Springtime in Russian retail - pwc.ru

Springtime in Russian retail

Major trends and consumer insights

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The Russian economy is recovering, with major macroeconomic indicators showing modest growth

• Russia’s real GDP in 2017 showed its highest growth since before the economic crisis began, increasing by 1.5%.

• Forecasts predict that the Russian economy will see the same growth rate of 1.8% in 2018 as it did in 2013.

• GDP growth is expected to stay between 1.7-1.8% for the mid-term.

Russian real GDP,RUB trillion (constant prices from 2011)

• For the mid-term, inflation is expected to stay at 4%.

• Considering the low CPI level forecasted, the growth in real wages is expected to be limited to a level of 2.8-3.7% in 2018–2020.

2013 201620152014 2017 2018F 2019F 2020F

Real wages growth, % YOY change

Russian real GDP growth, % YOY change

Consumer price index, % YOY change

2013 201620152014 2017 2018F 2019F 2020F

2013 201620152014 2017 2018F 2019F 2020F

62.464.163.6 66.765.664.463.362.3

1.81.81.51.8

-0.2

-2.5

0.71.7

4 42.5

5.44

12.911.4

6.5

-2.5% +1.8%

• Retail turnover growth rate moved in a positive direction in 2017, but it still did not reach pre-recession levels.

• While the average basket followed an upward trend, it is still below its peak in 2015.

Average basket, RUB

Retail turnover, % YOY change

2013 201620152014 2017 2018F 2019F 2020F

Due to a slowdown in inflation, real wages have started to grow

The growth in real wages has led to an increase in retail turnover

Sources: Data from international agencies; the Federal State Statistics Service; Romir; PwC analysis.

The Russian economy is expected to reach pre-crisis level in 2018

519.6

20172016

523

2015

575.3529.3

2014

552.7

2013

2.82.90.8

3.4

-9

1.2

4.8

2013 201620152014 2017 2018F 2019F 2020F

3.7

3.9 2.7

-10

-4.6

1.3 3 2.6 2.6

Springtime in Russian retail: major trends and consumer insights

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• The Russian population has endured high inflation over the past decades and has survived three major economic crises over the past 20 years. That distress has generated public mistrust in the government’s monetary policies and, consequently, concern over surging prices and inflation.

• Even though inflation was at 2.5% in 2017, it continues to remain a major risk that could negatively affect consumer incomes. Sixty-three percent of respondents indicated inflation as the top threat to their financial security.

Top three external factors that will impact the most spending over the next 12 months, % of respondents

• Despite GDP growth and historically low inflation in Russia in 2017, consumers continue to be conservative about the future of the Russian economy.

• In 2016–2017, the number of respondents who did not expect the economy to either grow or decline in the short term did not change. On a positive note, a growing number of people believe the economy will remain stable.

Consumer expectations for the economy over the next 12 months, % of respondents

Consumers remain conscious of prices and conservative about the future of the Russian economy

Consumers do not expect the economy to improve

People consider inflation to be the main risk to their spending

Sources: PwC survey; PwC analysis.

25%Income

<70k35%

Income

>70k

24%Income

<70k

19%Income

>70k

63%

52%

11%

Inflation Fuel and petrol prices Economic recession

Not sure

Same as this year

Better than this year

Worse than this year

45%

27%

23%

5%

33%

27%

24%

17%

30%

37%

16%

17%

2015 2016 2017


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Q: Not taking into account your personal circumstances, what is your impression of how the overall economy will perform in 2018?

• People’s perception of the economy generally correlates with their expectations about their future personal spending. Since people believe that the economic situation remains unchanged from one year to the next, most respondents plan to keep their spending at current level.

• Nonetheless, a positive sign is that more consumers plan to increase their spending over the next 12 months.

• Respondents with monthly income greater than RUB 70,000 are more optimistic about the short term and expect things to get better over the next 12 months when compared to respondents with monthly incomes less than RUB 70,000. For R&C companies, the middle class is the main driver of increasing sales because they are the first ones to increase their spending compared to other segments of the population.

Consumers’ shopping plans over the next 12 months, % of respondents

• From 2015-2016, consumers faced a sharp decrease in income, which resulted in a reduction in essential costs. Over the years, the crisis model for the consumption of goods and services became the new normal.

• Consumers continue to be cost-sensitive, e.g. less impulse purchases, buying more private labels products, less purchases on credit, less savings and less eating out in restaurants and cafes.

The crisis of 2014–2016 led to a reduction in overall expenses, including for food and fast-moving products, and frugality has become the primary spending model

Although some consumers are planning to increase spending, a large segment is likely to remain frugal

Sources: PwC Crisis Survey, 2015–2016; PwC survey; PwC analysis.

Buying more during promotions became the most popular tactic for saving money during the crisis from 2014-2016, and “crisis habits” started to appeared during that time

6%

15%

6%

17%

56%

18%

23%

3%

8%

49%

9%

20%

3%

11%

57%

2015 2016 2017

Higher income groups feel more confident, while

lower income groups are more

affected

Around the same

Slightly more

Much more

Slightly less

Much less

Income

28%<70k >70k21%Income Income

Buy less Buy more during promos

Buy cheaper brands

Buy fromcheaper retailers

20162015

%

27

31+4%

14

24

+10%

20

21

+1%20

14

+2%


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Share of consumers who have resorted more to specific savings tactic, % of respondents

Despite recent signs of recovery, the sales dynamic for food retailers’ LFL is negative in comparison to the rate of inflation

-20

-15

-10

-5

0

5

O’Key hypermarkets and supermarket

Lenta hypermarkets

Karusel

Average LfL sales growth

Magnit hypermarkets

-15

-10

-5

0

5

10

20172016201520142013

Average LFL sales growth

DIXY

Pyaterochka

Magnit convenience stores

Perekrestok

LFL sales growth adjusted for food inflation, %

LFL sales growth adjusted for food inflation, %

Average LFL sales growth by format when adjusted for food inflation, 2013-2017

LFL average basket growth in 2017, %

LFL traffic growth in 2017, %

LFL average basket growth in 2017, %

LFL traffic growth in 2017, %

-5%Lenta hypermarkets

0.1%

O’Key hypermarkets and

supermarkets

-7.9%

Magnit hypermarkets

Karusel -1.4%

O’Key hypermarkets and

supermarkets

1.9%

Magnit hypermarkets

-2.5%

5.3%

Karusel Lenta hypermarkets

2.2%

-2.6%Pyaterochka

6.7%

2.8%

Perekrestok

DIXY

-10.5%

Magnit convenience

stores

1.2%

DIXY

-2%Pyaterochka

1.7%

Perekrestok Magnit convenience

stores

3.2%

Hypermarkets

Supermarkets and convenience stores -2.2%

-6.1%

Buying during promotions and in cheaper formats is still part of consumers’ behaviour, putting pressure on retailers’ margins. Because of this, hypermarkets are losing a greater share compared to convenience stores

Supermarkets and convenience stores have shown mixed LFL sales growth, with the recent average growth in LFL sales close to the rate of inflation

Since the 2014 recession, most hypermarkets have demonstrated growth rates below the rate of inflation, with limited signs of recovery to date

20172016201520142013

Note: The average LFL sales growth is based on the growth rates of LFL sales weighted by retailers’ current sales.

Sources: Companies data; PwC analysis.

• Retailers are continuing their marketing and promotional activities to compete for customers.

• Operational efficiency and cost optimisation strategies will remain most important tactics for increasing margins.


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Market shares of retailers in terms of grocery retail turnover in Russia, %

Other

O’Key

X5 Retail Group

DIXY Group

Magnit

Lenta

+4.2

+2.8

+1.2

+0.4

+0

–8.6

∆ 2013-2017, pp

The food retail market further consolidated during the recession, with X5 Retail Group and Magnit significantly increasing their market shares

Sources: PwC survey; PwC analysis.

4.8 5.16

7.5

9

5.2

6.2

7.1

7.8

8

1.3

1.6

1.9

2.2

2.5

1.6

1.8

2

2.3

2

1.2

1.2

1.2

1.3

1.2

84.1 81.8 78.9 77.385.9

201520142013 20172016


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Retailers are focusing on increasing their capabilities by cooperating, developing new areas of activity and e-commerce channels, adopting technologies and expanding across Russia

Activities and projects in the food retail sector

Buying or selling

• X5 Retail Group, Lenta and Azbuka Vkusa has acquired Sedmoy Kontinent’s rental rights to retail premises.

• Lenta has reached an agreement with the Holiday Group to purchase 22 supermarkets in Siberia.• X5 Retail Group is selling Perekrestok Express and acquiring the O’Key supermarket chain.

E-commerce • Auchan has started selling products online in Russia.

Innovative technologies

• Perekrestok has launched a new system that identifies customers on their stores’ Wi-Fi networks and provides them with personalised offers.

• The Pyaterochka supermarket chain has begun using a bot to recruit prospective employees.• Auchan has opened an innovative flagship store in the centre of Moscow with electronic price labels and

digital information panels.• X5 Retail Group is developing self-service technology and testing a mobile app that scans and pays for goods

automatically.

New opportunities for business development

• O’Key plans to optimize the retail space of hypermarkets (decrease store size from 1,100 – 12,000 sq m to 3,000 – 7,500 sq m) and to reduce a number of retail formats (from 51 to 6).

• Magnit has started to test wholesale stores. • Dixy and Megapolis have launched the wholesale distribution of fast-moving consumer goods to small

retailers.• Lenta has launched wholesale trade for small businesses.

Strategic partnerships

• O’Key is providing space in their hypermarkets for the fashion retailer Familia. Their partnership includes marketing campaigns and sales promotions.

• X5 Retail Group and Danone are planning to sell unique dairy products in X5 Retail Group stores.

Sources: Open sources; PwC analysis.


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Activities and projects in the non-food retail sector

Buying or selling

• The Safmar Group has announced the consolidation of its household appliances and electronic goods retail assets, M.Video and Eldorado, under the name M.Video (Safmar had previously merged Technosila and Eldorado).

• Safmar is continuing to increase its market share in the retail of electronics and household appliances. The group is negotiating the acquisition of Media Markt, the Russian subsidiary of the German holding company Media-Saturn-Holding GmbH.

Expansions• Uniqlo is expanding to the Russian regions.• AliExpress is planning to open showrooms at the points of sale of mobile operators in Russian cities.

New entries and closings

• The BNS Group is opening its first women’s luxury boutique, Karl Lagerfeld, in spring 2018.• Disney has opened a toy store in Russia.• Reviva Holdings closed its last Debenhams store in summer 2017 and is now planning to develop the

Stockmann retail chain. • Accessorize, Mexx and the British baby and toddler-focused retailer Mamas & Papas have all left the Russian

market.

E-commerce• Yandex and Sberbank have set up an e-commerce partnership to develop an online retail aggregator. • Alibaba has launched Tmall, a new online platform, in the Russian market. • Adidas is focusing on increasing its online sales.

Innovative technologies

• Hoff is planning to implement VR technology in its stores. • M.Video, Alfa Bank and Sberbank have launched a blockchain platform for factoring operations. • Lamoda launched a way to search for clothing and accessories by allowing customers to upload a picture of

their things to their mobile app.



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Activities and projects in the consumer goods sector

E-commerce

• Danone has launched an online store for dairy products that delivers in Moscow. Danone plans to expand to the Russian regions within the next few years.

• The KDV Group, a Russian confectionary producer, has launched an online store.• Miratorg has opened its own online store.

Localisation and expansion

• Unilever considers opening of its own tea and ice-cream stores in Russia.• Mars has opened its tenth pet food plant. • Swedish bread producer Lantmannen is planning to acquire a second factory in Russia.• The KDV Group has bought a 60-hectare plot of land in the Orel Region to satisfy demand for its flour. • The Chinese consumer electronics manufacturer BBK Electronics is going to start selling Vivo smartphones in

Russia in 2018, with a marketing campaign to take place during the 2018 FIFA World Cup. • Chinese tea producer Hunan Super Industrial is planning to spend USD 150m to build a tea factory in Moscow

Region.

Consumer goods companies are focused on localisation and developing online sales channels



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Contacts

Martijn Peeters

Partner, Retail & Consumer Leader

[email protected]

+7 (495) 967 6144

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Springtime in Russian retail - pwc.ru