Why Magnit trade in Drugs

The co-owner of Magnit, Alexander Vinokurov, is already trying to build a large pharmacy network in partnership with Alfa Group, whose former employee was recently. But the market is too hot. Will Vinokurov succeed in achieving significant success with the help of Sergei Galitsky's brainchild?
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Less than two weeks after the company "Marathon Group" a native of A1 Alexander Vinokurov (co-owner of the company Alexander Zakharov also worked in A1, the partner's share is not disclosed) bought from VTB 11.82% of the retailer "Magnet", as it became It is known that Magnit itself intends to buy from its new co-owners the chemist's network of SIA Group.

In a message to the retailer on the London Stock Exchange website, it is said that Magnit is in negotiations and is beginning due diligence. The company emphasizes that pharmacies can be integrated into Magnit cosmetics stores, supermarkets and hypermarkets. This will allow building a large pharmacy network in a short period of time and with little capital expenditure. "We believe that the Russian retail pharmacy market is one of the most attractive for expansion: this segment is large enough - more than one trillion rubles", the words of the general director of "Magnit" Khachatur Pambukhchan, who came to replace the founder of "Magnit" Sergei Galitsky. In his opinion, the association of pharmacies and food stores can have a multiplier effect and increase client traffic.

Vinokurov became a co-owner of "SIA Group" in 2015, having redeemed 50% of the heirs of Igor Rudinsky, the founder of the network, who died a year earlier. The company was in a difficult situation then. According to the interlocutor Forbes in the pharmacy market, the IAA held a lot on Igor Rudinsky. "Under Rudinsky's personal guarantees, they could ship the goods or postpone the payment," said Forbes's interlocutor. - The last years of his life he was seriously ill and gradually departed from the operational management. Managers naturally in full could not close all the functionality that the founder of the company guaranteed. " As a result, the CIA accumulated huge debts, as it actively lent to its customers, who allowed delinquency payments. In addition, competitors forced the company into the secondary distribution market: instead of pharmacies and hospitals, SIA delivered goods to wholesale companies - the margins of such activities are much lower than direct supplies.

In 2017, Vinokurov brought his stake in the company to 100%, and the SIA joined Marathon Pharma (part of the Marathon Group), which unites the pharmaceutical assets of Vinokourov and Zakharov. At the same time, the partners agreed to pool assets in pharma with Rostekh, but, according to RBC, "SIA Group" will not enter the perimeter of the deal.

Overheated market

"Magnet" announced its intention to develop the pharmacy network in the last year, when the main shareholder of the retailer was Sergei Galitsky. Then it was about opening 5000 points. At the end of 2017, Magnit had 16350 stores. Can a retailer build a large pharmacy chain?

Head of operations at the Russian stock market IK "Freedom Finance" George Vashchenko notes that "Magnet" has a unique ability to build a network in a short time. "Given that pharmacies are planned to be torn off on the basis of existing stores, it remains to resolve issues with licenses and logistics. The project, offering turnkey pharmacies, declares a period of 60 days. "Magnet", most likely, will be able to establish points in this period, "the analyst believes. According to him, the expenses for the opening will most likely not exceed 10,000 rubles per square meter. m., or 250 000 rubles per point. "Thus, a network of 5000 pharmacies will need no more than 1.25 billion rubles. Current assets will require about 5 billion rubles, "the expert estimated.

The pharmacy market in Russia is growing - last year it grew by 8% to 1.6 trillion rubles. But despite the potential volume, the competition in the market is high. And at the end of last year, stagnation began. According to Nikolai Bespalov, Development Director of Analytical Company "ARNSI Pharma", the beginning of this year was marked by a 1.9% drop in rubles. "The payback, which sellers of pharmacy franchises declare within six months, in fact at times longer. And it's not a fact that pharmacies do not "cannibalize" the food retail business to some extent, "Georgy Vashchenko notes. He also notes that the pharmacy market is highly dependent on imports, accounting for 70% in value terms, with a physical volume of about 38%. "Weakening of the ruble, sanctions, retaliatory measures can hit the pharmaceutical market sensitively," the expert concludes.

Vinokurov already has experience in integrating pharmacies into retail chains. Partners of the co-owner of "Marathon Group" are good friends from Alfa Group, which includes A1. Most of the outlets "Mega Pharm" (included in the "Marathon Group"), was launched in X5 Retail Group stores "Alpha". However, according to Bespalov, the project "Marathon" with X5 is too early to be listed as successful: as of April 1, 2018 the network comprised 907 pharmacy institutions, for the Russian pharma market it is not small, but the total share of the company on the market is very small - only 0.4 %. "During the same period, the network comparable to the number of pharmacies" April "(891 pharmacies) accounted for about 1.9%, while Neo-Pharm and the Stolichki chain (combined) combine 469 pharmacies and have a share at 3.1 % ", - he explains. And as noted in the network "36.6", at the end of 2017 their share in the market was 4.4%.

On the turn of the "Magnet" itself, the launch of the pharmacy chain is unlikely to have a significant impact, but here's to change the structure of profitability - quite, the analyst thinks. "Moreover, large trading facilities are objective centers of traffic generation, it is a sin not to try to convert this traffic into additional profitability," says Nikolai Bespalov. He adds that building your own retail network can only be effective if you have your own logistics. SIA is just a ready-made logistics facility with the necessary set of infrastructure, competencies, agreements with suppliers and, most importantly, specialized specialists. This structure, objectively, is redundant for the tasks facing Magnit, and it seems that it will be restructured in a serious way.

Nevertheless, the purchase and restructuring of such an object is much more effective than building from scratch its own logistics system, Bespalov continues. The cost of 100% of SIA in the current form and without taking into account debts, he estimates in the range of 3.5-4 billion rubles. But in reality the deal could not be of a market nature, especially considering that the Marathon Group itself is a co-owner of Magnit.

Among the minority shareholders of Magnit, a possible deal does not cause enthusiasm. As they write "Vedomosti", the plans of the retailer alarmed them. "The pharmacy market is overheated: many players, few of them earn. Therefore, the question of how "Magnet" can earn in such a market is open, "Alexey Krivoshapko, director of Prosperity Capital Management, told the publication.