Russia retail one year on from Ukraine war

Russia retail one year on from Ukraine war

A year after the invasion, a Moral Rating Agency report shows that there are plenty of corporations still in Russia and that little has changed since the weeks after the invasion of Ukraine when most of the corporate boycotting happened. Many companies have started to make their moves but have gotten stuck on their journey out of Russia or made paltry efforts so they can say they took some action. Others made no move whatsoever. The MRA was set up as a rating agency and corporate watchdog to get companies out of Russia.

As of now, only 17 companies from the top 122 global companies involved with Russia at the time of Ukraine’s invasion had exited from all of their activities. The largest group (59) is comprised of those that are stuck in the middle’, making a partial or incomplete withdrawal. These include companies on a journey as well as those with no intention to move an inch.

Meanwhile, no exit at all was seen for 46 companies. These ‘hard core’ companies may be beyond embarrassment, feeling they have already suffered the full consequence of not having left, where the story of their failure is now old and their reputations have already been damaged. Thus, they may no longer have any incentive to make the sacrifice that is morally required.

The MRA’s strategy is to revive the lost momentum by exposing both those that have done nothing and those that have done a bit but think it’s enough, and to issue ratings about the extent of their involvement. The MRA’s end goal is to get Russia out of Ukraine and to use this momentum to help pro-democracy Russians get Putin and his regime out of Russia.

Mark Dixon, the MRA’s founder, explained, “We try to make life so unbearable for the half-hearted companies that they are forced to make full and complete exits according to our ‘out means out’ rule. Until then, we shall spotlight and publicly admonish them because their failures facilitate Russia’s invasion of Ukraine. The stakes are so high that these companies deserve no mercy.”

Commenting on Russia retail one year on from Ukraine war, Tatiana Lisitsina, retail analyst at Bloomberg Intelligence said: “The withdrawal of European retailers from Russia — to which Inditex, H&M, Ikea, LPP and Asos had the highest sales exposure of peers — is exacerbating the slowdown in sales and triggering a search for substitute growth markets. In pursuit of new growth avenues, H&M is targeting Latin America, Inditex the US and LPP western and southern Europe, though these are all more-competitive and less profitable markets.”

Lisitsina added: “The exit from Russia has left LPP, Inditex and H&M with a larger profit hole compared with sales, given the absence of that market’s historically higher margin is exerting a structural drag. The sale of LPP’s Russia stores — with an Ebit margin of 37.4 per cent vs. 4.9 per cent for the group (when excluding the country in fiscal 1H21) illustrates the extent of the gap. The comparable dent to H&M’s fiscal 2022 operating profit was 2 billion kronor. Lower operating costs (rent and wages) in Russia have lifted the margins of store-based retailers such as H&M and Inditex, though lower return rates and VAT have benefited Asos’ online sales. Inditex is the only one of peers expected to have increased fiscal 2022 profit.”

LPP has had to reorientate the business away from Russia (19.2 per cent of sales and its key growth driver), toward more-competitive western Europe. The company’s aggressive expansion plan, adding 10-15% of floor space a year to regain close to 23 per cent lost in Russia, could drive double-digit sales increases this and next year, though the retailer has yet to prove its stores can be profitable in the west. Inditex differs from peers, by keeping open its option to return to Russia — following the exit — via its franchise partner if circumstances change. The retailer has agreed to sell its business in Russia (making up about 5 per cent of sales and 8.5 per cent of Ebit) to UAE-based Daher Group, which runs the retail chain Azadea and with whom Zara has had a partnership since 1998 in the Middle East. By contrast, H&M and Ikea — which both had substantial Russia assets and supply links — seem to have completely closed the door. Asos and Next didn’t have any physical infrastructure in Russia, making it easy for them to turn supply chains back on, if desired.

European retailers still operating in Russia since the war in Ukraine — including Auchan, Leroy Merlin and Metro — could suffer reputational damage in Eastern Europe that leaves room for rivals (e.g. Kingfisher in Poland) to take market share. The former two companies are subject to protests and calls for boycotts in Poland, with the negativity potentially responsible for driving Auchan’s under performance lower, with only 5 per cent growth in 1H in Central and Eastern Europe vs. rivals Carrefour, Biedronka and Dino Polska.


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