MOSCOW, Oct 26 (Reuters) - A mix of low incomes and rising inflation is stifling purchasing power in Russia while driving growth of discounters and convenience stores in the retail sector that could soon produce Russia's largest IPO in years.
Low-cost retailer Fix Price raised around $2 billion in a London listing in March and the next Russian retailer to stage a market debut will likely be Mercury Retail Group, after the central bank registered its prospectus late on Monday.
"Trends are dictated by consumers, for whom convenience is today's priority," said Mikhail Burmistrov, general director of analysis firm INFOLine, which expects a customer focus on time saving to drive ultra convenience and online sales in Russia in the next few years.
Another driver is price, with inflation surging to 7.8% as of Oct. 18, its highest since February 2016, and long stagnant income growth, bruised by the pandemic, struggling to keep up.
Market leader X5 is planning to open up to 3,000 of its "hard discounter" Chizhik stores over the next three years, tapping demand for lower prices, a move which led BCS Global Markets to up its target price for the group by 5%.
BCS said retailers across the industry were adapting to changing customer behaviour, which also includes rising competition and the post-pandemic emergence of ‘ready-to-eat' food products.
Mercury Retail, which runs two chains of alcohol and convenience stores, combines low prices with proximity to customers at around 13,500 stores across Russia.
That is about three times more stores than Fix Price, which was valued at around $8.3 billion at its March IPO, when its shares were priced at $9.75 a piece. The company's stock has since slipped to trade at $8.80.
Russian share offerings in the past year have attracted investment from European, U.S. and Middle Eastern funds, but domestic investors can also provide liquidity, as does Russia's growing fleet of retail investors.
Mercury Retail is hoping to raise over $1 billion this year, sources told Reuters last month. Its valuation could be as high as $20 billion, which would make it the most expensive Russian listing in several years.
"Mercury Retail Group is now performing better than the biggest companies on the market, so I wouldn't be surprised if investors value the company higher than incumbent players," said Burmistrov.
But there are no guarantees of success, with Russia's IPOs so far this autumn garnering tepid appeal.
Renaissance Insurance listed below initial targets last week, while a bookrunner for IT firm Softline's IPO said on Monday it expected the deal to price at $7.50 per GDR, the bottom of a range that extends as high as $10.50.
The problems are not limited to Russia, with signs across Europe that investors are becoming less receptive to new issues.
Volvo Cars shrank its IPO on Monday, pricing it at the bottom of a previously announced range as inflation and global supply chain crunches have increased stock market volatility.
Another Russian firm eyeing a listing is high-end retailer and food producer VkusVill, which posted sales growth of 37.6% in the first half of this year, outpacing all other major competitors, according to INFOLine.
"If Mercury Retail is the leader on price, then Vkusvill is the biggest food brand in Russia," said Burmistrov. "Given the current business growth rate, in 2023 Vkusvill will lead the ranking of the largest food and beverage producers in Russia."
Reporting by Alexander Marrow; Editing by Katya Golubkova and Mike Harrison