Interview with X5 RETAIL GROUP N.V Supervisory Board Chairman Herve Defforey in Kommersant Daily newspaper
16 Nov 2006
Since the beginning of November, the Supervisory Board of X5 Retail Group has been led by Herve Defforey, the son of one of the founders of the international retail chain Carrefour. He is developing a strategy for the merged company and will consult on Pyaterochka and Perekrestok’s integration. HERVE DEFFOREY told Kommersant correspondent NIKOLAI DITSMAN about his plans for the merged company and his vision of the development of the Russian market.
– Who invited you to lead the Supervisory Board of X5?
– I met with key figures on the management level and the Supervisory Board. We discussed our retail vision and the vision for developing this specific group. Everyone made the decision – the participants from the X5 group on their side and me on mine – and we found a common language.
– And why are you interested in this position?
– I agreed to it because I’ve been involved professionally with retail for a long time, and it’s very interesting to me. The challenge before the company today is doubly interesting. From my perspective, my interests include the development of X5 Retail Group’s concept of in Russia. From the group’s side, it was interested in using my experience, which, in their opinion, represents some value. I assume that I can transfer a part of my knowledge to the management and Supervisory Board of this group.
– What will your responsibilities be?
– The Supervisory Board doesn’t participate in the routine management of the company. It has two main roles. The first is to express the interests, goals and tasks of the shareholders. The second is to help management develop a strategy for the group. Therefore, I have two roles: find the certain common denominator demanded by all shareholders and work out a strategy that is coordinated with the shareholders and shared with the management for the development of the group.
– You worked at Carrefour at the time when that retailer merged with the comparably-sized chain Promodes. What difficulties did Carrefour face and do you expect to run into them during the process of integrating Pyaterochka and Perekrestok?
– First of all, I don’t particularly like the word “difficulties.” I would say challenges. The fundamental two questions are: integrating people and tools. In relation to people, it is a question of bringing together two different corporate cultures. And a merger is like when two families with different characters, histories and cultures come together. The second moment more concerns the technical side: purchases, data collection about goods, and the introduction of goods into the delivery chain. The offices need to be united, as does the purchasing system, the delivery chain, and so on.
– What are the biggest issues in the merger between Pyaterochka and Perekrestok that you will have to resolve?
– The most important is the creation of a common corporate culture for both chains and realization of synergies of the merger. This must be done so that one plus one equals more than two.
– How do you rate the provisional results of the merger between Pyaterochka and Perekrestok?
– The merger only went into effect in May and I think it’s still too early to talk about practical synergies. Even though I haven’t had the chance to dig deeply into the process, I see that the management structure is theoretically oriented on mutually agreed goals and the managers are working on integration of offices, purchases. But it will take many months to reach the full effect of the merger.
"It’s most advantageous to have one brand that has a defining mark"
– How do you see the merged company’s strategy?
– The strategy is still in the fine tuning stage. But the parameters are already clear: support and increase the current market share on a fast growing and transforming retail market like Russia’s.
– How do you rate your market share on the Russian market?
– Our market share in the entire Russian retail market is around 2.5 percent, and the market share of the three largest operators is less than 6 percent. But it needs to be remembered that the market share of modern retail formats that we work in represent only a quarter of the entire market. Three quarters of the market are what they call unorganized forms of retail (open-air markets, pavilions, kiosks, and mom and pop stores).
– How do you plan on increasing it?
– We’re going to do it using two paths. One is the organic growth of the company – growth in the number of stores and introducing new formats – and the other is by acquisitions. It wouldn’t be prudent to forecast our market share in the future. It’s too soon to talk about that. We’re currently market leaders, but the market is still very fragmented and will consolidate more. At the current stage we can say that we would like to not only remain leaders in this market, but to lead its consolidation process.
– What investments are being considered by X5’s investment program over the coming years?
– That’s a typical question for a financial analyst. As a rule, answering it, we’re talking about billions of dollars. I can only say that right now we are leaders of a fragmented market and want to remain leaders of a consolidated market. It follows that we have to grow quickly and, if we want to grow quickly, we have to invest.
– Which formats are you going to develop?
– We have three store formats currently. We have soft discounters, supermarkets, and hypermarkets with an average size of 4 to 7 thousand square meters. But we will also consider developing other formats, for example hard discounters, cash & carry, and club stores.
– Is there the prospect of X5 having stores of all formats in the future?
– I don’t think so. We’ll have the formats that best fit consumers in a specific region or district.
– As has been said repeatedly, the X5 strategy involves the gradual acquisition of franchises. When do you plan on concluding that process?
– We are looking into voluntary purchase of franchises as one of the instruments of growth. But it will be a very selective process, in that we are only interested in high-profit stores that can be integrated into existing formats and compatible with geography of our presence and expansion plans.
– What do you think: is it better to develop several different formats under one brand or under different brands? I’m primarily talking about Perekrestok, which has opened both supermarkets and hypermarkets under its brand.
– It’s most advantageous to have one brand that has a defining mark that shows the given format. A good example is the way TESCO does it: TESCO-Express and TESCO-Mega.
– Does Õ5 have plans for the international market?
– Mostly we are planning on developing in Ukraine. I think that Ukraine and Russia are enough for the group’s dynamic development.
– Currently X5 has just 2 Perekrestoks and 22 Pyaterochka franchises in Ukraine. Do you plan on expanding its presence on that market?
– Yes. It is one of the most promising and fast growing markets in the CIS.
– How is the project to create purchasing alliances with other international chains that X5 announced this summer developing?
– This project’s only begun and is being implemented under the direction of Pavel Musyal, the former General Director of Perekrestok who recently was named vice president of X5 Retail Group responsible for international cooperation. He is looking into how to create purchasing alliances with international chains, as well as cooperation in the private labels sphere.
"The term BRIC was created by journalists"
– When you worked at Carrefour, the chain entered into the Brazilian and Chinese markets, which are, like Russia, considered part of BRIC. What is the difference between these markets?
– The term BRIC was created by journalists. These countries are similar in that they are all big markets with large and populous cities. These markets have a growing middle class and increasing purchasing power. They all are going through the restructuring of the retail market from a very fragmented level to a more organized one. But the analogy ends there, and the distinctiveness starts. Take Brazil, where there’s the state San Paulo, where 10 percent of the country’s population lives and which has 30 percent of the GDP. In China, on the other hand, there are 20 large and developing cities. And Russia has the megapolises Moscow and Petersburg, but also has a number of mid-sized cities with small differences in purchasing power. All this manifests itself on the retail market. Consumer habits are also different. In China the population wants to receive lots of fresh products and, if you want fresh products, you have to go to the store daily. In the north of Brazil, thanks to the heat, people buy frozen products because as soon as they get home they start to melt. It directly affects the chain’s assortment.
– Which country – China, Brazil or Russia – is closer from a retail development point of view to Western markets?
– It’s impossible to approach Russia as a country – it’s an entire continent. Brazil is the same way – San Paulo has a very developed retail market that compares with any market in the world, even Paris or New York. But in other cities the market is 20 years behind them. You can’t talk about the country, but about world megapolises, like Tokyo, Shanghai, Delhi, Beijing, Moscow and St. Petersburg throughout the world. All these cities in terms of retail development will be more or less comparable – in terms of the difficulties on the market, not in terms of product assortments and consumer preferences.
– Wal-Mart and Carrefour, world’s two largest retailers, still haven’t arrived in Russia, although they’re operating in China and Brazil. What do you think that’s connected to?
– In relation to Wal-Mart, it is a large, powerful group, but in the US they finished expanding throughout the entire country only 10 years ago. Before that they didn’t have a presence everywhere. And their international experience is, let’s say, moderate. Yes, they’ve developed and arrived in Germany, on the South Asian market, in England and so forth. Wal-Mart has a presence in Brazil, but as far as I know, it hasn’t been particularly successful. But I’m sure that Russia is one of their biggest priorities for development. As for Carrefour, I am sure that they’ve already investigated Russia as a perspective market, but apparently the company has different priorities for now.
– You worked at Carrefour at the end of the ‘90s, when another large French retail Auchan and Metro Group came to Russia. Why didn’t Carrefour come to Russia back then?
– As for Metro Group, their leading format is cash & carry and, when talking about developing markets, cash & carry stores arrive first and hypermarkets later. Therefore, I think it’s normal that the cash & carry format arrived first on a new, fast-developing market. As for Auchan, I think they made a big gamble when they decided to come to Russia. And, in principle, it was a wise move. Carrefour was developing on other markets then, like China and Brazil. It’s impossible to do everything at once.
– Do you think that X5 can compete equally with those chains when they arrive in Russia?
– Definitely. In most countries, local players occupy the leading positions. It’s CBD in Brazil, and El Corte Ingles in Spain.
– Why?
– Retail is basically a business that provides local products to the local population. And who can do that better than local players?
"I don’t have an apartment in Moscow yet"
– You are one of the members of the Defforey family that founded the Carrefour chain, but until 1993, you didn’t work at the company. Why?
– My personal goal was to gain experience in various spheres and working at Carrefour wasn’t planned, in spite of my last name. My work for Carrefour was completely coincidental. Last names don’t mean anything at Carrefour. Even I, a member of the group’s Board of Directors, didn’t arrive from my family, but from management.
– What projects are you involved in with at the consulting company GRP Partners, where you are a managing partner?
– My position means that I am an old partner with lots of experience, and I advise GRP portfolio companies on operational issues.
– How much time do you plan on devoting to work directed at X5?
– Approximately 20 percent of my time, and if it requires more time, I will work more.
– Do you have an apartment in Moscow?
– No. I heard that real estate in Moscow is more expensive than in London, where I live. So, if you know a good real estate agent, let me know.
Herve Defforey
Born in 1950. Together with some colleagues, his father Danny Defforey founded Carrefour, the first hypermarket in France. That was the beginning of the eponymous retail empire. Herve Defforey started his career in 1975 as a marketing advisor at Nestle. In 1977 he moved to Chase Manhattan Bank N.A., and was a vice president when he left in 1983. He then took a management post at BMW AG as the Treasurer. In 1990, he moved to Azucarrera EBRO S.A. in the capacity of Managing Director. From 1993-2004, he was the CFO and General Manager of the Carrefour S.A. retail chain. Starting in 2001, he worked as Partner at GPR Partners. In November 2006 he started leading the Supervisory Board of X5 Retail Group N.V. He currently sits on the Boards of Emida Technologies, IFCO Systems, PrePay Technologies, ULTA Salon, Cosmetics & Fragrance.
X5 Retail Group N.V. (Pyaterochka Holding N.V.).
Russia’s largest retail food company by sales volume. It was created as the result of the merger between the Pyaterochka and Perekrestok chains on May 18, 2006. 54 percent of the company is held by Alfa-group shareholders and management, 21.2 percent by the founders of Pyaterochka, and 24.8 percent is traded on the LSE. It’s capitalization is more than $4.9 billion. On September 30, 2006, the company consisted of 420 Pyaterochka stores in the soft distributor format, including 199 in Moscow, 199 in St. Petersburg, and 22 in Yekaterinburg, as well as 141 Perekrestok supermarkets in Russia’s central region and in Ukraine, including 81 stores in Moscow. There are an additional 539 franchised Pyaterochka stores in Russia, Ukraine and Kazakhstan and 10 franchised stores under the Perekrestok brand in Moscow region. X5 Retail Group’s net sales over 9 months in 2006 rose 45 percent to $2.411 billion. Pyaterochka increased earnings by 43.3 percent to $1.374 and Perekrestok increased earnings by 47.3 percent to $1.037 billion.
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