The CU retail network in the Kazakhstan market: a new standard for "stores near home"?

The partnership between the leading ice cream and food producer in Kazakhstan, "Shin-Line," and the largest South Korean operator, BGF Retail, has been announced. This involves the opening of over 500 stores under the CU brand in the next five years. Could you tell us what kind of stores these will be and what products they will offer?

— One important concept in retail is the trade format, which determines the key characteristics of a retail point and the services provided. In the case of CU, the store format can be classified as "ultra convenience," where the very name suggests the maximum proximity of the location to the buyer, with easy access – literally within a radius of several dozen or hundred meters. This is undoubtedly an essential factor for the consumer's choice. We see active development of this format in many countries worldwide. People value the factor of time, the desire to get everything they need in one place. The presence of fresh products in the shopping basket is also important, along with additional services and the opportunity to buy ready-to-eat products on the go, at the office, at home, or outside the home. The services offered by CU stores, in our opinion, are relevant for the people of Kazakhstan. Especially considering that this approach has been tested and refined in practice in some countries.

Many retail market players strive to gradually adapt the services of their retail points to changing consumer needs. We, on the other hand, aim to immediately offer a ready, balanced solution to the market based on the forecast of the future trends in consumer behavior. Therefore, fr om the first days in our stores, we offer categories such as ready-to-eat dishes, ready-to-cook items, ready-to-heat products, bakery and hot drinks, quick snacks, snacks, beverages, as well as traditional categories such as dairy products, gourmet products, bakery products, groceries, and more. CU stores offer over 2000 product positions, allowing us to meet the needs of almost any consumer with an assortment that, while not as extensive, is optimally selected for each category of goods, taking into account several different price segments.

A few words about the background of the partnership between BGF Retail and "Shin-Line": what benefits does it bring to both sides?

— The course of events that ultimately led us to a partnership with BGF Retail was logical; everything fell into place organically for us. Consider this: "Shin-Line" has always been a production company, and our entire development history is related to the development and subsequent implementation of certain high-quality products. At some point, the company became an undisputed leader in ice cream sales in the markets of not only Kazakhstan but also other countries.

Later, we realized that with our well-established logistics for delivering products to retail points, we could carry out logistics operations more efficiently and effectively than many other market players. Therefore, it is not surprising that some of them offered us the opportunity to develop distribution for their products based on our infrastructure. This allowed us to expand not only our production and product specialization but also our distribution capabilities.

When delivering goods to retail points, of which we have more than 50,000, we began to pay attention to the many opportunities for increasing sales and promoting our products in the retail points of partners. Gradually, we began to consider the feasibility of creating our own retail network, started studying this new industry for us, evaluating the market potential, and looking for the right specialists.

Parallel to the events in "Shin-Line," thousands of kilometers away in South Korea, a completely different story was unfolding, related to the development of the CU network. The first CU stores appeared in Korea 30 years ago, stood the test of time and millions of customers, proving their viability. At some point, the CU network became a leader in the so-called "home" market (today it is the number one network in South Korea in terms of market share and the number of stores, totaling more than 17,000). Competitors of the same format emerged. It is quite natural that the company began to discuss entering new markets.

The first foreign country for CU was Mongolia, wh ere the company entered with its business model and format in 2018-2019 and, within a few years, became a significant player in the local market, with over 350 stores across the country. Then there was an equally successful entry into Malaysia, where there are already more than 130 network stores today, and its further active development continues.

While exploring new markets, CU also paid attention to the Kazakhstan market and, in the search for potential business development partners, turned to "Shin-Line." Thus, quite organically, essentially fr om both sides, we approached this project simultaneously, wh ere our mutual interests and opportunities coincided. Specifically: we get the opportunity to enter the industry of interest to us, and the South Korean company gets a reliable partner in the region with an already functioning infrastructure, team, and history.

However, in addition to the so-called "infrastructure" cooperation, it is worth separately noting the "mental" resonance between us – between the shareholders and management of both companies. It turned out that both companies share similar values, goals, and aspirations. Therefore, we immediately had an active and productive dialogue at all levels. This part of the interaction is no less important for us than practical work: infrastructure, financial, etc.

Earlier in publications, it was noted that BGF Retail sees significant potential in the Kazakhstani market, high purchasing power, and the activity of the country's residents. How would you characterize the current qualitative level of development of retail trade in the country? And how will the arrival of a new retail network near homes affect the market?

The Republic of Kazakhstan is experiencing rapid growth in almost all sectors of the economy (4.8% as of December 2023), and retail trade is no exception; it is growing at an accelerated pace. For instance, the growth in sales of non-food items in 2023 was 14% compared to 2022, and the growth in sales of food items was 12.2%. The entire retail business grew by 7.7% in 2023, and the modern retail format, to which we belong, grew by 12.1%. The prosperity and purchasing power of the population also contribute to the expansion of the retail sector in overall trade, which increased fr om 31.1% to 31.5%. Accordingly, players in the retail sector strive to keep pace with changes in demand, offer new services and products to customers, improve product quality, expand their range, ensure high quality of each service provided, diversify them, and open new trading facilities. With such significant changes in external factors, internal economic factors affecting the country's population inevitably change. There are changes in consumer behavior and preferences. Players in the retail sector must respond promptly to these changes and ideally anticipate them. The ability to adapt to rapidly changing customer needs is particularly important. That's why the appearance of stores, product assortments, and services will quickly change. All of this will be reflected in market changes and the economy as a whole.

By the end of the year, we plan to invest up to 4 billion tenge in this project, and the overall project is estimated at up to 50 billion tenge, which is planned to be invested by 2030. This will be a significant stimulus for the development of small and medium-sized businesses in the city of Almaty. For example, just to staff the new retail network, warehouse workers, and employees of the central kitchen wh ere we centrally produce ready-made products, we will need to create new jobs, train and employ more than 600 people this year. And there is also a need for personnel in service enterprises that are not visible to the consumer but ensure the smooth operation of the entire mechanism—warehouse workers, drivers, employees of the head office. By solving the task of quickly attracting a large number of personnel, we must offer potential employees a competitive salary for the region. This will lead to an increase in social security-related taxes, an increase in employment, a reduction in unemployment, and an increase in the income of residents. In other words, the new network will have a positive impact on the economy as a whole.

CU is already a global network of "stores near home." In your opinion, will the quality of work of existing points of sale improve under the influence of a new competitor?

Undoubtedly. The emergence of another significant player will inevitably lead to a redistribution of market shares among others, meaning increased competition for customers. Competition leads to improved quality of services, the introduction of tested new services, and the enhancement of the external and internal appearance of retail facilities (the so-called Look & Feel parameter of stores). Key players will actively adopt experiences and solutions positively perceived by customers. In the end, it is the customer who will benefit.
Are the sales of "Shin-Line" products expected to be affected by the opening of the CU network in Kazakhstan?

Obviously, having a strong connection with the "Shin-Line" company, the CU store network will pay attention to integrating and developing the sale of its products. This includes ice cream, fruit ice, frozen semi-finished products, dough, quick-cooking noodles, and dairy products. However, the stores do not have the task of artificially imposing a specific assortment on the buyer. We closely monitor the development of other players in categories where "Shin-Line" positions are strong and, if necessary, promptly adjust the offered assortment, introduce novelties, including products fr om competitors of "Shin-Line," if demanded by the customer.

Is there an expectation of expanding production based on the "Shin-Line" product line assortment for CU stores?

We believe that centralization of processes is crucial in retail, allowing for simultaneous achievement of several goals: control over quality standards and process management, independence fr om market conditions and suppliers, minimizing additional markups from intermediate participants in the supply chain. All of this allows us to increase business efficiency through achieving various synergies and, most importantly, reduce the cost of production and gradually lower retail prices, thereby providing additional long-term competitive advantage.
Specifically for the CU store network, a unique "kitchen-factory" has been created based on the "Shin-Line" production complex, which will provide centralized preparation of dishes in one place, instead of producing the assortment separately in each store or managing supplies from numerous small external producers and ensuring compliance with standards for each store in the network. Our own centralized warehouse and distribution will ensure short delivery times for fresh products and reduce the number of intermediaries in the production chain, which will positively affect the quality of products and prices for consumers. This is convenient for ensuring continuous quality control at all stages of production, achieving savings through economies of scale. It is also important to guarantee taste stability, freshness, and an affordable price. Similarly, we will analyze opportunities to build vertical productions wh ere we see possible synergies with existing production or distribution infrastructure, wh ere there is growing sales capacity. However, all of this, of course, will be done gradually, leaving our main focus - meeting the needs of customers - unchanged.

What are the strong points of CU's business in its home country? Is it a wider range of products, competitive prices, always fresh products, or something else?

There are several distinctive features of this network's business that will be introduced in Kazakhstan as well. For example, when opening stores in Kazakhstan, we plan to adhere to a unified standard for the design of retail space: the network's outlets will not significantly differ fr om the existing 18,000 stores in other countries. Moreover, externally, CU will be qualitatively different fr om existing stores in Almaty. A recognizable facade in the vibrant urban environment, modern architecture with open panoramic glazing, a unique combination of signature colors and logos, standardization of external appearance and design, large bright signs with illumination at night - the network's stores will be easily "readable," recognizable, and memorable to customers even before entering. Inside, a key difference from other stores will be a fundamentally different organization of service. In addition to the traditional approach, wh ere the customer simply moves products fr om the shelf to their basket or cart and goes to the cashier, we aim to offer other points of contact with the customer. For example, cashiers in our stores do not just "ring up" goods at the end of the shopping journey but interact with customers from the entrance. We can greet the customer, warm up or prepare food for them, make coffee, provide information or advice, offer an additional service (such as selling SIM cards). All our stores have a café area wh ere customers can have a snack, meet someone, heat up ready-made dishes themselves, or ask our seller to prepare them. We also provide phone charging, free Wi-Fi, and, importantly, restroom facilities. Another important distinction is the 24/7 operating hours of our stores, positioning us as accessible 24/7 points of sale wh ere you can grab a snack, replenish groceries, or buy ready-made food at any time.

We also consider it important that CU visitors can enter a store near their home several times a day, depending on their needs. For example, on the way to work, they can buy crispy fresh pastries (traditional croissants or national samosas) and aromatic coffee prepared by our barista. At lunch, they can get a fresh salad or ramen made on the spot, and in the evening, on the way home fr om work or wearing slippers at home, they can get a suitable dinner dish or indulge in a tasty fresh dessert, fruits, or ice cream. In addition, we offer a wide range of products in all categories found in any large store, but the entire shopping trip takes only 3-5 minutes.

Another important distinction is the high proportion of fresh products from local producers, already prepared or created for quick "home cooking." And, of course, it's worth mentioning the significant share of imported Asian products from Korea, China, and Japan, wh ere these products already have their own consumers and fans in Kazakhstan. Sales of such specific Asian cuisine products have been growing rapidly in many countries recently.

Do you expect that the popularity of Korean culture and, in particular, cuisine in Kazakhstan will indeed become a strong point for CU's business, allowing this network to quickly capture the market of the republic?

Overall, we see trends of growing popularity of Korean food products, Korean cuisine, cosmetics, and snacks far beyond South Korea. It's also worth mentioning the rapidly gaining popularity elements of Korean culture in areas such as cinema, music, art, and TV series. There is even a separate term for this trend - "K-pop." Of course, these trends are initially supported by young people and later spread to middle-aged and older age groups. Confirmation of these trends can also be found in the growth of sales, so we consciously choose to expand the range of both food and non-food products from Korea or prepared in Korean traditions. It's worth noting that our stores will feature dishes from Korean cuisine. We centrally produce a wide range of different ready-made dishes. From Korean cuisine, for example, various types of onigiri, kimbap, tteokbokki. All these dishes are developed with the involvement of Korean technologists, ensuring full control over the production cycle, food safety, and compliance with all necessary technological processes and taste characteristics. At the same time, our assortment will include dishes from the already familiar and local national cuisine. In this way, we significantly expand our offering for the customer, diversify their daily diet, and make the shopping process more interesting, planning to differentiate favorably from competitors in the market.

On March 6th, the first CU convenience store in Kazakhstan opened in Almaty, becoming the country's first store for everyday demand of the innovative retail network.