Page 48 - bneMag Dec22

48 I Special Report bne December 2022
the buyer can take procession of the property rights. However, as many companies fund the construction by pre-selling apartments at deep discounts, would-be buyers cannot borrow to pay for the pre-pay deals.
Orient has a sister bank – not part
of the group, but with overlapping shareholders – that is offering 1- to 1.5- year loans to prospective buyers to fund a pre-pay deal.
There is no funding available to the developers either other than pre- selling apartments, so the business is concentrated the hands of a few large firms that have the financial firepower to fund construction projects.
“In a typical $150mn project the developer will have to come up with $15mn-$20mn to cover the initial construction phase, but the rest will be covered by pre-sells,” Maslov explains.
Retail off square two
Another prospective business that plays on the booming population theme
is retail. Orient Group has set up the Makro chain of supermarkets, which it often puts in as the anchor tenant in its commercial real estate developments.
The group has built, and sold, around eight large malls and often the anchor
Currently Makro has just under 100 stores, making it the third largest player on the market after Havas and Korzinka respectively.
“The chain has been growing very fast, but now we are turning to improving efficiency and increasing the turnover per square metre,” says Maslov. “We are competing with the bazaars that have no tax costs – no profit tax or VAT – but we need to be able to stay competitive on price. That means either you tolerate losses as you build up the business or you are very efficient.”
Maslov says that consumers are very price sensitive and cultural traditions are deep rooted; Uzbekistan families tend to buy much of their staples in bulk only once a month rather than pop out to the store when they need something.
“We have a lot of habits to break and misconceptions to overcome. For instance, the consumers assume that if products are in a store they are more expensive, whereas with some items we are cheaper than the bazaar,” says Maslov.
Last year the coronavirus-induced food price spikes provided Makro with a golden opportunity to persuade shoppers to enter their doors. Sugar
which has lifted per capita incomes ten- fold compared to Uzbekistan’s and are just behind those of Russia.
But the low incomes will also hinder the development, as for the meantime all the main players are concentrating on the capital and largely ignoring the regional cities.
In the first phase of the sector’s development the two market leaders Havas and Korzinka focused on simply taking over the Soviet-era Universal Magazine (Unimags), which were the closest the Soviet system came to department stores. The two leaders have taken over about 90% of the Unimags, which means from here on in new leases need to be signed and space converted or, as Orient group has been doing, new shopping malls must be built.
“It is not that expensive to start a new supermarket. Most of the premises are on long-term leases, which doesn't cost that much, and the cost of the fit-out
is not that high either,” says Maslov. “What does cost is bearing the losses from the store in the first months of operation. We have closed stores down fairly quickly that didn't work.”
Although Uzbekistan’s organised retail business is still at an early stage of development, the deep-seated cultural mores mean it will probably develop more slowly than those of Eastern Europe. In the 1990s in Russia the game was simply to open stores as fast as possible and it took almost two decades before profitability became an issue. Because of the stiff competition from the bazaars, in Uzbekistan profitability is an issue from the start.
“The main problem was poor price competitiveness, which was not justified by the quality of fruits and vegetables nor quality of departments,” trade publication EastFruit said in a recent report on Makro. “We suppose management’s main focus was on securing the greatest number of stores before it became more expensive to enter the market and competition moved in.”
“In a typical $150mn project the developer will have to come up with $15mn-$20mn to cover the initial construction phase, but the rest will be covered by pre-sells”
tenant is either Orieint’s Makro supermarket or its fashion stores.
But despite the three decades that have passed since the fall of the
Soviet Union, Uzbekistan retail sector remains dominated by the open air bazaars; organised retail only accounts for around 5-6% of Uzbekistan retail turnover, compared with 25% in Kazakhstan and over 60% in Russia.
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prices became destabilised worldwide, soaring 75% in the markets, leading to hoarding and speculation. Makro kept its prices at the same level as always to make the point it is also a reliable source of staples.
Maslov says that Uzbekistan’s retail sector is 20 years behind that of Kazakhstan’s, which has enjoyed a head- start thanks to its copious oil production,