Big interview: Vitaly Balabanov

Vitaly Balabanov has led the Alliance of Russian Distributors (ARD) as it has grown to 16 members in the four years since formation, but he tells OPI that there is still a significant opportunity to boost membership numbers from the larger Russian cities with a population over one million. Russia is currently big-box free, but the key for Balabanov in the coming years is to ensure that ARD, which became a member of BPGI in January 2012, has a clear long-term strategic plan before the likes of Staples and Lyreco inevitably take the plunge.

OPI: When was ARD formed?

VB: January 2009.

OPI: And in simple terms how would you describe ARD’s strategic mission?

VB:  That’s a good question because ARD has had a significant evolution. If you had asked me this four years ago, I would have said we set up the group to achieve purchasing power. But we had very interesting discussions before joining BPGI to try to understand how to get the business to reach the rate of other markets, and we realised that ARD should focus more on B2B. 

This evolution happened due to the unclear strategy of many companies in the Russian industry four years ago. If you ask some businesses here ‘what’s your specialism?’ they will say the ‘stationery business’. If you ask companies in the west they will say the ‘office products business’. There are also a lot of wholesalers in Russia – about 200 companies each operating in different regional territories, of which there are 81 in total. When we set up ARD we consolidated large companies from these regions and realised their model is not sustainable or effective. Smaller wholesalers are losing business to national wholesalers and they needed to have a new, clear direction. So two years ago we set up a catalogue for selling B2B, and have pushed strongly for ARD members to use it.

OPI: Are your members wholesalers that sell to other dealers or do they sell directly to B2B customers?

VB: They have a mix of activities, which is a reflection of the Russian market. Members all have their own shops, wholesale outlets and a B2B business.

OPI: How many members do you currently have?

VB: 16.

OPI: You mentioned that there were 81 regions; was it your intention to have 81 members?

VB: Our intention was not to attract quantity; we need to have quality.

OPI: What other criteria do you have for companies becoming members? What exactly do you define as quality?

VB: I think the first criterion is the ability to work with our catalogue because we need to consolidate around the key vendors that are included. We need to develop key brands in each category. At the moment vendors are not active in the regions due to the smaller income available, so private labels control a significant volume of the markets. 

Second, we look at what their business model is. If it’s original wholesaling, we believe it’s only a matter of time before national wholesalers acquire this business and it’s very clear that currently they’re losing more and more market share. So we need to understand what proportion of their business is B2B, what is retail business and what is wholesaling. If a significant proportion is wholesaling, we look at what investments they will make to develop the B2B side because we have members that are very keen to do this.

Thirdly, we look at quality. If you have a B2B customer base how many customers do you have? What’s your capability in CRM and logistics? B2B is a completely different business to wholesaling; you need to have trained staff, you need to have a system to sell products and high numbers of SKUs. Will we add value to them and, vice versa, will they add value to our development? The financials are also very important; they need to have a robust position to pay suppliers on time. If a company doesn’t have a good financial discipline it reflects badly on us.

OPI: You mentioned private label; do you have an ARD private label?

VB: No we don’t, but we’re having discussions about this. It could possibly be the next step because we are making our business step by step. As I explained, in a short time we have converted our business from wholesaling to B2B and have started to consolidate our members around the needs of B2B buyers. And it’s not easy because we cannot be ahead of the market. It’s also a big investment to build a reasonable quantity of SKUs from China and guarantee their supply and quality. However, we are thinking very seriously if it can be the next evolutionary step.

OPI: How price sensitive is a Russian business consumer? Is private label absolutely necessary to be able to win market share?

VB: At the moment there are many private label brands that dominate the regional Russian markets. In big cities like Moscow or St Petersburg the businesses are different and require more A-brands, but in the regions private brands control significant market share due to their lower price and having built a position over the last ten years. So distributors rely a lot on private label.

OPI: What is the combined sales volume of your 16 members?

VB: We estimate total turnover is about $490 million. Some members have a turnover of $10 million and some have more than $100 million. It’s a reflection of their business model; if they’re involved in significant wholesaling in many regions they will have significant turnover, but this doesn’t reflect their B2B business.

OPI: What is the market size in Russia?

VB: If you consider the five largest Russian markets, the market size for pure stationery products plus paper at retail prices is about $4.2 billion. If you consider the markets of furniture, EOS and office machines it’s significantly higher. And this trend will grow more and more because it doesn’t make sense for offices to buy products from the many non-stationery distribution channels that exist, especially in the regions.

OPI: Do you see Russian OP companies getting into emerging categories such as catering and cleaning products?

VB: Yes, I think this will be the next stage of the Russian market, which has significantly changed since the 1990s. The market is still very immature and stationery is still the main focus. Since the 1990s businesses have mainly developed their back-to-school (BTS) offers because a lot of people just think of stationery as something they buy for their children.

The industry has grown with the rest of Russia’s economy, which has increased dramatically due to oil prices and development. As a result many businesses have opened and are growing, even in the smaller regions. In Moscow and St Petersburg the concentration of rich companies is quite high and also there are a lot of state tenders. Traditional stationery businesses have started to focus on becoming an office products business where 30% of their business is stationery and the rest is facilities management, EOS, food, coffee machines and other things.

Companies are starting to invest money to develop such models, but at the moment it’s not easy for them to develop good relationships and terms with vendors. Therefore, our staff at ARD act as consolidators because we have a pool of companies that can act together to create value and negotiate with vendors – it’s a chance for them to get better conditions for developing their business directions.

However, it’s still not that dynamic because after the crisis of 2008 the pace of growth in the B2B market has reduced – the rate of growth pre-2008 was 30% a year, which is quite significant. But already resellers understand that the BTS market will increasingly move to hypermarkets and supermarkets, which started to happen five years ago, and ARD members are interested in developing their own retail networks.

OPI: Some of your members are trying to develop regional retail networks?

VB: Yes, and we are thinking very seriously about how we can restructure these businesses. We have experimented in a couple of regions with a new shop format including office products as well as stationery, and have had quite a good response.

OPI: What size are these shops?

VB: From 70 sq m (700 sq ft) to 200 sq m.

OPI: Is there an opportunity for larger superstores?

VB: If we consider Moscow, for example, at first glance it might seem logical to have a superstore as there is a large market, but when you consider the traffic situation a B2B delivery service is better. It wouldn’t make sense for end-users to go to a superstore and spend a lot of time in traffic jams; on average it takes people three hours to get to work here. The B2B companies offer a highly developed alternative; they supply products next day at a good price and with a wide assortment. So where superstores are considered, if there’s not an opportunity in Moscow there automatically won’t be an opportunity in the regions.

OPI: I understand that traffic or transport is a challenge in many places.

VB: Yes one of the problems here is logistics. Sometimes we can be stuck in a traffic jam for five hours, especially if there’s snow. The problem is that the number of cars has grown quickly; 30 years ago customers couldn’t afford to buy a car. Since the 1990s I think the number of cars has increased each year by 150,000. The main roads haven’t changed though, and even though the government has invested money in roads the number of cars has grown quicker than the developments. We’re not optimistic as everyone says there will be no improvement at least in the next three to five years.

OPI: So it must be very difficult if you are in a business that is involved in the distribution of products to offices in busy areas?

VB: Yes, but we don’t have any members in Moscow because when ARD was set up we focused on consolidating regional wholesalers. But we do think seriously about the Moscow and St Petersburg markets. 

OPI: When you joined BPGI your revenues were $417 million. You haven’t increased your member numbers, but your revenues are now $490 million. Is that all growth or anything to do with exchange rates?

VB: We have some members who became national wholesalers.

OPI: So it’s purely growth?

VB: Yes it’s growth. The market has only grown by about 10%, in some segments maybe 15%, but we can see the growth of some ARD members.

OPI: Is that because they’re selling more products or because they’re buying local competitors?

VB: They have expanded into new customers, so not just stationery anymore.

OPI: In Russia are you seeing a significant increase in sales to online retailers like Amazon and other companies?

VB: That’s another good question because I personally think that companies will switch straight to selling on the internet rather than evolving through superstores. A lot of companies have started to invest good money in their internet platforms so I think it’s the future. We’re lucky in Russia that we haven’t had the same market evolution, so we don’t have to follow the trends or history of Europe. We’ll switch straight from an immature situation to an internet platform and a strong internet service. 

OPI: Is there a dominant internet retailer in the Russian market like Amazon?

VB: Yes, we have a couple like Amazon, but they don’t have stationery or office products segments in their businesses.

OPI: Not yet.

VB: No.

OPI: In terms of other businesses entering the market, does it surprise you, given the tremendous growth of the Russian market over the last ten years, that companies like Staples, Lyreco or Office Depot haven’t done a better job at developing their presence in Russia?

VB: Yes and no. Yes, because if a company declares it is global it needs to be in such markets. No, because maybe the market isn’t ready. For them, if the market isn’t structured then it’s unclear how they can perform.  

OPI: Do you see a day soon when a company like Lyreco or Staples will put in place their own business structure as opposed to the alliances that have been the preferred choice until now?

VB: Definitely. I think their focus will be stronger and stronger, but I don’t know how they will convert that into real actions.

OPI: A leader of one of the companies we’ve just been talking about said to me that a big problem with entering or succeeding in the Russian marketplace for a western company is high levels of corruption. Do Russian business people take offence at that accusation?

VB: I think it’s all speculation about corruption, because if you consider the real facts you will see that all the global leaders of the FMCG category in Russia – businesses like Danone, Mars, Procter & Gamble, Nestle, Pepsi, Coca Cola and so on – are very successful and satisfied with their businesses, as are other leading companies like Metro and BP. And look at retail chains like the French company Auchan; other multinational players may say that they don’t have a significant business and ‘it’s corruption, it’s administrative problems’, but if so why has Auchan built a tremendous success in the Russian market?

OPI: So you’re saying that the office products companies that we speak to are just using that as an excuse?

VB: Yes, they make excuses. If you look at other segments you can see that most leaders in Russia never say ‘we need to pull out of the market because of corruption’. They joined the market in the 1990s when the situation was worse because of political instability and oil prices were miserable if you compare $11 a barrel then to $100 a barrel today. Now they have made significant investments, not just in offices but in production facilities so they have very deep roots in the Russian market. 

OPI: Let’s talk about the future of ARD. What are your short- and medium-term goals for developing the number of members, turnover and the products and services you provide? 

VB: First of all we need to create an alliance of companies that are focused on B2B and will use one, national catalogue. They need to be given best practice and guidance to achieve this new direction, and through BPGI we can do this as some of them don’t speak English. We would like to see our membership made up of independent B2B companies, and we need to attract more of these and help them to generate more customers. For example, if a dealer has 300 or 500 customers, we need to attract it to join ARD and grow this business. It’s not easy to persuade members to change their vision from wholesaling to B2B and we have a lot of meetings and discussions to do this. We try to persuade them using real facts that regional wholesaling is not a sustainable or profitable business as it is going to disappear. 

Secondly, we are going to focus on A-brands, most of them multinational. Our strategy is very simply 2P – to push and pull; we can push products onto the shelf and via catalogues into offices, but we need vendors to switch to ‘pull marketing’. When customers know more about their brands they’ll pull it from shelves. Once there is a higher brand awareness we can convert this to a higher purchasing frequency. We ask vendors to have detailed marketing programmes that focus on specific regions and members, and how we can take this forward, because pushing without pulling is not effective, especially in the regions. More brands that understand the channel will start to do this and together we can have a greater synergy. 

OPI: You mentioned your relationship with BPGI. You joined in January 2012, so what are your views on what you’ve seen in the last 17 months?

VB: Well first of all, for us it was a new experience because we are from an immature market. Anything new can definitely add value, and for us BPGI has not only benefited the relationship we have with vendors but has given us a good understanding of how other organisations operate. We have visited Quantore in the Netherlands and some other groups and seen how they’ve evolved, their logistics and so on. BPGI has been very supportive and has been a good channel for us in many respects, with not just information but interactions. The group is a reflection of many markets and it’s important for us to understand the way that the Russian market might go. It could become more orientated to the US market or maybe the European market, and all this analysis of information gives us a good chance to adjust and benefit from their knowledge and experience to develop our business.  

OPI: Many people have been critical of BPGI’s business model saying that it needs to change. What do you think CEO Barrie Hayes and BPGI need to do to meet the challenges of the future?

VB: For me it’s still very difficult to talk about BPGI’s global vision because, as I said, we are more on a learning process. I think they do a good job but I don’t know the needs of global dealers because I only represent the Russian market, so I need more time, maybe a year, to develop a deeper understanding of this.

OPI: What else should our readers know about the Russian market?

VB: I think it’s important to explain that the Russian market is currently consolidating in different directions. The market will become more interesting to not only Russian but to global players; when the market structure develops further and consolidation happens there’s a real chance for success here.  

OPI: Tell us about your career to date.

VB: Following university and two years’ army service, in 1991 I started to work for one of the largest state organisations selling food and non-food products. After that I joined New Zealand Dairy Products, which controls about 40% of the global dairy product market. In 1992 the Soviet trade system collapsed and we set up a new business with both local and foreign companies. I then became General Director at a New Zealand Dairy Products subsidiary. Then, after gaining my MBA from Kingston University, I spent two years developing the business strategy at a company involved in the production of ice cream. It was then I made the decision to develop my own business, so I set up Best Group, which manages distribution projects; one of the projects is ARD.

OPI: What exactly is Best Group?

VB: Best Group is a management development business that has shares in ARD, so I am both a shareholder and General Director. When we had the idea to consolidate Russian companies I was invited to manage it, and now my role is to develop a clear strategy for ARD and make it happen.

ARD:

Full name: Alliance of Russian Distributors

Founded: 2009

Founder members: Best Group, Relef-Center, RostovKantsOpt, UfaBum Torg

General Director: Vitaly Balabanov, owner of Best Group

Business model: All members have their own stores, wholesale outlets and B2B outlets

Members: 16

Combined sales: $490 million (approx).