Looking back at my ﬁrst full year as CEO of X5 Retail Group, I am happy to say that we have achieved all of the targets set out by the Supervisory Board and Company management. We are now Russia's largest food retailer
— we ﬁnished the year larger, stronger, and growing faster than ever. We are creating value for stakeholders as the fastest-growing public player in Russia’s food retail market, building a stable and sustainable
business that aims to beneﬁt consumers, employees, partners and investors over the long term.
Record-setting growth in terms of square metre, 86% of which was organic, was the major contributor to top-line growth, helped by a 7.7% increase in like-for-like sales. At the same time, our continued focus on efficiency
and operational excellence delivered solid profitability and a stable financial position: adjusted EBITDA rose 34% to RUB 80 billion, helping bring our net debt to EBITDA ratio down to 1.8x, the lowest level in
the Company’s history.
Delivering on strategic targets
With the strategic transformation successfully completed, we are focused on execution against the targets that the Board of Directors has set before the Company. As promised in 2015, we maintained strategic continuity,
stayed focused on execution, and delivered on our targets in 2016.
Effective multi-format operating model: X5 continues to develop each of its three major formats with the goal of capturing a significant 15% share of Russia’s food retail market as it continues to
grow. We delivered 29.1% selling space growth, adding 968.6 thousand square metres of retail space during 2016, with 2,167 new stores added during the year. In line with our strategy, 86% of this selling space
growth was attributable to organic growth.
These results are particularly impressive given that the Russian food retail market as a whole grew by just 2.2% in 2016 and that the top 10 players grew by 17.6%, illustrating just how much faster we are expanding
than the rest of the market.
In 2016, we completed the reorganisation of the Corporate Centre to strengthen its role as a management company and to decentralise many business functions by handing them over to the formats. The X5 Corporate Centre
plays a key role in ensuring that the Board’s strategic vision is properly implemented, in a sustainable way, across each of our formats. It focuses on establishing and enforcing standards, business planning,
analysis and control functions. Other important roles played by the Corporate Centre include acting as an incubator for launching new projects and facilitating the sharing of best practices across the retail
With the Corporate Centre providing overall guidance and leadership, each of the formats strives to be the best in its respective segment. This will enable X5 to maximise benefits of scale while improving efficiency
across retail brands by giving them the necessary flexibility and decision-making power, as well as responsibility, to achieve goals set by the Board and the Corporate Centre.
Superior value propositions: Each of X5’s major formats addresses unique shopping missions and shopping strategies of consumers in Russia. Through continuous monitoring and adaptation of their value
propositions, each of the formats seeks to capture the maximum share of wallet and expand market share in its respective segment. X5’s successful implementation of advanced IT systems has enabled us to analyse
and gain deeper insight into market trends and to tailor our assortment, promotions, and new offerings to the shopping missions of our consumers.
We are also adapting to our customers’ needs by introducing day-to-day improvements in Pyaterochka stores, piloting a promising regional supermarket model for Perekrestok, developing the loyalty programmes of Karusel
and Perekrestok, and preparing to launch a new online supermarket project aimed at supporting Perekrestok’s core audience.
Intelligent growth while maintaining margins: 2016 marked the completion of the full rollout of our in-house GIS system, which significantly streamlines the decision-making process for new store
openings and has brought about a 4x reduction in the number of errors when choosing new locations. In order to build a sustainable market leader, we use advanced analytics to select new store locations, and
X5 has built strong in-house capabilities for land acquisition and construction. Our primary focus is on organic growth, but X5 also possesses strong internal capabilities in M&A, enabling us to rapidly enter
new regions or strengthen a format’s market position in an existing location.
Hand-in-hand with business growth, we managed to improve our EBITDA margin in 2016 thanks to successful cost management as a result of operational efficiency programmes, as well as the operating leverage effect.
End-to-end operational excellence: Achieving the growth we have delivered in recent years while maintaining and even expanding margins requires constant attention to operational excellence throughout
the value chain. In 2016, we continued to focus on in-store operations, improving lease conditions, strengthening our transport and logistics infrastructure and enhancing our partnerships with suppliers. X5
has shown it is able to continue growing and adapting effectively and efficiently, even in Russia’s rapidly changing environment. We lead the market in terms of electronic document exchange, which has significantly
improved the quality of our work with suppliers. We are constantly improving our logistics operations, opening seven new state-of-the-art distribution centres while closing down the same number, as they no longer
met our increasingly ambitious efficiency criteria.
Strong leadership team: Our performance in 2016 also underscored the strength of the X5 team and the fact that we have effective systems in place to retain and motivate staff, both short-term and
long-term, in alignment with the interests of our shareholders. Even as we successfully completed the transition to a new CFO during the year, X5 stayed on course for another year of excellent results. We likewise
have high hopes for the new head of Karusel, Maksym Gatsuts. I am confident that the two new members of our team will make important contributions to X5’s future. Going forward, our succession planning efforts
should mean that we see a larger number of internal promotions to key posts.
We delivered strong growth despite a continuing downturn in most key economic indicators for Russia. In this challenging macroeconomic environment, we adjusted our assortment with more lower-priced goods, optimised
our promotional mechanism, offered interesting new products and focused on improving customer loyalty. This is in line with our constant focus on providing the best shopping experience, the best service and
the best store in every single location where X5 operates.
Our challenges range from changing demographics to declining per capita incomes, growing competition and the spread of new technologies, and stricter regulation. These factors will affect the entire retail industry,
so we seek to be better-prepared to address these issues in order to continue building a successful and profitable business. We discuss X5’s response to these key market trends in detail on pages 32–33 of full
One of the ways that we are adapting to the changing market environment is by focusing on building long-term, mutually beneficial strategic partnerships with suppliers. Relationships like this, built on trust, will
help to improve purchasing conditions, create long-term relationships based on trust and help introduce cutting-edge solutions and products.
While we do not expect meaningful positive macroeconomic developments in Russia in the medium term, significant growth opportunities still exist in the food retail sector thanks to consolidation among top players,
increasing penetration of modern retail, the opportunity to implement modern retail features that improve customer satisfaction, and overall market growth.
Longer-term, we remain confident about X5’s potential as a leading food retailer in Russia, with forecast market expansion (see page 28 of full report) and top players expected to consolidate their positions (see
page 31 of full report). As we move from the goal of being the #1 food retailer in Russia to the goal of having a target market share of 15% by the end of 2020, X5 is positioned to deliver significant growth
for years to come.
Our focus will remain on organic growth while maintaining margins as we develop all three of our major formats. X5 will focus on continued growth of Pyaterochka as the country’s leading proximity store, expanding
Perekrestok’s regional model and improving Karusel’s performance in the hypermarket segment.
An important element of sustainable leadership is operational efficiency and innovation. To achieve this we remain focused on implementing a logistics strategy that efficiently meets the needs of our growing business,
more comprehensive coverage of our supply chain with new direct import and cross-docking facilities, and on the construction of new, efficient DCs. We also bought 976 new trucks in 2016, and plan to continue
expanding our own fleet of modern, efficient trucks throughout 2017.
Putting the numbers aside, our aim is for every store to be the leader for its customers in its neighbourhood or region. With fierce competition from other federal and regional players, we are constantly looking
for ways to improve our value proposition, shopping experience, and efficiency. While the increases in our key indicators tell part of the story, our goal in this report is to show how X5 Retail Group’s philosophy
of leadership influences everything we do, forcing us to constantly innovate to create value for our customers in every store, which will ultimately be reflected in value for shareholders.
Credit for our success in 2016 is due to the support we received during this year from our suppliers, shareholders and the Supervisory Board. Of course, we would be nothing without our customers, who are at the
core of everything we do.
I give my thanks to the excellent management team and the employees of X5 Retail Group, who put our leadership mentality into practice every day, for their hard work and dedication to achieving the challenging goals
that have been set before the Company as we continue to strengthen our position as Russia’s #1 food retailer.
Chief Executive Officer