Fast-growing chain of discount liquor stores creates Russia’s newest billionaire

The latest update of Bloomberg Billionaire Index revealed the Russia’s newest billionaire – Sergei Studennikov. Don’t be surprised if you hear the name for the first time. Even in his home city of Chelyabinsk with over 1 million people, he still remains not very famous beyond the business circles, and prefers not to draw much media attention. 

Quite the opposite is the name of his discount liquor stores which can meanwhile be found around many corners. Krasnoe & Beloe (Red & White) is not only well-known, it has the reputation of “best price”. Probably there are only few people, at least in the chain’s home region, who would have never shopped here.

The first store was opened in a small town of Kopeysk on the outskirts of Chelyabinsk in 2006. Today, only 12 years later, the retailer counts 6,700 outlets in 57 of 85 regions across the country, and 100,000-plus employees. A sales jump of about 50 percent to 215 billion rubles ($3.3 billion) in 2017 and another 40 percent this year has turned the company into the fastest-growing major retailer in Russia, a rollout that intensified in the last years, noteworthy in a period most industry players consider as a difficult economic environment. Six new stores are opened on average every day, and there is no intention to slow down. Krasnoe & Beloe is on the on pace to overtake Metro, Dixy, Auchan and Lenta for the third place among Russian chains by 2021, according to Infoline, a research group based in St. Petersburg.

A typical Krasnoe & Beloe store is located in a residual area and has a selling space of just 80 square meters, so the shelf is allocated to a strict selection of items and suppliers. The portfolio changes to some extent regularly, but the number of products is held at about 1,300, including groceries and general goods. 

“The most efficient retailer is the one who offers a limited assortment—like Aldi does in Europe,” Studennikov said.

Krasnoe & Beloe offers roughly 800 positions 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 positions are basic foodstuffs like coffee, milk and sausages, with the rest allocated to cigarettes (60-70) 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 the prices are at the level of supermarkets or even below.

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 valuable know-how. The chain is known for its tough approach towards suppliers and employee, smart logistics and real estate management. Studennikov also says he eliminated corruption in his company, whereas other major retailers in Russia would have to price in a very high corruption cost.

The today’s retail guru made his first profits with illegal selling of vodka amid an anti-alcohol campaign in the late 1980s. As many business people in 1990s, he tried several ventures, but at the end, in his words, he was back to retail of alcohol.

In one of his few interviews given to a Russian business news outlet RBC in 2015, Studennikov talks about his past, the business model, corruption, interesting motivation technics and the mission. We present parts of it providing even more compelling insights from today’s perspective:

When you opened the first Krasnoe & Beloe store in 2006, did you have the idea of a big retail chain?

Yes, starting with the first store, from the first second. Our company had been engaged in this kind of business for quite some time before. My experience dates even back to 1988, the times of Soviet Union, when I started selling vodka. Back then it not easy to get. Later beer and tobacco were added…..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. It became clear to me that the future belongs to retail chains, and not to those with a just 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 short after 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 anymore. 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 offer for an item, let’s say, they sell it for 1 ruble, we will set the price at 1 ruble. When Auchan’s special offer expires, but the item is now available at Lenta for 1 ruble, we will keep the price. Tomorrow there is no special offer anywhere available, and the price goes up to 1.2 ruble, we will adjust accordingly. The goal is to take the customer the hustle 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 to our customer. We monitor the market for our customer, and offer him the best available price 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 we set the goal to get there for the Ural Region, and in next step for the whole country.

With this position, of course, we get certain bonuses and more. Everything we can squeeze out of our suppliers, is passed on to the shelf. It is clear that we are minimizing our logistics costs, we have our own 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 premises. This was our position from the beginning – to rent only. And until recently, I looked at each rental object personally and made the final decision to take it or not.

At each of 1800 rental objects?

1800 stores are opened. And to get there, you have to look at a number of objects multiplied by 20. It means out of 20 pre-selected proposals, 1 gets approved. I challenged the conditions, payment terms, rent price indexing etc., how much to squeeze out. 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 is high in the country. It’s very important to control everything personally. Because the absence of corruption 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 very 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 is 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 shit on your shelf for a year, doesn’t matter, if you want it or not. No, this shit will stay as long as it takes for us to understand that this is shit. That’s all. 

Some employees tell that if they miss the sales plan, they have to take merchandise, and this merchandise gets written off the books as stock loss. 

No, no, no. This is, of course, insinuations. Nonsense, of course. There is no such thing like a “sales plan”. There is a slightly different situation. Constantly there are some SKUs that we take out from our sales portfolio. There is a timeline, for some positions a month, for some others three or six months. So a colleague has a list of items that we delist. He should pay a special attention and sell it out as soon as possible. We give it to him, for example, and say: “Everything you have left on this item in three months, you will eat by yourself, or together with the store team”. This is the approach, yes. The staff is motivated. There is a double motivation (a positive and negative one). If the employee sells it, he completes the task and receives a bonus. And if not, he simply buys it according to our internal corporate agreement. The same way a customer goes to the cashier and buys it.

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 density of our stores 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 without it. I don’t understand, what can I buy? There are plenty offers, with 50 stores, 100, and even 300. But what do you want me to buy? (Studennikov 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? 
  • No. 

And what is it to buy? In general, this is some kind of nonsense, an idea from a decade ago: we will build 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 four stores in an apartment building.

…..About the mission 

The company has a mission: to change people’s attitude towards alcohol. Everyone is so surprised. Especially our new employees. In order to convey this idea, I personally do trainings,  at least five hours a week, especially for the low-qualified workers from the warehouse etc. as they wonder: “How is that? We give people alcohol, bring them to drink, and he tells us something about changing our attitude towards alcohol ”. But simply with prohibitive measures you cannot stop people from drinking. Some restrictive measures – what the state is doing – are though necessary…..Five generations of communists turned alcohol into a tool for managing us. The task was to turn off the brain through alcohol. Alcohol should be a joy, and not a tool for switching off the brain.

No company can succeed without a mission in a long term…..Our goal is this – we are forever.

We have five more years of active development ahead. In five years we will be available to almost every resident in the country. In three generations, in 60 years, I guarantee you, we will get our grandchildren and great-grandchildren away from heavy drinking, we will get them out of this shit.

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