VkusVill: Russian Health Food Retailer Is Preparing For An IPO

Aug. 12, 2021 12:16 PM ETAKSJF, DDL, IFMK, NGVC, OZON, SBRCY, SFM, VLGEA2 Comments
Gleb Krivosheev profile picture
Gleb Krivosheev
607 Followers

Summary

  • VkusVill is a Russian retailer that sells high-quality food. The key features of the company are excellent service and high-quality products. Also, it has a very strong brand image.
  • The company has been planning to hold an IPO for a long time, but recently news began to appear saying that IPO is already in process.
  • VkusVill is expected to list its shares on Nasdaq in early 2022. My analysis has shown that this is a very high-potential company with a unique business model.
  • Russian retail market is constantly growing, so is VkusVill. The company has its own niche, where it is a leader. Also, it will benefit from the growth of e-grocery.
  • VkusVill is financially successful. It has shown extraordinary growth since the beginning. The company keeps constantly developing its business by opening new kinds of sales points.

Food store building and woman with baby stroller 24.07.2018
mgrushin/iStock Editorial via Getty Images

Investment Thesis

Recently, news about the upcoming IPO of VkusVill has become more frequent. Some sources say that the IPO is already in the process of preparation and the application has been filed (source in The Russian language). According to it, the company selected the Nasdaq exchange. The event is expected to take place at the beginning of 2022. I found it very interesting to analyze the company's business in anticipation of such an event because this is probably the most anticipated Russian IPO in recent years.

VkusVill is an extraordinary representative of Russian retail. This company shows very high growth rates, active business development (omnichannel sales routes), and at the same time good profitability indicators (in some places even higher than peers). Retail is an ever-growing industry, but VkusVill focuses on healthy food, the popularity of which is growing in Russia. In addition, the company is one of the most active e-grocery retailers. The potential of the company in the long term is obvious, and its development is facilitated by unique features.

What Is VkusVill?

VkusVill is a Russian retail chain of stores with a focus on high-quality foods with transparent ingredients and shorter shelf life. The prerequisite for the appearance of the VkusVill brand was the active development of the "Izbenka" chain of dairy products stores, founded in 2008. The founder, Andrey Krivenko, noticed the need for not only fresh and healthy dairy products, but also for everything else. In 2012, the VkusVill brand appeared. Subsequently, this chain of stores grew very quickly throughout Russia, and revenue increased by a multiple.

At the moment, VkusVill is not just a network of retail supermarkets. This is a brand of healthy food products, a chain of cafes, micro-markets, and branded vending machines. As well as a huge network of online food sales. A unique business model for the Russian market allowed the retailer to grow manyfold. We are talking about retail space, the range of products, and sales.

VkusVill IPOSource: Corporate Rebels

At the moment, the network consists of more than 1900 supermarkets (source in the Russian language). Also, it includes 101 cafes, 165 vending machines (in offices, schools, cinemas, clinics, etc.), and 183 micro-markets. Points of sale are open in 46 cities, but the vast majority of them are concentrated in Moscow. This is a good phenomenon since the population of Moscow has one of the highest purchasing abilities in Russia. The network is actively expanding to the regions of Russia, but this process is not as fast as that of larger competitors. The problem is to find suppliers of fresh goods, which takes a lot of time. However, the rapid growth of the offline business is not the only thing that VkusVill can boast of.

The global pandemic has brought many changes to our lives, and perhaps VkusVill has become one of the fastest companies that have adapted to them. The company has become one of the pioneers in the e-grocery market. In just a year, to date, the staff of couriers has grown to more than 3,000 people, not counting partners. VkusVill delivers more than 80 thousand orders per day, and the annual volume of orders for 2020 amounted to 10.6 million. The company became the first in terms of the number of orders in the Russian e-grocery in 2020, and one of the leaders in revenue. Now there is an active development of dark-stores, VkusVill already has 55 dark-stores (source in the Russian language) what is 51 more than at the end of 2020, and plans to open even more. As of January, online sales bring up to 25% of revenue.

The reason for such success in both offline and online retail is the sale of very high-quality products and good service. VkusVill notices that 94% of our customers are re-ordering after their first experience. VkusVill has more than 5.2 million active customers (approximately 3.6% of the population) and gave over 10 million loyalty cards. At the moment, VkusVill is a very strong brand in Russia, which most people associate with a healthy diet.

Financials are even more surprising. The company managed to increase revenue by 984 times in 9 years (115% CAGR). According to the results of 2020, VkusVill entered the top 10 largest retailers by revenue but also showed one of the highest growth rates, second only to one discounter. It is worth noting that the products of VkusVill are not the cheapest on the market (the target audience is the middle class, prices are slightly higher than average), and 2020 and the lockdown hit the incomes of the population hard. And even in such a difficult year, the company managed to show 38% revenue growth.

Retailer Number of stores 2020 Revenue, bn RUB. Change, %
X5 Retail Group 17,698 1,973 14
Magnit 21,564 1,510 13
Dixy, K&B, Bristol 15,858 950 18
Lenta 393 438 7
Auchan 256 225 -11
Metro CC 92 204 8
Svetofor 1,641 198 39
O'key 195 173 6
Monetka 1,680 123 11
VkusVill 1,252 114 38

Source: created by the author using data from Forbes.ru (source in the Russian language)

Key features of VkusVill's business model

VkusVill has chosen a simpler business model than that of regular retailers. Instead of receiving goods from retail suppliers and storing them in a warehouse, the company focuses on fast sales on the day of delivery. This is extremely important since most of the products are dairy products and products with a short shelf life. In a few days, they place an order to local farmers and producers, who deliver them to the cross-docking, where they are marked with their own brand. At night, the products are distributed to points of sale, where about 60% are sold on the same day.

Vkusvill Retail SystemSource: Corporate Rebels

Most of the VkusVill stores are small premises of about 150 sq. m. These stores also operate with limited staff and also serve online purchases. VkusVill tries to optimize the work of the staff, using the principle of "duplicating", when each employee can be quickly replaced. The company also has a small administrative staff. For 14,000 employees, about 650 are engaged in administrative work (top management, coaches, store management, and supply chains).

Such rapid growth of online purchases is facilitated by good IT solutions and a user-friendly system. The order can be made starting from any amount, without extra charges, and with free delivery. A huge number of orders are received through the mobile app, and more than 78% of customers buy with a loyalty card.

Peers Analysis and Market Outlook

VkusVill has a very unique business model, which differs from conventional retail in several aspects. The first is the store model, "fresh format" and health food. Other products that have a long life span and are not very useful composition are also sold in stores, but their share is extremely small in relation to healthy nutrition. Another distinctive feature is the supply chain described in the previous paragraph. The company also focuses on different values in management, such as limited freedom of action.

Fresh and healthy food isn't a new market, it is a new niche

One of the closest analogs of VkusVill is Trader Joe's. The Russian retailer also focuses on a small assortment and small stores and also makes every effort to increase customer satisfaction. Similarly, the store is dominated by the products of its own brand. However, there are also positive differences, for example, the presence of online sales. There is another analog, Whole Foods Market, which has been acquired by Amazon (AMZN) in 2017. Today, Amazon does not disclose the revenue of this network in the reports, but in 2016 it received $15.7 bn of revenue. This company specializes in selling organic food and has more than 500 stores mainly in North America.

There are other American analogs with a greater focus on healthy eating. This is the company iFresh Inc. (OTC:IFMK), which specializes in retail sales and delivery of fresh healthy food. Another company is Natural Grocers by Vitamin Cottage, Inc. (NGVC), it is engaged in a similar business, but has a significantly smaller number of stores. Similarly, Village Super Market, Inc. (VLGEA), sells healthy and fresh products but has only a few dozen stores. Sprouts Farmers Market, Inc. (SFM) is one of the largest healthy food retailers in the United States, surpassing its competitors by several times in terms of revenue. The following is a graph of the revenue of these companies. For comparison, the revenue of VkusVill for 2020 was $1.6 bn.

Chart
Data by YCharts

There is a public company in China that is engaged in the e-commerce of useful products. Dingdong Ltd. (DDL) is engaged in the delivery of various products, from fresh and ready-made food to household goods. But mostly these are healthy products.

Chart
Data by YCharts

In the previous part, a comparison of VkusVill with Russian retail chains by revenue was presented. Several of them are public companies whose shares are listed on the Moscow and European stock exchanges. These are the largest X5 Retail Group, Magnit, Lenta, and O'key. Basically, these stores represent the format of ordinary hypermarkets and supermarkets. VkusVill is developing a slightly different strategy, which is of great value. Therefore, VkusVill and the above-mentioned companies may compete in the same market and for the same customers, but consumers themselves perceive these companies differently.

Similar to Russian companies, large international (mainly trading on the American market) retail chains are not analogs of VkusVill.

E-grocery will drive the growth of the Russian retail

2020 was a revolutionary year not only for e-commerce but also for grocery retail. The lockdown affected the development trajectory of most retail chains. Companies went online, and VkusVill succeeded in this direction.

The population of Russia is quickly switching to online and adopting new trends, such as online shopping. The companies managed to convince consumers that home delivery of products is much more convenient than going to the store and has many other advantages. According to Statista estimates, today 40% of customers use food delivery services. The agency estimates the e-grocery market at the end of 2020 at 135 bn RUB (approximately $1.85 bn), and by 2024 predicts its growth to $3.5 bn.

E-grocery market in Russia

Source: Statista.com

According to InfoLine (source in the Russian language), in 2019 the market was 43 bn RUB, and in just a year it grew 3 times to 135 bn RUB. The largest retail chains have become leaders in the market. VkusVill was among them, even if it did not take a leading position in terms of revenue. The difficulty of competing with retail giants is that, as mentioned above, goods in VkusVill are more expensive than in conventional chains. VkusVill provides customers with the freshest, high-quality products, for which a certain margin is formed. In addition, the product line is smaller, since many brands and products are excluded from the sale.

Retailer

6M 2020 turnover, bn RUB

Perekrestok & Pyaterochka (X5 Retail Group) 8.2
Utkonos 8.05
Sbermarket (Sberbank (OTCPK:SBRCY) (OTC:AKSJF)) 6.7
Ozon.ru (Ozon Holdings (OZON)) 5.0
Wildberries 4.3
iGooods 4.1
VkusVill 3.5
Yandex.Lavka (Yandex (YNDX)) 3.4
Samokat 3.1
Azbuka Vkusa 1.9
O'key 1.5
Save Time 1.1
Auchan 0.8
Globus 0.3

Source: Forbes.ru (source in the Russian language)

It is impossible to deny the growing popularity of healthy eating. Russia is no exception, and currently, there is a rapid popularization of healthy nutrition. Already, many networks are opening special corners with useful products. VkusVill is not a pioneer in this market, but the largest player. The "healthy" brand that they managed to build gives a strong advantage to the company.

Financial Performance: A Story Of Rapid Growth

Until June 2021, VkusVill remained a Limited Liability Company. In June of this year, the company was reorganized (the source in the Russian language) in the form of a joint-stock company (which is a signal for the upcoming IPO). Previously, the company prepared annual financial statements in accordance with Russian GAAP (but the picture is still clear). Just by looking at the financial results, you can declare a lot of positive signals.

The revenue growth is amazing. It was mentioned above that in 9 years it has increased by 984%. The growth rate has slowed down a bit in recent years, but the company is still developing at a huge pace.

Source: created by the author using the company's financial reports (source in the Russian language)

In a very short period of time, VkusVill achieved a positive operating and net profit. This is very important for Russian business. Such stability gives confidence to the company's owners in the future and protects them from many risks. The company does not suspend the development of its business, but on the contrary, invests more in it. Perhaps that is why in 2020 there was a decrease in net profit since a huge cash flow was directed to the development of online. In addition, the company has been paying dividends to its shareholders for some time.

Source: created by the author using the company's financial reports (source in the Russian language)

The profitability indicators of VkusVill are good. Retail is characterized by low profitability indicators. In addition, the company is at an early stage of development, and huge investments have been made in the last year. We should expect that this trend will remain for several more years. The company plans multi-channel development of its brand, including the opening of points of sale of a new format.

Source: created by the author using the company's financial reports (source in the Russian language)

The company has good liquidity ratios. In the first years, it had a negative equity value due to the accumulated losses, but later the situation improved. By now, the company has good liquidity ratios, which indicates low risk. It is worth noting that at the moment the company does not have long-term debts.

Source: created by the author using the company's financial reports (source in the Russian language)

Comparison With The Peers

I compared VkusVill with two groups of analogs by key financial indicators and comparative multipliers. The first group is retail chains that sell fresh and healthy products. These include the aforementioned companies: iFresh, Natural Grocers by Vitamin Cottage, Village Super Market, Sprouts Farmers Market, and Chinese e-grocery company Dingdong. The second group is Russian competitors. These are large public retailers: X5 Retail Group, Magnit, Lenta, and O'key. A comparison with the world's largest retail chains (such as Walmart (WMT), Costco (COST), etc.) will not show a reliable result, since their business models are very different from VkusVill.

First group: fresh and healthy food retailers

Compared with foreign analogs, the profitability indicators of VkusVill look very impressive. The first thing you should pay attention to is that some companies are unprofitable or have a very low net profit. Even though VkusVill cannot boast of the highest value, its indicator is still slightly below the market. It is worth considering that this is still a young company, and most of the presented ones have been working for several decades.

After analyzing the comparative multipliers, we can give a hypothetical estimate of the enterprise value of VkusVill. I used P/B only for comparison, but for evaluation purposes it is irrelevant. The average value of hypothetical value for P/E, P/S, and EV/S was 87,746 bn RUB (approximately $1.19 bn). This figure is far from the real value since the comparison was carried out according to the financial results for 2020.

Source: created by the author using data from Finviz.com

Since the IPO will take place in early 2022, the company will be priced based on the financial results for 9 months. The year 2020 brought strong changes to the activities of VkusVill, but judging by the growth in the number of retail spaces in 2021, the current year will be even more successful. Given such a rapid growth of offline and online sales, it is worth using a different approach to the assessment, taking into account forecasts for 2022 and beyond. It is fair to assume that the current valuation of the company may be significantly higher, and amount from 2-3 bn USD.

Second group: Russia's biggest retailers

Among Russian competitors, VkusVill does not look as good as among American ones. Perhaps because the comparison is made with the largest Russian grocery chains, which sell a much wider range (including non-food products), and also have a much larger network of retail space. VkusVill shows good profitability indicators, not worse than its competitors. It is irrelevant to conduct a valuation for this competitive group. Competitors participate in a completely different niche since these are significantly larger chains with a large assortment, but at the same time, less unique business.

Source: created by the author using data from Koyfin.com

News and IPO Details

VkusVill has been thinking about an IPO for a long time. The difficult year 2020 did not allow us to fulfill our dreams, but it allowed us to consolidate our positions in the Russian market. Despite the fact that the company has not yet officially announced an IPO, most news indicates that this event will take place at the beginning of 2022. The financial results of 2020 were good, but not really representative (because of a long lockdown and other factors related to the pandemic). It is fair to presume, that VkusVill will have a higher valuation based on 3Q 2021 financial results since this year the company is doing even better than last year.

RIA News reports (a source in Russian) that according to an unnamed source on the stock market, the IPO is already at the planning stage. According to this source, the IPO is planned on the Nasdaq stock exchange, with a secondary listing on the Moscow Stock Exchange.

Other facts also indicate that the IPO will be held soon, for example, the transformation of VkusVill from a limited liability company into a joint-stock company, which ended on June 1. At the same time, there was a significant increase in the authorized capital. As before, the founder Andrey Krivenko remains the key owner. Another major shareholder is the structure of Baring Vostok.

The Bottom Line

VkusVill's IPO is a long-awaited event for investors who follow the Russian market. This is a very interesting company that has gained a foothold in Russian retail. The well-developed flexible management system of VkusVill contributed to high rates of income growth with low financial risks. According to my estimates, the VkusVill's IPO can become no less successful than the IPO of Ozon, which took place in the fall of 2020. The company will definitely become one of the largest retailers by market capitalization not only in the Russian market but also in the world. VkusVill is one of the most successful companies in the niche of healthy and fresh food.

This article was written by

Gleb Krivosheev profile picture
607 Followers
"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim said. Even though this statement may be true (history shows that in most cases it is so), I am focusing on investments, that will pay off soon. Therefore, most of my articles are about companies that can unlock great potential in the near future.I started investing while I was studying at the university. Since then I was interested in stocks' fundamental analysis and valuation. Having 4 years of experience in the stock market, I decided to share my unbiased view on the market. My area of interest is global companies with decent growth potential and good financial health. Also, I cover some Russian companies, that I personally find good for both domestic and foreign investors. Feel free to contact me via email: gleb.krvshv@gmail.com

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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