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Session Summary. Russian Retail: Superior Growth Prospects

February 4, 2010

Fedor Rybasov: Last year was difficult for Dixy Group due to logistics issues, including the move to a new IT system. The company was involved in cutting operating expenses, including rent and personnel. This year, Dixy Group plans to open 100 stores net (approximately 120 gross) and continue to improve efficiency and EBITDA profitability. This month, the management has begun to speak to distributors about the new retail law that has come into effect as some suppliers are evidently unprepared for the law and do not understand the all the intricacies. This could create additional headaches not only for retailers but also for producers. Coming out of the crisis, the plan is to focus more on the customer and ensuring that marketing efforts increase sales per square meter.

Nikolay Vlasenko: Victoria Group started feeling the fallout from the crisis in February 2008, with increased volatility in consumer spending. The management had to react quickly and began to reduce the number of SKUs. Many retailers undertook ad-hoc measures in reaction to the crisis, experimenting with different things. Clearly, there are numerous lessons to be learned from the crisis. If you lower prices enough, people will start buying. Eggs were sold at half price, sending sales rocketing 500%. Victoria Group is also unhappy with the retail law, and there is clear lobbying from agricultural producers that are already getting government funding. The law is more sensible for inefficient distributors, but market leaders tend not to work with such companies anyway.

Lev Khasis: The start of 2009 was challenging for X5 Retail Group due to increasing cost of capital, and there was concern over the company’s dollar-denominated debt of $1.1 bln. However, the retailer followed a prudent cash saving strategy in 1H09 and cut costs, but switched to a more expansionary model in 2H09. The introduction of new selling space exceeded the company’s initial plans despite lower capex. Now with Sberbank refinancing warrants, X5 Retail Group has much greater flexibility in executing its capital investment strategy, intends to maintain the EBITDA margin at 8-9%, expand the share of private labels to 50% of SKUs by 2011, and further develop distribution to increase centralization this year. Operating cash flow will be the key source of financing for organic expansion, while an increase in equity would only be considered in the event of strategic acquisitions, which could include chains in Siberia. The new retail law starting introduced on February 1 is unwelcome for the food producers, as it restricts opportunities to introduce new products. But X5 Retail Group will follow the law diligently, continue to find opportunities to improve performance and phase out distributors that fail to obey the new rules.

Sergey Galitskiy: Magnit’s healthy balance sheet created a strong platform during the crisis. The year was successful and the retailer surpassed its store openings plan and increased profitability, realizing efficiencies from logistics developed earlier. The company reiterated its 2010 capex guidance of $1 bln but believes that there is upside risk to its store rollout target, with convenience store openings possibly exceeding 500 outlets, as guided at the beginning of the year. There have been lots of negative comments about the retail law and the fact that retailers’ interests were completely overlooked. It remains unclear who the law is trying to protect, with the main argument being that retailers’ net margins are significantly smaller than those of producers. Who and on what basis will measure the market and retailers’ market share remains unclear. Importantly, Magnit feels that consumers were not taken into consideration. Clearly, smaller retailers cannot offer lower prices as they cannot afford the capex to be more leaner. For example, the price tag for a distribution center is $60 mln for construction alone, which smaller players simply cannot afford.


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