Lenta Oleg has several options with respect to the future of Lenta. He can expand Lenta within St. Petersburg, expand to Moscow, hold steady with the current size of the company, or he can take Lenta into some smaller cities around St. Petersburg. Another option is to grow outside of St. Petersburg into other major cities, but avoiding the Moscow market for now.

There are several factors that need to be taken into consideration. In favor of the more conservative options is that Lenta is still a relatively young company and has internal issues that it may wish to resolve before tackling major expansion. It is presently been expanding rapidly, and using some debt for this, and that is reflected in the balance sheet. The company is already highly-leveraged and thus exposed to further volatility in the Russian market. Internally, there are issues that Lenta has with retention of personnel. The company has its own internal training, which is costly, but it still has high turnover. It is losing managers, too, which is even more alarming because some are going to work for competitors. Lenta has to look at how much it is paying people and what else it might do to retain staff. Certainly, this will only be a bigger issue if the company goes into the Moscow market. Lenta could, for example, choose to adopt a strategy not unlike what Costco uses in the United States, paying well above industry average wages and benefits as incentive to foster greater retention of talented employees.

Operationally, however, Moscow is essential the company's plans. To operate on a high-volume, low-cost platform, Lenta needs to sell high volume, and that means Moscow. Being in Moscow will allow for Lenta to build out economies of scale in all aspects of operations, including the critical purchasing. Moreover, it can charge higher prices there in order to account...

Given the size and relatively compact nature of Moscow and the Golden Ring region, and its wealth, it is essential to the long-run viability of Lenta to establish a presence there, build out those economies of scale, and gain first-mover advantage.
A risk-averse strategy would have the company hold steady, but this strategy allows competitors to grow in Moscow, and ultimately those competitors will have advantages in terms of bargaining with suppliers and in terms of superior volume that will allow them to compete with Lenta in terms of price. A company that pursues a cost leadership strategy has to support that strategy with as many tactics as possible, in particular the need to extract economies of scale. In the short run, Lenta should probably look at stabilizing its position, but in the long run it needs to build out those economies of scale before competitors do.

The middle path option has some merit here. The company has a high debt load and would have to take out more to begin the process of opening stores in Moscow, knowing that it will not see positive cash flow for another two years. From a market perspective, gaining a foothold in either the Volga or Urals region makes some sense, because the company can build out from there, but it would also need to make investments in infrastructure. Expanding near St. Petersburg would allow it to piggyback existing infrastructure, but would offer lower returns because the cities involved are smaller (unless Vyborg would give them Finnish customers, in which case that location would be quite a coup).

It is recommended that the company set out a three-year plan to expand into Moscow. In the short run, a store in Vyborg or Novgorod is a good way to continue expanding in the local area.…