September 19 2007, 11:04

Russia: retailer presses the suppliers for 30% margin and low prices

Just after "Pyatorochka" and "Perekrestok" supermarkets merged, the joint company X5 Retail Group has equaled the purchase prices of both chains. Now it strives to press suppliers for new discounts, Kommersant informs.

Starting from the summer X5 has been including the provision to the contracts, according to which its margin (the ratio of markup to retail price) should be not less than 30%. Otherwise the supplier pays to the chain the fine equal to the sum of the lacking profit. X5 plans to set the retail prices on the level recorded in Auchan and Metro chains.

Past fall X5 notified the suppliers that "Perekrestok" supermarket chain intended to purchase products for the same low prices as "Pyatorochka" discounters did. According to the private data of the company, this measure along might provide the economy worth to $10-12 mln. in 2006. In the annual report 2006 X5 says that "suppliers' bonuses" totaled to $246 mln. But, according to the results of 2007, X5 plans to save much larger funds.

Kommersant obtained the copies of the additional agreements to the contracts signed by "Perekrestok" and its suppliers for 2007-2008. The contracts should enter into effect on the 1st of November. They stipulate the guaranteed marginal profit marginal revenue (it shows the share of the retail price for the product the stores get as their profit) up to 30-40% for some categories of sales items. For example, such conditions were provided to "Dymov" (meat products), "Ledovo" (frozen seafood), "Erkon-product" (dairy and vegetable canned products). The commercial departments of Russian office of Bunge company (seed oil) and "Mirital" company (dumplings and ready-to-eat food) have heard about the toughening of the cooperation conditions; however, they have not obtained X5 official notification yet.

If X5 has less than 30% margin, the supplier should pay to X5 the fine equal to "the sum providing 30% marginal revenue", not later than in five working days since the moment of the reception of the relevant report. One of the additional agreements says this. Earlier, "Perekrestok" margin was 7-25% for the sales of meat and frozen products (if no intermediaries are engaged in the work between the chain and the producer), the companies-suppliers inform. Now the average marginal revenue of Х5 is 26% in average, Gennadiy Frolov, the Director of Communications specifies.

If the chain annually extends almost 50% and enters new regional markets, it has the right to demand "better commercial terms" from its suppliers, Lev Khasis, Chief Executive Director of X5 thinks. He says that the new approach will be imposed on all categories of sales items.

As of March 31st 2007, X5 Retail Group included 512 "Pyatorochka" and 169 "Perekrestok" supermarkets discounting for franchise. The net income equaled to $3.551 billion, net profit - $103 billion in 2006. The shareholders of "Alpha-Group" own 47.8% of X5, the founders of "Pyatorochka" have 21.2%, and the managers of X5 - 6.2%, 24.8% of shares are in free circulation in LSE. The capitalization of X5 is $7.04 billion.

According to the calculations of the former employee of the Purchase Department in "Pyatorochka" supermarket, the set marginal revenue worth to 40% for meat products presupposes more than 80% markup. The suppliers say that, for example, the same markup in Auchan is 15%. The ex-employee of "Pyatorochka" asserts the chain orientated to the cost of products in Auchan and Metro chains, setting such price level. "I.e. X5 wants to combine low prices with the high marginality of its business making use of its position of the leading chain in Russia", he says.

Alexey Krivoshapko, the Analyst of Deutshe Bank says, usually the fixed level of markup, but not the margin is specified in the contracts. "40% margin is similar to the suicide to meat producers; any of the producers will hardly agree on these terms", he is sure. "MosMart" top manager supposed that this way X5 was getting ready to the adoption of the Law "About Trade" and other limitary documents for this industry: "Those provisions, which the officials and producers demand to cancel (entrance bonuses for example) will leave the contract step by step. But new provisions will come in order to ensure the same profit".