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DIY MARKET IN RUSSIA2nd edition

18 декабря 2012 г.

DIY MARKET IN RUSSIA

2

CONTENTS

MACROECONOMIC REVIEW

DIY GOODS MARKET

DIY RETAIL

OPERATING CONDITIONS OF RUSSIAN DIY CHAINS

FINANCIAL SOLVENCY RATING

APPENDIX 1. DIY CHAIN STORES IN RUSSIA

APPENDIX 2. TOP 10 DIY CHAIN STORES

CONTENTS (1)1. CONTENTS2. MACROECONOMIC REVIEW

• Gross domestic product (GDP)• Comparison with foreign economies• Inflation rate• Nominal personal income and real disposable income• Unemployment rate• Retail turnover• Global Retail Development Index

3. DIY MARKET IN RUSSIA• Sales of DIY and household goods in Russia• Retail market segments• Crisis impact on Russian DIY market• Comparison of Russian DIY market with foreign countries• Russian DIY market forecast

4. DIY RETAIL IN RUSSIA• Specifics of the Russian DIY market• Sales channels of DIY goods • Types of Russian DIY stores• Types of DIY chains in Russia• DIY chain stores in Russian regions• DIY hypermarkets in Russia• DIY supermarkets in Russia

3

CONTENTS (2)5. OPERATING CONDITIONS OF RUSSIAN DIY CHAIN STORES

• General requirements• Entering DIY chains• Delivery terms• Payment terms• Bonuses• Marketing costs• Penalties and total contract cost

6. FINANCIAL STABILITY RATING OF RUSSIAN DIY CHAIN STORES• Rating overview• Financial solvency rating• Detailed overview of companies in the rating

A. APPENDIX #1: DIY CHAIN STORES IN RUSSIAB. APPENDIX #2: TOP 10 DIY CHAINS IN RUSSIA

4

DIY MARKET IN RUSSIACONTENTS


DIY GOODS MARKET

DIY RETAIL





In 2010‐2011 Russian economy has shown significant signs of recovery after great decline in 2009. In 2012‐2015 Russian Ministry of Economic Development forecasts stable growth with Compound Annual Growth Rate (CAGR) at ..,.% in current prices and .,.% in constant prices

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F

trln. R

UR

GDP (current prices)*

CAGR +..,.%

‐.,.%

+..,.% +..,.%

+..,.% +..,.%

+..,.% +..,.%

+..,.%

Sources: Federal State Statistics Service of the Russian Federation (FSSS RF), Ministry of Economic Development of the Russian Federation (MED RF)

*The forecast is based on “Forecast of socio‐economic development of Russian Federation till 2015” MED RF, adjusted according to the results of 2011

100%

120%

140%

160%

180%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 F 2013 F 2014 F 2015 F

Cumulative Inde

x of GDP actual

volume GDP 2003

= 100%

Cumulative index of GDP actual volume (constant prices)*

‐.,.%

+.,.% +.,.%

+.,.% +.,.% +.,.% +.,.%

+.,.%

CAGR +.,.%

6

At the same time recovery rate of Russian economy is much slower than in other BRIC countries

‐10%

‐5%

0%

5%

10%

15%

2008

2009

2010

2011

2012

F

2013

F

2014

F

2015

F

y‐o‐y, %

GDP growth rate (constant prices)

China+.,.%

India+.,.%

Brazil+.,.%

RussiaRussia+.,.%

Sources: International Monetary Fund, European Central Bank

CAGR2012‐2015

According to the International Monetary Fund forecast economies of China and India will increase in .,. times in 2012‐2015,while economies of Brazil and Russia will grow .,. times.

The impact of financial crisis on Russian economy was the most significant compared to other BRIC countries: GDP of Russia has decreased by .,.% in 2009 while GDP of China has shown growth of .,.%

7



DIY GOODS MARKET

DIY RETAIL





The construction works value is the basic indicator that promptly reflects the dynamics of DIY goods market value

9

0

150

300

450

600

750

900

2005 2006 2007 2008 2009 2010 2011

bln. RUR

DIY AND HOUSEHOLD GOODS MARKET VALUE

0

2

3

5

6

2005 2006 2007 2008 2009 2010 2011

trln.R

UR

CONSTRUCTION WORKS VALUE

Sources: Federal State Statistics Service of the Russian Federation (FSSS RF)

+..,.%

+..,.%

+..,.%

‐..,.%

+..,.%

+..,.%

+..,.%

+..,.% +..,.%

‐..,.%

+.,.%

+..,.%

Construction works value Includes the cost of construction and installation works of the following types: construction of new facilities; capital and current maintenance, reconstruction, modernization of commercial

and residential buildings and engineering structures.

In 2000‐2008 annual growth of construction works value reached ..,.%.

In 2009 reduction of construction works value was ..,.%. DIY market reacted by ..% decrease

In 2010 most experts believed, that house construction value has a delayed impact on the DIY market with a lag of .‐.,. years and DIY market would plunge into crisis in next few years

Despite of these expectations, in 2010‐2011 DIY goods sales showed higher rates of growth than construction market

CAGR +..,.%CAGR

+..,.%

CAGR +..,.%CAGR

+..,.%

In international comparison Russian DIY market reduction in 2009 was one of the most significant in Europe

10

DIY MARKET TRENDS IN 2009 (EUR)

Sources: European DIY Retail Association, DIY Global

Fall in national currency (in RUR)

Fall due to devaluation of Russian Ruble

44,2

36,5

20092008

EXCHANGE RATE, RUR/EUR

Austria Belgium Germany

France Netherlands Spain RUSSIA

In 2009 sales of do‐it‐yourself products were down in the majority of countries in Europe. According to information from EDRA, a comparison of the like‐for‐like sales trends reveals that it was the countries of eastern and southern Europe that suffered most from the consequences of the economic and financial crisis.

While Austria, Belgium and Germany can point to positive results, France, the Netherlands, Spain and Russia were unable to avoid losses.

CAGR +20,9%

At the same time consumption of DIY products per person in Russia is several times lower in comparison with EU countries

11

0

100

200

300

400

500

600

IE UK GR DE FR HU PL IT RO BG ES RU AL TR UA CN

DIY MARKET VALUE PER CAPITA, EUR

Sources: Kingfisher Annual report and accounts, Castorama Russia, FEDIYMA, DIY Global, Federal State Statistics Service of the Russian Federation (FSSS RF), 2009‐2010, 2011 (Russia)

Two years ago DIY market value per capita in Russia was almost two times less than the current value – just .. EUR

Rapid growth of Russian market can quickly catch up with EU countries some of which are close to the stagnation.



DIY GOODS MARKET

DIY RETAIL





SPECIFICS OF THE RUSSIAN DIY MARKET

13

In the very centre of the DIY term stand construction and maintenance of houses, homes and gardens, including everything from renovation of e.g. kitchen and bathrooms, to decorations, accessories and furniture of the living rooms. Private persons, i.e. not professionals, should above all perform all these activities

This definition was introduced in Europe and North America and even there it is not working properly in practice now. As for Russia there are several constraints which imply on term DIY:

Do‐it‐yourself (DIY): Home maintenance and improvement work conducted by household members on their own household without the paid services of a professional Williams, C. (2008) “Re‐thinking the motives of do‐it‐yourself (DIY) consumers”

First of all, the culture of DIY is not widespread in Russia and then people do construction and renovation works, they usually call professionals to do it for them. Thus, the term DIY in Russia is more often DIFM –do‐it‐for‐me

Second, In Russia, especially in regions, the boundaries between DIY retailers , wholesalers and professional stores are even more fuzzy than in Europe. In regions big DIY stores are just becoming conventional and gradually replace traditional shops and DIY goods markets. Still most of Russian DIY retailers have a significant share of their sales emanated to corporate clients (e.g. building and engineering companies). There are even types of DIY stores (retail‐wholesale base, construction wholesale base) which are mostly specified for corporate type of clients but also selling DIY goods to private consumers

The other peculiarity of the Russian market is a large number of stores selling DIY goods with area about 100‐200 sq. m. There are even regional chains consisting just of such small shops which call themselves DIY, but this DIY can hardly be compared to European DIY stores

1

2

3

INDOOR AND OUTDOOR (OPEN) MARKETS

14

Outdoor (open) markets are open areas where large groups of small shops selling different DIY goods are grouped

OUTD

OOR (O

PEN) M

ARKETINDOOR MAR

KET (TRA

DING CEN

TRE)

Indoor markets are big or middle size trading centres where area is divieded between many small shops which sell differentskinds of DIY products

The major types of civilized DIY stores in Russia are supermarkets and hypermarkets, while discount stores and cash’n’carry are not widespread

15

STORE AREAsq. m STORE LOCATION ASSORTMENT

thousands DEPTH OF PRODUCT

ASSORTMENT

HYPERMARKET

SUPERMARKET

Sources: RosBusinessConsulting, company data, Inventica estimations

CASH & CARRY

DISCOUNT STORE

NEIGHBOURHOOD STORE

BOUTIQUE STORE

MAJOR

STORE

TYP

ESothe

r store

type

s

For the purposes of the following research we will take into account only civilized DIY retail which meets the following requirements

16

CRITERIA REQUIREMENTS

STORE ASSORTMENT

The store assortment should include most of these productcategories:

• Timber and building materials• Finishing materials • Doors & Windows• Hand tools & Power tools• Electrical & Hardware• Plumbing & Heating & Cooling • Furniture & Kitchen & Bathrooms• Garden & Outdoor Living• Household goods

CUSTOMER TYPE • Mostly private customers

STORE AREAAt least one store should be:

• From 600 to 5’000 sq. m (supermarkets, cash ’n’ carry)• Over 5’000 sq. m (hypermarkets)

Thus small neighborhood shops, highly specialized (e.g. bathroom equipment or furniture) stores and mostly wholesale sites are not included in the research

Global chains operate ..,.% of DIY stores in Russia, which accounts for ..,. of total revenue DIY chain retail

17

Company operating in one or several regions (cities) or in one federal district

… stores

Russian company operating in several federal districts of Russian FederationChain sales are implemented in several districts and number of stores in different federal districts is comparable

.. stores

DIY CHAINS BY NUMBER OF STORES, 2012

GLOBALFEDERALREGIONAL

Retail chain, operating stores in different countries. Chain sales are implemented in several countries and number of stores in different countries is comparable

.. stores

DIY CHAINS TYPES

GLOBAL

FEDERAL

REGIONAL

DIY CHAINS BY RETAIL TURNOVER

Sources: RosBusinessConsulting, company data, Inventica estimations

..

..

..

# Number of chains

Moscow and Leningrad regions are the leaders in the number of DIY hypermarkets

18

no DIY hypermarkets

. – . DIY hypermarkets

. – . DIY hypermarkets

Over . DIY hypermarkets

St Petersburg ‐ ..

Moscow ‐ ..

Sources: Inventica estimations

Kaliningrad ‐ .

Over ..% of DIY hypermarkets are concentrated in Moscow and Saint‐Peterburg and their suburbs. Hypermarket format is primarily developed for global DIY chains. In the last 2 years to adapt to the Russian specifics international retailers have adopted smaller formats – ….– …. sq. m. However, as before, international retailers are winning the war for the most promising areas in the multi‐million cities. For Russian DIY chains the cities with a population of …… are becoming more attractive because of lack of competition with global DIY chains.

Krasnodar ‐ .

Orenburg ‐ .



DIY GOODS MARKET

DIY RETAIL





There are several mandatory requirements for suppliers of Russian chain stores

Service centers Producer/supplier should have service centre in every city where the chain has its stores. For example, this is required by:

• LEROY MERLIN

• AGAVA / MEGASTROY

In case if there are no service centres, the supplier must compensate the cost of service to the chain store

Individual manager Individual manager responsible for dealing with retailer and solving urgent issues is a must for most of major chain stores

Documentation All product documentation must fully meet Russian trade requirements

Thus supplier’s accounting (or ERP) system should be adjusted to prepare invoices in “TORG‐12” form, VAT invoices and other specific documents required by Russian authorities

Some retailers like START/DOMOVOY oblige to use their own software

20

Deferment of payment (2)* • PRACTIKA

• standard deferment of payment is .. days• depending on product turnover payments may be adjusted up to .

times a month

• STROYLANDIA• standard deferment of payment is .. days*• for new stores payment delay is .. times more than standard

• LEROY MERLIN• standard deferment of payment is .. days• for new stores payment delay is .. times more than standard

• CASTORAMA• deferment of payment is up from .. to .. days• for new stores payment delay is .. times more than standard

• MAXIDOM• standard deferment of payment is ..‐.. days depending on product

category*

* Payment terms are determined during negotiations between retailer and supplier and may vary for different suppliers and product groups 21

Average contract cost for suppliers of Russian DIY chains is about ..‐..% in supply prices

TOTAL

..,.%

Retro bonus – .‐..%

Logistics costs– .‐.%

Advertisement – .‐.%

Promoters – .‐.%

Discounts – .‐.%

Penalty charges for short‐delivery– .‐.%

Other Penalty charges – .‐..%

Supplier’s credit – .‐.%

Marketin

g costs

Pena

ltycharges

Contract cost is calculated on the basis of supply pricesLogistics costs depend on supplier’s location and vary greatly for local (.%) and foreign (.%) suppliersSupplier’s credit value is calculated based on interest rate ..‐..% and deferment of payment ..‐.. days

22



DIY GOODS MARKET

DIY RETAIL





Each company in the financial solvency rating is ranked by 4 groups of parameters which are calculated based on financial data, suppliers interviews, commercial courts information and other sources of information

24

Max = 25

Min = 1

Max = 25

Min = 1

Max = 25

Min = 1

Max = 25

Min = 1

Max =100

Min = 4

Market positionMarket position is defined by the company’s market share and total turnover1 – low market share; 25 – high market share

ReputationReputation is based on suppliers interviews, information about payment delays and company reviews from open sources1 – bad publicity; 25 – high reputation

Legal claimsLegal claims stands for the total number of lawsuits against company in 2009‐2012 in Russian commercial courts1‐ number of claims is higher than 50; 25 – no legal claims

Sustained claims valueSustained claims value stands for the total amount of claims against company lost in commercial courts and money recovered out of court. Sustained claims value is calculated with regard to company total turnover1 – value is higher than 3,5% of turnover; 25 – value is less than 0,01% of turnover

Financial solvency rating: details(1)

LEROY MERLIN

TURNOVERmln. RUR .. …

MARKET POSITION

LEGAL CLAIMS

IN PROGRESS …

REPUTATION2012 …

2009‐2011 …

LEGAL CLAIMSVALUE OF LEGAL CLAIMSmln. RUR

IN PROGRESS …

2012 …SUSTAINED CLAIMS VALUE

2009‐2011 …

“Very disciplined payer”

25

9999

2525

2525

2525

2424

As for stability of payments only global chain stores can be considered as a really reliable partner on Russian DIY market. But even in global chains can be delays in payments due to improperly executed documents

Regional chains usually arrange their payments considering supplier’s value and its sales volume

There is also a number of chains that systematically do not pay to their suppliers who have to go to the commercial court



DIY GOODS MARKET

DIY RETAIL





DIY CHAIN STORES IN RUSSIA

27

№ BRAND CHAIN TYPE*

STORESFEDERALDISTRICTS REGIONS

TURNOVER RETAIL

mln. RUR

TURNOVER WHOLESALEmln. RUR

WHOLESALESHARE

ALL HYPERMARKETS SUPERMARKETS OTHER TYPES

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

* G – Global, F‐ Federal, R ‐ Regional

Sources: БИР‐Аналитик, «Коммерсантъ», www.retail.ru, www.diynews.ru, company data, Inventica estimations



DIY GOODS MARKET

DIY RETAIL





LEROY MERLIN

29

2004 2005 2006 2007 2008 2009 2010 2011 2012

NUMBER OF STORES

DIY MARKET VALUE DIY CHAIN RETAILTURNOVER*

TOP‐10 RETAILTURNOVER

OPERATOR’S SHARE

.,.% .,.%

DIY CHAIN STORES

TOP‐10 STORES

CHAIN TYPE GLOBAL

RUSSIAN MARKET ENTRY 2004

REGIONAL COVERAGE .. regions

NUMBER OF STORES ..

STORE TYPES hypermarket

AVERAGE STORE AREA (sq. m) . ….

PRODUCT MIX

construction materials, tools, appliances, flooring, tile, plumbing, hardware, paint, decor, lighting, kitchen furniture, garden furniture

TURNOVER

.. bln. RUR (2011)

.. bln. RUR (2010)

.. bln. RUR (2009)

.. bln. RUR (2008)

DEVELOPMENT PLANS

Yekaterinburg, Volgograd, Tver, Moscow (the 2d part of 2012)Sankt‐Peterburg (mid‐term perspective)


* 2010

LEROY MERLIN: REGIONAL COVERAGE

30

CITY POPULATIONSHARE OF

REGIONAL DIY HYPERMARKETS


Gazetny side‐street, 3/5Moscow, 115280

Tel.: + 7 495 629 65 41Fax: + 7 495 629 65 41

[email protected]

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