U.S. retailer Wal-Mart Stores Inc
Fearful of getting hamstrung by Russia's complicated and time-consuming bureaucracy, the world number one retailer has been outmanoeuvred by its European peers - Auchan
It has missed out on the 30 percent-plus sales growth currently enjoyed by Russian retailers - now likely to slow as companies start to realise that further growth will depend on expansion into Russia's less wealthy provinces.
Most shoppers in Russia's cities have embraced supermarkets and malls since the fall of Communism over 20 years ago, overcoming suspicions about freshness and quality.
However, people in Russia's sprawling countryside or smaller towns may not be so easy to win over. Any transition there will be costly and difficult due to low incomes, and poor quality roads and warehouses. Intensified competition in major cities also means it will take longer for new stores to break even.
Now there is more risk, but more return, said Alexei Krivoshapko, director at Prosperity Capital Management, one of the biggest investors in Russian stocks with $4 billion under management.
Later there will be lower returns, more cash for entry, but less risk because it will be about buying a mature business.
Wal-Mart could also see competition from other foreign retailers if it tries to buy a local player in Russia, with accession to the World Trade Organization in 2012 making Russia's import-heavy retail sector even more appealing for international players by simplifying the import process.
Top Russian chains in graphics http://link.reuters.com/vab57s
The low-cost U.S. giant has been expanding internationally since the early 1990s to counter a slowdown in its saturated home market, and Russia has long been a target alongside China, India and Brazil.
But several attempts to enter Russia have been thwarted over the past decade, both greenfield and via acquisition.
After studying the market, Wal-Mart ruled out starting from scratch due to the dominance of local players and bureaucratic obstacles such as bribery and excessive red tape - a difficulty which Swedish retailer IKEA says held back its expansion.
Wal-Mart closed its Moscow office of 35 people in December 2010 after top Russian food-to-everyday items retailer X5 Retail Group
However, hiring Russian retail guru and former X5 CEO Lev Khasis in 2011 seemed to signal that Wal-Mart was preparing another advance.
Khasis has a reputation as a dealmaker, growing X5 through $3 billion worth of acquisitions that strengthened its foothold in Moscow and Russia's second city of St Petersburg, and secured it presence in other regions.
Khasis, an advocate of the long-term potential of Russia's retail sector, dismissed rumours of a looming deal, telling state-run Russia Today television that Wal-Mart was unlikely to come in the short term ... like one or two years.
Now senior vice president for international operations based at Wal-Mart headquarters in Bentonville, Arkansas, he said there was no time pressure on Wal-Mart to enter the market.
(Entering Russia) is a matter of opportunities and not a matter of need, he told Reuters in an email exchange.
The company has tremendous growth potential in the markets where it already has operations, especially in South America, Africa, China, and India.
The Russian retail industry is highly fragmented, with the top 10 players controlling under 20 percent of the market. That leaves room for consolidation while still promising revenue growth rates of 15-30 percent.
The market is quite big and could easily digest a couple of more international players that would start from scratch, said Krivoshapko.
Russian shoppers have also proved more resilient in downturns than Europeans or Americans who tend to immediately tighten their belts when a crisis hits.
A Reuters survey showed that six out of nine analysts believe that X5, whose chain comprises mostly small low-cost stores such as Pyaterochka and Kopeika, or its hypermarket unit Karusel are the most wanted acquisition targets for Wal-Mart.
The other three named St Petersburg-based hypermarket chain Lenta, which is back on an expansion path after resolving a bitter corporate dispute, as a top-pick.
According to sources, Wal-Mart was in talks to buy Lenta in 2010 but its founding shareholder August Meyer opposed the deal. Last August, U.S. private equity fund TPG raised its holding in Lenta to a controlling stake by buying most of Meyer's shares.
The survey also showed that O'Key
X5 has been in turmoil since Khasis left, sparking an exodus of several senior managers, and is now worth a fraction of its peak value - a situation that could interest Wal-Mart. Its stock has fallen 45 percent.
X5's biggest shareholder, billionaire tycoon Mikhail Fridman's Alfa Group, could sell down its 48 percent stake in two-three years, said a source close to its board.
But before that, Alfa may want to see X5 restore its stronghold on the market after the retailer posted its first drop in quarterly underlying sales since its creation in 2006.
X5 missed its target for sales growth in 2011 and cited difficulties in integrating its $1.65-billion purchase of Kopeika. It expects a slowdown to 15-20 percent top-line growth in 2012 from 32 percent in 2011, although last year's figure was boosted by the Kopeika acquisition.
The market has gone crazy, we are worth twice as much as X5, it (the market) is too emotional, Sergei Galitsky, CEO of fast-growing Magnit, which generates sales that are 25 percent lower than its rival, tweeted last month. Magnit sees sales up 25-30 percent in 2012 after 42 percent growth in 2011.
While the United States is Wal-Mart's largest business, accounting for 59.5 percent of sales and 76.7 percent of operating income in the latest fiscal year, it is growing at a slower pace than Wal-Mart International.
Wal-Mart's U.S. sales rose 1.5 percent and operating income rose 2.2 percent last year, while international sales rose 15.2 percent, helped in part by acquisitions of Britain's Netto and South Africa's Massmart, and operating income rose 10.8 percent.
Russian market growth compares favourably with the pace achieved by Wal-Mart's international unit, which includes both emerging markets such as India and China and mature markets including Britain.
But analysts have said that Wal-Mart's extensive international footprint needs further attention to avoid failures similar to those in Germany and South Korea from where the retailer pulled out last decade.
It sold its underperforming German stores in 2006 after struggling to capture market share in the cut-throat German market, where it acknowledged that it misunderstood German regulations, shopping habits and tastes. It pulled out of the fiercely competitive South Korea market the same year after failing to win the market share and scale it desired.
The international operations have ... been less productive and less profitable than they would like them to be, and more of a drag, said Budd Bugatch, retail analyst at Raymond James in the United States. They've got a lot on their plate and they're working very hard to make it all work.
Russia's market outlook gives Wal-Mart a little time to consider targets - current growth rates are expected to endure for three to five years before slowing more sharply.
Experts say that overseas interest is likely to persist in the retail sector, helped by expected economic growth rates in Russia of 3.7 percent this year and forecasts for oil prices remaining high, helping the energy-heavy country's budget.
There's a sustainable growth story here, said Antanas Petrosius, head of investment banking and deputy CEO for UBS Russia and CIS.
You have already seen international players looking closely and it is likely that some (M&A) will materialise, he said, without mentioning any specific companies.
(Reporting by Maria Kiselyova; Additional reporting by Jessica Wohl in Chicago and Megan Davies in Moscow; Editing by John Bowker, Megan Davies, Douglas Busvine and Elizabeth Piper)