Transcript Materials for Strategic Committee of Supervisory Board

X5 RETAIL GROUP
STRATEGY
March 15, 2007
p. 1
Disclaimer
This presentation does not constitute or form part of and should not be construed as an advertisement of securities, an offer or invitation to sell or issue or the solicitation of an offer to
buy or acquire or subscribe for securities of X5 Retail Group N.V. or any of its subsidiaries or any depositary receipts representing such securities in any jurisdiction or an invitation or
inducement to engage in investment activity in relation thereto. In particular, this presentation does not constitute an advertisement or an offer of securities in the Russian Federation.
No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment or investment decision whatsoever.
No representation, warranty or undertaking, express or implied, is given by or on behalf of X5 Retail Group N.V. or any of its directors, officers, employees, shareholders, affiliates,
advisers, representatives or any other person as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information or the opinions
contained herein or any other material discussed at the presentation. Neither X5 Retail Group N.V. nor any of its directors, officers, employees, shareholders, affiliates, advisors,
representatives or any other person shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this presentation or any other
material discussed at the presentation or their contents or otherwise arising in connection with the presentation.
This presentation includes statements that are, or may be deemed to be, “forward-looking statements”, with respect to the financial condition, results, operations and businesses of X5
Retail Group N.V. These forward-looking statements can be identified by the fact that they do not only relate to historical or current events. Forward-looking statements often use
words such as” anticipate”, “target”, “expect”, “estimate”, “intend”, “expected”, “plan”, “goal” believe”, or other words of similar meaning.
By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, a number of which are beyond X5 Retail Group N.V’s
control. As a result, X5 Retail Group N.V’s actual future results may differ materially from the plans, goals and expectations set out in these forward-looking statements. X5 Retail
Group N.V. assumes no responsibility to update any of the forward looking statements contained in this presentation.
This presentation is not for distribution in, nor does it constitute an offer of securities for sale, or the solicitation of an offer to subscribe for securities in Australia, Canada, Japan or in
any jurisdiction where such distribution, offer or solicitation is unlawful. Neither the presentation nor any copy of it may be taken or transmitted into the United States of America, its
territories or possessions, or distributed, directly or indirectly, in the United States of America, its territories or possessions or to, or viewed by any U.S. person as defined in Regulation
S under the US Securities Act 1933 (the "Securities Act). Any failure to comply with these restrictions may constitute a violation of United States, Australian, Canadian or Japanese
securities laws. The distribution of this presentation in certain jurisdictions may be restricted by law and persons into whose possession this document or any other document or other
information referred to herein comes should inform themselves about, and observe, any such restrictions. Any failure to comply with these restrictions may constitute a violation of the
securities law of any such jurisdiction.
For Russian law purposes, the securities mentioned in this presentation (the "Securities") represent foreign securities. It is not permitted to place or publicly circulate the Securities on
the territory of the Russian Federation at present. No prospectus for the issue of the Securities has been or is intended to be registered with the Federal Service for Financial Markets
of the Russian Federation. The information provided in this presentation is not intended to advertise or facilitate the offer of the Securities in the territory of the Russian Federation.
This presentation does not represent an offer to acquire the Securities or an invitation to make offers to acquire the Securities.
The information and opinions contained in this document are provided as at the date of this presentation and are subject to change without notice. Some of the information is still in
draft form and neither X5 Retail Group N.V. nor any other party is under any duty to update or inform recipients of this presentation of any changes to such information or opinions. In
particular, it should be noted that some of the financial information relating to X5 Retail Group N.V. and its subsidiaries contained in this document has not been audited and in some
cases is based on management information and estimates.
Neither X5 Retail Group N.V. nor any of its agents, employees or advisors intend or have any duty or obligation to supplement, amend, update or revise any of the statements
contained in this presentation.
p. 2
Table of Contents:
1.
2.
3.
4.
5.
6.
7.
Russian Food Retail Market
Company
Expansion Strategy
Format Strategy
Integration
Support Functions (Strategy of Logistic, IT, HR)
Conclusions
p.4
p.8
p.16
p.20
p.27
p.31
p.36
p. 3
Russian Food Retail
Market
p. 4
Russian Food Retail Market (overview)
Main characteristics: attractive, large, with high potential of growth,
unsaturated, with low competition, with short period of advantages to catch
Official Russian Food Retail market (2006)
– USD 146 bln
Total Russian Food Retail Market (2006)
– USD 233 bln (incl. “grey” part)
Share of modern formats
– 15% (of total market)
Share of Top 10 in modern retail chains
– 53% (of total market)
Share of X5 Retail Group on the market
– 1.7% (of total market)
Key Russian food retail operators
Place in
TOP 10
Source of info: FSGS, analysts, media reports
Company
Revenue 2006,
USD excl VAT
Market share,
%
1
X5 Retail Group
3485
22%
2
Metro
2544
16%
3
Magnit
2504
16%
4
Auchan
2016
12%
5
Dixi
1080
7%
6
Lenta
1060
7%
7
Kopeyka
980
6%
8
Seventh Continent
958
6%
9
Victoria
900
6%
10
Ramstore
635
4%
16162
100%
Total TOP 10
p. 5
Forecast of Russian Retail Market Growth
$bln, incl VAT
2006 year
2011 year

Official Russian food retail market
$146 bln.
$281 bln.

Estimated share of «grey» market
37%
30%

Total Russian food retail market

Share of modern formats in total
Russian food retail market
TOP 10 modern food retail chains
(share)

$233 bln.
$405 bln.
15%
35%
$18.4 bln. (53%)
$106 bln. (75%)
• Forecasted annual average growth rate for 5 year period of Total Russian food retail market
is 12% per year.
• Average growth rate of top-10 in 5 year period is expected at a level of 42%.
Source of info: FSGS, analysts, media reports
p. 6
Perspectives of Modern Formats
in Russian Retail Trade
Perspectives of retail formats, (bln.$)
Change of the format structure in modern retail trade, (%)
405
450
* TRRM
2006 г.
400
350
300
* TRRM
227
233
250
Other
200
Other formats
150
0
5%
4%
6%
163
100
50
14%
Share of modern trade
(of total Russian market)
34
9
15
13
CAGR of the formats:
Hypermarket – 39%
Discounter – 33%
Supermarket – 20%
2006
37
46
Hypermarket
35%
16%
11%
8%
56%
71%
Discounter
63
33
15%
2011 г.
9%
Supermarket
2011
* - Total Russian Retail Market
The main formats in Russia are discounters,
supermarkets, hypermarkets.
It’s expected that the fastest growing market
segments in 5-year period will be hypermarkets and
discounters (CAGR respectively 39% and 33%).
Source of info: analysts and media reports
p. 7
Company
p. 8
History
Key milestones
1995
1998
 Perekriostok
chain founded by
Alfa Group
Consortium
2002
 20
supermarkets
opened
 1st DC acquired
 1st Perekriostok
hypermarket opened
 Regional expansion
start
 A.Rogachev and
A.Girda founded
Pyaterochka chain
 16 stores opened in
St.Petersburg
1999
 Pyaterochka enters
to Moscow market
 Pyaterochka
franchise operations
start
 Private Label
development
program start
2002
2001
2003
2004
 Templeton
Investment
foundation buys
7.7% of Perekriostok
stock
 75 supermarkets
opened
 SPAR Middle Volga
chain acquired
 The largest DC
opened in NorthWest Russia
2003
 «365» chain
acquired in Yaroslavl’
 Gastronomy
production started
 90 supermarkets
opened
 100th store opened
 Ukraine &
Kazakhstan markets
entry
2004
2005
2006
 Ukraine market
entry via 4 Kiev
stores chain
acquisition
Merger
of Pyaterochka
and
Perekriostok
 IPO at LSE
 18 St. Petersburg
and 25 Moscow
Kopeyka stores
acquisition
2005
Pyaterochka & Perekriostok chains development in
2003-2007F period
PEREKRIOSTOK
PYATEROCHKA
th.m2
900
400.0
400.0
CAGR (03-06): 32%
CAGR (03-06): 38%
675
300.0
675
200.0
450
257.2
209.0
450
225
300.0
205.5
141.5
79.5
th.m2
900
200.0
145.9
112.4
102.4
100.0
451
225
100.0
347
0
90
120
168
64
2003
2004
2005
2006
185
0.0
Number of stores (eop)
Trade area (eop)
234
0
0.0
2003
2004
Number of stores (eop)
2005
2006
Trade area (eop)
p. 9
X5 Retail Group Today
X5 Retail Group – is the leader of the
Russian Food Retail Market
Net sales – USD 3.485 bln
Number of company own managed stores – 619
Net selling space – 466,000 sq.m.
Geography of operations – Russia (9 regional offices), Ukraine, Kazakhstan
(franchising stores)
Number of customers in 2006 – 445,871,769.
p. 10
X5 Retail Group Today
2006: Total Retail Sales by the
Regions (mln.$, VAT excl.)
St. Petersburg
Pskov
Veliky Novgorod
Cherepovez
Tver’
Vologda
Yaroslavl
Smolensk
MOSCOW
Kostroma
Kaluga
Bryansk
Vladimir
Orel
Kursk
Moscow
North-West
Nizhny Novgorod
Samara
South
Tatarstan
Ural
Ukraine
Centr.- Chernozemny
1’924
1’124
158
78
70
49
35
27
20
TOTAL:
3485
2006: Share of Retail Sales
by the Regions (%)
1%
Moscow
1%
North-West
55%
1%
N.Novgorod
Samara
South
2%
Tatarstan
2%
Ural
33%
Ukraine
5%
Ivanovo
Kirov
Tula
Ryazan
Lipetsk
Arzamas
Belgorod
Yoshkar-Ola
Cheboksary
Saransk
Voronezh Tambov
Kazan
Penza
Perm
Izhevsk
Ulyanovsk
Ekaterinburg
Toglyatty
Saratov
Ufa
Samara
Chelyabinsk
Rostov-na-Donu
Total Stores including Ukraine: - 619
Volgograd
Novorossiysk
Orenburg
Krasnodar
Sochi
Stavropol
Elista
Astrakhan
Tyumen
Perekriostok stores - 47 (excl.4
Pyaterochka stores - 25
Combined: Moscow:
Perekriostok - 100
Pyaterochka - 222
stores in Ukraine)
St. Petersburg:
Perekriostok - 17
Pyaterochka - 204
p. 11
New Mission, Vision and Value
NEW
MISSION:
«We are improving the quality of your life»
VISION:
«Leadership. Always.»
VALUES:
• Respecting individuality
• Servicing customer needs
• Striving for excellence
p. 12
Corporate Rules
•
Be proud of your company. Trust in it
•
We are one team. Trust and support each other
•
Employees of the company are its key value
•
Be purposeful, energized, emotional and enjoy what you do
•
Our opportunities are defined by our objectives
•
Defining your priorities, focus on result
•
We do what adds value to our customers only
•
To stay competitive we must be the best in cost efficiency
•
Learn from your competitors, to be more efficient and successful than they
are
•
We are socially responsible company
p. 13
Strategic objectives
Building-up platform for further growth
 The two key objectives for 2006 – start of integration and
uninterrupted fast growth – were being met successfully
 In 2007 X5 plans to finalize the integration process and build up a
solid multi-format platform for further growth
 The Group’s long-term strategy is focused on investments into multiformat growth and upgrading its technological competitive advantages
in logistics, IT, HR and other key support functions
The key strategic objectives of X5 going forward
 Maintain the leadership position on the Russian market
 Play role of the market consolidator in Russia
 Ensure highest return on shareholders capital in the sector
p. 14
2007 key objectives and projections
2007: CapEx Projections
(mln.$, VAT excl.)
Key objectives
TOTAL
at least 700
New stores 2007
450
2007: New DCs opening
(th.sq.m)
 add at least 150’000 sq.m. of net selling
space
 expand supermarket chain
across all
regions of the European part of Russia
expand discounter chain in Moscow area,
enter Samara and Nizhny Novgorod regions
Rented
44.0
Owned
19.3
TOTAL:
63.3
 develop hypermarket format, with the
aim of massive roll-out starting from 2009
p. 15
Expansion Strategy
p. 16
Focus on Russia and Ukraine
«Х5»
RUSSIA
is the PRIMARY
course for expansion for now
target regions
for expansion
UKRAINE
expansion strategy
will be finalised and announced
during 2007
X5
X5
p. 17
Focus on the most attractive regions
X5 Retail Group will grow both organically and by means of M&A
3-rd priority
1-st priority
2-nd priority
Zone №1 – European part and Urals
Zone №2 – Siberian regions
Zone №3 – Other regions of Russia
In its 5-year strategy, X5 Retail Group
concentrates on the regions of the
European part of Russia, which have the
highest
density
of
population
and
represent the largest part (84%) of food
retail market.
Source of info: analysts and media reports
* Concentration of population, territory and
market volume by Russian regions in 2005
Geographical
zone
Population
Share
(>100 th. people)
%
Area
(mln.m2)
Share
%
Market
volume
mln.$
Share
%
European part
and Urals
53 000
75%
2.8
16%
100 800
84%
Siberia
7 300
10%
2.7
16%
14 400
12%
Other regions
10 000
15%
11.5
68%
4 800
4%
Total (towns
With population
more than 100 th.):
70 300
(50%)
100%
17.1
100%
120 000
100%
Total
(all population):
142 000
* - official data
p. 18
M&A Strategy
Main objective for M&A is to provide sustainable growth of X5 shareholder value (price per share) through acquisition on
financially attractive terms of strategically located and growing retail chains to enable Company’s strategy for long-term market
leadership and to obtain access to new retail technologies and market segments
European part and Urals
Regions with the own stores
of X5 as at the end of 2006 year
Regions of western Siberia
There are no own stores
as at the end of 2006
Purchasing of retail chains with trade areas,
suitable for organization of discounter,
supermarket and hypermarket formats
and attractive for investments
Creation of joint ventures or purchase of shares
in the leading companies on the local market
(organization of self dependent growth centers
under X5 control with out withdrawing
of operating resources of X5)
Other regions of Russia
No own stores are planed
to be opened on this
territory during 5 years
Selling of franchising contracts and possible creation of JVs
to pass under X5 control in a longer term perspective
p. 19
Format Strategy
p. 20
Format Strategy
To increase market penetration and maintain high growth rates,
X5 Retail Group focuses on MULTI-FORMAT STRATEGY:
Hypermarket
Soft Discounters
Supermarkets
p. 21
Soft Discounters
2006
As of 31 December 2006 X5 Retail Group
operated 451 own discounter stores,
with total net selling space of 257,000
sq.m., and net sales of 1,973 bln. USD
Value Proposition
 Next to customers apartments
 Low prices
 Balanced assortment
 Guaranteed quality of goods
Format Concept
Trade area (average)
Assortment (average)
Non-food
Price
- 600 м²
- 3500 SKUs
- 10%
- EDLP
Future Format Development
 Focus on efficiency
 Increase % of centralized deliveries
 Investment into price
 High speed of opening (multiple centers
of growth)
 Optimization of assortment
 Advertising and Promo activities
 Loyalty programs
 Increase share of fresh food
 Increase contribution of Private Labels
p. 22
Supermarkets
2006
As of 31 December 2006, X5 Retail Group
operated 168 supermarkets stores, with
total net selling space of 209,000 sq.m,
and net sales of 1.512 bln USD
Value Proposition
 Perekriostok is the best in fresh fruits and
vegetables, own bakery products, meat and fish
products
 Good location: close to customers apartments or
«on their way home». Easy access, convenient
parking.
 Saving customers’ time
Format Concept
Trade area
Assortment
Price
Quality
Environment
Non-food
- 800, 1200, 1600, 4000 sq.m.
- 15 000 – 25 000 SKUs
- high/low
- high
- friendly, welcoming
- 20-30%
Future Format Development
 Accent on effectiveness
 Increase % of centralized deliveries
 Rationalization of assortment
 Increase participation in fresh up to 60%
 Increase contribution of Private Labels
 Focus on standardization
 Increase efficiency of ratio between trade
and total areas
p. 23
Hypermarkets – New Format
for the Company
 The segment of hypermarkets is expected to be the most attractive and fast
growing in the next five years
 Among international operators only
and
the market, which gives huge room for growth
are represented in
 Consumer profile: a customer gives a premium to the format (everything under
one roof)
 The hypermarkets can provide the necessary speed of growth and increase the
purchasing power
p. 24
Hypermarket
• Hypermarkets will allow to maintain high growth rates, increase market
share and purchasing power
• This format has high turnover and efficient low-cost operations,
smart pricing strategy (high/low) to create a low-price image
uses a
• Supported by highly disciplined commercial and operational policy based on
negative working capital
Trade area
5.000, 7.000, 10.000 sq. m
Assortment
40,000-60,000 SKUs
Price: When I shop in Frank I do a cheap shopping
Atmosphere: I’ll find a happy (friendly) atmosphere
Promotions-Campaigns: I’m always surprised. I’ll get
a good deal
Staff: The people is friendly, willing to help, they know
the business and what they are talking about
Assortment: They did the best selection for me. I can
cover almost all my needs
p. 25
Drivers for Hypermarket format development
 Building up platform for massive roll-out of hypermarkets starting from 2009
 land bank in process of creation (over 20 land plots secured, other 60 in
progress)
 X5 plans to open around 70 hypermarkets organically over next 5-7 years
 Focus on Development projects - building own bigger trade centers in priority
regions
 Karusel chain acquisition
 option excersisable from January 1, 2008
 ca. 25 hypermarkets by the beginning of 2008
 the potential acquisition fits well into X5 format strategy
p. 26
Integration
p. 27
Integration objectives
•
Integrate “Perekriostok” and “Pyaterochka” chains:
that means
•
Implement the best practices from both companies
•
Find and implement synergies to increase operating profit and reduce
expenses
•
Create organizational structure and business processes (including multiformat regional offices) to support high growth rate of the company
•
Create mechanism to integrate all companies from future M&A deals to
support our growth and consolidation of the sector
p. 28
Priorities of Integration
People
Purchasing
SYNERGIES
Commercial
•Cross compare
•Retroactive
application
•Scale
Negotiation
•Franchising
Scale
negotiations
Non-commercial
purchasing
Finance
Non-commercial
Headcount
Cross compare
suppliers
information
Negotiate scale
(Discount Credit)
Central Head
Office
Regional
Structure
Stores
IT
Logistics
Support
•Logistics
consolidation and
delivery
centralization
p. 29
New Management Team
Following the merger
 a new international management team composed of professionals with extensive
and successful experience in major Russian companies and leading international
retail chains was built up
that means
• Lev Khasis, CEO, former Chairman of Perekrestok Supervisory Board, over 10
years in retail business, PhD in Retail Economics, Chairman of Russian Retail
Association
• Vitaliy Podolskiy, CFO, MBA from the University of Chicago, over 10 years of
finance experience with leading investment banks and multinationals
• Antonio Melo, COO, around 20 years of experience in retail with Makro
• Pawel Musial, CCO, 10 year experience in retail with Tesco, Hit and Perekrestok
• Dariush Bator, Perekrestok GM, over 10 years of experiense in retail with Tesco
and Perekrestok
• Andrei Gusev, M&A Director, MBA from the University of Pensylvania, over 5
years of M&A activity with Alfa-Group
• Yuri Kobaladze, Corporate Affairs Director, probably Russia’s best professional in
this area
• Yulia Anokhina, HR Director, over 10 years in HR with leading Russian (YUKOS)
and international companies (Bristol-Myers Squibb, Reemtsma)
p. 30
Support Functions
- Logistic Strategy
- IT
- HR
p. 31
2006 Logistic operations and objectives
Locations
– DCs in Moscow and St Petersburg
Level of centralization – 50% for discounters; 25% for supermarkets
DCs total area
– 69’000 sq.m. (excl. 3PL operators):
- Rented area – 6’000 sq.m.
- Owned area – 63’000 sq.m.
Strategic objective of X5 Retail Group
•
to build uniform logistic infrastructure (DC network with transportation
fleet) to support operations in all formats
Target level of centralization:
- 85% for discounters
- 75% for supermarkets and hypermarkets
DC types:
- Regional DC (FMCG and Fresh)
- National DC (SMCG, strategic goods: import & private label)
- Both DC types will be company managed
p. 32
X5 DCs Locations in European Russia
Pskov
- National DC location
St. Petersburg
Planned total area of national and regional DC’s
in 2011 about 600’000 - 700’000 sq.m.
Veliki Novgorod
Cherepovets
Tver’
Smolensk
Vologda
Yaroslavl
Kostroma
Moscow
Vladimir
Kaluga
Bryansk
Ivanovo
Tula
Orel
Kursk
Kirov
Ryazan
Yoshkar-Ola
Cheboksary
Lipetsk
Belgorod
Nizhni
Novgorod
Saransk
Tambov
Penza
Voronezh
Perm
Izhevsk
Kazan
Ekaterinburg
Ulyanovsk
Saratov
Togliatti
Tyumen
Samara
Rostov-na-Donu
Ufa
Chelyabinsk
Volgograd
Orenburg
Novorossiysk
Krasnodar
Sochi
Stavropol
Astrakhan
p. 33
IT Mission and Goals
Increase
efficiency
turnover
Provide X5 with competitive
advantages through
stability, development and
innovations
IT
as
costs
% of
Support
expansion
capabilities
company
with
IT
Provide
stability
&
support for company
operations optimization
Build effective processoriented IT organization
Build
professional
united team
Future IT landscape
Stores
Integration Bus
Competitor
Chain
Access Control
Management
SC planning and
execution
Customer
Management
LDAP
Decision Support
System
Category
Management
Merchandising
Data warehouse
Financial
Management
HR
Management
New IT Platform Implementation
p. 34
Human Resources Strategy
The main asset are the employees
The main priorities of HR
• Create a uniform corporate culture
• Build efficient system of recruiting, training and
retaining employees to support high growth
• Increase staff efficiency, improve productivity and
decrease staff turnover
p. 35
Conclusions
p. 36
KEY TAKE-OUTS
 X5 Retail Group has corporate 5-year strategic plan in Russia* and objectives, supported by its
Supervisory Board and key shareholders, new core management team in place and access to necessary
resources;
 X5 Retail Group’s key long-term objective is to maintain and reinforce its position as the leading
Russian chain in each format and market in which it operates, to provide our shareholders with superior
return on investment in the industry;
 X5 Retail Group is a multi-format chain, with primary focus on three core retail formats, namely
discounters, supermarkets and hypermarkets;
 X5 has been and intend to remain the consolidator of the fragmented Russian retail market:
 X5 Retail Group plans to grow both organically and by M&A
 Organic growth will remain the primary growth engine, with X5 Development and “green filed” construction as
fast-growing area of its expansion especially in hypermarkets
 X5 will actively develop JVs and partnerships with other market players such as developers, financial
institutions, suppliers and other partners to promote growth and new products and services to its consumers
 X5 key internal priorities will be:
 Completion of integration of two organizations, development of “know-how” and organizational platform for
a fast and efficient integration of retail companies
 Creation of own SCM chain, including of DCs network and transport fleet to ensure unparallel and sustainable
competitive advantage
 Implementation of “best-in-class” IT system to support efficiently growing business needs, including SCM,
CRM and IMS
 Become an Employer of Choice, by building HR processes of recruiting, training and retaining employees to
support growing demand of employees on each level
* X5 strategy in Ukraine will be finalised and announced during 2007
p. 37