2009 was a tough year for Russian consumers and the economy as a whole. X5 Retail Group delivered strong performance in this environment, first, by responding to the plight of consumers more effectively than competitors, and second, through disciplined execution of our long-term strategy for leadership and growth in the Russian retail market.
X5’s people can look back with pride on the Company’s achievements. We met our 25% pro-forma revenue growth target for 2009 and posted the highest like-for-like sales increases in the Russian retail market. With many retailers weakened by the economic downturn, X5 responded aggressively to win customers with superior offerings and strengthen its leadership in all regions of operations. The Company entered 2010 in an excellent position to drive growth and efficiency while benefiting from future economic recovery.
At the beginning of last year, I laid out a simple game plan for X5’s response to Russia’s economic crisis: Win customers, expand selectively and manage finances prudently. Let me review our progress against these priorities and then discuss the Company’s plans for future customer success, operational efficiency and disciplined growth.
Winning Customers
In 2009 we clearly benefited from our multi-format strategy and the phenomenal customer appeal of discounters. Pyaterochka had the highest customer traffic growth of any retailer as customers responded enthusiastically to our brand promise of lowest price in the market on 100% of assortment.
In hypermarkets, we re-launched Karusel following successful integration of this acquisition. We are educating Russian consumers on the attractions of hypermarkets for weekend family shopping through our “Everything Under One Roof – At Low Prices” publicity campaigns and promotions.
Supermarkets faced the biggest challenge from trading down trends, especially in regions outside of Moscow and St. Petersburg. Our goal was to maintain loyalty among middle to upper income consumers in areas with favorable demographics for supermarkets.
Selective Expansion
Weaker market conditions created opportunities for X5 to accelerate new store openings well in excess of plan. In total we added 271 new stores in 2009, including 189 store openings through organic growth – primarily in discounters, which fit the times and are cheap to add – bringing X5’s total store count to 1,372. We shifted our real estate strategy to leasing new locations to take advantage of lower rents and availability of unused retail space.
We were also able to acquire assets at attractive prices while staying within our disciplined investment limit. In addition to organic expansion, we reinforced our number one position in supermarkets with the acquisition of Paterson. Paterson adds high quality locations in key geographic markets with strong demographics for supermarkets, positioning X5 to benefit from future economic recovery.
We see substantial scope for raising sales density and profit margins by rebranding and realigning the value proposition of these stores and leveraging X5’s scale, distribution and efficiency programmes.
X5 made great progress in developing logistics infrastructure to enhance operational efficiency and competitiveness. We secured at least one distribution centre in each region of our operations and achieved a supply centralisation rate of 61%. This is substantially in excess of our 57% target for 2009, and we now expect further improvement to 67% in 2010.
Manage Finances Prudently
The volatility and crisis conditions in the Russian financial markets were a real test of X5’s financial strength and endurance in 2009. X5 successfully improved it’s financial position, ensuring adequate short-term liquidity while increasing cash flows and strengthening the Company’s foundation for future growth.
First, we maximised cash flows by growing the top line, controlling costs and managing working capital. Second, we limited capital expenditures, looking closely at all investment projects and identifying the most profitable and strategically important priorities. Third, we managed our liquidity prudently, to optimise our debt structure and improve the maturity profile.
We learned many useful lessons this year for making X5 a stronger, more efficient and disciplined Company. This brings us to our plans for 2010 and beyond. Clearly X5 is now in a unique position to strengthen its growth and leadership in the Russian retail market. Our continued success will be driven by our evolving strategy to balance growth, efficiency and capital discipline:
- We will pursue our strategy of being close to the customer, driving like-for-like sales growth by developing our value propositions, assortment and private label;
- We will execute our Strategic Efficiency Programme to drive operational excellence throughout the supply chain, leveraging our scale, distribution and technology investments to support a much larger and more efficient operation;
- And lastly, we will maintain our focus on disciplined growth, capitalising on positive long-term trends in the Russian market while managing margins and capital expenditures to drive positive cash flow and maximise value for our shareholders.
The new retail law that came into effect in 2010 imposes certain restrictions for modern retail expansion in Russia. The impact on X5, however, will be limited to St. Petersburg, where we are by far the market leader. It is too early to assess the impact of the new supplier relationship rules on the sector and our business until we gain more experience throughout 2010. However, you can be sure that X5 will continue to give customers superior value and assortment with the goal of outperforming the competition.
We will continue to deliver strong growth in 2010 through like-for-like sales increases and stepped up new store openings. We will also look for attractive M&A opportunities, in order to capitalise on consolidation trends in the industry. We are off to a good start following a successful year, and I look forward to reporting to you on our Company’s continued progress.
Lev Khasis