A partnering approach to mass merchandising in Russia

Business Horizons, July-August, 1995 by James R. Lowry

A large, untapped retail market exists in Russia--if, as Oscar Wilde stated, the potential conforms to what "statistics have laid down for our guidance." The country represents a market of about 148 million people, but it has fewer than 700,000 retailers--compared to more than 1.9 million in the United States, which has a population of about 263 million. Although the gross domestic product (GDP) per capita in Russia is only $2,500, compared to $14,000 in the U.S., most economists foresee a continual growth in GDP and workers' incomes. When measured in dollars, say Western economists, Russian GDP increased by 41 percent between 1993 and 1994.

In the 1950s and 1960s, West European countries with their market economies embraced the concept of mass merchandising. Enlightened entrepreneurs saw a growing mass market that was not being well served by the small, high-priced specialty shopkeepers. This resulted in the development of large discount stores and huge hypermarkets handling a variety of general merchandise and groceries. At this same time, Russia--a communist nation with a command economy--was prescribing the kinds of retailers that could exist, adhering to an archaic distribution system that provided consumers with the essentials of life but few of the luxuries.

Today, Russian retailing is characterized by enclaves of small, independently operated stores and numerous medium-sized, state-run stores. As the Russian economy stabilizes and employment and wages increase, Russians will increase their demand for consumer goods. The question arises about how to satisfy the needs of an emerging market with a distribution system designed for a less affluent and tightly controlled economy. One way to meet this need is to borrow from the experience of the United States after World War II and encourage the development of discount stores containing a variety of leased departments. Russians would provide the physical facilities and store services while foreign retailers would provide the necessary merchandising talents. In addition to operating leased departments, the foreign retailers would make a direct investment in the enterprise, supplying startup capital to their Russian landlords. This type of organization would satisfy the Russian desires for joint ventures and for Russian management of these ventures. In a similar manner, a mass merchandising industry could develop in the other republics of the former USSR.

ORIGINS AND USE OF LEASED DEPARTMENTS

Although leased departments have played an important role in contemporary retailing, their roots are found in antiquity. The bazaars of the Persian Empire from 550 to 323 B.C. were similar in concept to modern leased departments. Later, the fairs that were prevalent in England and Europe in the eleventh and twelfth centuries contained many aspects of present-day leased department management. For example, merchants could rent wooden booths at these fairs from which to sell their goods.

In the U.S. in 1874, Macy's contracted with L. Straus & Sons to install a china, glassware, and silver department in its New York store. After the Macy department proved successful a few years later, the Strauses developed similar arrangements with other department stores in Philadelphia, Boston, Washington, Brooklyn, and Chicago.

In the decade after World War II, traditional department stores in the United States were being challenged by maverick discount stores for the patronage of the broad-based, middle-class market. Seeing an important market slip away, department stores employed a strategy of adding new leased departments in an effort to halt their declining share of total consumer expenditures. Two surveys covering the operations of leased departments in department stores revealed that in 1959 and 1961, 42 percent and 28 percent of the stores, respectively, added new leased departments.

During this same period, discount-store operators were using leased departments as a means of offering a variety of goods, gaining merchandising expertise, and reducing their capital investment and risk of loss. Many of the first discount stores were typified by the Korvette store in New York City, a specialty discount center concentrating almost entirely on name-brand hard lines. Other discounters emerged, generally in the New England area, that handled mainly soft goods. Operating from previously abandoned cotton and woolen mills, they became known as soft goods supermarkets. To expand their offerings to become general merchandise vendors, both the hard-line discounters and the soft-line discounters turned to leased department operators to fill voids in their merchandise lines. Some establishments used leased operators for nearly half their departments while others used them for fewer than 10 percent.

This same period saw the development on the West Coast of closed-door discount stores, which required consumers to pay a nominal membership fee for the privilege of shopping there. Although the operators of both the hard-line and soft-line discount establishments had extensive backgrounds in retailing, the founders of the closed-door stores had no prior retailing experience. Instead, their backgrounds were in finance, real estate, law, or accounting. So to obtain the needed merchandising expertise, they leased nearly all of their departments. Because the buildings were generally secured on a leased basis, the operation was mainly a financial shell serving and coordinating the activities of its lessees.