We are ready to compete with Wal-Mart

What is the largest challenge for X5 regarding the new trade law?

The biggest challenge for us is to change contracts and system of cooperation with thousands of food retailers. We have six months to make these changes. I can say we will manage to do it by the deadline even though it is big task to be undertaken in a short period of time.

What about the rule limiting retailers market share to 25% in cities?

The limit of 25% market share is not of a big concern to us at the moment as our market share in many regions is much lower. In Moscow, our second biggest market after St. Petersburg, we have market share of just 8%- 10%, therefore we still have huge potential to grow there.

And St. Petersburg? X5 reportedly has more than 25% market share there.

We are the strongest player in St. Petersburg, and have further improved our positions recently through the purchase of Paterson with 11 acquired stores in the city. Indeed, we will not be able to open new stores in St. Petersburg in the future, however, our market share is actually supported by the new law. As there is no requirement to close existing stores, this gives us an advantage over other market players whose market share will always be restricted at 25%.

Apart from the great position in St Petersburg, how can X5 profit from the new tradelaw?

Article 15 of the new law has abolished the barriers against moving products between regions that were artificially imposed by certain regional authorities and has prohibited lobbying interests of local suppliers, which was against market practices. With the free movement of products between regions we can more efficiently use our sourcing and logistics which will lead to higher efficiency, price reductions in many regions and consequently new consumers in our stores.

In the light of the new trade law, X5 is going to reduce and restructure its product range. What impact it will have on manufacturers and suppliers? Are they be wiped out?

To be more efficient, retailers will change their assortment strategy and cut out duplications in some categories as well as slow moving goods. Clearly, the number of suppliers will be refined and reduced, sometimes in favour of big brands, sometimes in favour of local suppliers. As the issue is very complex, it is difficult to predict who will be worst affected. We will see the reflection on the law in the market after July 2010 when all contract must be closed according the new law.

X5 plans to open new Perekrestok stores in new regions through franchising. Until now, you have only developed company-owned Perekrestok supermarkets. Is franchising a new strategy for X5s regional expansion?

Please note that while Pyaterochkas franchising has been widely spread, we are not prepared for mass distribution of Perekrestok. Moreover, the approach will be significantly different. With Pyaterochka we do not fully control franchisees, we just provide them with the brand and know-how. But we do not share our purchasing, logistics or try directly influence management. This new franchising concept that we plan to apply to Perekrestok is based on hard franchising, i.e. it implies that 100% of the assortment will be ours, the pricing poicy will be ours, we have full management control and develop this project in regions where we already operate stores and have logistics facilities to keep operational cost as low as possible. The entrepreneurs, in their return, will be responsible for servicing customers. This is a pilot project with a dozen stores and our decision on its wide implementation will depend on the pilots success.

Retail development in Siberia was booming in the pre-crisis period. Whyhave you postponed expansion in Siberia until 2013? Is the decision related to store efficiency again?

European part of Russia and Urals, i.e. the geographic area that is our focus at the moment, represents about 1/5 of Russias territory, but is over 80% of the countrys retail market. Even though Siberia has cities with high population densities, e.g. Novosibirsk or Kemerovo, logistics is a huge challenge and significantly increases operational costs. As you know, store efficiency and operating cost savings is one of the factors we compete on and we place a huge emphasis on it. Since X5 was founded four years ago, our gross margin has been decreasing by about 1% annually as we invested in prices and consumer loyalty. At the same time, our EBITDA margin stayed stable, which means that we have been consistently cutting our operating costs as percent of sales. Our focus on efficiency explains why we do not see expansion in Siberia as our priority at the moment.

X5 is going to launch a new Pyaterochka city format which has a sales area three times smaller than a standard Pyaterochka outlet. Could you tell me more info about this concept?

I would not call it a new format. What we mean is the following: Pyaterochka is the most popular discount store in Russia and we want to capitalize on this. There is huge demand for this format in urban areas and city neighbourhoods. At the same time, due to real estate market conditions, very often there are no available premises where we can fit our standard Pyaterochka store. The idea of opening smaller-sized Pyaterochkas should enable us to address this issue and accommodate customer requests for our stores. But this should not be taken as a strategic direction of our development, as regular Pyaterochka stores will remain our priority.

Wal-Mart has already negotiated with some Russian retailers about their possible acquisition a number of times. If Wal-Mart entered Russia through acquiring a local chain, what would be X5’s biggest strength and what would be X5s weakness?

I am sure Wal-Mart will enter Russia one day. If it happens, I see one key area where Wal-Mart has a competitive advantage over us- it is non-food assortment, especially general merchandize. At the same time, we are very strong across the food categories as majority of food items are produced in Russia and our purchasing power is very strong here. Additionally, our strengths would include our knowledge of the domestic market and developed relationships with Russian business partners. We also better know consumers needs and the shopping habits of Russians.

Would Wal-Mart be a serious competitor against X5?

We are already competing with strong foreign retailers like Auchan and Metro Group and are doing well. So we are ready to compete with other big players like Wal-Mart.

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