main logistics challenges in retail & fmcg in russia
DESCRIPTION
2008, June 11th, Brussels Conference : “Logistics in Russia: Outlook, challenges & solutions”, organized by AhlersTRANSCRIPT
MAIN CHALLENGES IN RETAIL & FMCG
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11th June, 2008 Brussels
Logi
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O
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Serge Rivet 2
Graduated from the Bordeaux Management School (France).
Started his career in Russia, in 1997.
Has been working for foreign and Russian companies in the area of logistics and supply-chain management.
Worked for international logistics operators such as FM Logistic and Kuehne & Nagel.
Conducted projects in large companies, such as Eldorado, and Mosmart (retailers).
Animated a "Pooling" project from Moscow to the regions for ECR Russia
Created Conseo CIS in summer 2007 in Moscow Consulting, Project Management, Interim in Logistics and Supply Chain
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Professional Track record
10+ years of experience in logistics
in CIS
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INTRODUCTION
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What is talking about … 5
…Retail & FMCG in Russia ?
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1/ Drivers of logistics 6
FMCG and Retail drive logistics today
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2/ Ambitious project
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Summary 8
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FACTS : RETAIL IN RUSSIA
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Fact 1 : A young market History of Retail in Russia
Soviet Style Retail
1994 : First retail chains appearing in Moscow
1998 : Russia’s Default
2001 : coming of 1st big foreign Retailers
2004 : Visible Regional Retail Expansion
• 1% Of the Moscow Retail • 0% of Russian Retail • Great part of imported products • Expensive Prices
• Sadko Arkada ‘s margins = 100 – 200 %
• Almost no Self Service • Foreign companies take over Eastern Europe Retail Market but do not touch Russia
Great impact onto retail market • Re-orientation towards discounter format • Re-orientation towards National Products (development of foods product industry) • As a result, in 2000, most of the today’s big players and formats are already created
• Moscow shows mainly super and hypermarket development • ST Petersburg shows mainly discounters
• The Relationship between the retailers and suppliers turn to retailers advantage • Did not accelerate the coming of foreign retailers
• Metro, Auchan, Ramstore, Ikea, • No Tesco, No Carrefour, No Casino, No Ahold, No WalMart
• Appearing of local regional operators (magnit, MDM, Edelweiss, …)
• Retails becomes a real economic sector, with its rules, trends and players • Retail becomes a consumption habit on federal level
Remarks : • The entry ticket to the retail market gets more and more expensive for new retailers, as big players has already come and developed infrastructure (Specialists, Logistics, Regional Network, etc..) • The next solutions to enter are mainly :
• Development of new formats, underdeveloped in Russia • Acquisition of existing networks (Federal or Regional) • Franchising
• State Monopoly • Recurrent deficit • Small assortment • No import • Small Formats • Specialized Formats
Source : Renaissance Capital
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Fact 2 : A small market
Russia remains undersupplied in terms of modern retail space,
only 150 m2 of shopping-centre space per 1,000 inhabitants in Moscow and St Petersburg,
and as low as 40 m2 per 1,000 in Novosibirsk.
(end of 2006)
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Fact 3 : Small Players
Company FY ’06 Net Sales USD mln
1 X5 Retail 3,551
2 Metro 2,544
3 Magnit 2,504
4 Auchan 2,016
5 Dixi 1,080
6 Lenta 1,060
7 Kopeyka 980
8 7 Continent 958
9 Victoria 900
10 Ramstore 635
Total Top-10 16,228
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Russian Food Retail Market Evolution
10%
Top-10 Other modern formats The rest
30%
9%
10%
Total Russian food retail market estimated CAGR of 10%
USD 280 bln
USD 449 bln
In UK the top 4 of retailers represent 85% of the market In Germany the top 4 of retailers represent 80% of the market Source : Pricewaterhouse Coopers and Datamonitor
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Fact 4 : A Large geographical scope
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Russian Regions Real Estate Markets in 2007 Knight Frank
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Fact 5 : Modern retail is complex
One hypermarket From 700 to 1500 suppliers From 100 to 250 orders a day Up to 50,000 sku’s
One convenience store From 150 to 450 suppliers From 40 to 100 orders a day Up to 10,000 sku’s
More drivers in store than clients !!!
High transport cost (last mile)
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Fact 6 : A High Speed Market 15
Windows of opportunity Analysis (Based on GRDI ranking for 1995 – 2006)
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Windows of opportunity Analysis (Based on GRDI ranking for 2008)
Fact 6 : A High Speed Market L
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Fact 6 : A High Speed Market A very important European market
4th largest retail market in Europe
(kingsturge)
The largest in Eastern Europe
(Retail and Consumer Worlds – PWC - January 2008)
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Fact 7 : Poor Suppliers service
Assortment is a key to success
Poor supplier service this is a supplier
market
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Source: Roland Berger / ECR Europe
8,30% 8,60% 7,90%
17,70%
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
14,00%
16,00%
18,00%
20,00%
All countries European Union
North America
Russia
Out of Shelve
???
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Retail in Russia
A great opportunity for Western Investment :
Differentiation through know how to the market
Really effort-worth opportunities
A fast moving market
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FACTS : LOGISTICS IN RUSSIA
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Foreword : History of WW Logistics
Military Logistics
IT Revolution
Operational Researches
Modern Industry Revolution
Retail Revolution Globalization
Caesar -> 1939 1980 - 2000 Future 1945 -> 1970 1960 -> 1980
• Supply lines • Warehouses positioning • First Logisticians
See : • Van Creveld
• Speed of supply (transport, cross docking)) • Logistics Preparation • Standardization (pallets, jerrycans)
See : • Overlord
• MRP • Planning
See : • Forrester (MIT) : Industrial Dynamics (1962)
• Managing thousands of SKUs • Just in Time • TQM
See : • M. Ohno works
• Distribution center • Outsourcing • Globalization of flows • Cross Docking
• Global Networks • Supply Chain Management • Reverse Logistics • E-commerce • Role of IT
See : • ECR
1939 -> 1945
WW II
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Fact 1 : A specific history of Logistics in Russia
Military Logistics
IT Revolution
Operational Researches
Modern Industry Revolution
Retail Revolution Globalization
Caesar -> 1939 2000 - Future 1939 -> 1945
WW II 60 years
?
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Fact 2 : The Infrastructure issue
45% of retail executive consider that problems with infrastructure influence their business
Third factor
Infrastructure barriers
• Lack of retail space and rising prices for retail space in large cities. especially critical in Moscow
• Lack of warehouse facilities: This is a common issue faced by retailers in all of Russia’s largest regions. Many overcome this problem by constructing their own distribution centers;
• Limited transportation infrastructure: Retailers face the problem of deliveries delay and longer transit periods due to poor roads and heavy traffic. The situation is forecast to worsen in the next two to three years;
• Lack of electricity and poor lines of communications in the regions
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In eastern Russia at the Pacific Ocean, the capacity of the seaports has not met the rising demand for years.
size of the ships has steadily increased over the past decades, but much of the equipment in these ports has remained the same restricting handling capacities.
scarcity of Russian ships, poor integration of ports into the
railway system. Russia’s neighboring countries profit from
Russian capacity problems, Finland Baltic States Ukraine,.
most freight needs to be shipped from west to east or vice versa. However, Russian waterways flow mostly from south to north. the inland waterways’ share of total
transportation fell from 3.6% in 1991 to 1.6 % in 2005 (in ton/km) (Rosstat, 2005).
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Parallel to the economic growth in Russia, air freight prices are rising and capacity utilization is at its limit due to a poor infrastructure :
1302 airports in 1992 vs approximately 421 in 2003.
About 50% of all civil aircrafts are more than 15 years old.
620 to 820 new aircrafts will be needed in the next few years in Russia, not counting regional airlines (estimates by Russian Ministry of Transport 2003, Economist 2005, Boeing and Airbus)
Most ground handling equipment is technically outdated and
56% of all air cargo is handled via the three Moscow airports (Domodedovo, Sheremetievo and Vnukovo). Of these, only Domodedovo has been renovated and fully meets western requirements.
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Roadway 940,000 km of roads in 1995 / 871,000 km today (France = 891,290 km)
approximately 85% only of the roads are hard surface
weight restriction for about one third of the total network; consequently its use by trucks is limited
Russian roads remain dangerous; approximately 35,000 Russians are killed every year in road traffic
Furthermore, low speed limits in Russia, constant traffic jams in and Moscow, as well as the c’ by the Russian police, hamper transportation..
prefered transportation up to 1,500 km. This fact contributes to the high importance of road haulage in distribution logistics in Russia.
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Railway The Russian railway accounts for 75.4 % (or US$ 29.6 billion) of the entire revenues of the freight industry,
– (importance for the transportation of natural resources)
Largest railway network in Europe with 87,000 km (USA = 226,605) in regular use,
– 10 % of railways are defective in some way (the Economist)
– half of the system needs urgent modernization (the Economist) .
– Only 50 % of the network used In common carrier service Is electric.
The major player on this market is the national railway operator, JSC Russian Railways (RZhD),
– By 2010, the company shall be privatized – The investments made are marginal, with a growth of
just 8.5% in 2006. not enough to reach western standards.
– Due to the railway’s significant importance as the backbone of transportation, the poor condition of the Russian railway network could have a negative impact on economic growth.
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Warehousing significant growth of the Russian economy caused the warehousing prices in Moscow to increase dramatically.
The price per square meter in 2005 was just below the level in London: up to USS 135 per square meter (JonesLangLassalle 2006).
demand exceeds supply, storage, cross-docking areas for commissioning. Logistics can not be assured, in particular for perishable or sensible goods.
It is expected by specialists that the warehouse market will be growing during the next 10 years
Strong fragmentation of LSP - No Market leader in Russia Even not the Russian Post Only pioneers : FM Logistics and NLK
Low level of service Lack of experience Heavy documentation rules in Russia
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Infrastructure
0%
10%
20%
30%
40%
50%
60%
70%
80%
Москва и МО Санкт Петербург Регионы
% Quality Warehouse Space 0%
2%
4%
6%
8%
10%
12%
USA Europe Russia
Warehouses Vacancy Rates
10% 5-7% 1,5%
67% 11% 22%
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Transport availability
In the future, 20t trucks fleet will increase at ca. 9-11%, but trucks shortage risks remains
Will transport logistics in Russia pose a challenge for FMCG sector development?
Market studyMoscow May 2007
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CHALLENGES
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Challenge #1 : Rare federal operators
Logistics companies in Russia: 4000 - 6000
Around 100 companies can be rated as logistics service providers.
The market share of LSPs in 2006 : Top 20 LSP in Russia = 9 % Top 10 LSP In Germany = 12 %
Russia’s logistics market is very fragmented,
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DEVELOPMENT STRATEGIES OF LOGISTICS SERVICE PROVIDERS IN RUSSIA
Frank Straube, Peter Franke Berlin Institute of Technology -2008
Industrial, Warehouses and Land Department 2007 Actuals Knight Frank - October 2007
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Challenge #1 : Rare federal operators
19 LSP contacted
Would be 5 to 6 in Europe
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16%
37% 37%
10%
Responses to Logistics Tender
no answer
no space
no resource or limited range of services in scope
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Challenge #1 : Rare federal operators
The difference between the 2 top offerts > coeff 1,5 !
The market is till not stabilized
The winner has no space
Some respondents have been at the limit of politeness
The entrepreneurial spirit is missing on this market
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Tender process delayed by 1 month
Answer rate = 10% Would have been be 80% in Europe
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Challenge #2 : The “3S” challenge
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Challenge #2 : The “3S” challenge
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High control culture Control vs efficiency
Best Practice
Security Speed
Security Speed
Smartness
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Challenge #2 : The “3S” challenge
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What we want What we do
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Challenge #3 : Network Management
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Challenge #3 : Network Management
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?????
Challenge #3 : Network Management
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executives expressed that within the next 10 years, they expect a shift of the center of logistics activity towards Nizhny Novgorod and Ekaterinburg
Source : Dynamic Supply Chains ion Russia Christopher Jahns - Inga-Lena Darkow - Tobias Weigi German Logistics Association - 2006
Is it a reason for panicking ?
THE KEYS TO SUCCESS
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Key to success #1 : A reactive government : Undertaken Measures the Russian government ignited several
programs among : the federal program “Modernization of the
Transport System in Russia (2002-2010)” the “Transportation Strategy of the
Russian Federation” (2005 – 2020) “To create the conditions necessary for a
new development model in a global economy, transportation is the instrument for realizing Russia’s national interests and providing a suitable place for the country in the world economy.”
“stimulate the creation of Russian multi-modal transit operators.”
Air Logistics centers already are being created at
airports in Moscow, Novosibirsk and Krasnoyarsk.
the government is creating the conditions to attract private capital from both Russian and foreign investors.
For instance the Krasnoyarsk airport, the Swiss company Swiss Port,
Sea The government plans to double the
capacity of the existing 43 seaports by 2010.
Railways By 2010, JSC Russian Railways (RZhD), shall
be privatized
Roadways The Russian government initiated several
roadways projects : an investment fund in 2006 of US$ 2.5
billion to improve and extend the roadway network by 27,000 km by 2010.
public-private-partnerships to improve the network by using.
Since Moscow is the major bottleneck for transport in Russia, the Moscow city government agreed upon one of the largest projects in June 2005: an orbital motorway with 8 lanes and a total length of 500 km will be built around the city. This urgently needed project should be finished by 2015.
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Key to success #2 : A reactive business community : Unlocked strategic possibilities
Financing Logistics Infrastructure
Developing Logistics Infrastructure
Operating Logistics
Owning the Product
Russian Traditional Vertical Integration
of the 90’s Producers Distributers
Foreign FMCG outsourcing of the 90’s
Logistics Operator of the 90’s FM Logistic, NLK, Molkom
Unilever, Eldorado, etc
Kuehne + Nagel
Pension Funds
Developers
3PL – Logistics Operator
Clients
New Trend on the market
$$$
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Key to success #2 : Privatization & Professionalisation Changes in the Russian Logistics Market Structure
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Financing Logistics Infrastructure
Developing Logistics Infrastructure
Operating Logistics
• Hypo Real Estate • International
• AIG European Real • Estate Fund
• Raven Russia Limited
• Multinational Logistics Partnership • Kulon Espro • Ros Evro Development • Giffels (Canada) • A.M.G. Group (US) • Megalogiix • Eurasia • Ghelamco • Aig Lincoln • Belaya Datcha • Bouygues
• FM Logistic • NLK • Ahlers • DHL • Relogix • Excel • Kuehne + Nagel • Cat Logistics • Schenker • PLE
• Hypo Real Estate International financed MLP for the construction of two warehouse complexes at a cost of $300 Mln.
• The AIG European Real Estate Fund has acquired the FM Logistics complex, located in the town of Khimki and offering approximately 65,000 sq m of warehouse space, for over $60 million. First sale and leaseback investment transaction between foreign companies in the warehouse sector of the Moscow market.
• Multinational Logistics Partnership announces the construction of 1 000 000 m2 in CIS • Rosevrodevelopment announces the construction of warehouses in biggest regional centers • Giffels (Canada) Preparing about 550,000 square meters of Class A space. Eurasia is planning to bring to the market anywhere between 1.0-1.2 million square meters of warehousing space within the next 2-3 years. • Capital Partners preparing 500,000-600,000 square meters to market within the next couple of years. • A.M.G. Group (US), Plans the development of a chain of specialty warehouse facilities throughout Russia for 250,000-350,000 square meters to the market within the next 2-3 years.
• Cat Logistics is a new comer on the market
• DHL and Relogix operating in Pushkino
• FM Logsitcs renting out facilities in the regions
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Key to success #3 : Channels in-depth evolution
Supplier Distributor (Wholesaler) Retailer
Supplier Supplier Retailer Retailer
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Key to success #3 : Channels in-depth evolution
Supplier Supplier Retailer Retailer
Key account management
Consolidation & Cross Docking Strategies
Logistics Bonus
Barycentric reviews
Outsourcing Outsourcing
Barycentric reviews
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Key to success #3 : Channels in-depth evolution
Wholesalers turn 3PLs
Avalon (Tea)
Alidi (Procter&Gamble’s wholesaler)
“Ulkom“ – (Krokus Cosmetics)
Bee logistics (Perfume Group)
Direct Logistics (Food FMCG Wholesaler)
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Key to success #4 : Focus onto the right issue
Stagnant demand : master plans conducted with constant volumes
Tougher competition : higher standards with reduced margins
Doing better than standard 97/98% is a costly and risky bet
Durable double-digit growth, namely in the regions
Providing everyday reliable service is an everyday challenge
Focusing onto capacity is the challenge
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Looking at western business Looking at Russian Business
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Key to success #5 : Avoid the Copy/Paste syndrome
Adaptation of your solutions
Парад неудачников // “Черная Грязь. Белые перчатки”
(…) Один из крупнейших международных девелоперов – американская компания ProLogis – был вынужден отказаться от строительства в Подмосковье складского терминала и свернул бизнес в России. (…)
Автор: Милена Бахвалова Источник: ''Компания‘’
В 2007 году российская компания ООО "Метро Вэрхаус Ногинск" начнет строительство в Ногинском районе Московской области логистического центра - объекта складского назначения. Основной функциональной задачей комплекса является центральное складирование и распределение товаров по складам-магазинам.
(См. в Яндексе)
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The real issue may be PEOPLE !
Key to success #6 : PEOPLE L
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real need 1,000+ logistics specialists per annum.
currently talent pool available 100 logistics specialists per annum
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5 High leverage opportunities 54
1. People and knowledge
2. Business partners
3. Stock deployment
4. Capex
5. Top Management buy-in
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Alain Katz, Metis consulting 05th June 2008, Moscow, Freight 2008 Conference
CONCLUSION
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The gain is worth the effort
The largest new floorspace pipeline, (kingsturge)
Retail sector growing 30% per annum
(Economist Intelligence Unit – Feb 2007)
Food retail sales are rising 45% per annum
(Economist Intelligence Unit – Feb 2007)
by 2010, it is expected to exceed the UK, France or Germany.
(Retail and Consumer Worlds – PWC - January 2008)
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FY 2007 Retail Revenue Growth
Source: Companies’ Data
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Relative problems for absolute successes : It is not a matter of keeping patient
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It is taking 5-7 years in Russia, to do what took 20-30 years to happen in
Europe
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Portrait of a winner 58
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Questions & Answers
Serge Rivet [email protected]
+ 7 916 453 30 55
Skype : rivetmoscow
ООО «Conseo» www.conseo-cis.com
Thank You for attention!