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Retail Industry Survey 2009
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Retail Industry Survey 2009

Mar 08, 2016

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“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.”
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  • Retail Industry Survey

    2009

  • 4Introduction 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

    Table of contents

  • 1At 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.

    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.

    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.

    Introduction

  • 2 Retail Industry Survey 2009 Basic conclusions

    Current situationChanges 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.

    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 industrys fortunes.

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

    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.

    Basic conclusions

  • 3Retail Industry Survey 2009 Economic overview

    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?

    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.

    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.

    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.

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

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

    Economic overview1

    Position Country Country risk (25%) Market attractiveness (25%) Market saturation (25%)Time

    pressure (25%)Attractiveness

    index

    2007 2009 2007 2009 2007 2009 2007 2009 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

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

    Countries attractive for retail investment

  • 4 Retail Industry Survey 2009 Economic overview

    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.

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

    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.

    Retail turnover

    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

    Macroeconomic indicators

    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.

    2005

    5,545,798

    2006 2007 2008

    Retail turnover of organisations

    Sales thorough market and fairs

    7,000,310

    9,218,579

    12,083,946

    0

    2,000,000

    4,000,000

    6,000,000

    mill

    ion

    RUB

    8,000,000

    10,000,000

    12,000,000

    14,000,000

    In the next four to five years, the concentration of Russian food retailers will increase dramatical-ly; 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.

    Fyodor Rybasov, Vice President of Dixy Group

  • 5Retail Industry Survey 2009 Legislation

    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 provi-sion of services by retail networks to man-ufacturers which would require additional payments for sales promotions by net-works 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 ex-ceeding 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 settle-ments between manufacturers and retail networks for supplied food products ac-cording to the type of product. Supply agreements which have already been con-cluded 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 agree-ments 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.

    Legislation

    A new law regulating trade activity in Russia came into force on February1,

    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.

    6%

    9%

    26%

    34%

    46% It will have a negative impact

    on the development of retail trade

    It will worsen the relationship betweennetworks and suppliers

    It will help develop the relationshipbetween networks and suppliers

    It will not change anything

    It will aid the development of the sector

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

    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.

  • 6 Retail Industry Survey 2009 Legislation

    Changes in tax legislationA 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 reimbursementThe 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 taxpayers request the amount of VAT may be refunded in monetary form or

    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 taxpayers 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

    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.

  • 7Retail Industry Survey 2009 Legislation

    VAT: invoice errors 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 January1,2010. 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.

    Profits tax: interest expenses 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).

    Profits tax: simplification of the application of the 0% rate to income in the form of dividendsDividends 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 January1, 2011 in relation to dividends payable on the basis of an organizations operating results for 2010 and subsequent periods. This change might ultimately transform corporate structures which include Russian holding companies.

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

    Consequences of the crisisMost 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.

    The Russian retail sector in the context of the economic crisis

    Reduction in consumer purchasing power

    Limited access to debt financing

    Adapting to changes in legislation

    High interest rates

    High rental costs

    8%

    26%

    29%

    42%

    74%

    0% 10% 20% 30% 40% 50% 60% 70% 80%

    FinancingThe 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

    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.

    Most severe problems faced by the retail sector

    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.

  • 9Retail Industry Survey 2009 The Russian retail sector in the context of the economic crisis

    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.

    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.

    No need for financing

    Bank credit

    Financial investor

    Combination of various types

    Factoring

    Bonds 3%

    3%

    3%

    6%

    8%

    78%

    0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

    Types of financing used

    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 eco-nomic 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

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

    Decrease in demandThe 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 good-quality 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.

    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

    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.

    Increase in rouble revenue coupledwith reduced profit margin

    Increase in rouble revenueand increased profit margin

    Decrease in revenue coupledwith reduced profit margin

    Decrease in revenue coupledwith increase profit margin 18%

    21%

    29%

    32%

    0% 5% 10% 15% 20% 25% 30% 35%

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

  • 11Retail Industry Survey 2009 The Russian retail sector in the context of the economic crisis

    Loyalty schemesOur 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.

    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.

    Customer loyalty cards

    Other

    Points-based schemes(jointly with other companies)

    Consumer credit arrangedjointly with banks

    20%

    23%

    37%

    90%

    27%

    29%

    25%

    88%

    2007 2009

    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

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

    Measures takenAs 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.

    Reducing rental costs

    Cutting labour costs

    Optimizing working capital

    Optimizing logistics

    Increased centralization of purchasing processes

    Negotiating larger manufacturer bonuses

    Replacing imports with domestically produced goods

    Streamlining product range

    What measures have been taken to cope with the crisis? Which have been the most successful?

    14%

    16%

    14%

    22%

    22%

    43%

    65%

    70%

    30%

    32%

    35%

    51%

    51%

    68%

    81%

    86%

    0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

    What measures have been taken to cope with the crisis? Which have been the most successful?

  • 13Retail 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.

    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.

    Staff cuts made

    No changes

    Other

    More attention paid to seekingkey employees

    Began using reliable recruitment agencies

    22%

    3%

    11%

    57%

    65%

    How has your companys approach to personnel management changed over the last three years?

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

    Approach to the meeting of real estate requirementsThe 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.

    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.

    What is your companys approach to the use of commercial real estate?

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

    66%

    28%

    6%

    Combination of different forms

    Long-term lease

    Construction of own facilities

    Investment requirementsThe 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%.

    0%

    More than 250 million US dollars

    100-250 million US dollars

    50-100 million US dollars

    10-50 million US dollars57%

    17%

    20%

    7%

    39%

    20%

    28%

    13%

    10% 20% 30% 40% 50% 60%

    2007 2009

  • 15Retail Industry Survey 2009 Looking to the future

    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

    of the markets 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.

    Looking to the future

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

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

    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 governments legislative initiatives.

    Market will shrink by 10-15%

    Market will grow by 10-15%

    Market will grow by 15-20%

    Market will grow by 20% or more

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

    2007 2009

    11%

    14%

    20%

    46%

    9%

    63%

    12%

    20%

    4%

    0%

    0% 10% 20% 30% 40% 50% 60% 70%

    Overall economic conditions

    Adverse legislation

    Shortage of skilled managementpersonnel

    Shortage of investment/financing

    Increased competition

    Other

    68%

    43%

    38%

    24%

    14%

    8%

    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 industrys

    fortunes.

  • 16 Retail Industry Survey 2009 Looking to the future

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

    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.

    There will be no increase in competition

    There will be increased competitionbetween federal and regional players

    There will be increased competitionbetweenforeign and Russian players

    on the market

    There will be increased competitionbetween Russian players

    84%

    32%

    30%

    5%

    Other

    Sports clothes and accessories

    Jewellery and luxury items

    Furniture and related goods

    Perfumes and cosmetics

    Domestic appliances

    Footwear

    Clothing

    Food

    2007 2009

    14%

    6%

    9%

    11%

    17%

    19%

    22%

    33%

    61%

    16%

    16%

    24%

    10%

    29%

    18%

    33%

    47%

    57%

    Do you expect to see greater competition?

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

  • 17Retail Industry Survey 2009 Looking to the future

    Direction and forms of developmentThe 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).

    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.

    Private labelsAn overwhelming majority of those sur-veyed (71%) believe that selling goods un-der a companys 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 consid-erably lower than for companies operating on more developed markets. This is particu-larly true of the food retail sector. The sur-vey 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, compa-nies in the non-food retail sector had considerably more success in developing private labels.

    Organic growth

    Mergers and takeovers

    Joint venture

    No plans on this

    Other3%

    8%

    11%

    14%

    86%

    13%

    0%

    31%

    40%

    81%

    2007 2009

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

    The retail market will see higher rates of growth next year. This has to do with a reduction in the num-ber 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

  • 18 Retail Industry Survey 2009 Looking to the future

    % of answers

    More than 20%Pr

    opor

    tion

    of g

    oods

    11-20%

    6-10%

    1-5%

    Non-food retail Food retail

    56%

    22%

    0%

    22%

    30%

    15%

    15%

    40%

    0% 10% 20% 30% 40% 50% 60%

    More than 20%

    % of answers

    Prop

    ortio

    n of

    goo

    ds 11-20%

    6-10%

    1-5%

    2007 2009

    42%

    11%

    8%

    39%

    38%

    17%

    10%

    34%

    0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

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

    Change compared to 2007

    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 down-wards and Russia is a good market to play this game because there will be some good end left to combine with the new afford-able products. This change in CP strategy will be one factor altering the relationship with Russian retail.

    Large consumer products company executives

  • 19Retail Industry Survey 2009 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.

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

    appliances (9%) and furniture and DIY(9%). Operators of pharmacy, perfumery, multimedia and mobile phone networks also took part in the survey.

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

    Information on the participants in the study

  • 20 Retail Industry Survey 2009 Contact details

    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.

    Contact details

    Dmitry KhalilovPartner, Head of the Retail Group in the CIS, Tax

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

    Vitaly PyltsovPartner, Retail Group, Assurance

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

    Tatiana ShustovaPartner, Retail Group, Transactions

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

    Ivan RyutovPartner, Advisory, Fraud Investigation & Dispute Services Group

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

    Mathias WeberPartner, Assurance

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

    Pavel SereginDirector, Assurance

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

  • Notes

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