Sun, Mar 07, 2021 page16

• Russia’s hot IPO is an US$8bn bet on frugality

  • By Clara Ferreira Marques / Bloomberg Opinion
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  There are few more eloquent expressions of faltering Russian living standards than the rise and rise of discount retailer Fix Price Group Ltd, set to begin trading in London and Moscow. An equity value of US$8.3 billion assumes sizeable ongoing appetite for cheap detergent and affordable cosmetics. It says everything that Russia’s hottest initial public offering (IPO) in years is a dollar-store chain.

  A pioneer with snazzy technology to manage inventories and product selection, Fix Price has plenty going for it and a raft of big-name backers, including Goldman Sachs Group Inc, BlackRock Inc and the sovereign wealth funds of Singapore and Qatar.

  On Friday, the company priced its global depositary receipts at the top of its expected range. Assuming it grows roughly in line with its market segment this year, the valuation would be not far off 30 times this year’s earnings.

  

  A woman carries grocery bags along a street in Moscow on Monday.

  Photo: AFP

  That places Fix Price closer to Poland’s fast-growing, rural-focused chain Dino Polska SA than to local retailers, such as supermarket owner X5 Retail Group NV, or even US giants Dollar General Corp and Dollar Tree Inc.

  Cheap-and-cheerful is not a new phenomenon in retail. German discounters Aldi Einkauf GmbH and Lidl GmbH stormed Europe’s grocery market in the 1990s. In the US, the likes of giant Sears Holdings Corp struggled after the last recession, but tills are ringing at purveyors of bargains to lower-income households.

  Dollar General’s chief executive officer put it best: The economy just keeps creating more of their core customer.

  His company is valued today at more than US$40 billion, more than nine times storied chain Macy’s Inc.

  Investors are betting Fix Price, with its array of goods for less than 249 rubles (US$3.35), would benefit from a stagnant economic backdrop. Russian households have not recovered from the economic crisis of 2014, and real disposable incomes fell 3.5 percent last year.

  More importantly, consumers feel poorer as prices of staples climb: In January, 53 percent of Russians surveyed by NielsenIQ reported being financially affected by the COVID-19 pandemic, double the rate in September last year. Even among those not hit, 16 percent said they were trying to make their money stretch further.

  The country’s economy held up better than expected last year, contracting 3.1 percent.

  However, even with some income and job support, households bore the bulk of the pandemic’s financial pain, and not all of that shows up in official statistics.

  Russia’s unemployment rate is back below 6 percent, but that does not capture reductions in working hours and pay, nor what has likely been a significant dent in informal work.

  As more people buy in bulk and flock to discounters, Fix Price has expanded its network by more than two-thirds since the end of 2017 to more than 4,000 stores. It last year posted an earnings before interest, taxes, depreciation and amortization margin of just more than 19 percent, well above local supermarket peers. A focus on non-food items and an investment-light model means profitability should remain strong.

  However, competition is heating up from online rivals and traditional retailers such as X5 Retail.

  Figures in the IPO prospectus indicate Fix Price has a 93 percent share of its retail segment, described as variety value stores, but there is no guarantee that will stick. Maintaining the rate of top-line growth implies continued store expansion, which might not be sustainable.

  Whatever happens at the stock’s debut, Fix Price is worth watching for what it says about Russia’s squeezed consumers. It might become a bellwether much like Fast Retailing Co’s Uniqlo stores were in Japan for former Japanese prime minister Shinzo Abe’s stimulus effort.

  Economists cheered rising prices and worried when discounts, like the ones announced on Thursday, began to pile up. Fix Price’s fortunes might well be inversely proportionate to Russia’s own.

  Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the UK, Italy and Russia.

  This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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