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Russian Expansion: Comparative Analysis Europe & North America January 2014

Contact: Mark Stiles President & CEO T. +7 495 287 1818 F. +7 495 287 1819 M. +7 985 764 5117 E. [email protected] | Acknowledgements

!e authors would like to thank Mr. Mike Nelson, former head of international real estate with Walmart, and Mr. Gregory Madick, Executive Director of Investor Relations with X5, for their invaluable assistance in compiling this report.

Russian Retail Expansion: Comparative Analysis Europe & North America AVICA Property Investors | January 2014 Russian Retail Expansion: Comparative Analysis Europe & North America

This report was prepared by Kim Iskyan and Rebecca Baldridge on behalf of AVICA Property Investors.

January 2014 Contents Executive Summary ...... 1 Key Points ...... 3 Introduction ...... 5 Russia – The Final Frontier in European Retail ...... 5 Russia’s Economic Growth Expected to Continue ...... 6 Rising Incomes and Continued Consumer Spending Support Retail Growth ...... 10 A Brief History of the Retail Sector in Russia ...... 14 Russians Get a Taste of Modern Format Retail ...... 17 Mushrooms After a Rainstorm – Russia’s Home Grown Retail Chains ...... 18 Eastward Ho! European Retail Giants Expand Into Russia ...... 20 Retail Explodes in the New Millenium ...... 22 Russia’s Retail Sector Today ...... 24 Clicks Versus Bricks: Online Shopping and the Impact on Russian Retail ...... 32 Big Box Retail in North America, Europe and Eastern Europe ...... 39 The Future for Big Box Retail in Russia ...... 48 Conclusion ...... 50 Appendix ...... 51 Executive Summary

Today the global retail industry is in the midst of a revolution, and retailers across the board are feeling the impact from changes in both the industry and consumer landscapes. !e success of online retail across markets, as well as digital media, the widespread use of mobile devices, and the proliferation of shopping apps for smartphones and tablets has fundamentally changed the way consumers shop. Moreover, demographic changes such as declining family size and increasing urbanization, particularly in developed markets, have also had a very signi"cant e#ect on the industry and have forced many retailers, particularly those in the big box segment, to alter their approach to the traditional brick and mortar format. Big box retailers in the developed world are responding to their evolving environment by reducing the number of “big box” stores in favor of smaller formats more suited to urban areas, and developing multi-channel retail solutions that combine online sales with brick-and-mortar locations to deliver value to customers in new ways. In addition to altering the way they have typically done business, many global retailers are also looking for new paths to expansion and growth. Russia, with its powerful combination of a positive macroeconomic outlook, robust and growing consumer demand, and an environment that strongly favors the big box format, o#ers a rich opportunity for both home-grown retailers and global retailers alike. Russia’s economy is the world’s ninth largest, and has been growing at a faster pace than economies in developed markets including the US and Canada as well as those within the Eurozone. Although growth is currently slowing, the economy is nonetheless continuing to expand, principally due to the steadily increasing purchasing power and the acquisitive zeal of the Russian consumer. Research by major international "nancial organizations has demonstrated that in the country’s consumer-driven economy, increases in consumption typically lead GDP growth. With only a brief crisis-related retreat in 2009, household income has been rising steadily (USD 250/month in 2004 to USD 720/month in 2012). Moreover, income taxes are low and consumers typically own their homes while having minimal levels of personal debt. Since the dissolution of the Soviet Union,