Russia’s Hot IPO Is an $8 Billion Bet On Frugality

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 $8.3 billion assumes sizeable ongoing appetite for cheap detergent and affordable cosmetics. It says everything that Russia’s hottest initial public offering 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 2021 earnings. 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 U.S. giants Dollar General Corp and Dollar Tree Inc.

Cheap-and-cheerful is not a new phenomenon in retail. German discounters Aldi and Lidl stormed Europe’s grocery market in the 1990s. In the U.S., the likes of giant Sears 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 $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 (just above $3), will benefit from a stagnant economic backdrop. Russian households haven’t recovered from the economic crisis of 2014, and real disposable incomes fell 3.5% last year. More importantly, consumers feel poorer as prices of staples climb: In January, 53% of Russians surveyed by NielsenIQ reported being financially affected by the pandemic, double the rate in September. Even among those not hit, 16% said they were trying to make their money stretch further.

The country’s economy held up better than expected last year, contracting 3.1%. But even with some income and job support, households bore the bulk of Covid-19’s financial pain, and not all of that shows up in official statistics. Russia’s unemployment rate is back below 6%, but that doesn’t 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 posted an Ebitda margin of just over 19% last year, well above local supermarket peers. A focus on non-food items and an investment-light model means profitability should remain strong.

But competition is heating up from online rivals and traditional retailers like X5 Retail. Figures in the IPO prospectus indicate Fix Price has a 93% of its retail segment, described as variety value stores, but there’s no guarantee that will stick. Maintaining the current rate of top-line growth implies continued store expansion, which may 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 may become a bellwether much like Fast Retailing Co.’s Uniqlo stores were in Japan for former 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 may well be inversely proportionate to Russia’s own.

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

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 U.K., Italy and Russia.

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