Sat, 19 Oct 2019

Leroy Merlin retail chain demonstrates success on the modern market of Vladimir Putin's Russia, which is not an easy place for many international players. In 2018 alone, the company managed to open 20 new shops in this country, having taken up to 13% of the local DIY market. And, according to Andrey Simkin, the national procurement director, by 2022 Leroy Merlin intents to double its share on the Russian DIY market up to 26%. Frenchman Vincent Gentil, General Manager of the entire Russian branch of Leroy Merlin, also agrees with his subordinate. He has already announced that in Russia the retail chain plans to add in revenue at least 5% annually.

All this is happening against a background of the ongoing economic crises caused by Vladimir Putin's sharp political confrontation with the West. The political leadership regularly responds to the economic sanctions imposed against Russia with counter-actions, for example, imposing restrictions on the Europe's food supply to Russia. The Russian economy has been stagnating for several years and the real income of the population has been declining. Many European market players - competitors of Leroy Merlin – are leaving Russia, fearing further political escalation and failing to cope with the decline in consumer demand. In 2018, Finnish Kesko shut down and sold off all its Russian K-Rauta stores to the French. At the end of the year, British Kingfisher, which owns Castorama stores, decided to leave Russia too.

The success of the Russian branch of Leroy Merlin seems doubly surprising against this background. Though, there are serious risks involved that threaten not only the position of the retail chain in a single Russia, but also its reputation on a global scale.

In the years of crisis, the main development of Leroy Merlin happens due to expansion into the Russian regions, which requires the ability to identify common interests with the local administrations. Sometimes schemes of interaction with Russian officials fail and become accessible to the public. For example, in 2013, it was revealed that the son of the Minister of Justice of the Republic of Tatarstan – one of the richest national autonomies within Russia – forced the French to pay over a million euros to facilitate the connection of their new store to public utilities. The money was transferred, but the officials did not fulfill their obligation. And only after this incident the managers of Leroy Merlin appealed to the law enforcement agencies. And how many such incidents simply do not receive publicity? After all, in most cases in the regions Leroy Merlin stores are built and opened on time. Meanwhile, in 2018, according to official statistics only, Russian law enforcement agencies registered 25 thousand criminal acts involving corruption, several governors were dismissed, dozens of regional ministers and mayors were arrested for bribery and frauds. Active mutually beneficial Leroy Merlin's contacts with Russian administrations at any point might become toxic and result in serious reputation losses at the international level.

2018 also marked serious political risks specific to present-day Putin's Russia. A high-profile Leroy Merlin employee responsible for public relations has found herself at the center of the scandal. She made several comments in her personal blog, and a number of patriotically minded Russian elements considered them offensive and anti-Russian. Soon, from the pages of the largest Russian mass-media and on the main television channels open calls to boycott Leroy Merlin started to sound, and the guilty employee herself became a subject of harassment on social media. Afterwards, the employee was fired, and Leroy Merlin Management formally apologized for her words. Based on reader's interest statistics, the flagship Russian trade publication considered this scandal "Event of the year No. 1". The consequences of this scandal for the retail chain development still remain to be felt in the future.

Other publications caused a relatively similar public outcry. Russian Leroy Merlin was found to trade in products with signs of counterfeit, which were potentially dangerous for the customers' health. Leading media's journalists and social networks' users discovered that global chain stores sold goods under the guise of Russian and European brands which actually had Chinese underground origin. For example, it was documented, that one of the plumbing brands was made of a zinc alloy that is hazardous to health, though in Leroy Merlin it was misdescribed as brass. Outraged customers wrote that consultants deliberately promote the poisonous fake in Russian stores to the detriment not only of local and reputable foreign brands, but also Leroy Merlin own trademarks.

The story with the electric cables and wires in the chain store assortment is also quite indicative. According to media reports, a large share of this production was sold at Leroy Merlin with fake certificates and did not meet Russian standards of quality and safety.

Russian customers' patriotism, which is often taken to extreme forms up to direct aggression towards the Western world, as well as the problem of corruption - not only "external" one, but perhaps "internal" as well, which has already affected its own employees. These are those factors that can quite seriously affect the ambitious plans of Leroy Merlin chain to further take over the Russian market. Are there many benefits from this ability to make agreements with Russian partners, if tomorrow these agreements can be the subject of the high-profile anti-corruption investigations? Is it necessary to build up the outdated retail formats and sell high-margin but obviously poor-quality goods through it, if some Russian competitors achieve better growth rates as compared to the French without any costly construction projects or dubious items in the range? All these questions should give a cause for serious thought for the top management at the Leroy Merlin head office. It seems that the current growth of the Russian chain is ahead of its internal capabilities to meet high standards of quality and service. And immense investments in the retail store construction may not pay off, especially if there is an obvious failure in the development of such promising areas as internet trading and adequate own delivery. And to overstock the range with cheap, but obviously poor-quality products is good for statistics and short-term profit, but very bad in terms of long-term reputation in the market.

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