Valerii Makovetskyi, director of Foxtrot Group of Companies: We hope the market to become entirely white within two-three years…
Exclusive interview of Valerii Makovetskyi, head of Foxtrot Group of Companies, chairman of the supervisory board at the Foxtrot chain, with Interfax Ukraine agency
Would you please tell about this year’s financial results of the Foxtrot chain?
In general, the economy grew in 2018 so the consumer electronics market showed growth too. Over 11 months, the sales went up by some 28-30%. But December is the key month for our industry and it will show how successful the year is. Unfortunately, about 50% of the industry is still grey that is why it is very difficult to estimate results of the market as a whole.
In your opinion, what was the growth due – the new supermarkets opened, rise in the cost of goods, other factors?
Naturally, there was inflation among these factors but it was not as noticeable as in the retail food segment. I would estimate inflation at 5-7% at the most. The market growth totaled about 30% so our business grew in line with the market. The growth was due to rise in the population’s paying capacity, consumer sentiment and wage increases.
Do you expect this dynamics to continue the next year? May the coming election have any effects on consumer sentiment?…
In my experience, election years have no effect on business results. The factors that matter are economic growth, inflation, exchange rates between the hryvnia and major currencies and population’s income. We expect the next year to show the growth of about 18-20%.
Competition has become much fiercer in the consumer electronics and household appliances market over the past years. Traditional outlets have to compete with online shops. The market is very active: Rozetka opens offline shops, Epicenter develops online shop 27.ua, others invest in shops remodeling, focus on gadgets.
Being the long-time market leader, has Foxtrot been making efforts to hold its position?
Right you are, this market is facing severe competition. The market is large so many companies would like to enter it. We have been holding leadership but it is not an easy thing to do. Sales methods are changing, and we can see many chains succeeding in e-commerce. Consumer prices for legal goods are equal in online shops and traditional chains today.
I’d like to note that Foxtrot is developing multichannel sales too. Consumers are welcome to buy goods on our web portal, in the supermarkets nearest to them or order door delivery from the web portal or the supermarkets using our online catalogue, and be supported by our sales assistants. I can see Comfy and Eldorado developing the same model. We are aware of how promising this market is.
As of our competitors, I forecast everyone to keep the balance, in whole. Comfy has become a bit stronger this year, in the first place due to online sales. At the same time, Rozetka’s market became a bit smaller in our segment (household appliances and customer electronics – Interfax) due to equal online and offline prices, I guess. It is a successful online shop that offers huge groups and numerous types of goods but it’s working as a marketplace. Besides, the market has got a new powerful player – Epicenter, and it is investing much to build its business in this segment focusing mostly on household appliances for its target groups.
What is more, we have competitors focusing on the fastest growing segment – gadgets, smartphones, tablets. They are two strong competitors – Citrus and Allo. They have been quite successful over the past two-three years.
A smartphone has developed into a lifestyle brand, in the first place for the youth. On average, consumers buy new devices every two-three years. But unfortunately a part of the market players – especially those in the gadget segment – supply grey goods by declaring lower cost when importing them or even smuggling them. Using tax loopholes and evading taxes give them serious competitive advantages - for instance, they can afford much higher rent in the best outlets or pay high cash (black) bonuses to their staff. Any business has revenues coming from margin and it uses them to defray costs. Running “grey” business, you have the margin of 15% or higher, and you have extra 15% to invest in promotion, advertising, rent. It is difficult to compete under such conductions but we are doing our best and Foxtrot is staying ahead of the game. Let me stress that Foxtrot, Comfy, Eldorado are "white" businesses.
Epicenter is forcing its way into the top-3 household appliances chains - Comfy, Eldorado and Foxtrot, is not it?
Yes, it is. It is our competitor as it has entered the household appliances segment quite successfully. It has invested much in its trade stock and specialized departments in its hypermarkets. But household appliances and customer electronics are not the same as nails or tiles. They become dated and thus cheaper very quickly. If Epicenter fails to have the sales turnover high enough (it is not now), it could suffer great losses in the future.
Has your market share changed?
We use such a rate as the chain market share. All the biggest players and small oblast chains report it. We cover about a third of the market.
Actually, no one works to get a larger market share. Except for big producing brands that have a huge margin. For instance, Apple manufactures iPhones for $200 and sells them for $ 1,000. The market share is of importance for them, and the huge margin enables them to cover their costs. But when your margin is 10-12%, the market share is still important but it is not the major factor. What does matter is whether your business is efficient and modern, whether you lose money or get profit. What is your goal? To pay wages, cover costs, pay taxes and have what to invest in further development. Well, I may be a businessman of the old school and I cannot understand working just for the sake of the market share. What is a goal of any business after all? To make profit.
How are you planning to develop your business strategy to hold your market? In the first place, in the online segment?
The company has decided to invest much in a modern online platform by this segment’s global leader - SAP. The investments planned are quite large, we are going to remodel our sale techniques, our customer communication interface, and we hope to strengthen our online sales segment. Our plan is to at least double sales in this segment. Currently Foxtrot covers about 10% of the online sales market.
How large are the investments?
It’s a trade secret.
Are you planning to expand your chain of offline supermarkets or redesign those you have now?
We consider our chain to be large enough – 162 supermarkets in Ukraine. We are going to close a part of them, in the first place inefficient ones, and open those in new modern malls, that is our plan is to follow a traditional retail chain development path. We will open about 10-20 new shops in 2019 but mostly under our relocation plan. And we are going to invest much more to renew our chain, the form of it: new equipment, new signs, new sales techniques, etc.
How much are you going to invest to renew your supermarkets?
Next year we are going to reformat about 60 supermarkets, these projects requiring the investments of about UAH 4-6 million each.
How large is Ukraine’s "black" market, in your opinion?
It is very difficult to estimate it. I think that “black” and “grey” segments make up 50% of the market now. Some people estimate it at 40%, and some say it is as large as 60%. Mostly it refers to smuggling and cheating entrance and sales taxes. At that, the segment of counterfeit leading brands is not larger, I think. Counterfeit is mostly sold on markets but it is impossible to estimate it, no one is able to do that. I think it is up to 5%.
What is about non-networked online shops?
They are able to sell contraband rather than counterfeit goods. These are the goods manufactured for other markets, not under the manufacturer warranty and, naturally, counterfeiters do not pay taxes.
Would you share your opinion about the initiative on parallel imports, please? Several big retail companies are promoting this innovation.
We import almost no goods. Foxtrot mostly cooperates with local suppliers, the biggest manufacturers that have local warehouses – Sony, Samsung, LG. That is why we have almost nothing to do with it. We think that this initiative has both strengths and weaknesses. Firstly, yes, there are counterfeit goods in the market, these are the goods manufactured for foreign markets but they are imported and may cause problems, became faulty because of voltage drops, network standards. Manufacturers are aware of this problem and do not want their goods to come to the markets they were not designed for. Secondly, it is an open secret that every market has its prices, they depend on manufacturer policies and we hardy can change them. Thirdly, there are issues related to transportation, proper storage conditions, exposure on shelves - they are of importance for brands.
On the other hand, counterfeit goods are in demand. For instance, in China you can buy fake iPhones or Samsung phones for $50-70. Naturally, manufacturers are afraid that these devices may become available on the market. As of the prices in Ukraine, they are almost equal to those in the global market. Brands always compete. For instance, competing between themselves, Apple, Samsung, LG, and Sony have to make adequate offers to customers. And although tax regulations differ from country to country having effects on final prime costs, average prices are almost equal.
On the other hand, large international hypermarket chains working in Ukraine own large businesses in foreign countries. For various reasons, they may have surplus goods there. And this is why they may need the parallel imports initiative – to import these goods and sell them here. Their market may have changed there, their competitive landscape has become different and they think they can sell the goods in Ukraine. Dieselgate cars can serve as a recent real-life example. Too toxic for Europe, acceptable for Ukraine.
But manufacturing distributors disagree because these goods were not designed for this market. They will not be under manufacturer warranty here, they are not certified here, and they have no manuals. It’s a knotty question.
Would you tell about your company’s logistics infrastructure, please? Does your company manage its logistics projects by itself or does it outsource them?
We have been outsourcing them since 2018. We lease warehouses, and since this year we have outsourced warehouse management too. We contract Korsa, Nova Poshta, Ukrposhta and Presto. The goods are stored in two storehouses – in Hostomel (30 thousand square meters) and Dnipro (12 thousand square meters).
Why have you made this decision, is it proving itself?
It is an internationally accepted approach. No international household appliances chain owns warehouses. Outsource companies work with the market, apply advanced techniques and optimize expenses.
I’m afraid it is difficult to estimate now how effective this decision was. Fuel prices and wages have considerably grown this year. That is why logistics became even more cost intensive, even outsource services. But estimates suggest that not to outsource them would be much more expensive.
Has it become more expensive to lease warehouses too?
The rent has become higher, and wages have become much higher – they’ve almost doubled. Loader teams, drivers. But in percentage terms, warehouse wages have decreased.
Did you use to own warehouses and vehicles?
The chain has never had a warehouse of its own. As of vehicles, we still own them. Actually, Ukraine’s logistics market is still underdeveloped and there is no fierce competition among logistics companies. There are western firms working in Ukraine but we cannot afford their services so far. We contract Ukrainian companies and hope them to improve the quality of their services in the future.
Are you considering the sale of the Foxtrot chain?
Probably, the best business is the one you create and then sell at a high price. Naturally, are considering this scenario but it could become possible only if we received really tempting offers. But they are hardly probable in the near future, to tell you the truth.
There are no buyers, no interest. The market is facing fierce competition and certain risks. For serious buyers to become interested in it, the market should be 100% white. I hate to say it but in Russia 99% of the market is white, they managed to achieve this result, they had the willpower to do so. They created favorable conductions and almost every big carmaker and household appliances manufacturer opened factories there. There are no contraband goods there, everyone pays taxes. In Ukraine, 50-60% of the market is grey or black, no companies want to have production facilities here, and skilled Ukrainian workers are leaving for Europe or even Russia.
How much does the Foxtrot chain cost, in your opinion?
There are a lot of cost estimation methods. Unfortunately, the major method – stock market – does not work in Ukraine. Actually, your business costs as much as investors are ready to pay for it. In case of successful businesses and the teams working effectively under control of business owners, highly competitive businesses can be estimated at EBTDA х 5-8 in Ukraine.
What’s about your team? Are you planning any staff changes?
We’ve changed the marketing agency we outsource. It is developing our marketing strategy now in the view of the planned large-scale chain renewal. So there is a new team to work on our marketing strategy in 2019.
You have shops abroad. How do they work?
Well, we have a chain of five shops in Moldova. Our business is not large but quite successful there. Two years ago Moldova’s market became entirely white. And we immediately started receiving offers to sell the chain, we’ve got a buyer.
Was it a local or international buyer?
Would you please share your opinion about the development prospects of the Foxtrot chain and the market as a whole?
We hope for a rise in population’s income and economic growth. There is every prerequisite for it. We have a unique chance to take advantages of free trade with both the CIS and the European Union. That is why I hope that our business will grow as the economy grows. We hope the market to become entirely white in two-three years, for Ukraine to develop in line with the global market rather than be behind the curve in terms of investment opportunities. If we were back to where we were in at least 2013, our business would double. I think it is achievable within three years.
Foxtrot Group of Companies develops the chain of Depo't malls. What are you plans about it? Are you planning to sell it or expand with new outlets?
This business has demonstrated quite good results. The malls have been showing profit. Rent has grown by about 30% this year. That is why we are going to develop this business rather than sell it so far.
How are you going to develop it?
We have several construction projects and several projects to increase/renew existing buildings.
Where are you going to open new malls? In Kyiv?
No, we are not planning any construction projects in Kyiv. It is a characterful market with a not high return of the capital employed. To work there, you should either focus on this business area or have access to large internal funds or cheap loans.
We have neither. We are following a different strategy: to construct commercial building in oblasts of Ukraine. We buy small buildings we consider liquid. Next year we are planning to construct a nice building in the center of Chernihiv and we are developing the reconstruction plan now. Besides, we are reconstructing our building in Kryviy Rih, expanding it with a sports center and a swimming pool for the Sportlife chain. We are planning to reformat a mall in Zaporizhzhia and increase our mall in the center of Kropivnytskiy. And we may become a partner of a mall in Kharkiv.
Are these large-scale projects?
The scale meets our format – 10-15 thousand square meters, they are not very large oblast malls. We are not ready yet to meet the scale of Kyiv.