The Bloomberg Billionaire Index has revealed in late 2018 the name of Russia’s new billionaire — Sergei Studennikov from Chelyabinsk. Even in his home city, with over 1mn people, he remains unknown beyond business circles and prefers not to draw too much media attention.
Quite the opposite can be said of his discount liquor stores, which can be found on many street corners throughout the nation. Krasnoe & Beloe (Red & White) is not only well-known; it has the reputation of ‘best price’. Probably there are only a few people, at least in the chain’s home region, who would never have frequented Krasnoe & Beloe.
“The goal is to save our customer the trouble to work through several stores looking for the best price. Come to us, and trust us. We monitor the market for our customer, and offer the best price available today. This is the main service we provide.”
The first store was opened in the small town of Kopeysk on the outskirts of Chelyabinsk in 2006. Only 12 years later, the retailer boasted 6,700 outlets in 57 of the 85 regions across the country, and 100,000-plus employees. A sales jump of about 50 percent to 215 billion roubles ($ 3.3 billion) in 2017, and another 40 percent in 2018, has turned the company into the fastest-growing major retailer in Russia, a rollout that has intensified in the last few years: noteworthy in a period that most industry players considered a challenging economic environment. In 2018, six new stores were opened every day on average, and there was no intention to slow down. Krasnoe & Beloe was on track to overtake Metro, Dixi, Auchan and Lenta for third place among Russian chains by 2021.
However, in January 2019 the company surprisingly announced a merger with Dixi and Bristol. Now the three partners have amassed 13,000 stores together and are the third largest retailer in Russia. The analysts called Krasnoe & Beloe as ‘the pearl of the deal’.
A typical Krasnoe & Beloe store is located in a residential area and has a selling space of just 80 square meters, so shelf space is allocated to a strict selection of items and suppliers. The portfolio changes regularly to some extent, but the number of products is held at about 1,300, including groceries and general goods.
Krasnoe & Beloe offers roughly 800 types of alcohol, mainly wine (520) and beer (100). The price segments range from cheap booze to brands such as Barton & Guestier wine, Corona beer, Jack Daniel’s whiskey or Martini. About 400 items are basic food- stuffs like coffee, milk and sausages, with the rest allocated to cigarettes and whatever the chain can get a good deal on. The portfolio is a combination of a liquor store and a typical corner shop, but with the difference that the prices are at the level of supermarkets, or even lower.
The limited assortment, priced to be the best offer available and offered around the corner, is probably the main success factor. How to get there, is the company’s unique know-how. The chain is known for its robust approach towards suppliers and employees, smart logistics concepts and real estate management. Studennikov also says there is no corruption in his company, while other major retailers would have to price in corruption costs.
In a rare interview, given to Russian business news outlet RBC in 2015, Studennikov talks about his successful business model. Below parts are quoted, which provide compelling insights even from today’s perspective.
Back in 2006, when you opened the first Krasnoe & Beloe store, did you have the idea of a big retail chain?
Yes, starting with the first store, from the first minute. Our company had been engaged in this kind of business for quite some time before. My experience dates even back to 1988, still the times of Soviet Union, when I was dealing with alcohol…I tried many things, but at the end it all came back to it. I was very lucky in my life to meet people who started to develop retail chains in 1990s. They inspired me and extended my horizons. I realized that the future belongs to retail chains, and not to those with just a local presence in a particular city or region. In retail, to say it short, you are the number one or none. This is the position to be.
You don’t have a business education, is it right?
No, I don’t have a business education, I don’t have MBA. I come from Bakal, a small ore mining town in Chelyabinsk Region. I studied in (neighboring) Satka at a mining school. I was lucky, the education was surprisingly good, although I was not a very diligent student. After graduating, I took a job in the mine, and a short time later I went to the army. When I came back, I moved to Chelyabinsk. It was winter, before the New Year’s Eve, and I had some gym shoes and fufaika (a cheap winter jacket) on. And that’s all I had. For a couple of weeks, a train station was my shelter. It was tough.
Your retail prices were sometimes even below the purchasing prices of other retailers, is it still the case?
No, not anymore. Now we do not experiment any- more. In the past, we were experimenting, driving the prices down in the market. Now, our pricing is 100% market determined. For example, if today Auchan has the best o er for an item, let’s say, they sell it for 1 rouble, we will set the price at 1 rouble. When Auchan’s special o er expires, but the item is now available at Lenta for 1 rouble, we will keep the price. Tomorrow there is no special o er anywhere available, and the price goes up to 1.2 rouble, we will adjust accordingly. The goal is to save our customer the trouble to work through several stores looking for the best price. You don’t have to run from store to store. Come to us, and trust us. This is the main service we provide for our customer. We monitor the market for our customer, and offer him the best price available today.
What is your profitability?
Our margin is about the average. Gross margin in grocery retail today is somewhere around 26– 27%. We are slightly below, by 2–3%. How do we get the low price? First of all, we get premium discounts for being the number 1 customer for our suppliers. Initially, our target was to get there for the Ural Region, and in the next step for the whole country. With this position, of course, we get certain bonuses and more. Everything we can squeeze out from our suppliers, is passed on to the shelf. It is clear that we are minimizing our logistics costs, we have our own logistics concepts, and with it we are doing probably better than the industry average. And I think we are ahead with a very efficient real estate management, we have a strong development team. We rent 100% of our store facilities. This was our position from the beginning — to rent only. And until recently, I looked at each rental facility personally and made the final decision to take it or not.
At each of 1800 rental facilities?
1800 stores are opened. And to get there, you have to look at a number of facilities multiplied by 20. It means out of 20 pre-selected proposals, 1 gets approved. I personally challenged the conditions, payment terms, rent price indexing etc. This is a serious job, taking time.
Are you a tough leader?
Of course. Our company, like our state, has a tough vertical of power. There is no other way, at all, otherwise there is confusion and vacillation. On top, the corruption risk is high. It’s very important to control everything personally. Because the absence of corruption a affects the price on the shelf.
Thanks to personal control?
Of course. All retail chains, if we take the major ones in the country, have a high corruption component in their product prices. The procurement department is usually the most corrupt one. The number 1 problem for any retailer, any owner of retail business, is how to control this issue. Everyone has its own method of some kind, less or more effective than ours. But in our company it’s impossible to take a single SKU (stock keeping unit) into the sales portfolio without a collegial management approval, and my personal approval. Meanwhile we have also a certain image among suppliers. They all know, if, God forbid, they make an illegal move, we will never work with them again. They will lose our sales channel forever, because I consider corruption as a theft personally from me, as taking money out of my pocket. Nobody needs that.
Do I understand correctly that your suppliers do not pay for listing?
We don’t practice that at all. This is some stuff other retail chains engage in. We don’t take money to list a merchandise in our sales portfolio, we have other valuation criteria for new items. If a SKU is not working, we take it out. We have no obligations to the supplier. In case with paid listing, you will have this useless stuff on your shelf for a year, doesn’t matter, if you want it or not. No, this stuff will stay as long as it takes for us to realize that this is useless That’s all.
In Chelyabinsk Region you have more than 470 stores. Don’t you think, it’s too much?
Yes, I do. The Chelyabinsk Region was our testing ground, we did all the experiments we could here. We had to find out where the limit for the store density is. Now we do have the understanding, which area and how many people a new store should cover in order to be effective.
And what is this density?
Well, let everyone figure it out by himself, this is a serious work.
Did you buy other chains to grow faster?
We grow fast enough without it. I don’t understand, what can I buy? There are plenty offers, with 50, 100, and even 300 stores. But what do you want me to buy? (Sergey quotes a conversation below)
• What do you have, tell me?
• Well, we have 300 stores there
• Good. Is it your property?
• No, we lease
• What about the merchandise?
• It’s not paid yet
• And what else do you have, technology? Are you better than us?
And what is it to buy? In general, this is some kind of nonsense, an idea from a decade ago: we will develop a chain with 100 stores and then sell it to a bigger retailer like X5 or Magnit. Or to those idiots from „Krasnoe & Beloe“. Oh, look, we have a liquor store, buy it! And the morons will buy it.
• Why should I?
• You will get a quick access to our region, for example, to Omsk
• Ok, but we can do it without you anyway
• You are wrong, there is no room in Omsk. For twenty years we have been taking the market, everything is taken here
• Are serious, guys? So for the sake of experiment, let’s try it.
Two years later we have 100 stores there. End of story. Any more questions? Is there room?
Are you kidding when you describe the situation like that?
Three years. You enter any region, and in three years you cover it 100%. Doesn’t matter where, at all. St. Petersburg is a city with a high number of retail chains. But it’s sure, we can take it in three years. Well, St. Petersburg maybe in five. It’s never too late. We can do the same thing in New York. What’s the difference? New York is even better. And somewhere in Guangzhou you can open even four stores in an apartment building.