Russia remains the red hot ticket in Central and Eastern Europe - but cumbersome bureaucracy and endemic corruption make it far from an easy play for foreign retailers and suppliers, according to the latest IGD report analysing the region's markets.

Tesco is among the foreign players said to be eyeing the market with interest and no wonder. The market was worth roughly €109.9bn in 2005 but is expected to be worth as much as €142.1bn by 2010, according to IGD.

The report describes Russia as offering "a significant opportunity at the door of Europe" thanks to the short-term potential to roll out modern formats alongside the long-term opportunity to grow market share. It points out that the market remains highly fragmented, with the top 25 retailers accounting for only 9% of the market. But all 11 markets in the region offer opportunities, according to the report, highlighting the fact that the region's GDP grew 5.1% in 2005, outstripping 3.6% growth in the global economy.

Cecile Riverain, senior business analyst at IGD, says: "Russia is definitely one of the biggest opportunities. Rising incomes and the desire to spend are boosting sales. Although levels of income are significantly lower than in the West, the amount of money they can spend is significantly higher. But in general, the Central and Eastern European bloc is an area where both fmcg and retail companies are looking for growth and they're looking further and further east."

Entry into the EU has already led to significant investment in the Czech Republic, Hungary, Poland, Slovakia and Slovenia. If Romania and Bulgaria get the green light to join in 2007, they could also prove key markets and are already attracting investment from Western European retail chains, predicts the report.

Others have already recognised the region's potential, Rewe and Metro to most obvious effect. They stand out among the leading players in terms of the scope of their operations across the region, though a number of retailers had sales above or close to the €2bn mark in 2005.

Because the region is still dominated by small traditional retail outlets, hypermarkets and cash and carries have become the primary vehicle for market entry for Western retailers.

However, they are increasingly adopting a multi-format strategy to capture market share in second and third-tier cities.

The likes of Tesco are also making effective use of the compact hypermarket format in Central and Eastern Europe. As in Western Europe, the discount format has expanded rapidly and was last year the fastest-growing format in several countries, including Russia, Hungary and Poland. There are also "significant opportunities" for suppliers that can deliver consistent quality or quantity, suggests the report, pointing to the fact that many local suppliers are experiencing difficulties in meeting retailer requirements and that retailers are therefore establishing their own production in order to control and improve standards.

Perhaps some of the biggest prospects are in private label because of the price sensitivity in the region and the rise of the hard discounters - a trend that suggests the traditional supermarket operators may not have it all their own way as they try to grow their share.

Consumers are still influenced primarily by price but, like their Western European counterparts, they are also brand-conscious. One of the main challenges for suppliers is overcoming the natural preference for local brands, which are widely recognised and benefit from a loyal customer base and low prices. This has prompted some multinationals to either buy local brands or develop specific brands for the market.

However, the report also sounds a note of caution. "Central Europe is a challenging environment for retailers, with a large number of players competing for market share and levels of hypermarket penetration already higher than in many Western European markets. There's a lot of consolidation and not all existing retailers will survive," it says.

"The current pace of change in south-eastern Europe and Russia is breathtaking. Therefore, we believe that for retailers, the window of opportunity will be limited and late market entry often means that the prime sites have been taken and that market consolidation is looming or already under way."

Nowhere is the environment more challenging than in the country that offers the greatest opportunities: Russia. Potential barriers to entry include the influence of corruption and organised crime, bureaucracy, the underdeveloped legal system and the existence of an influential black market, says the report. Now that Pyaterochka and Perekriostok have merged, creating a clear market leader for the first time, and a domestic one at that, the market could be even tougher to crack.

A bigger issue still is staying ahead of the curve in such a rapidly developing market, says Riverain. "Currently the biggest challenge is the pace of growth. If you are a retailer, being able to grow fast requires the ability to acquire sites and there's a lot of competition for sites as well as a lot of corruption," she says.

On the plus side, the focus has spread beyond St Petersburg and Moscow to the regions, presenting a host of new opportunities for retailers and suppliers alike.

The supply chain has also begun to evolve and several multinationals have stepped up their presence in the country, Nestlé recently opening a factory in Krasnodar, for instance.

Retailers haven't been slow to respond.Metro has already unveiled plans to operate 30 cash and carry stores in the country and to open four Real hypermarkets by the end of the year, while Auchan is expanding outside Moscow with five hypermarkets and plans to open five more in Moscow by 2010 as well as build supermarkets in towns close to the capital.

As for who will make their move next, Tesco is clearly one contender but entry is considered unlikely in the short term given its new focus on the US. Riverain thinks Carrefour could make a move, however. "It's really focusing on the emerging markets. It could go for organic entry or acquisition in Russia."

Whether it does or not, there are clearly opportunities for everyone - and the further East, the bigger those opportunities are likely to be over the next few years.

There are also plenty of risks, so it makes sense to work with a partner, suggests the report. At least make sure you do your homework, advises Riverain: "With any market, it's about market research and understanding the system."n