Jun 17, 2005: IKEA Starts Work On $500M Mega Project

By Yekaterina Dranitsina
SPECIAL TO THE ST. PETERSBURG TIMES

Swedish retailer IKEA started construction work on a $500 million investment project that includes setting up two family shopping centers and a further furniture store in the city.

By the side of the existing IKEA store in Dybenko, the company will build a MEGA retail and entertainment center and add another MEGA complex and IKEA in the Parnas area of the city, the company said Thursday.

Construction of the three projects will be complete by 2006.

Lennart Dahlgren, CEO of IKEA Russia, said that the company will invest $400 million into the project, with the rest of the financing to arrive from some of the retail centers‘ anchor tenants.

IKEA will remain the main owner and operator of the centers. Dahlgren said he expected a return on investment within eight years.

The company hopes to attract between 20 million and 30 million visitors to each of the two MEGA centers during their first year of opening.

Since IKEA opened its first Mega center in the Moscow region in 2002, the annual visitor numbers have reached about 50 million people, making it the company‘s most-attended retail center in the world.

Dahlgren expects the success to continue in St. Petersburg. "St. Petersburg is the fourth-biggest city in Europe. Megas shouldn‘t have difficulties with buyers here," he said.

Mega Dybenko will be the larger of the two St. Petersburg centers, occupying 145,000 square meters. Mega Parnas will take up 120,000 meters.

Each shopping center will accommodate more than 200 tenants, 50 percent of which have already been determined, IKEA said. Own brand IKEA furniture stores, Auchan supermarkets, DIY chain OBI and electronics chain M-Video will make up the anchor tenants.

Patrick Langue, head of Auchan in Russia, said the supermarket chain will invest $20 million into setting up their shops‘ production capacity. Auchan has leased 24,000 square meter and 20,000 square meter areas for its stores.

Oleg Spivak, commercial department director of Becar, sees the expansion by the Swedish retail giant as positive news for the city as it will broaden the number of retailers represented on the St. Petersburg market and tighten competition.

The view was not shared by Viktoria Kulibanova, development manager at Astera real estate agency, who attracts tenants for the Raduga retail center being built by Vinci Construction near the city‘s Park Pobedy area.

"Many shopping centers in the city are of rather low quality. Foreign affiliated retailers have the advantage of strong corporate philosophy and business concepts," Kulibanova said. "But even this doesn‘t guarantee market success. It will be rather hard for Mega to attract buyers to such a remote district."

Tenants often prefer shopping areas in the city center or in districts with active building activity.

Closeness to metro stations is also very important, Kulibanova said.

IKEA‘s Dahlgren said the company was interested in central locations for its new shops, but good relations with the Leningrad Oblast authorities has so far kept the focus outside of the city perimeter.

Meanwhile, Spivak thinks the out-of-town sites suit IKEA‘s marketing strategy, besides being more realistic because of the kind of space a large retail center requires.

"It‘s impossible to locate such huge shopping areas in the city center," Spivak said. "IKEA is middle-class oriented, while the city center is occupied mostly by expensive boutiques.

"The remoteness of the location is not a problem. Even in Moscow, Mega is far from the Rublyovskoye highway. When St. Petersburg gets the ring road highway, the construction of [out-of-town] shopping centers will dramatically increase," Spivak said.

Vice governor of the Leningrad Oblast, Grigory Dvas, said that IKEA‘s projects will make significant additions to the regional budget - about $7 million. The regional authorities are still discussing the possibility of offering IKEA an exemption from property taxes.