First half of 2018 update Latest retail & consumer market trends Executive summary In the first half of 2018 Russian GDP is growing slower comparing to the same period in the previous year. Despite low official inflation and continuous real wages growth consumers do not feel positive changes in their financial situation. They continue cutting their spend. Strong trend for buying less and cheaper products is remaining determinant in Russian consumers behavior. Highly competitive market demands an efficient approach for marketing and promo as well as for cost optimization and operational excellence. 3 In the first half of this year GDP shows slower growth comparing with the previous year Russian real GDP, Q2,16 – Q2,18 growth, Y-o-Y, % Russian real GDP growth, Q-o-Q, Q4,16 – Q2,18, % (constant 2016 prices) 2.5 2.9 2.5 2.2 2.0 1.8 1.9 1.5 1.3 0.9 1.0 0.6 0.4 0.5 -0.5 0.0 Q2,16 Q2,17 Q2,18 Q4,16 Q1,17 Q2,17 Q3,17 Q4,17 Q1,18 Q2,18 Source: Federal State Statistics Service 4 Despite the lowest inflation rates consumers expectations and estimations are not so optimistic Inflation, Y-o-Y, Q1,17 – Q2,18, % Inflation, Y-o-Y, Jan,18 – Jun,18, % -1.8 p.p. 10.6 9.9 9.8 -2.4 p.p. 9.4 9.2 9.2 8.9 4.6 8.6 8.4 8.58.3 4.2 7.8 3.4 2.6 2.4 2.2 2.2 2.2 2.4 2.4 2.4 2.3 Q1’17 Q2’17 Q3’17 Q4’17 Q1’18 Q2’18 Jan, 18 Feb, 18 Mar, 18 Apr, 18 May, 18 Jun, 18 Observed Expected Current Source: Central Bank of Russian, FOM 5 Comment The negative inflationary expectations affect the consumers behavior, despite low official inflation rates in the “ current year Martijn Peeters Retail & Consumer Leader ” 6 Excluding a significant jump in the first quarter due to the presidential election, real wages are constantly growing in 2018 Average real wage growth, Q-o-Q, % 12 10.2 10 8 7.4 5.9 6 4.8 p.p. 3.1 4 2.6 1.8 2 0 Q1,17 Q2,17 Q3,17 Q4,17 Q1,18 Q2,18 Source: Federal State Statistics Service 7 Consumers’ expectations became more skeptical… There is no significant improvement in The strong trend for buying less and cheaper products consumer financial situation remaining determinant in consumer behavior How did your financial situation change in the last What of the below have you started doing over the last month? 12 months? +8 p.p. 35 13 14 14 13 14 13 11 +6 p.p. 30 29 28 54 55 27 27 27 27 58 58 59 % of respondents of % % of respondents of % 58 61 23 23 +6 p.p. 21 21 21 21 32 32 28 27 26 24 26 0 Jan,18 Feb,18 Mar,18 Apr,18 May,18 Jun,18 Jul,18 Jan,18 Feb,18 Mar,18 Apr,18 May,18 Jun,18 Jul,18 Improved No change Worsened Buy less Buy cheaper products Source: FOM, PwC analysis 8 … which led to changes in their buying behavior There is very significant degrease in … leading to lack of readiness for consumer expectations … large purchases Consumer indexes reflects people’s perception of the state Do you consider now a bad or a good time for large and expectation around their financial situation purchases? and country economy / index (from 0 to 200) 30 -17 p.p. 118 20 116 115 116 117 25 26 25 10 24 23 22 21 100 99 0 91 -10 88 89 90 89 -34 -32 -34 -33 -34 -36 82 82 -20 -39 -30 -5 p.p. -40 Jan,18 Feb,18 Mar,18 Apr,18 May,18 Jun,18 Jul,18 Jan,18 Feb,18 Mar,18 Apr,18 May,18 Jun,18 Jul,18 Current state Expectations Good Bad Source: FOM, PwC analysis 9 Comment Consumer “crisis behavior” force retailers to optimize for the “New normal” paying more attention to the operational efficiency and continuing their marketing and promotional activities “ to compete for customers. Martijn Peeters Retail & Consumer Leader ” 10 Retail turnover growth in Q1-Q2 2018 is mostly driven by FIFA World Cub Retail turnover growth, Q1’17 – Q2’18, Q-o-Q, % 3.3 3.5 3.0 2.7 2.4 2.5 2.0 2.0 1.5 0.9 1.0 0.5 0.0 -0.5 -1.0 -1.6 -1.5 -2.0 Q1,17 Q2,17 Q3,17 Q4,17 Q1,18 Q2,18 Source: Federal State Statistics Service 11 Average check has reached its minimum for two years Average check, Jan’17 – Jul’18, M-o-M, RUB 586 Average check growth 590 7.3 8 580 -0.9 p.p. 6 570 4 -2.3 p.p. 2.9 -4.6 p.p. 2.0 1.5 1.3 560 1.0 1.2 0.9 2 0.0 Average Average check, RUB -0.4 -0.6 550 -0.8 0 , % 543 -1.7 -1.7 -1.5 -2.3 539 540 -2.7 -2 533 534 -3.3 531 532 530 528 527 530 524 524 -4 521 520 517 518 -6 512 513 510 -8 503 -10.1 500 496 -10 490 -12 Jul,17 Jul,18 Oct,17 Sep,17 Jan,17 Feb,17 Apr,17 Dec,17 Jun,17 Jan,18 Feb,18 Apr,18 Aug,17 Nov,17 Jun,18 Mar,17 May,17 Mar,18 May,18 Source: ROMIR 12 The food retail market has been consolidating top 5 retailers having about 25% of total turnover Top retailers market share, Q1’17 – Q2’18 75.4% 75.1% Other 77.2% 76.8% 78.1% 77.5% 1.1% 1.0% O’KEY 1.2% 2.1% DIXY 1.3% 1.2% 2.1% 2.1% 1.1% 2.1% 1.9% 1.8% 2.7% 2.8% Lenta 2.5% 2.4% 2.4% 2.8% 8.5% 8.5% Magnit 8.3% 8.2% 7.8% 7.6% Karusel 0.7% 0.6% 1.5% 0.6% 0.6% 0.6% 0.7% 1.6% Perekrestok 1.4% 1.3% 1.2% 1.4% 8.4% Pyaterochka 6.8% 7.2% 6.9% 7.0% 7.9% Q1,17 Q2,17 Q3,17 Q4,17 Q1,18 Q2,18 Source: Company reports, PwC Analysis 13 Comments (For Page 13) 1. X5 Retail Group continues to increase its market share mostly driven by Pyaterochka (1,4 p.p. growth in 6 months 2018 comparing with the same periods in 2017) 2. Perekrestok’s growth rate of net retail revenue was 22.8%, the highest rate among X5 3. Karusel’s slowdown in overall growth was discussed by the closure of six hypermarkets for reconstruction 4. Magnit and DIXY restores its positions in the first half of 2018 after decrease in the end of 2017 5. OKEY shows slight 0,2 p.p. decrease in the second quarter of 2018 6. Lenta’s positions remain stable in 2018 after 0,4 p.p. growth in the last quarter of 2017 7. Lenta’s total sales area as of June 30, 2018 was 1,403,145 sq m (+ 19.6% compared to June 30, 2017) 14 The main growth driver in grocery retail is opening new stores, while LfL growth has low or even negative effect Estimation of H-o-H revenue growth by factors*, H1’18 to H1’17, % Perekrestok 5,2% 17,6% 23% Pyaterochka -0,3% 21,6% 21% Lenta 4,7% 13,4% 18% Magnit -4,5% 11,7% 7% Karusel 1,2% 2,2% 3% LfL growth -2% Growth via opening/closing stores O'Key -2,3% -6,4% -9% Total revenue change, H1’18 to H1’17 *LfL effect was estimated based on reported revenue numbers and LfL revenue growth rates. LfL revenue growth rates have been applied to total revenue of the previous period, as share of LfL revenue is not available. Source: Company reports, PwC Analysis 15 “Convenience store” format became more attractive for clients… LFL sales growth adjusted for food inflation, Q-o-Q % LFL average basket growth in 6 months 2018 adjusted for food inflation, Y-o-Y % 10 8.2 7.9 0.0 8 6.8 6.3 -0.3 6 5.1 4.0 4 3.2 2.0 -2.3 1.2 1.3 2 Magnit Perekrestok Pyaterochka 0.1 conveniece stores 0 and supermarkets -2.1 -2 -2.9 -4.3 LFL traffic growth in 6 months 2018 adjusted for food -4 -4.8 -5.1 inflation, Y-o-Y % -5.6 -5.9 4.4 -6 Q1,17 Q2, 17 Q3,17 Q4,17 Q1,18 Q2,18 Perekrestok Magnit convenience stores -0.8 and supermarkets -3.6 Pyaterochka Magnit Perekrestok Pyaterochka conveniece stores Source: Company reports, PwC Analysis and supermarkets 16 …at the same time, the traffic of hypermarkets is decreasing LFL sales growth adjusted for food inflation, Q-o-Q, % LFL average basket growth in 6 months 2018 adjusted for food inflation, Q-o-Q, % 5.9 5.4 6 4.3 3.4 3.2 2.9 3.3 4 1.5 2.0 2 0.5 -0.8 0 -1.5 -2 -5.2 -4 -5.3 -6.2 -6.9 -7.1 -6 -8.0 Magnit hypermarkets Karusel Lenta -8 -11.0 -10 -12 -14.8 LFL traffic growth in 6 months 2018 adjusted for food -14 inflation, Q-o-Q, % -16 -19.0 -18 0.9 -20 Q1,17 Q2,17 Q3,17 Q4,17 Q1,18 Q2,18 -1.7 Karusel Magnit hypermarkets Lenta hypermarkets -2.9 Magnit hypermarkets Karusel Lenta Source: Company reports, PwC Analysis 17 18 Contacts Martijn Peeters Partner, Retail & Consumer Leader [email protected] +7 (495) 967 6144 PwC Russia (www.pwc.ru) provides industry-focused assurance, tax, legal and business consulting services.