X5’s price leadership is made possible by continuous gains in efficiency. As the Russian market develops, we believe efficiency will be even more important for sustaining leadership and shareholder returns. Russia’s supply chain and logistics infrastructure is still under-developed, and we see major opportunities for raising productivity and building new competitive advantages through our investments and implementation of international best practices.
Cost controls and productivity improvements were essential for supporting X5’s profitability in 2009 as we reinvested in our price position to win customers. In addition, the Company launched its Strategic Efficiency Program to take X5’s operational excellence to the next level.
Operational excellence benefits both our customers and shareholders. It enables us to give customers even better prices, higher quality and a more exciting range of product choices. And it helps us run a better business, with the ability to expand rapidly, compete successfully and grow profitably into the future.
CONTINUED IMPROVEMENT IN EFFICIENCY IN 2009X5 aims to be Russia’s food retail price leader. To ensure that we can profitably and sustainably reinvest in our price position, X5 must continuously improve operational efficiency in addition to leveraging our purchasing power as Russia’s largest retailer.
This was especially the case in a crisis year for the Russian economy – X5 delivered the best like-for-like growth in the industry by offering customers the best prices in the marketplace. In line with the Company’s “Close to the Customer” policy, in 2009 X5 reduced its gross margin on sales of goods in our stores to 24.2% from 25.6% in 2008. At the same time, we delivered healthy profits for our shareholders as a result of strong top line growth combined with dramatic improvement in our key performance indicator for cost control – Selling, General and Administrative (SG&A) expenses excluding depreciation, amortization and one-off non-cash items, as a percentage of sales. We cut this indicator year-on-year by nearly 90 basis points to 16.9% for full year 2009. Net of Employee Stock Option Programme (“ESOP”) cost, this indicator declined by 160 bp year-on-year to 16.2% of sales in 2009.
SG&A(1) as % of Sales
STRATEGIC EFFICIENCY PROGRAMME –
DRIVING OPERATIONAL EXCELLENCEIn 2009 X5 launched its Strategic Efficiency Programme to drive operational excellence in line with international benchmarks. This is a multi-year effort that covers virtually every area of X5’s operations:
- Integrated supply chain management;
- IT systems transformation;
- In-store labour productivity improvement;
- Business process improvement;
- Asset efficiency in real estate, energy use and business portfolio.
The Programme will support the Company’s long-term scalable expansion and enhance our ability to drive sales growth, secure substantial cost savings and maximise cash flows. Key elements of the Programme are in planning and test-pilot phases and will be rolled out in stages over the next two to three years.
Strategic Efficiency Programme Impacts Every Area of X5's Business
| (1) Excluding deprecation and amortization & one-off non-cash items. |