Quotes of the Day

I used to say Moscow is an island of prosperity in an ocean of despair," laughs Mark Wrong, a British developer with plans to build Western-style malls in several Russian cities. "But it's not true any more." Last month he broke ground on his first mall, in Yaroslavl, which is about 240 km northeast of Moscow, and over the next two to three years he hopes to have outposts as far as Ufa and Yekaterinburg.

Such expansion outside Moscow was unthinkable even a few years ago, but it's a sign of how Russian retailing has evolved over the past decade. Some new retailers are racing to create national chain stores for the first time — an ambitious goal given Russia's vast size, the poor state of its roads and railways and the complexity of dealing with local bureaucrats. In sectors ranging from pharmacies to DIY stores, recognizable brand names are starting to emerge.

Euroset, a seller of mobile phones, is the best example. Its fortunes have soared as Russians across the country have discovered the joys of wireless. The company started out in the mid-1990s with two Moscow stores and began a national push in 2004. In the two years since, the number of its cheerful yellow outlets and the size of its revenues have both increased tenfold. Last year it sold 9 million handsets. It's now a $2 billion company. By any standard, that's explosive growth. "Microsoft and Dell didn't do it that quickly," says Jan Dauman, a London-based consultant who is advising the company on how to cope with its rapid expansion.

Yevgeny Chichvarkin, Euroset's ponytailed co-founder and chairman, is conscious of his success — perhaps too conscious. In a corner of his Moscow office, perched beneath a painting of a businessman fondling his half-naked secretary, is an open silver attaché case containing wads of U.S. $100 bills in packs of $10,000. It's meant as a joke, poking fun at perceptions of Russian businessmen as big-spending bandits.

After the 1998 crisis, Chichvarkin says Euroset's focus was on low prices. But now that Russians have more money, the firm is focusing on branding and store location. Most employees work entirely on a commission basis. One of the biggest challenges for the company, says co-founder Timur Artemiev, is finding enough good managers. Among the criteria: "They mustn't be lazy or steal."

Emerging consumer credit is helping to fuel sales. Credit cards such as Visa or American Express have only taken off in Russia in the past three years, and few Russians yet own one. But stores have increasingly begun offering loan terms to customers. Offering credit was pioneered by M.Video, an electronics and electrical equipment chain, and has quickly been adopted by others. M.Video now has 62 stores in 16 different regions of Russia and Mikhail Kuchment, the commercial director, says the plan is to open 20 more in 2006 and hit the 100 mark by the end of 2007. About 25% of M.Video's sales are credit financed. "A majority of customers in big cities already have basic products such as TVs and fridges," he says. "Nowadays it's more a question of replacement, or selling DVDs or plasma TVs."

Food retailing has also taken off. A couple of the bigger Moscow supermarket operators, Seventh Continent and Pyaterochka, are already publicly listed on the stock exchange. Several rivals are expected to follow suit in the near future as they look to finance national expansion. The industry is also starting to consolidate. Last month, Pyaterochka agreed to merge with rival Perekriostok to form Russia's biggest food retailer, with almost 900 stores and sales of $2.4 billion. What's happening in Russia is very different from the experience in East European countries such as Poland and the Czech Republic. There, Western retailers rushed in as soon as they were allowed and trampled the local competition. But Western firms have largely been wary of Russia's political and economic instability during the 1990s; their hesitation has allowed a domestic retail industry to grow up.

It's not just Moscow-based firms that are looking to expand. Pavel Kukarskikh left his native Yekaterinburg for Ottawa, Canada, when the 1998 financial crisis hit, convinced it was impossible to do business in Russia. Three years later he was back, and today he runs 16 kebab stands, a family diner called Sunday and McPeak, a burgeoning hamburger chain with eight outlets that he says McDonald's recently offered to buy. McDonald's says it approached him as part of its attempt to find prime locations for its own restaurants as it expands across Russia. He's trying to turn McPeak and Sunday into national brands, and he recently set up a bread factory in Moscow that will supply what he hopes will become a nationwide bakery chain. This winter he took his top managers away to Thailand for a management-strategy retreat. One of its conclusions: his firm, Malachite, will need to hire about 3,000 new staff and should consider creating its own training school.

All these entrepreneurs say that official corruption is a hazard of doing business in Russia that they have more or less learned to navigate. Euroset co-founder Artemiev says that the firm tries to lease stores wherever possible rather than build or buy its own, in order to avoid hassles with permits. "We try to outsource our problems with bureaucracy," he says.

The growth of this new generation of Russian retailers is good news for foreign consumer-goods firms trying to tap into the market. Already some foreigners are working closely with the new generation of Russian retailers, hoping to piggyback off their expansion. The French cosmetics firm L'Oréal, for example, is selling in Russia two skin-care lines, Vichy and La Roche-Posay, distributed exclusively through pharmacies. The French company works with individual pharmacies to revamp their look and feel, including providing fittings such as shelving. This January, L'Oréal and a pharmacy chain called 36.6 teamed up to open what they call a "concept store" on one of Moscow's smartest shopping streets, Kutuzovsky Prospekt. It consists of three sections: shampoos, pharmacy and over-the-counter supplies, plus an inviting, brightly lit room filled only with La Roche-Posay and Vichy products and advertising. "This is like a window of the brand," says Alexandre Emilianov, the managing director of L'Oréal active cosmetics in Russia, who wants to open a similar concept store in 10 major Russian cities over the next three years. It seems to work: both Vichy and La Roche-Posay have quickly established themselves as leading brands in Russia, and sales growth is buoyant. The real beauty of it all, of course, is that Russia as a whole is benefiting.

• PETER GUMBEL
• For big brands, Russia is the new retail wonderland