s consolidated revenue reached 52.8 billion euros, 824 million euros net profit, ed.), experience, access to latest technologies and other resources “. So in many respects the question is whether the French will want to get involved in the competition with Epicenter K and the New Line. Alternatively, following the example of colleagues from the Austrian REWE Group, they will focus on the chain developing in the most solvent and convenient city in logistics terms – Kiev.

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The Caravan left: The Auchan Ukraine bought the Caravan chain assets