Retail Industry Survey 2009

Retail Industry Survey 2009

Table of contents

4

Introduction

1

Basic conclusions

2

Economic overview

3

Legislation

5

The Russian retail sector in the context of the economic crisis

8

Looking to the future

15

Information on the participants in the study

19

Contact details

20

Introduction At the end of 2009 we conducted a survey of Russian and foreign retail companies operating in Russia. We did not set ourselves any complex goals: a comprehensive analysis of the market and forecasts for its future development were not within the scope of our study.

Our objective was rather more basic: to obtain an understanding of the moods prevailing on the retail market and of how its participants see the future of Russian retail.

In the course of our study we examined various aspects of business activity and gathered together the opinions of the respondents regarding the effect of the economic crisis on companies in various market segments, their growth forecasts for the sector, their assessment of legislative amendments and their plans with regard to the development of their respective retail networks.

We would like to thank all respondents for their participation in our study.

Our surveys of representatives of retail companies have become a regular tradition – we send out questionnaires once every two years, and this is our third survey. A great deal has changed on the market over these years, and in those areas where the changes have been most salient we have tried to compare the results of the new survey with data for past years.

1

Basic conclusions Current situation Changes in customer demand against a background of higher-cost debt financing and an unwillingness on the part of banks to make concessions on lending have been key factors affecting retail companies during the financial and economic crisis. Debt defaults, bankruptcies and changes in company ownership have become characteristic features of the end of the boom era on the retail market.

Those who have suffered most from the crisis are companies which invested in construction or real estate, as well as small networks which have found themselves unable to adapt to the new conditions.

Nonetheless, the results of our survey indicate that those companies which have remained on the market are not only coping, but are actually seeing improvements in such financial indicators as revenue and gross profit margin. More than 60% of the survey participants indicated revenue growth in rouble terms.

29% of those surveyed had been able to achieve a higher profit margin as well as increasing revenue.

2

The crisis has forced businesses to get to grips with such matters as operating efficiency, which did not seem so pressing when the market was in a state of constant growth. The main measures employed by companies have been to reduce renting costs (first place in terms of popularity and effectiveness) and to cut staff (second place). Other measures were rated by the respondents as less effective.

What next?

The prospects for the development of the market are still very uncertain, but most of those surveyed (87%) believe that the situation will not get very much worse. At the same time, only 38% of respondents think that the lowest point of the crisis has passed. 14% of respondents representing non-food networks expect a significant improvement in the industry’s fortunes.

The changed economic circumstances have forced many companies to abandon investment programmes and adjust their development strategy in favour of organic growth.

Retail Industry Survey 2009 — Basic conclusions

It is clear from a comparison of the 2007 and 2009 surveys that companies have revised their regional development strategies. Whereas in 2007 most were planning to develop their business in the provinces, having decided, quite reasonably, that the market in Moscow and other large towns was fairly saturated and rapid growth could only be achieved through regional expansion, in 2009, on the contrary, the majority of respondents indicated that they intended to focus on developing their networks in Moscow and large towns.

But are company owners thinking today about the longer-term picture? Constant network growth is not, after all, an end in itself. What would they prefer – to pay larger dividends rather than investing in development, or to build up their networks at the expense of less successful competitors who have failed to cope with the consequences of the crisis, with a view to achieving a better return on the sale of their share when investor interest returns? Such interest does exist, and although many strategic investors are currently busy dealing with problems on their core markets, the crisis affords a chance for those who think now about their long-term strategy to establish themselves as future leaders on the Russian market.

Economic overview1 According to a report by AT Kearney, in 2009, as in 2007, Russia took second place (after India) in the ranking of most attractive countries for retail investment.

Most analysts agree that the move is unlikely to have been caused by any decline in the investment appeal of the Russian retail sector. As one German business publication observes, “despite the economic downturn and the weakening of its national currency, Russia remains firmly on the radar of German retail companies.”

The recent declaration by the major European retailer Carrefour that it was pulling out of the Russian market was somewhat unexpected. We had got used to Russia being regarded as one of the most attractive countries from the point of view of the expansion of foreign retail networks. So what has changed? Surely the market has not been so shaken by the crisis that the retail sphere has ceased to be of interest to investors?

Countries attractive for retail investment Position

Country

Country risk (25%) 2007

Market attractiveness (25%)

2009

2007

2009

Market saturation (25%) 2007

2009

Time pressure (25%) 2007

2009

Attractiveness index 2007

2009

1

India

67

54

42

34

80

86

74

97

92

68

2

Russia

62

31

52

58

53

51

90

100

89

60

3

China

75

62

46

42

46

47

84

74

86

56

Source: AT Kearney Global Retail Development Index 2009

Despite the substantial increase in its country risk, Russia achieved top scores for retail market attractiveness and time pressure (the indicator of the speed with which the retail market is developing, which takes into account sales growth and the quantity and quality of sales areas), which is what enabled it to take second place.

Russia is in second place in terms of market saturation. This indicates that although there are a number of large networks on the market, there is a lack of consolidation, and this makes it easier for new players to enter the field.

to such macroeconomic indicators as population and projected growth in per capita income.

The attractiveness of the Russian retail market is also linked in no small measure

The following sources were used in preparing this section: Rosstat, EIU - Country Forecast, EIU IndustryWire – Forecast, The 2009 AT Kearney Global Retail Development Index.

1

Retail Industry Survey 2009 — Economic overview

3

The rapid development of the market and its level of civilization is also indicated by the reduction in the proportion of retail turnover accounted for by public markets.

“In the next four to five years, the concentration of Russian food retailers will increase dramatically; large and efficient players will undertake regional expansion and at the same time compete more aggressively among themselves for customers. As a result, the market share of the ten largest players will grow from the current 15% to 50-60% by 2015.”

Retail turnover 14,000,000 12,083,946

12,000,000 9,218,579

million RUB

10,000,000

Fyodor Rybasov, Vice President of Dixy Group

7,000,310

8,000,000 6,000,000

5,545,798

4,000,000 2,000,000 0

2005

2006

2007

2008

Retail turnover of organisations Sales thorough market and fairs

A number of studies indicate that there was no substantial growth in trade through public markets in 2009.

Nevertheless, the proportion of retail trade accounted for by markets and fairs rose from 13.2% in December 2008 to 13.6% in December 2009. Retail companies would probably be well advised to review their attitude to markets and look upon them as serious competitors, as a 0.4% increase is not so insignificant in absolute terms.

On the whole, though, it must be said that the Russian retail sphere has weathered the crisis rather well. According to Rosstat data, retail trade turnover in 2009 amounted to 14,516.9 billion roubles, which is a 5.5% decline compared

to 2008. Viewed in the context of an overall GDP decline of 7.9% in 2009, this suggests that the retail market has been more resistant to the effects of the crisis.

A number of analysts, including specialists within the ministry of economic development, hold the view that the period 2010-2012 will witness a return to growth in the retail market.

Naturally, that growth will be considerably more modest than the pre-crisis levels: the ministry of economic development estimates that it will be within the range of 1.9-3.9% in 2010, increasing to 3.4-5% in 2012.

the food retail sector will be the first to get back on track once the economic crisis is over.

Analysts point out that investors are also taking a positive view of things: their attitude to Russia has fundamentally changed over the last six to nine months.

Until only recently 96% of investors were expecting the Russian economy to shrink, whereas now 88% are predicting an average of 3% GDP growth. Most investors expect that Russian companies will begin actively conducting IPOs as soon as 2010, and indeed 49% believe that this will happen in the first half of the year.

In fact, 2010 will be the first year of growth in the market following the decline caused by the crisis. Experts believe that

Macroeconomic indicators Indicator

2007 (a)

2008 (a)

2009 (b)

2010 (c)

2011 (c)

2012 (c)

2013 (c)

2014 (c)

Population (millions)

142.3

141.8

141.4

141.0

140.5

140.0

139.6

139

Increase in GDP (%)

8.1

5.6

(7.8)

2.5

4.0

4.0

4.5

4.4

Per capita GDP (US dollars)

9090

11,820

9350

11,370

12,600

14,390

16,220

18,400

Real disposal income (billions of US dollars) 686

820

684

839

950

1072

1195

1332

Per capita GDP (thousands of roubles)

233

294

297

335

372

422

474

534

Real disposal income (billions of roubles)

17,553

20,376

21,736

24,759

28,017

31,410

34,907

38,640

Source: Economist Intelligence Unit (EIU) — Viewswire (a) actual values (b) EIU estimate (c) EIU forecast

4

Retail Industry Survey 2009 — Economic overview

Legislation A new law regulating trade activity in Russia came into force on February 1, 2010. The bill was the subject of intense discussion and debate among legislators, representatives of trade networks and manufacturers. As a result of discussions held and compromises reached, the final version of the law establishes a special regulatory framework for trade in food products.

In an attempt to restrain the growth in food prices, the legislators have forbidden the inclusion in supply agreements of any additional conditions concerning the provision of services by retail networks to manufacturers which would require additional payments for sales promotions by networks and other such payments. As from February 1, 2010 food supply agreements may only provide for the payment to the purchaser of an additional reward not exceeding 10% of the price of the goods in return for the acquisition of a particular quantity of products. The new law also clearly regulates the timeframe for settlements between manufacturers and retail networks for supplied food products according to the type of product. Supply agreements which have already been concluded and are in force must be brought into line with these provisions of the law

within six months of the date of entry into force of the law. It goes without saying that the new rules for the regulation of trade in food products will generate a need for adjustments to existing agreements and the development of a new structure of co-operation between retail networks and food manufacturers, which is bound to have certain tax implications.

It should further be pointed out that the new law also regulates the manner in which retail networks operate and imposes restrictions on their presence in a given region. Those restrictions are likely to have a considerable impact on plans for the development of retail networks and their future strategy in regard to their presence within Russia.

The majority of survey participants (72%) took a negative view of the new trade law.

What is your view of the trade law (bill)?

It will have a negative impact on the development of retail trade

46% 34%

It will not change anything It will worsen the relationship between networks and suppliers

26%

It will help develop the relationship between networks and suppliers It will aid the development of the sector

9% 6%

However, only 8% of respondents believe that adapting to the requirements of the amended legislation poses a serious problem for the retail sector at the present time.

Retail Industry Survey 2009 — Legislation

5

Changes in tax legislation A number of substantial changes to tax legislation were made in 2009, some of which may help to simplify tax administration and related paperwork and thereby reduce certain costs for retail networks.

VAT: fast-track procedure for VAT reimbursement The aim of one of the most significant amendments to VAT legislation is to improve the existing procedure for the reimbursement of that tax. The amendments introduce a fast-track procedure for VAT reimbursement.

According to the amendments, under certain conditions a VAT reimbursement (deduction, refund) will be granted to taxpayers “in advance”, i.e. before the completion of an in-house tax audit of submitted tax declarations. Where there are no outstanding amounts of taxes, levies, penalties and/or fines against which reimbursable VAT may be offset, at the taxpayer’s request the amount of VAT may be refunded in monetary form or

6

offset against future tax payments within approximately 16 days of the relevant VAT declaration being submitted to the tax authorities. Where a tax authority partially or wholly rejects a taxpayer’s VAT deduction claim after performing an in-house tax audit, appropriate arrears, penalties and interest for the use of monetary resources (if the VAT amount was remitted to the taxpayer) must be paid. It should be noted that a special rate equal to double the refinancing rate of the Central Bank of the Russian Federation is used in this case. This provision was evidently introduced in order to reduce the number of instances of the submission of invalid VAT reimbursement claims which would subsequently be rejected as a result of a tax audit.

The fast-track VAT reimbursement procedure is available to a limited range of taxpayers based on the amount of VAT paid or the existence of a bank guarantee.

The new procedure might help improve taxpayers’ cash flow and enable them to secure VAT reimbursement sooner than is allowed by the existing framework.

Although this is a positive step for

Retail Industry Survey 2009 — Legislation

taxpayers, its success will depend in practice on the attitude adopted by each individual tax inspectorate to the new procedure. Also, given the high probability that the tax authorities will disallow the deduction (refund) of VAT on the basis of a tax audit, thus resulting in the requirement to pay interest at double the refinancing rate, the fast-track procedure might prove to be less advantageous than the existing system. The advantages of using the fast-track procedure would have to be weighed up in each individual case.

VAT: invoice errors

Profits tax: interest expenses

Requirements relating to the preparation of VAT invoices have been established, and clearly state that errors in VAT invoices which do not prevent identification of the seller, the purchaser, the name and value of goods (work and services) or property rights, the tax rate and the amount of tax charged to the purchaser do not constitute a basis for disallowing the deduction of amounts of tax. This is consistent with relevant case law. The rewording will apply to relations arising on or after January 1, 2010. This is a change that will obviously benefit taxpayers and remove one more argument which is used by tax authorities to disallow VAT deductions and has normally in the past resulted in legal proceedings.

In 2010 a legislative amendment was introduced to extend the period during which a taxpayer has the right to recognise a higher amount of interest expense than is provided for in Article 269 of the Tax Code, which is undoubtedly a positive development for taxpayers. From January 1 until June 30, 2010 inclusively the rate that taxpayers will be able to apply in relation to interest expenses for debt obligations which arose before November 1, 2009 in determining the maximum amount of interest which may be deemed an expense (including interest and value differences in respect of obligations expressed in notional monetary units on the basis of the exchange rate of notional monetary units established by an agreement between the parties) will be equal to double the refinancing rate of the Central Bank of the Russian Federation (in the case of a debt obligation arranged in roubles) or equal to 15% (in the case of debt obligations arranged in foreign currency).

Retail Industry Survey 2009 — Legislation

Profits tax: simplification of the application of the 0% rate to income in the form of dividends Dividends received by Russian organizations are subject to profits tax at the rate of 0% where all the conditions established by Article 284 of the Tax Code are met. Otherwise the tax rate is 9%. One of the conditions is that the cost of the acquisition or receipt of ownership of the holding in the charter capital of the organization paying the dividends or depositary receipts conferring the right to receive dividends exceeds 500 million roubles. This condition has been abolished with effect from January 1, 2011 in relation to dividends payable on the basis of an organization’s operating results for 2010 and subsequent periods. This change might ultimately transform corporate structures which include Russian holding companies.

7

The Russian retail sector in the context of the economic crisis Considered below are various aspects of the activities of retail companies in Russia.

In the period since our last survey in 2007 the most significant event affecting the state of the retail market has been the global financial crisis.

Consequences of the crisis Most respondents believe that the principal negative consequences of the crisis for the retail sector have been changes in consumer demand and the increased cost of debt financing.

Most severe problems faced by the retail sector Reduction in consumer purchasing power

74%

High interest rates

42% 29%

High rental costs Limited access to debt financing

26%

Adapting to changes in legislation

8% 0%

Financing The banking sector was among the first to suffer from the global crisis. The huge amounts of funds allocated by the state to saving the banking system enabled it to survive, but banks have become more cautious about lending. This trend has had an impact on retail companies. Those who have suffered worst are companies which borrowed money from the banks for the purpose of acquiring or building commercial real estate, the price of which fell sharply

8

10% 20% 30% 40% 50% 60% 70% 80%

during the crisis. A number of construction projects were halted, and new trade outlets often opened significantly behind schedule and/or failed to meet planned margins within the budgeted timeframe. As a result, some companies faced the problem of refinancing credits attracted for investment projects. By no means all banks were willing to make concessions as the main types of collateral that the retail sector was able to offer the banks – real estate and shares – had rapidly fallen in price.

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

“Retail trade will see strong rates of growth. For obvious reasons, growth rates fell by approximately 10% during the crisis, but this is a good dynamic in the given economic situation. Newcomers to the market should not be expected this year, as the impact of the new law on trade has yet to be assessed. This year could see mergers and acquisitions among current major market players.�

Nikolai Vlasenko, a member of the board of directors of the Victoria Group

Those least affected by the financing problem were companies which rely primarily on their own resources for their development and borrow to finance their working capital. Some of these were able to pass some of the burden on to their suppliers by extending deferrals on

payments for goods or renegotiating payment schedules for past supplies.

Others were able to make arrangements with banks: short-term credits usually secured on goods in circulation or cash, where there is no question over liquidity.

Types of financing used Bank credit

78%

Financial investor

8%

Combination of various types

6%

Factoring

3%

No need for financing

3%

Bonds

3% 0%

10% 20% 30% 40% 50% 60% 70% 80% 90%

Compared with 2007 there was a substantial fall in the popularity of such methods of financing as bond issues or the attraction of a financial investor.

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

9

Decrease in demand The change in consumer demand was the biggest consequence of the crisis to hit the retail market. As one major international retailer puts it, “consumers want to buy goodquality products at low prices and are more thoughtful about their purchases.”

It was the consumption of durable goods and clothing that fell first. Customers also began switching to cheaper brands and/or private labels.

Nevertheless, measures taken by retail chains to keep their customers enabled many of them not only to keep their financial results at the pre-crisis level, but even to improve on them.

Over 60% of the participants in our survey indicated an increase in revenue in rouble terms. Some companies also managed to increase their gross profit margin.

How did the network’s operating results change in connection with the crisis (in 2009 compared with 2008)?

Increase in rouble revenue coupled with reduced profit margin

32%

Increase in rouble revenue and increased profit margin

29%

Decrease in revenue coupled with reduced profit margin

21%

Decrease in revenue coupled with increase profit margin

18% 0%

5%

Paradoxical though it may seem, revenue growth occurred both when prices increased and when they fell. Price reductions made it possible to retain those customers who would rather refrain from making a purchase than pay a higher price.

Price increases allowed the rise in the cost of imports to be passed on to customers.

But prices were not the only tool used to

10

10%

15%

20%

25%

30% 35%

keep and attract customers. A number of companies began to think more deeply about their product range, which had a positive impact on sales for those companies which found ways of increasing the appeal of goods on offer. This was a particular important factor for the non-food retail sector.

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

Loyalty schemes “Western investors pouring into the Russian retail market is not a scenario but some smaller players may look at options and players from other emerging markets and CEEMEA markets could do so.

The big shifts do not look in the offing. But Russian retail will surely change and adapt as a consequence of the crisis.

Nothing stays static in anything and certainly not in retail.�

Dr Daniel Thorniley, President DT Global Business Consulting

Meanwhile, the use of customer credit arrangements in conjunction with banks has become less widespread. This is a perfectly logical trend in the context of the economic crisis, as consumer lending is the highest-risk type of financing.

Our survey did not reveal substantial changes in the methods used by survey participants to motivate customers. Customer loyalty cards are still the most popular approach.

The only notable change is the increased popularity of points-based schemes conducted jointly with other companies.

Loyalty schemes 88%

Customer loyalty cards

90%

Points-based schemes (jointly with other companies)

25% 37% 29%

Consumer credit arranged jointly with banks

23% 27%

Other

20%

2007

2009

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

11

Measures taken As the owner of one retail chain observed, the crisis has had a positive effect in making companies think harder about the effectiveness of their business processes. It is undoubtedly true that when the market is developing at a rapid pace, there is little incentive for companies to analyse their operating efficiency.

Many retailers agree that their priorities at present lie in efficiency raising and cost optimization.

50% of our survey participants indicated that they had started to pay more attention to operating efficiency.

The most popular and successful measures were those aimed at cutting costs.

What measures have been taken to cope with the crisis?

Which have been the most successful?

Reducing rental costs Cutting labour costs

65%

Optimizing working capital

51%

22%

Streamlining product range

51%

22%

Increased centralization of purchasing processes

35%

14%

Negotiating larger manufacturer bonuses

32%

16%

Replacing imports with domestically produced goods

14% 0%

What measures have been taken to cope with the crisis?

10%

20%

81%

68%

43%

Optimizing logistics

12

86%

70%

30% 30%

40%

50%

60%

70%

80%

90% 100%

Which have been the most successful?

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

The most popular and successful measure was the cutting of rental costs: landlords became more accommodating during the crisis. Many have managed to switch from dollar-based rates to roubles.

In second place was the reduction of labour costs. Labour cost optimization included the unpopular measure of staff

cuts (65% of our survey participants had to resort to this).

The crisis made many companies think deeply not only about the quantity but also about the quality of their staff – 57% of respondents began to pay more attention to seeking key employees.

How has your company’s approach to personnel management changed over the last three years?

Staff cuts made

65%

More attention paid to seeking key employees

57%

11%

No changes

Began using reliable recruitment agencies

Other

3%

22%

It is no surprise that measures to reduce rental costs and labour costs have proved the most popular and the most effective.

These represent substantial cost items for the retail sector, and making such cuts in the context of the decline on the real estate market and the growth in unemployment is a perfectly feasible proposition. Meanwhile, other measures were rated by the survey participants as less effective. The question is how they

reached this assessment: is it because the effect produced by the measures in question is less striking, or because the company experienced difficulties in implementing them?

Judging from the answers given by our respondents, retailers have not had a great deal of success in their attempts to secure larger supplier bonuses and to replace imports with domestic goods.

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

13

Approach to the meeting of real estate requirements The reduced access to debt financing and the decline on the real estate market have caused many to rethink their approach to meeting real estate requirements. Around 77% of surveyed companies have begun to give greater preference to the renting of real estate.

What is your company’s approach to the use of commercial real estate?

6% 28%

The abandonment of investment in real estate in favour of renting has become a clear trend in the context of the crisis. While in 2007 more than 35% of companies were willing to buy new facilities, and 20% to invest in the construction of their own premises, not one of the respondents in the new survey indicated the acquisition of real estate as an approach to the meeting of real estate requirements, and only 5.6% of the surveyed companies invest in the construction of new facilities.

66%

Long-term lease Combination of different forms Construction of own facilities

Investment requirements The change in the approach to meeting real estate requirements has lessened the need for financing sought by companies for the purpose of implementing their chosen development strategies. This is illustrated by the fact that the proportion of companies with financing requirements amounting to 10-50 million dollars (the minimum level specified in the questionnaire) grew from 37% to 57%.

How much financing will your company need to carry out its chosen strategy?

13%

More than 250 million US dollars

7% 28%

100-250 million US dollars

20% 20%

50-100 million US dollars

17% 39%

10-50 million US dollars

57% 0%

10% 2007

14

20%

30%

40%

50%

2009

Retail Industry Survey 2009 — The Russian retail sector in the context of the economic crisis

60%

Looking to the future An overwhelming majority of those surveyed (87%) believe that the situation on the retail market will not worsen dramatically in the future.

However, only 38% of respondents believe that the lowest point of the crisis has passed. 14% of respondents representing non-food networks expect a significant worsening of the industry’s fortunes.

of the market’s prospects, predicting market growth of 10% or more, and only 9% of those surveyed (the most pessimistic all being from non-food networks) expect a 10-15% fall in market volumes.

On the whole, the survey participants do not expect substantial changes in market volumes in the next two or three years – 46% of respondents believe that fluctuations will be no greater than 5%. Approximately the same number (45%) take an optimistic view

How will the Russian retail sector develop over the next two or three years?

Market will shrink by 10-15%

0%

Market will remain stable: changes in volume will not exceed 5%

9%

4%

46% 20% 20%

Market will grow by 10-15%

12% 14%

Market will grow by 15-20%

63%

Market will grow by 20% or more

11% 0%

10%

20%

2007

30%

40%

50%

60%

70%

2009

Generally speaking the survey participants are in agreement that the future development of the retail sector will depend first and foremost on the recovery of the economy as a whole and on the practical application of the Russian government’s legislative initiatives.

Which of the following factors pose the greatest threat to the sector?

68%

Overall economic conditions Adverse legislation

43%

Shortage of skilled management personnel

38%

Shortage of investment/financing

24% 14%

Increased competition Other

8%

Retail Industry Survey 2009 — Looking to the future

15

An overwhelming majority of respondents expect to see greater competition on the market, primarily between Russian and foreign players.

Do you expect to see greater competition?

There will be increased competition between foreign and Russian players on the market

84%

There will be increased competition between Russian players

32%

There will be increased competition between federal and regional players

30%

There will be no increase in competition

5%

For understandable reasons the food retail sector has proved more resilient to the crisis. As the owner of one large chain pointed out at a conference, “people eat: always have and always will. They will need their two thousand

calories the same as ever.” It is not surprising that, in the context of the economic crisis, the majority of respondents marked food retail as the market segment with the best prospects.

Which of these retail segments do you think have the best prospects?

57%

Food Clothing

33%

Footwear

18% 19%

Domestic appliances Perfumes and cosmetics 10% 11%

Jewellery and luxury items

24%

9% 6%

16% 16% 14%

Other 2007

16

29%

17%

Furniture and related goods

Sports clothes and accessories

33%

22%

2009

Retail Industry Survey 2009 — Looking to the future

47%

61%

“The retail market will see higher rates of growth next year. This has to do with a reduction in the number of intermediaries and the elimination from the supply chain of distribution companies, which were hardest hit by the crisis.

As a result, the retail market is moving toward a Western model – the direct supply of products from the manufacturer to the retail network.”

Andrei Korkunov, Chairman of the Board of Odintsovo Confectionary Plant

Direction and forms of development

Only 13% of those surveyed plan to cultivate markets outside Russia. The majority of respondents (75%) intend to develop their business exclusively within Russia. Indeed, most participants in the survey (88%) are placing their stakes on Moscow and a few other large towns.

The crisis has led to a substantial decrease in the proportion of companies which view mergers and takeovers as a potential business expansion strategy (from 38% in 2007 to 11% in 2009). The change is primarily attributable to the increased popularity of organic growth (from 46% in 2007 to 71% in 2009).

Which of these forms of business expansion is being considered by your company?

81% 86%

Organic growth Mergers and takeovers Joint venture

No plans on this Other

40%

14% 11%

31%

0% 8% 13% 3% 2007

2009

Private labels An overwhelming majority of those surveyed (71%) believe that selling goods under a company’s own labels is an important factor in the development of the sector.

There is certainly room for the Russian retail sector to grow in this respect — performance indicators for many retailers are still considerably lower than for companies operating on more developed markets. This is particularly true of the food retail sector. The survey shows that private label products account for only 1-5% of sales for 56% of surveyed representatives of grocery chains, while, for example, the equivalent figure in West European countries is 30-40%.

Our study shows that, as in 2007, companies in the non-food retail sector had considerably more success in developing private labels.

Retail Industry Survey 2009 — Looking to the future

17

Proportion of sales of goods under own label Food and non-food retail 40%

More than 20%

11-20% Proportion of goods

“Consumer products companies will be looking at higher level of affordability of their products and new price points in 2010 and in the longer term as well. They will “mix and match” their premium strategy with innovation downwards and Russia is a good market to “play this game” because there will be some good end left to combine with the new affordable products. This change in CP strategy will be one factor altering the relationship with Russian retail.”

22% 15% 0% 15%

6-10%

22% 30%

1-5%

56% 0%

10%

20%

30%

40%

50%

60%

% of answers

Large consumer products company executives

Non-food retail

Food retail

Change compared to 2007 34%

Proportion of goods

More than 20% 10%

11-20%

8% 17%

6-10%

11% 38%

1-5% 0%

5%

2007

42%

10% 15% 20% 25% 30% 35% 40% 45% % of answers

18

39%

2009

Retail Industry Survey 2009 — Looking to the future

Information on the participants in the study 37 companies took part in our survey, including operators of federal (53% of the total number of participants) and regional (47%) networks.

appliances (9%) and furniture and DIYÂ (9%).

Operators of pharmacy, perfumery, multimedia and mobile phone networks also took part in the survey.

The retail networks represented in the study were primarily grocery chains (32%) and retail chains for clothing (32%), domestic

The great majority of participants (90%) are Russian companies.

Retail Industry Survey 2009 — Information on the participants in the study

19

Contact details

Dmitry Khalilov

Vitaly Pyltsov

Tatiana Shustova

Partner, Head of the Retail Group in the CIS, Tax

Partner, Retail Group, Assurance

Partner, Retail Group, Transactions

Tel.: +7 (495) 228 3664 Vitaly.Pyltsov@ru.ey.com

Tel.: +7 (495) 755 9867 Tatiana.Shustova@ru.ey.com

Ivan Ryutov

Mathias Weber

Pavel Seregin

Partner, Advisory, Fraud Investigation & Dispute Services Group

Partner, Assurance

Director, Assurance

Тел.: +7 (495) 641 2902 Mathias.Weber@ru.ey.com

Тел.: +7 (495) 755 9953 Pavel.Seregin@ru.ey.com

Tel.: +7 (495) 755 9757 Dmitry.Khalilov@ru.ey.com

Тел.: +7 (495) 755 9738 Ivan.V.Ryutov@ru.ey.com

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Ernst & Young can accept no responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate adviser.

20

Retail Industry Survey 2009 — Contact details

Notes

Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services.

Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,400 professionals work at 16 offices in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk.

For more information, please visit www.ey.com.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity.

Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Š 2010 Ernst & Young (CIS) B.V. All Rights Reserved.