There are two characteristics that make the retail industry in Russia a unique phenomenon.

First is the fact that, as a capitalist society, Russia is in its infancy. The rise of consumer culture is a relatively recent development, especially in the more remote regions of the country, and market dynamics, long established in the West, are only now beginning to take hold.

Second is the geography of the country. Covering 6.5 million square miles (much of which is snow-covered wasteland) and spanning 11 time zones, Russia is the quintessential logistical nightmare.

An ongoing SAP implementation by Technosila, one of the country’s leading consumer electronics retailers, demonstrates how Russia’s burgeoning commercial sector is addressing these challenges through software-enabled business processes.

Founded in 1993, Technosila today has over 250 stores in 197 cities, from Moscow to Vladivostok; an annual turnover approaching $2 billion; and a 10% share of the Russian consumer electronics market.

For the first ten years of its existence, the company used paper processes to manage its distribution network; any IT that was in place was self-built. But these processes and systems began to buckle around the early part of this decade.

One reason was that the company was expanding into ever-more remote locations, demanding more sophisticated logistics planning. “In somewhere like

the UK, you can order stock for a shop and it will arrive within 24 hours,” outlines Leonid Tyukavkin, Technosila’s vice-president for strategic development. “But in Russia, the size of the country makes this impossible [in many cases]”.

In 2003, Technosila had hired Tyukavkin as IT director from its archrival Eldorado. His first move was to build a data warehouse from scratch using in-house developers.

Application building

Having built the analytical capability to find out where the weak points and bottlenecks in Technosila’s distribution network lay, Tyukavkin’s second move was to replace the manual finance and distribution processes with vendor-built business applications.

SAP and Oracle were the two main contenders, and for a time the latter was the forerunner. “The Oracle solution was a bit better [for us] in terms of functionality,” Tyukavkin recalls. “But when we considered the total cost of ownership, we decided on SAP.” The local availability of SAP-trained engineers and consultancy firms helped to make the German company a more economically viable proposition, he adds.

Combining SAP application functionality with its own data store, Technosila was able to introduce some important procedural improvements, mostly in the area of transport management.

For example, one expensive inefficiency in Technosila’s existing distribution network was the fact that the allocation of shipments to transport vehicles took no account of the size of the products shipped. With those vehicles often making trans-Siberian journeys, this blind spot cost serious money. Today, the logistics system plans shipments by volume and allocates transport accordingly.

Unused to software implementation of this scale, Tyukavkin’s superiors had some pretty unrealistic expectations. “They starting asking to see the return on investment after one month,” he recalls. “In fact, we had to wait more than a year.”

But for Tyukavkin, it will be the next phase of his IT strategy – the introduction of automation – that will have the real revolutionary impact on the business. There are still many processes that require human involvement that could be automated, driving cost down even further. “Automation is not just the next phase of the strategy, it is what will bring the real benefits,” he says.

Competitive advantage

Technosila’s process refurbishment began not a moment too soon. Shortly after it started in December 2005, the consumer electronic retail market crossed a critical threshold, with buying psychology changing dramatically. “After February 2006, sales dropped for all retailers in the market,” explains Tyukavkin.

“What happened was that it went from a seller’s market to a buyer’s market almost over night. Beforehand, people would buy whatever we would stock as long as it was cheap; now they know what brands and which models they want; they want variety and choice.”

That watershed moment drove Technosila to hire management consultancy Accenture to forge a new strategy for the new market conditions. The strategy they decided upon was – put simply – to ape US electronics retailer BestBuy.

The long distances involved in distributing stock across America made BestBuy’s logistical model suitable for use in Russia, while its approach of offering customers services – such as IT support and maintenance – as well as products offered Technosila an opportunity to move on from its position as the market’s discount retailer.

Tyukavkin explains that the move to services is underpinned by operational efficiencies. “It’s no good offering all these services if the products aren’t in the stores,” he says. “Plus, in order to be able to afford to provide services, we must cut costs elsewhere.”

The global economic crisis has put the brakes on the SAP project, with some elements postponed to the second half of this year. But it has not rattled Technosila, which looks to its role model for leadership.

“BestBuy’s stock price is down,” reflects Tyukavkin, “but it predicts growth after its competitors go bust.” In November 2008, one of BestBuy’s main competitors, Circuit City, filed for Chapter 11 bankruptcy protection, and Tyukavkin implies that a similar fate awaits some of Technosila’s competitors.

As this reveals, Russia’s communist past does not mean its present form of capitalism lacks competitive zeal. “Companies like Technosila are a product of new Russia,” says SAP’s Marjanovic. “The retail industry here is extremely entrepreneurial. It is an exciting market to work with, and one where anything can happen.