Retail in Ukraine: Today's realities, tomorrow's possibilities

Main conference: Sessions 1 and 2

Olga Sagirova, Partner Roland Berger Strategy Consultants
Kyiv, December 2008
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During our conference we would like to discuss key strategic and operating aspects in preparing retail chains for future economic growth in light of the current crisis
1

What are the development prospects of the Ukrainian retail market in light of the economic crisis?

What opportunities exist that will ensure future growth for Ukrainian retail chains under current market conditions?

What are the targets and criteria for selecting acquisition targets from the viewpoint of strategic and financial investors?

What are the priorities for future value chain development under the current market conditions?

How can Roland Berger Strategy Consultants support further value chain growth?
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UKRAINIAN RETAIL MARKET

The Ukrainian retail market is still growing The economic crisis will bring it to the maturity stage
Dynamic of modern retail markets
Profiling formats

Format
Unorganized trade

Rapid growth of organized trade

Southern Europe2) Central Europe1) Baltic states Slovakia Turkey Greece Russia
Rumania

Developed Europe3)

Germany

France
Spain

Selected countries

Poland

Ukraine
Bulgaria
Phase Formation Growth Maturity Saturation
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1) Poland, Hungary, Czech Republic 2) Italy, Spain, Portugal 3) Germany, France, Great Britain, Netherlands, Belgium
Source: Roland Berger Strategy Consultants

UKRAINIAN RETAIL MARKET

Even with inflation, the Ukrainian retail market showed rapid growth in 2003-2008
Real and nominal growth of the Ukrainian retail market, 2003-2008
Inflation, food and non-food products [%] Volume of the Ukrainian retail market [bn UAH]
Growth vs. previous year [%]

Food Products
30,0 12,6 6,9 2,3

26% 22%

35% 33%

40% 42%

38% 41%

32% 27%

38% 22%
237 200

7,1

9,9

2003

2004

2005

2006

2007

2008
94 91

172 163 130 128 50 48 68 64

Non-food Products
7,5

0,3

0,9

0,7

0,4

1,2

2003

2004

2005

2006

2007

2008

Retail turnover in actual prices

2003

2004

2005

2006

2007

2008

Retail turnover in 2002 prices

4

Source: State Statistics Committee, Roland Berger Strategy Consultants

UKRAINIAN RETAIL MARKET

Despite declining forecasts for industry development in 2009, market consolidation could spur future growth
Key indicators overview of the Ukrainian retail market
Volume of the Ukrainian retail market, 2002-20091) [bn EUR]2) Investor attractiveness of the Ukrainian market In recent years, the Ukrainian market was one of the most attractive retail markets worldwide Market share of foreign retailers is small Few international players have entered the "overheated" market Crisis developments in the industry and falling multipliers during business sales will allow new investors to enter the market Industry consolidation and new players' entry will give a new impetus for industry development

+26% p.a.

+4% 31 25 32

-5%

30

21 35% 38% 10 8 48% 52% 2002

45%

44%

44%

46%
54% 2004

62%

65%

55%

56%

56%

2006

2007

2008

Optimist.

Pessimist.

Forecast
Food

Non-food
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1) In current prices 2) growth includes EUR inflation

Source: State Statistics Committee, Roland Berger Strategy Consultants

UKRAINIAN RETAIL MARKET

So far, the share of retail chains is not very significant as a percentage of the overall retail turnover structure The crisis will contribute to the increase in chains market share
Retail sales structure in Ukraine, 2007 [%]
Retail sales structure 100% = EUR 24.8 bn
Unorganized markets Organized markets 3%

Sales structure of organized retail 100% = EUR 17.3 bn

Sales structure of chain retail 100% = EUR 7.5 bn

Other
Supermarkets

27% Chain

Convenience

5%

13% 37%

24.1 bn
56%
Other companies and stakeholders in retail Non-chain 70%

44%

Discounters 14%

15%
Hypermarkets

16%
Cash&Carry

2007
Source: State Statistics Committee, Roland Berger Strategy Consultants 6

UKRAINIAN RETAIL MARKET

Declining buying power will accelerate competition between retail formats

Retail food sales per capita by formats, 2007 [EUR]
2007 HYPERMARKET
1,302

Comments

485 25 168

DISCOUNTER

Ukraine

Poland

Germany

France

Low-cost format has significant growth potential Buyer focus to a larger extent on price more than on quality Non-food assortment and introducing ones' own brands will be key issues facing this segment Segment has the main growth potential, especially in middle income level cities Pre-requisites for future demand will be conditioned on the development of new trading technologies and the developments of one's own brands Markets format's presence is relatively saturated, but growth prospects still exist Further growth due to consolidation and filling-in of previously uncovered niches in certain regions
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710 244

25
Ukraine

90
Poland Germany

SUPERMARKET

France

1,065

268 61 73

Ukraine

Poland

Germany

France

Source: Planet Retail, EIU, Roland Berger Strategy Consultants

FUNDING SOURCES FOR FURTHER GROWTH

During the financial crisis companies have limited options left in attracting external funds Search for internal growth reserves becomes vital
Possible fund attraction sources to secure further growth
LOANS SHAREHOLDER CAPITAL INTERNAL GROWTH

Bank loans, bonds

IPO/SPO

Private placement (strategic investors, direct investment funds, etc.)

Internal efficiency increase

The amount of loans offered has been cut

Loan value is going up

Share value is falling Attraction of strategic investors is still possible In such situation most but often means sale of part or all of their companies have business cancelled IPO Investment funds and FIGs become more interested in retail but remain cautious

Today's most realistic method

Focused growth, accurate work with internal efficiency and liquidity

Source: Roland Berger Strategy Consultants

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INVESTOR TARGETS AND CRITERIA

Requirements of strategic and financial investors to potential partners are very similar
Key requirements of strategic and financial partners

Criteria requested and assessed by strategic and financial investors are very similar
These criteria could be separated into 3 main groups: Profitability Professionalism

Transparency Retail chains should consider these criteria during further business build-up and take them into account when making decisions and designing the future business model
Only upon retailers fulfilling requirements and implementing the designed action plan regarding every key criterion will investors be ready to pay a fair price for company shares

Source: Roland Berger Strategy Consultants

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INTERNAL DEVELOPMENT PRIORITIES

The crisis, which began as a result of external environmental conditions, exposed many problems inside of retail chains
Classification of crisis situations
CRISIS CHARACTERISTICS Destroying STAGES OF CRISIS Threatening

Comments The current liquidity crisis has been provoked mostly by external environment conditions: an abrupt increase of funding costs
Simultaneously, in the most cases the crisis revealed internal problems and unpreparedness of companies to operate in a volatile environment, for the following reasons: No clear market strategies Operational inefficiency of companies, no control over costs, expansion periods, etc. Ill-considered investment policies

Liquidity crisis CRISIS TYPES

Performance crisis

Strategy crisis

Crisis Crisis preconditioned preconditioned by internal by external environment environment CRISIS SOURCES

Source: Roland Berger Strategy Consultants

INTERNAL DEVELOPMENT PRIORITIES

A recovery program should address the main problems From operational liquidity issues to structural transformations in the balance sheet and business model
Development of the initial concept and anti-crisis measures concept
FINANCIAL CONCEPT
Recurrent check of main initial conditions for recovery measures Structural cleansing Structure change/balance management Reassignment of debts Liability management Injection of own capital Actions for liquidity enhancement Increasing capital Private Equity, etc. Injection of loan capital Assets implementation Other funding forms

OPERATIONAL CONCEPT
Actions to increase operational effectiveness Supplier portfolio optimization Goods flow optimization Product range optimization Shop portfolio optimization Cost-cutting including personnel costs Actions to enhance liquidity Cutting investments Closure of separate shops and warehouses Inventory optimization Outsourcing Accounts payable/receivable management

STRATEGIC CONCEPT
Strategic positioning Value creation model Strategy of shop formats Regional strategy Shop portfolio management Category management Trading unions and franchising Increasing productivity due to IT application Structural changes (structure is stipulated by strategy) Organizational structure Value chain (outsourcing, insourcing) Optimization/ formation of main processes

EMERGENCY MEASURES AND LONG-TERM MEASURES

Source: Roland Berger Strategy Consultants

INTERNAL DEVELOPMENT PRIORITIES

Strategic concept should prepare the company for a new wave of growth
Logic of strategic chain development Key questions
What is the mid- and long-term target of the chain development? What format should be focused on later? What market segment will be the most attractive?
What regions should be developed as high-priority ones with regard to market attractiveness and entry costs? How to achieve profitable growth? How to ensure maximum flexibility in marketing policy for increasing the chain's turnover and gross margin growth as well as cutting stocks and releasing working capital? How to standardize all chains supporting processes in order to speed up order processing and reduce costs (procurements, logistics, in-shop processes, regional representative offices and HQ)? How to optimize the chain's management system for timely and focused company value enhancement?

Mission and vision

Format strategy

Regional strategy

Marketing strategy
Product range Prices Location Promotion

Functional strategy
Supply chain In-shop operations

Organization and staff Planning and controlling Evaluation system for efficiency and motivation

IT
Source: Roland Berger Strategy Consultants

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INTERNAL DEVELOPMENT PRIORITIES

The current situation requires focusing the entire management system on recovering from the crisis and implementing a balanced growth strategy
Planning stage
Corporate strategy Organizational strategy
Development of strategic roadmaps Prioritizing Balanced Scorecards Target KPIs for each management level Introduction of KPI scales and target values Development of planning processes at the CC/regional/shop level (topdown and bottom-up) Stages Order of interaction and decision making Periods Joint management bodies

Balanced metrics

Change Management stage

Adaptation of tools and structure of incentive funds Determination of scales for key performance indicators and frequency of bonuses depending on sizes of stimulation funds

Motivation system

MANAGEMENT SYSTEM

Planning and budgeting

Efficiency estimation
Optimization of efficiency evaluation processes System of divisions' performance evaluation aimed at incentives/ motivation
Source: Roland Berger Strategy Consultants

Management information system

Efficiency monitoring, controlling and evaluation stage

Formats and order of presenting documents and reports depending on the management level Implementation of the monitoring and controlling system within the existing IT system
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ROLAND BERGER STRATEGY CONSULTANTS

Roland Berger can support retailers in a wide range of consulting services

Strategy Strategic alliances/ Mergers and Acquisitions Business value increase Format and regional strategies Strategic audit and due diligences Business processes reengineering Reengineering of core business processes and organizational structure

Restructuring

Market analysis / Marketing and sales Target consumer analysis Brand management Sales organization Pricing

Cost-cutting Liquidity management

Innovation /New product development Innovative management Process of new product entry Process of product development

Business growth

Company

Business efficiency

In-shop operations Availability of shelf stock Efficiency of in-shop processes Organizational structure of shop and headcount planning Service quality improvement

Category management E-commerce New sales channels 2

Source: Roland Berger Strategy Consultants

Organization Strategy/Best global experience Implementation

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ROLAND BERGER STRATEGY CONSULTANTS

Roland Berger Strategy Consultants is the largest strategic consultancy of European origin

36 offices in 25 countries Turnover of EUR >600 m 2,000 employees 76% international projects Turnover growth in Asia 50% Turnover growth in CEE 24%
Amsterdam I Bahrain I Barcelona I Beijing I Berlin I Brussels I Bucharest I Budapest I Casablanca I Chicago | Detroit I Dsseldorf I Frankfurt I Hamburg I Hong Kong I Istanbul I Kyiv I Lisbon I London I Madrid I Milan I Moscow I Munich I New York I Paris I Prague I Riga I Rome I So Paulo I Shanghai I Stuttgart I Tokyo I Vienna I Warsaw I Zagreb I Zurich
Source: Roland Berger Strategy Consultants

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