Is a Lukoil/X5 collaboration on the horizon?

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6 April 2011, Oil

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Reports suggest that Lukoil is considering a joint venture with X5 Retail Group, Russia's largest supermarket chain, for either the opening of Lukoil-branded service stations at X5 hypermarkets, or for the opening of X5 stores at Lukoil sites. At the end of 2010, X5 had a portfolio of 2,469 stores across 52 cities and $11.2bn in retail sales. During 2010, the retailer added 1,097 stores to its network via acquisitions, and aims to open 540 new stores and increase sales by 40% in 2011.

X5's growth plans fit in well with Lukoil's non-fuel sales target for 2014. Lukoil plans to double its non-fuel retail sales in Russia over a five-year period, from $155m in 2009 to $300m in 2014. At the start of 2010, 80% of the 2,170 Lukoil-branded service stations in Russia featured shops. These shops operate under the Lukoil brand name, with the product mix skewed toward convenience products, car accessories, and lubricants. However, food-to-go options are increasingly being introduced at its forecourts, with some of its bigger motorway sites featuring restaurants and cafes operated by the Rostik Group, a Russian fast food chain.

If the joint venture is finalized, Lukoil will secure an important competitive edge, at a time when players like Gazprom and TNK-BP are also in the process of firming up their non-fuel strategies. A joint venture model will serve to improve Lukoil's non-fuel proposition at its fuel retail network, while leveraging the brand name and resources of the country's food and grocery market leader.

While some oil companies have managed to develop a successful convenience offering at their service stations, others have struggled in this area. Many consumers still view service station shops as a means to satisfy an urgent or impulse need, rather than as a destination for grocery shopping. This is partly because traditionally, brands owned by fuel retailers have been associated more with fuel, car care products, and sometimes basic convenience products, rather than with a broad range of food and grocery items. Furthermore, service station shops were considered to be of poor quality and quite expensive. Decades of such basic offerings at forecourt shops and kiosks have led to unfavorable brand perceptions in the minds of the consumers.

By partnering with a specialist food and grocery retailer, a forecourt retailer can dispel any doubts about the quality and range of its shop proposition. Although it means relinquishing some non-fuel revenue, having an established specialist grocery brand at a fuel outlet can drive greater customer traffic to the forecourts by attracting motorists who are seeking to top-up shop while on the move.

Furthermore, given their prime locations, service stations present an attractive destination for convenience retailing, and have become a keen area of interest for several convenience retailers across Europe, especially given the growing trend for top-up shopping. If the Lukoil/X5 talks do end in a mutual agreement, then it will indeed mark a significant milestone in the evolution of the service station convenience landscape across Russia and the Baltic states, and one that may evoke interest from food and grocery majors across Europe.

Source: Datamonitor

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