Electronic Billionaire: Mikhail Gutseriev sells a third of all home appliances in Russia

After the purchase of MediaMarkt, Mikhail Gutseriev’s Safmar Group controls almost 30% of the domestic consumer electronics and home appliances market. Now the group will have to meet expectations for capitalization growth by focusing on increasing efficiency, profitability growth and development of online sales channel

In mid-June Safmar group of Mikhail Gutseriev #69 announced the sale of 15% in the retailer M.Video to German Ceconomy Group for €258 million. Under the terms of the deal the financial-industrial group also received the Russian business of MediaMarkt (a “daughter” of Ceconomy). We are talking about 42 chain stores and several dozen corners of Metro Cash & Carry supermarkets, the closure of which the company announced immediately after the deal. As a result, the billionaire controls almost 30% of the consumer electronics market. The unique deal will probably be the last for Safmar in this market.

The market of home appliances, consumer electronics and mobile devices in Russia has been aggressively consolidating since 2017. However, this trend is typical not only for Russia, but for the whole world. In our country, we also see, for example, the “collapse” of independent cellular retailers. The fact is that this market is very much influenced by the effect of scale. That is why the only model of development is to absorb competitors. Another thing is that in Western markets the traditional players have already lost the battle with the online. In Russia the market leaders (“M.Video”, “Eldorado”, DNS) came online in time and retained the ability to compete with the “pure” online (“Citylink” and Ozon.ru).

A few years ago “Safmar” was able to quickly orient itself, taking on the role of the player, uniting this market. Although the history of the company’s entry into the business of household appliances and electronics cannot be called unequivocally successful. “Tekhnosila, which was taken over by Safmar along with MDM Bank, ceased to exist, and Eldorado reduced its revenues in 2017. At the same time, “Safmar” made a strategically correct decision – to consolidate the business around “M.Video”. This network has long been a model of efficiency in terms of profitability and conservative financial policy – in a good sense of the word. In addition, it has two components that almost never meet together in Russian retail. Firstly, both the company’s shareholders and top management have a real strategic vision. A few years ago Alexander Tynkovan, the founder and head of the chain, decided to take M.Video out of pure offline and develop it as a multi-channel business with a focus on the ever-increasing share of the online segment. True, M.Video and Eldorado were behind DNS Group in terms of online sales separately in 2017, but M.Video managed to launch the Goods.ru marketplace, which now competes with the Beru.ru site of Yandex and Sberbank .

The second feature (which is even rarer in Russian retail) is the highest level of corporate responsibility, transparency and respect for the rights of minority shareholders. If the deal on M.Video’s purchase by Safmar had not been done so cleanly, smoothly and with respect for minority shareholders, Media-Saturn-Holding (which manages MediaMarkt) would not have risked buying a minority stake in a company with a unique premium to the market. The valuation of M.Video, at which the Germans received a stake in it, is almost three times higher than the current market capitalization – such multiples for public companies in the Russian retail sector have never been seen before.

However, MediaMarkt’s business in Russia was unprofitable. Why? Accustomed to actively investing in empty markets and then skimming the cream off them, the company lost flexibility and after the 2008 crisis became uncompetitive against Russian players who were rapidly growing and actively investing in the development of online sales. Things got even worse after 2014 because of another Euro jump. In addition, the market in Russia differs from the European market not only because of more aggressive price competition, but also because of increased demands on logistics because of the great distances and proximity to China. International companies realize that they can no longer succeed on the highly competitive Russian market. MediaMarkt has completed its development cycle in Russia, a signal to retailers such as Metro and Auchan, which have already lost leadership in their segments and continue to rapidly reduce sales and revenues.

What does this consolidation mean for the consumer? First, consolidation allows the retailer to get more attractive prices from suppliers. Through its size, lower costs and increased efficiency, the combined company will be able to positively influence prices. At the same time the risks of monopolization on the market are objectively low since online is a good inoculation against this “vice”. In addition, we should not forget about cross-border trade, which due to the absence of VAT and the effect of scale in production allows you to provide the buyer with the lowest prices.

Nor will this deal affect the negotiations on a possible partnership with the Chinese Alibaba, which became known at the end of last year. I think that the Goods.ru project, which is already working quite successfully, may be of much greater interest to the company. It is important to understand that the price at which the Germans bought a share in the merged company is too high for the Chinese. Therefore it is unlikely that in the near future we will see a deal with them as well. But that does not mean that Safmar will not want to attract a new investor to the company.

I also do not think that we will see any new merger-acquisition deals in the market of home appliances and electronics with participation of Mikhail Gutseriev’s company in the nearest future. Now Alexander Tynkov has a company that has grown in size by about 70%. Now it is necessary at least to maintain its indicators at the level of the M.Video chain. In this case, it is very important to digest what has already been absorbed and justify that price and those aggressive multipliers that investors now put in the company’s valuation.