David Noble

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David Noble Supervisory Board Director Boston
29th October , 2003
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Introduction
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• 1 The Food Retail Market in Russia
• 2 A Brief History of Pyaterochka
• 3 Questions and Answers

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Overview

• An Overview of the Russian Food Retail Market in
  2003

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AT Kearney
AT Kearney Global Retail Development Index
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Go Now
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Source AT Kearney GRDI 2003-( EDS)
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Institute of Grocery Distributions (UK) Market
Index
Country Rank Score Status
China 1 70 Priority 1 markets
Italy 1 70 Priority 1 markets
Russia 1 70 Priority 1 markets
Japan 4 68 Priority 2 markets
Hungary 5 66 Priority 2 markets
India 5 66 Priority 2 markets
United States 5 66 Priority 2 markets
Poland 8 65 Priority 2 markets
Canada 9 62 Priority 2 markets
France 9 62 Priority 2 markets
United Kingdom 9 62 Priority 2 markets
Germany 12 61 Priority 2 markets
Turkey 13 61 Priority 2 markets
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Top 5 European Grocery Markets (2001)
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Country Grocery Market ( bn)
Germany 204
France 176
United Kingdom 162
Italy 134
Russia 99
Source Institute of Grocery Distribution (IGD)
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Western food retailers in Eastern Europe
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Source IGD, MM Planet Retail
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Food retail spending in Moscow by outlet type
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Supermarkets and hypermarkets 12
Traditional small shops and kiosks 58
Outdoor markets 30
Source Moscow City Hall
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Major food retailers in Russia
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Chain / Company Number of stores Number of stores Number of stores Gross turnover, m Gross turnover, m Gross turnover, m
Chain / Company 2000 2001 2002 2000 2001 2002
Pyaterochka 38 80 135 75 212 501
Perekrestok 28 38 46 156 252 333
Ramstore 9 9 15 125 250 308
Sedmoy Continent 15 22 31 124 201 301
Kopeika 16 23 27 60 116 182
Dixi 23 28 40 20 70 n/a
Bin n/a 26 32 70 100 120
Paterson 4 10 16 12 40 82
Source Company data, UFG
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Share of top 3 food retailers
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Source ACNielsen, Company estimate for Russia
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Why international retailers have not come (Yet!)

• shortage of suitable retail properties
• the difficulty of getting access to land and
  necessary permits
• lack of long-term leases
• underdeveloped supply infrastructure
• huge distances between major urban centers
• shortage of qualified retail staff
• BUT IKEA , METRO, AUCHAN, AVA/EDEKA have taken
  the plunge

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Market Summary
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• Russia is among the worlds top 10 grocery
  markets with over 100 bn turnover in 2002
• Share of open markets and small shops is still
  high
• Domestic food retail chains enjoy strong growth,
  but share of top 3 retailers is only 1.1
• Foreign competition is insubstantial

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• Pyaterochka Overview

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Pyaterochka Introduction
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• Pyaterochka is the leading grocery chain in
  Russia by sales and number of stores 162 own
  stores and 20 franchised
• Pyaterochka was formed after 1998 financial
  crisis from two food wholesale operations
• First store opened in February 1999
• Positioned as a soft discounter with 3500
  products
• Average store size 585 sq m
• Mostly located in residential districts
• EBRD has been a shareholder since 2001

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New store openings in 1999-2003E Rapid Growth
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Pyaterochka stores in St. Petersburg and
Moscow
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Pyaterochka Proposition
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• OUR CUSTOMER STORE CHARACTERISTICS
• Low to middle income group Convenient
  location
• Average basket 4.5 Competitive prices
• Frequent shoppers Guaranteed quality of
  products
• Majority do not have cars Well-chosen range
  of products
• Live within 1,5 km Always in stock

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One of Pyaterochka stores in St. Petersburg
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Inside the store
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Pyaterochka Phase One Strategy
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• Build Pyaterochka brand as fast as possible
• Lease all stores rather than buy or build
• Increase range from 600 to 3500 SKUs
• Build reputation for low cost quality branded
  goods
• Concentrate on supply chain issues
• Introduce best practices throughout organisation

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Pyaterochka Phase Two Strategy
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• Continue aggressive roll out strategy
• Buy well located stores
• Build stores when the opportunity arises
• Introduce a number of own label products
• Leverage buying power to keep prices low
• Build consolidated warehouses
• Introduce best of breed IT solutions across the
  supply chain
• Develop larger format

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Pyaterochka Critical Success Factors
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• Keep it simple
• Limited Promotional Activity
• No Internet Home Delivery
• No Credit and Loyalty Cards
• Every day low prices
• Same price in every store in each region
• Well trained employees
• Pyaterochka training school 3 week course
• Source products locally
• 2000 50 of all products imported
• 2003 95 of all products bought locally
• Always in stock
• Very high sales per sq m on a range of 3500
  products

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Pyaterochka as a Proxy for Russia - Positives
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• Rapid growth in all forms of organised retail
• Stock market up by over 50 av for each of last
  three years
• Increasing interest from Multi Nationals in
  setting up local operations
• All big 4 accountants present and very busy (and
  expensive)
• EBRD and IFC very active
• Top Law Firms and Investment Banks returning
  since 1998 financial crisis

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Pyaterochka as a Proxy for Russia - Negatives
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• St Petersburg and Moscow reasonably easy places
  to do business- regions less so
• A bit of a bubble again with high real estate
  prices. Leases still short 5-6 yrs common
• Infrastructure Road Rail need investment
• Little sale/ lease back activity
• No 3rd Party Logistics Operators- Do it all
  yourself!
• Red tape does mean you need a local partner

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Pyaterochka Key Challenges
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• Finding appropriate locations
• 2 teams of people in St Pete Moscow
• Keeping highly trained employees
• Continual learning at training school
• Above average compensation
• Keeping costs low
• Re-investing supplier discounts into lower prices
  for customers
• Fight competition
• Outdoor markets, other discounters, Western
  operators

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Financials and operating data
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• Key performance measures in 2002
• Inventory turnover 11 days
• Average purchase bill 4.5
• Average daily number of purchases 296,228
• Sales/sq. metre of selling area 8.986
• Long term debt/equity 0.05 (as of end 2002)

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Benchmarking Analysis European Comparables
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Source SSSB, Company data (audited IAS)
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Pyaterochka Plans
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• Continue rapid organic growth of existing format
  in Moscow St. Petersburg
• Increase purchasing power with suppliers
  enhance gross margins and volume
• Increase share of owned and purpose built stores
  to 50/50
• Expand into the regions (through franchising)
• Develop larger format
• Be well positioned to fight eventual competition
  from other Russian and foreign retailers
• Become a strong candidate for an IPO

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Conclusion
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• Growth in consumer spending in Russia will
  further boost development of all retail chains
• Food retail industry is very fragmented, but
  entering stage of fast consolidation
• Suppliers need to set up shop in Russia to do
  business
• Excellent opportunities for western Suppliers
  prepared to invest in Russia
• Logistics and IT services companies in short
  supply but translation issues must be tackled
• Own label manufacturers will have massive demand
  over next 5 years

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Contact details
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• Any questions? E mail
• David Noble
• Supervisory Board Director
• Pyaterochka
• e-mail dnoble_at_e5.ru