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Russia's Magnit eyes Siberia as pushes deeper into regions

By Maria Kiselyova and Natalia Ishchenko

MOSCOW (Reuters) - Magnit , Russia's No.2 food retailer by sales, is targeting Siberia as it presses on with a rapid expansion into the country's regions which it believes can deliver at least another four or five years of strong growth.

Sergei Galitskiy, who opened his first shop in 1998 and has built Magnit into a 6,000-store empire, told Reuters he would stick to a winning formula of targeting low- to middle-income shoppers through mostly convenience stores.

"Do you really think that many people in this country earn more than $2,000 per month?" he said, sitting on a couch in the lounge of a five-star hotel a short walk from the Kremlin.

"When we cut the price for bananas by 1 rouble, we sell 100 tonnes a day more ... There are people who live within their budget."

Magnit turned over $11.4 billion in 2011, compared with $15.5 billion at Russian grocery leader X5 Retail .

But it is currently growing three times as quickly as it opens three stores a day and as X5 struggles with its shift away from acquisition-led growth and underperforming hypermarkets.

Magnit expects revenue growth, which has run at an annual rate of around 40 percent in recent years, to slow to 30-32 percent this year and gave preliminary guidance last month that it would ease further to 25-27 percent in 2013.

Galitskiy, Magnit's chief executive and 42-percent shareholder, said that was only natural for a maturing business, and there was still plenty more mileage in its existing strategy as it has only a 4 percent share in a highly-fragmented market.

Investors seem to agree, as Magnit, based in the southern city of Krasnodar where Galitskiy owns a top-flight soccer club, has a market value of $13.5 billion, more than double X5's.

"We have heaps of ideas how to keep the company growing. If investors like them, we can guarantee that we will easily spend some $2 billion in capex per year for the next 5-10 years," said Galitskiy, who is ranked Russia's 25th richest man by Forbes magazine with an estimated fortune of $4.9 billion.

Expanding into Siberia from its central, southern and north-western heartlands, was natural, but it would be premature to go further east, given the logistical challenges, added the 45-year-old.

Magnit will finance Siberian expansion from existing capital spending plans - using its owns funds and debt. Galitskiy said he saw no need to raise capital by selling more shares.

MISTAKES IN MOSCOW

Magnit is grabbing business in towns from outdoor markets, kiosks and independent shops. It plans to add 800-1,000 convenience stores, up to 60 hypermarkets and 500 cosmetic shops next year - similar to the expansion this year.

Russian retail law, seeking to promote competition, caps market share at a maximum 25 percent, meaning a firm can't open new stores in a region when it hits the ceiling.

Galitskiy is a critic of the clause.

"To constrain business is absolutely wrong. It impedes our development. It is hard to control, there is massive abuse, it is non-existent elsewhere in the world," he said.

Most Magnit outlets are convenience stores with basic ranges, which allows it to open in less densely populated areas, including those with just 3,500 inhabitants.

Galitskiy for years avoided entering Moscow - so far, only 32 Magnit stores are in the capital. Although the regional focus allowed him to take advantage of a lack of competition, he now admits Moscow was a major omission; one he is now putting right.

"We missed the capital, came too late. We were slow to understand what a rich customer wants, that we can work with more expensive lease rates, with higher salaries," he said.

In a country where many billionaires made their fortunes through political connections, Galitskiy denied that corruption was his biggest business headache. Russia's declining population, now around 140 million, and an excess of legal restrictions pose greater challenges, he said.

Nonetheless, he praised Russia's stable fiscal regime and low business taxes, and complained about negative perceptions towards Russia abroad.

"You can do business here. There are certain problems but I don't know a single country where there are none," he said.

He smiled at the suggestion his words might lure more foreign players to market. Global retailers have had mixed experiences in Russia, with France's Carrefour and U.S. group Walmart failing to break in to the market.

Should they change their mind, Galitskiy is ready to rise to the challenge: "All I can tell them is: 'Welcome!'"

($1 = 31.0190 Russian roubles)

(Editing by Douglas Busvine and Mark Potter)

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