Strategic report
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Strategic
report

Changing faster — leading by innovating and adapting
We are constantly adapting our business with our customers’ needs at the centre of our decision‐making. As technology‐driven innovations are accelerating the pace of change in consumer behaviour and the competitive landscape, X5 is implementing a strategy that aims to strengthen the business today while preparing it to continue to lead tomorrow.
Overview
About this report
The X5 Retail Group annual report provides a yearly review of the Company’s financial, operating, environmental, social and governance performance. The report also explains our latest strategic priorities and goals, and our progress against these objectives. In addition to complying with UK and Russian Federation listing requirements, as well as Netherlands Corporate Governance Code, our goal in publishing this report is to provide our stakeholders with an up‑to‑date and detailed picture of our current position and our plans for the future.
Report boundary
and scope
This report covers the period from 1 January 2019 to 31 December 2019. The topics reviewed in this report include X5 Retail Group’s business model and strategy, recently adopted sustainable development strategy, market and consumer trends, operating and financial performance, as well as the Company’s progress on initiatives in the areas related to environmental, social and governance (ESG) criteria. The report covers the activities of X5 Retail Group and all of its operating subsidiaries. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). In order to ensure comparability during the transition period, IFRS financial results in this report are presented according to IAS 17 as well as new IFRS 16 standards. In addition to covering the financial year ending 31 December 2019, this report discusses any significant events that happened after the reporting date.
Materiality
The contents of this report were determined by X5 Retail Group management, based on its understanding of stakeholder interests, the economic and competitive landscape in Russia, our business model, risks and opportunities. Material issues are understood as both significant financial issues and material non-financial topics. The tools used to inform decisions about the material issues facing the Company include internal analysis and reporting mechanisms, market research, external polling and research products, as well as feedback received directly from key stakeholders. The framework of the United Nation Sustainable Development Goals (UN SDGs) and X5’s sustainable development strategy, which was approved in 2019, were also used to define the Company’s material issues. Management believes that this report accurately covers how X5 Retail Group interacts with and creates value for its stakeholders.
Alternative performance measures
In this report, we provide alternative performance measures (APMs) that are not defined or specified under IFRS requirements. We believe that these APMs provide important information on the performance of our business. We have included a glossary of the APMs. This glossary includes an explanation of how each APM is calculated, why we use it and how it can be reconciled to a statutory measure, where relevant. be reconciled to a statutory measure, where relevant.
Financial and non-financial information
X5 Retail Group’s management and Supervisory Board review the Company’s financial, operating and other non-financial performance on a regular basis. This is reflected in this report, which also discusses the Company’s performance in areas like innovation, consumer safety, reducing our impact on the environment, investments in local communities, providing our employees with a safe and enriching workplace, busi- ness conduct and relations with suppliers.
Assurance
The Supervisory Board, with the support of the Audit and Risk Committee, is responsible for X5 Retail Group’s internal controls to provide reasonable assurance against material misstatement and loss.
Supervisory Board approval
The Supervisory Board of X5 Retail Group confirms that this report addresses all material issues and provides a balanced overview of the Company’s performance for the reporting period, as well as an accurate reflection of its strategic commitments. The Board approved the 2019 annual report for publication.
Our approach, mission and goals
X5 Retail Group operates a sustainable business model that aims to address three key priority areas that are important to our stakeholders and aligned with the UN SDGs that we have determined as being most relevant to our business: people (Zero Hunger, Good Health and Well‐being, Decent Work and Economic Growth), the planet (Responsible Consumption and Production) and profits.
People
People are at the core of how we do business: we can only create value if we succeed at constantly adapting to changing demand from our customers in a highly competitive landscape. The people who work for us are essential to customer recognition: whether it is in‐store staff who interact directly with customers or an employee in our Big Data Department developing new tools to help us better understand and respond to demand, we expect and value the contribution of every single person employed by X5 Retail Group. This is also reflected in the policies and practices we implement as an employer and the ways in which we help local communities to address issues that they face where X5 can make an impact.
Planet
We look at our impact on the planet in a broad sense that includes the environmental impact of our store and logistics operations. This ranges from constantly exploring measures to reduce energy consumption in our stores and seeking to reduce the carbon footprint or our fleet of trucks to recycling much of the waste produced at our stores and encouraging our customers to recycle packaging from the goods they purchase.
Profit

When our communities, customers and employees recognise the value that we create for them, we are confident that this will lead to recognition of the value that X5 Retail Group holds for shareholders. The key strategic KPIs that the management team uses to measure its success are based on customer recognition, employee recognition and shareholder recognition.


This defines our approach to business, which we believe enables X5 to build a sustainable business that creates value for all of its stakeholders. Detailed infor- mation on our sustainable development strategy is provided in the "Sustainable development" section.

UN Sustainable
Development Goals
1
No
poverty
2
zero
hunger
3
good health
and well-being
4
Quality
education
5
Gender
equality
6
clean water
and sanitation
7
affordable and
clean energy
8
decent work and
economic growth
9
industry, innovation
and infrastructure
10
reduced
unequalities
11
sustainable cities
and communities
12
responcible
consumption
and production
13
climate
action
14
life
below water
15
life
on land
16
peace, justice
and strong
institutions
17
partnerships
for the goals
Primary Goals
Secondary Goals
Values
The values that we seek to instil in every one of our employees are key to achieving our strategic goals and are fully aligned with our people, planet, profits and approach to business.
Customer-oriented
  • We put the customer at the centre of everything we do and at the centre of all of our decisions.
  • We strive to find solutions that meet our customers’ needs.
  • We build long‐term relationships with our customers.
Respect
  • We are respectful in our interactions, problem‐solving and feedback with customers, business partners, our employees and other stakeholders.
  • We consider the opinions, interests and emotions of our stakeholders when making decisions and interacting.
  • We help our stakeholders even if doing so goes beyond the scope of our job responsibilities.
Driven to achieve results
  • We set goals for ourselves that require significant effort to achieve.
  • We take responsibility for our actions.
  • We reward our employees for their achievements, while also acknowledging that we sometimes make mistakes.
Honesty and integrity
  • We respect the agreements we sign and honour our obligations to all of our business partners and other stakeholders.
  • We provide accurate and complete information about our products, activities and performance in a timely and transparent way.
  • We have zero tolerance for corruption, which is backed by strict policies and practices covering every aspect of our business, as well as our supply chain.
Key highlights
Sustainable growth and value for all stakeholders
X5 Retail Group further expanded its market share in Russian food retail in 2019, reaching 11.5% for the full year. While our Pyaterochka and Perekrestok formats both maintained positive like‐for‐like (LFL) performance throughout the year, we also developed new business areas like the Perekrestok.ru online supermarket and 5Post delivery service, which we believe will be sources of growth in the future.
↑0.8 p.p. 2018/19
11.5%
X5 market share
for the full year 2019

As X5 moves forward, we see our competitive landscape changing as players from industries spanning from technology to financial services seek to develop or expand their online marketplaces. With our large and efficient network of stores and logistics operations — backed by a robust IT infrastructure, industry‐leading in‐house big data capabilities and established innovations track record — we aim to be one of the key players in the future of retail.

As we look to the future, we are also taking steps to consolidate the various sustainability activities that we already implement under a unified strategy with new, measurable KPIs. Having approved our first sustainability strategy in December 2019, over the course of the next three years we will be integrating sustainable development criteria into our overall business strategy and will further enhance our reporting on performance in these areas on an ongoing basis.

2019 financial and operating highlights
↑13.2% 2018/19
1,734
BLN RUB
Revenue
 
↑18 b.p. 2018/19
7.3%
Adjusted EBITDA
margin (under IAS 17)
 
 
1.71×
Net debt / EBITDA
(under IAS 17)
As of 31 December 2019
  2018/19
↑4.0%
Like-for-like sales
 
  2018/19
↑2.0%
Like-for-like traffic
 
12.0% 2018/19
↑7,239
THOUSAND
SQM
Selling space
As of 31 December 2019
Strategic highlights
Customer
centricity
Continued to adapt and innovate to refine our customer value proposition (CVP) to customer needs across all formats, further improving in‐store service and leveraging efficiency gains to invest in customers. Added new client feedback tools into customer communication, marketing and assortment planning.
New store
concepts
Tested and approved new store concepts for Pyaterochka and Perekrestok.
Adapting
assortment
Expanded selection of fresh goods and fruits and vegetables. Launched Smart Kitchen to expand own production of ready‐to‐eat foods. Continued to develop private‐label offerings, with a focus on health foods for this assortment.
Strengthen
current business
Implemented successful measures to reduce staff turnover at both management level and store operations and reduce shrinkage, which helped to improve operational (LFL) and financial (margins) performance.
Digital
transformation
Further strengthened X5’s capacity to use digital technologies to enhance and improve business performance, with in‐house Big Data Department piloting and launching services for internal and external use such as automated pricing, automated assortment for Pyaterochka and big data‐driven promo tools for suppliers.
Innovation
Further expanded regular interna- tional search, review and piloting of innovative solutions, with 64 pilots of new technologies in 2019, including self‐checkout counters developed in‐house, loyalty terminals in stores, electronic price tags, a cashierless store and others.
Omnichannel
and complementary
businesses
The Perekrestok.ru online supermarket continued to grow, handling up to 8,000 orders per day at peak times and becoming the #2 online grocery platform in Russia. We launched the 5Post parcel delivery service for third‐party e‐commerce companies, expanded our parcel locker network to over 12,700 parcel lockers and pickup points in 9,957 stores and piloted same‐day delivery service for groceries and ready‐to‐eat foods from our stores.
Maintaining
profitability
levels
While continuing to grow and consolidate the market, our focus on operational excellence and efficiency allowed us to maintain an adjusted EBITDA margin (under IAS 17) of 7.3%. Sustainable cash flows and profitability enabled X5 to pay out RUB 25 billion in dividends to shareholders in 2019, representing 87.3% of consolidated net profit for 2018. The Board rec- ommended paying RUB 30 billion in dividends to shareholders in 2020, representing 115.8% of net profit under IAS 17 (153.8% under IFRS 16) for 2019.
Adopted
sustainability
strategy
The Supervisory Board approved X5’s first sustainable development strategy in December 2019. The strategy will be integrated with X5’s overall business strategy and is based on the four UN Sustainable Development Goals through which the Company can make the most significant impact: end hunger, achieve food security and improved nutrition; ensure healthy lives and promote well‐being for all at all ages; promote sustainable economic growth and decent work for all; ensure sustainable consumption and production patterns.
Operational highlights
Net retail sales
21.1%
CAGR 2015–2019
BLN RUB
Selling space
21.4%
CAGR 2015–2019
THOUSAND SQM
Number of stores
23.4%
CAGR 2015–2019
 
Customer visits
20.3%
CAGR 2015–2019
MLN
Financial highlights
Revenue
21.0%
CAGR 2015–2019
BLN RUB
 
Gross profit
21.0%
CAGR 2015–2019
Gross profit (under IAS 17), bln RUB
Gross profit margin (under IAS 17), %
Adjusted EBITDA
21.0%
CAGR 2015–2019
Adjusted EBITDA (under IAS 17), bln RUB
Adjusted EBITDA margin (under IAS 17), %
Adjusted net profit
26.7%
CAGR 2015–2019
Adjusted net profit (under IAS 17), bln RUB
Adjusted net profit margin (under IAS 17), %
Sustainability highlights
Number of supplier audits conducted by Pyaterochka and Perekrestok (including audits of private-label goods)
THOUSAND RUB
Amount of recyclable waste sold
THOUSAND TONNES
Lost time injury frequency rate (LTIFR) among employees
PER PERSON PER YEAR
Number of people receiving support through X5 social initiatives
THOUSAND
Customer-centricity at the core of our business
We seek to understand our customers and meet, or even exceed, their expectations in every interaction they have with us.
This ranges from constantly adapting our CVPs and piloting new store concepts to developing personalised offers based on individual customer behaviour and improving in‐store processes to free up personnel to devote more time to customer service. Our customers and their needs are at the very core of our business, and they are the key factor in every decision that we make. We understand customers even better with the help of data from 130 million loyalty cards and constantly‐upgraded customer feedback tools.
Smart growth
We have shifted our focus from expansion to LFL growth and new businesses as the most promising areas for X5’s continued development.
Net expansion
As the pace of new store openings decelerates, we focus on quality and consolidation, with around 50% of our new stores replacing smaller players that previously occupied the premises. We continue to prefer leased premises for our organic expansion.
LFL growth
We are constantly adapting our CVPs and regularly updating store concepts in order to secure continued LFL growth. Key areas of focus include continued work on adapting assortment to changing customer needs, maintaining attractive pricing for products on our shelves, further enhancing freshness and introducing additional services in stores.
New business
We launch new businesses that enhance our existing client proposition and have strong prospects of becoming profitable: Perekrestok.ru and 5Post are examples that are already functioning, with others being piloted and prepared for launch.
Chairman’s statement

Dear stakeholders,

In 2019 X5 Retail Group continued to expand and evolve, with new businesses emerging alongside the traditional retail formats. Entering into this exciting next phase of our development, the Supervisory Board adopted X5’s first sustainability strategy, reflecting our commitment to embedding sustainable development priorities into X5’s overall business strategy. This is something that I, as Chair of the Supervisory Board, take a personal interest in as the Board’s attention on non-financial performance increases. Mindful of our social and environmental responsibilities, we are setting ambitious but realistic goals, in order to move towards higher sustainability standards in line with generally accepted Sustainable Development Goals.

Stephan DuCharme
CHAIRMAN OF THE SUPERVISORY BOARD

Throughout the year X5 continued to focus on creating value for stakeholders across a wide range of areas.

Our strategy focused on further developing Pyaterochka proximity stores and Perekrestok supermarkets, which remain at the core of our business. Their success was supported by updated value propositions and the introduction of new store concepts, effective measures to improve efficiency, and innovative in-store solutions. In line with the global trend in food retail we accelerated our efforts in the readyto-eat segment, with our first Smart Kitchen launched in 2019.

The Supervisory Board is continuously evolving X5’s strategy to adapt to changes in the Russian market and global retail trends. To enhance our traditional businesses, X5’s long-term development increasingly depends on commercial and technological innovation. Digital technologies and innovative retail concepts are being developed for the further benefit of customers, from the Perekrestok.ru online supermarket to in-store solutions that utilise artificial intelligence as as well as big data products that enable us to better understand and meet demand. Our digital transformation goes hand in hand with an approach to innovation based on partnerships with relevant start-ups, venture funds and technology accelerators to identify new ideas that benefit our businesses as well as our business partners.

X5 continues to seek transparent and partnership- based business relationships with suppliers, leveraging its logistics and IT infrastructure to bring a greater variety of high-quality food to the Russian consumer. X5 is also increasingly focused on direct import opportunities for itself and the Russian consumer.

Our employees are the key to X5’s customer centric strategy. As an employer of more than 300,000 people across Russia, the Company continued to invest in training and development, while also ensuring a safe and healthy workplace based on equal opportunities and inclusiveness. This is clearly reflected in decreasing staff turnover rates company-wide. We are confident that the launch of X5’s Digital Academy, training employees on the skills needed to support the Company’s digital transformation, will be a further contribution to this trend.

The Supervisory Board carefully monitors the development of the X5 culture and organisation, the way that colleagues work together, as well as leadership development and succession planning. I believe that one of the keys to X5’s success is how we develop our talent and encourage leadership at every level. In doing so, we encourage diversity and diversity of thought across our operations, ensuring that X5 is able to attract, develop and promote talented individuals, regardless of gender, age and background.

In terms of corporate governance, we continue to seek ways to improve and enhance our standards in line with international best practices and the requirements of the Dutch Corporate Governance Code. Through annual self-assessments we ensure that the Supervisory Board is fit for the future, with the skills needed to support the management team and the ongoing development of the Company, taking into account the needs of all stakeholders. In this context I am delighted with the appointment, in May 2019, of Alexander Torbakhov, who chairs the Innovation and Technology Committee created to strengthen our understanding and oversight of one of our most promising areas for development. I personally had the pleasure of joining the senior management team for a seminar in Silicon Valley on technology and disruption in retail. While we continue to refine X5’s governance model, we seek to operate as a team, and be a partner to management in supporting the Company’s sustainable growth.

In 2020 Andrei Elinson will retire as a member of the Supervisory Board at the end of his current term, having served on the Board since 2016. On behalf of the Supervisory Board I want to thank Andrei for his valuable contribution during these important years in X5’s development. With the successful implementation of our strategy bringing more value to customers and other stakeholders, I am pleased to say that X5 has delivered another impressive year of growth and profitability. This performance enables the Supervisory Board to recommend a dividend of RUB X per GDR to the 2020 General Meeting of Shareholders.

The Supervisory Board will continue to reflect on X5’s strategy in light of the rapidly changing industry and the demands this places on the Company, keeping a keen eye on ensuring that X5 can achieve its full potential.

Our value creating business model
X5 is Russia’s largest food retailer with 11.5% market share and 16,297 stores operating in 65 regions of the country as of 31 December 2019. We operate in a highly competitive sector with established players as well as new and innovative startups requiring that we maintain a constant focus on customer needs, efficiency and innovation. We also aim to leverage our considerable scale and infrastructure to create value for our stakeholders, from suppliers to customers to employees and, ultimately, shareholders.
Suppliers
5,946
Suppliers
27.8%
Share of top 30 suppliers in revenue
Corporate Centre
Provides strategic guidance and centralised services like corporate finance, IT infrastructure, big data products, innovation review and piloting, logistics management, best practice sharing, internal controls, business risk management and reporting.
Supply Chain Infrastructure
5
Direct import hubs
42
Distribution centres
Retail
Formats
15,354
Pyaterochka
proximity stores
852
Perekrestok
supermarkets
91
Karusel
hypermarkets
UNDERGOING
TRANSFORMATION
Other
businesses
Perekrestok.ru
5Post
Express delivery
11.5%
Market share
16,297
Total stores
65
Regions covered
Our formats
We are focusing on the development of our two largest retail formats: proximity stores (Pyaterochka) and supermarkets (Perekrestok), which we consider the most promising segments of Russia’s traditional food retail market.
Due to the growing role of e‐commerce for the stock‐up mission, we decided in 2019 to transform our hypermar- ket format (Karusel). Most Karusel stores will be closed or transferred to the Perekrestok brand to operate as large supermarkets*. In addition to developing and piloting online businesses, both Pyaterochka and Perekrestok developed new store concepts in 2019, which will be rolled out as part of the formats’ updated CVPs in the coming years.
For more information on the Karusel transformation, see the Karusel section
Pyaterochka
15,354
Proximity stores
5,975 THOUSAND SQM
Selling space
1,367 BLN RUB
Net retail sales
79.1%
Share of X5’s net retail sales
Pyaterochka is Russia’s largest proximity format and was established in 1999. Our proximity format aims to provide Russian consumers with a convenient and high‐quality shopping at affordable prices, with a market‐leading loyalty programme and an extensive network of stores that we will be upgrading in line with the new concept approved at the end of 2019, and which will be part of additional omnichannel businesses like 5Post or express delivery services from local stores.
Perekrestok
852
Supermarkets
900 THOUSAND SQM
Selling space
273 BLN RUB
Net retail sales
15.8%
Share of X5’s net retail sales
Russia’s oldest supermarket format, Perekrestok was established in 1995. We position Perekrestok stores as the “main store in the neighbourhood”, in the mass market segment offering customers a wide assortment of high‐quality goods, with a focus on fresh and ready‐to‐eat goods, and a comfortable shopping experience. In addition to leading Russia’s supermarkets segment, our online platform Perekrestok.ru is on track to become the country’s #1 online food retail operator.
Karusel
91
Hypermarkets
364 THOUSAND SQM
Selling space
87 BLN RUB
Net retail sales
5.1%
Share of X5’s net retail sales
Karusel, established in 2004, operates compact hypermarkets that are usually within city limits. With the development of e‐commerce businesses in Russia, much of the hypermarkets’ non‐food space has become obsolete, and customers are opting to do more of their food shopping locally. As we transform our hypermarket business, X5 will close 20 Karusel stores and transfer 34 to the Perekrestok brand. Thirty‐seven Karusel stores will continue operating as our branded hypermarkets and will be evaluated with a view to their being repurposed, sold or closed, subject to further test pilots and management analysis.
Russia’s food retail market
A large market with significant opportunities
Russia is home to the world’s eighth‐largest food retail market, with a total turnover of RUB 16.1 trillion in 2019. We see significant opportunities for growth in this sizeable market, from both the continued expansion of modern retail formats and the consolidation of the market around leading players.
8
Largest globally
by food retail
turnover
29%
Share of top
five players
76%
Share of modern
formats in overall
retail market
X5 Retail Group position
X5 Retail Group is the largest food retail operator in Russia by revenue, and our market share in 2019 was 11.5%. We will continue to consolidate our position in the market, predominantly by organic expansion.
20
Amoung global
food retailers by
revenue in 2019
11.5%
Share of Russian
food reail market
in 2019
c.50%
of the new opening replace
other players
Competitive landscape
X5 vs Russian food retail and top-10 players, %
X5 y-o-y revenue growth
Top-10 y-o-y revenue growth
Market y-o-y nominal growth
SOURCE: INFOLINE, X5 ANALYSIS

Since 2015, X5 Retail Group has grown faster than the food retail market and faster than its top-10 peers. Even as we shifted to a strategy of selective and intelligent growth, we expanded our business at a faster pace while maintaining margins.

We see a strong trend towards food retail market consolidation, with over 50% of X5’s new openings in 2019 coming in the form of replacing existing players.

While we see regional modern and traditional food retailers losing their competitive position and reducing their market presence, a number of new offline competitors have emerged in recent years. This new competition can be divided into lower-price and higher-price segments.

The lower-price segment targets lower-income consumer groups by focusing on a particular product (for example, cheap alcoholic beverages) or by offering very deep discounts on no-name or non-branded goods, but this segment offers a very poor shopping experience.

Competitors in the higher-price segment target more affluent consumers who are looking for healthier foods (vegan, gluten-free, straight-from-the-farm products from local producers, expanded assortment of fruit and vegetables), with a tailored assortment and with greater customer engagement in product selection and ratings.

Top 10 Russian food retailers, %
Market share
Company name 2019 2018
1 Х5 11.5 10.7
2 Magnit 7.6 7.7
3 DKBR * 5.7 5.1
4 Lenta 2.5 2.8
5 Auchan 1.5 1.9
6 Metro 1.1 1.3
7 O'Key 1.0 1.1
8 Monetka 0.7 0.6
9 Svetofor 0.7 0.6
10 Globus 0.6 0.6
Total top 10 32.9 31.9

* In january 2019, dixy group merged with red and white and bristol
source: INFOLINE

Russia’s evolving food market and consumer trends
We are adapting our business as the food retail market landscape in Russia changes. As we grow online businesses, we are also bringing new CVPs and store concepts to our offline businesses in order to meet the latest trends in consumer demand.
Evolution of Russia’s food market
Online food and ready-to-eat will attract new customers from tradition retail
NOTE: MARKET SHARE EXCL. NON-FOOD
SOURCE: INFOLINE
Non-price elementsgain importance
The behaviour of Russian consumers is also changing. Factors like assortment and a pleasant shopping atmosphere are gaining impor- tance, while price remains the top consideration for consumers in choosing where they shop. In response to these changes in customer behaviour, X5 is adapting the CVPs of its offline formats and developing new in‐store services. We now offer more convenient store layouts with features like an in‐store bakery, fresh coffee and juice, self‐checkout counters, as well as additional services like parcel lockers.

The changes that we are introducing to our business on a regular basis are aimed at ensuring that we are able to adapt quickly as Russia’s food market continues to evolve.

In line with global trends, Russian consumers in larger metropolitan areas are choosing between shopping for food and groceries in stores and ordering meals via mobile apps or online. While new food delivery businesses are growing rapidly, the overall offline food retail market remains significantly larger, with 2019 turnover of RUB 17.5 trillion compared to RUB 0.2 trillion for online grocery, online food delivery and express delivery, combined.

Our online supermarket Perekrestok.ru is fully operational, and we are starting express delivery from our stores. We have opened our first Smart Kitchen, which will enable us to significantly expand X5’s own ready‐to‐eat offering for both proximity stores and supermarkets.

What clients expect from retail?
% OF RESPONDENTS GIVING POSITIVE ANSWER
Price/Quality
While this remains the #1 priority for Russian consumers, the importance of this element is declining relative to others.
Convenience
Convenience is becoming significantly more important as consumer choice grows and they gain greater access to a wider range of services and information from their smartphones.
Assortment
Demand for a unique, high-quality assortment, especially in fresh categories, is also rising.
Pleasant atmosphere
As the market has developed in Russia, with competition and new players increasing, consumers and employees are becoming more attuned to the in-store atmosphere.
Sustainable approach
Sustainability is a rapidly-growing priority for a wide range of our stakeholders, and we have adopted a sustainability strategy to help address this demand.
Overview of keymarket trends
Modern retail has room to grow
The share of modern formats in the Russian food retail market has grown significantly in recent years and currently stands at 76%. However, this level still lags behind several developed markets like North America, Australia and Western Europe, where modern formats represent 86%, 82% and 81% of the food retail market, respectively. We believe that the expansion of modern retail formats will be one of several drivers of growth in the years ahead.
Just five years ago, traditional retail accounted for 37% of Russia’s total food retail market. The balance of modern vs. traditional food retail formats has shifted rapidly since then and today modern retail like our Pyaterochka and Perekrestok formats accounts for 76% of the Russian food retail market.
Traditional vs. Modern retail acrosskey world regions in 2019, %
Traditional retail
Modern retails
 
NOTE: ALL VALUES USED ARE NOMINAL. ALL NUMBERS ARE EXCLUDING VAT/SALES TAX.
SOURCE: EUROMONITOR, X5 ANALYSIS
Russian food retail
market development, %
Traditional trade
Regional modern trade
Federal chains
SOURCE: INFOLINE
A future of smart growth and consolidation
The cumulative market share of Russia’s top five was just 29% in 2019. While the overall food retail market is forecast to expand from RUB 16.1 trillion in 2019 to RUB 18.8 trillion in 2022 (source: Infoline), leading players in Russian food retail are likely to focus on smart growth and consolidation. We are already witnessing this trend, with around 50% of X5’s new openings during 2019 coming from the replacement of existing players.
Share of top-5 grocery retailers globally in 2019,%
SOURCE:EUROMONITOR, INFOLINE (FOR RUSSIAN MARKET ONLY), COMPANY REPORTS, X5 ANALYSIS
Focus on proximity, supermarkets and online
X5 already operates Russia’s leading proximity and supermarket formats, and we aim to achieve market leadership in the online grocery market by 2021 with our Perekrestok.ru online business. In 2019, we took the decision to transform our Karusel hypermarkets, as this segment is under structural pressure from online and the attractively priced proximity segment.
Substantial mid-term growth potential for proximity and supermarkets, RUB trn
Total market size
16.1 RUB TRN
2019
18.8 RUB TRN
2022E
NOTE: MARKET SIZE INCLUDING
SOURCE: INFOLINE
Legislative changes
Omnichannel retailing
Our omnichannel approach is one of the keys to becoming a next‐gen retailer. As technology and innovations change the competitive landscape, we want to continue to ensure that our loyal customers can get the goods they want, when they want them, in a way that is convenient for them.
1.
Stores
Our stores are the core of our business, where we interact directly with about 14–16 million customers on a daily basis, offering them an assortment and experience that is regularly adjusted to their needs and a growing array of additional services.
2.
Online
X5’s online offering is currently focused on the online supermarket Perekrestok.ru, which achieved revenue growth of 234% year-on-year in 2019, making it the #2 online grocery service in Russia.
3.
Mobile apps
Our mobile apps offer customers a convenient way to manage their loyalty programme points, receive personalised offers and provide feedback. In addition, users of the Perekrestok app are able to use it to shop at Perekrestok.ru.
4.
Click & collect services
Click & collect services offer our customers a quick and convenient way to optimise their shopping trips by enabling them to pick up goods ordered online at store.
5.
Express Delivery
Express delivery is a new service that we are currently offering at Pyaterochka stores in Moscow and Kazan. Express delivery offers customers the full assortment from their local Pyaterochka delivered to their doorstep in less than 60 minutes.
6.
Large purchase
For customers who would prefer to have large purchases and/or heavier goods delivered straight to their door, we offer home delivery services through the Perekrestok.ru online supermarket.
7.
Parcel lockers and pickup points
Parcel lockers offer a convenient way for customers to have orders from third-party online retailers delivered for safe and convenient pickup or to return goods that did not meet expectations. These additional in-store services are integrated into our 5Post parcel delivery service.
8.
Cashierless stores
Another operating model that we are currently piloting in-house is a cashierless store, where customers can use a special mobile app to enter the store, pick up the goods they want and pay for them without having to wait in a queue.
STRATEGIC REVIEW
CEO statement

Dear stakeholders,

In 2019, we continued on our path of growth, digital transformation and continued improvements in operational efficiency across our formats and business units.

I am pleased to report that X5 Retail Group and its traditional retail formats, as well as our new businesses, delivered strong financial performance in 2019. Revenue rose 13.2% year-onyear in 2019 to RUB 1.7 trillion, and we achieved a 7.1% EBITDA margin under IAS 17, in line with our internal target. X5’s online sales rose 234% year-on-year to RUB 4.3 billion. This solid growth enabled us to further solidify our food retail sector leadership, and our market share reached 11.5% (excluding online).

X5 achieved positive like-for-like revenue and traffic in each quarter of 2019, which was possible thanks to our strong retail brands, as well as the greater loyalty of our client base as we continued to invest in our customers, deliver improvements in key areas like assortment and in-store service, as well as reach higher penetration of loyalty cards in our customer traffic and revenue. Perekrestok supermarkets led in terms of LFL revenue and traffic growth in 2019, followed by the Pyaterochka proximity format, which also maintained positive LFL revenue and traffic despite a competitive pricing environment.

Igor Shekhterman
CHIEF EXECUTIVE OFFICER

We made several important decisions during 2019, including the transformation of our Karusel hypermarkets and the establishment of 5Post and Perekrestok Online as separate business units within the organisation. We also resolved to gather our numerous sustainable development initiatives under a more cohesive system and for sustainable development to become an integral part of our business strategy and decision-making. In December 2019, the Supervisory Board approved a three-year sustainable development strategy for X5 Retail Group.

Our investments in 2019 totalled RUB 81 billion, which represents 4.6% of 2019 revenue. The structure of our investments is changing towards a higher share of refurbishment and non-store capex, which reflects the evolving technological landscape and customer preferences for a better shopping atmosphere. We adhered to an 80/20 approach to dividing our efforts and investments between existing offline operations that are already generating profits and cash flows, and development of new initiatives with strong business cases that will enable X5 to stay competitive and profitable in the fast-changing and increasingly digital retail universe.

Despite our sizeable investment programme, our net debt/EBITDA under IAS 17 remained at a comfortable level of 1.71x, and we increased our dividend payouts to RUB 30 billion (RUB 110.47 per GDR) for 2019, up 20% vs. 2018 in roubles.

Main highlights of 2019
  • We maintained leadership in revenue and LFL revenue growth against our main peers.
  • We achieved positive developments in personnel turnover and labour productivity.
  • Despite the downward trend in food inflation in H2 2019, our EBITDA margin under IAS 17 was in line with target levels for the full year.
  • Our investments in prices in H2 2019 were successful at stimulating consumer traffic.
  • We continued to adapt to consumer needs with the successful testing and launches of new CVPs in our proximity and supermarket formats.
  • We took steps to develop new businesses with the establishment of 5Post as a separate business unit with an approved growth model and organisational structure.
  • We continued to develop our omnichannel business model and pilot new services.
  • The transformation of X5’s hypermarket format was launched in order to focus on the most promising segments of the market.
  • To support our digital transformation we created a digital management committee, started the implementation of a more flexible IT platform and launched the X5 Digital Academy.
  • X5 has launched a massive digital transformation programme, with over 30 product teams working on digitalisation of critical business processes, develop- ing the CVM system and improving our ability to make data-driven decisions.
  • In Pyaterochka alone, the digitalisation of key commercial processes like assortment, pricing and promotions yielded an estimated RUB 2 billion positive effect on EBITDA in 2019. These systems will be further refined and expanded in 2020.
  • Our CVM process is based on constant analysis of customer behaviour and feedback through a wide variety of channels, and we are putting in place systems that enable us to respond even faster to requests, complaints and recommendations.
  • X5's Supervisory Board approved our first Sustainability Strategy, which covers the period 2020–2022.
Sources of growth in 2019

At X5, we aim to ensure that customers can shop with X5 however, wherever and whenever they want. We already help them to get an affordable meal on the table through our extensive network of Pyaterochka proximity stores (15,354 stores at the end of 2019) and through omnichannel shopping for an expanded assortment within our Perekrestok supermarket brand (852 supermarkets at the end of 2019 and four dark stores that delivered 1.4 million online customer orders in 2019).

We increased our selling space by 12.0% in 2019 to 5,975 thousand square metres and opened 1,866 new stores (net of 300 closings), which was less than in 2018. Around 50% of these openings replaced less efficient food retail operators. X5 continued to consolidate the offline food retail market in both the proximity and supermarket segments in 2019 and gained market share. Management sees this trend as ongoing.

Our LFL revenue was positive in both the proximity and supermarket formats, while Karusel hypermarket LFL results were below expectations, as online grocery shopping is replacing hypermarkets for customers with a stock-up shopping mission, and most hypermarket operators suffer from weak or negative LFL trends.

Our Perekrestok supermarket operations continued to enjoy positive customer response to the updated CVP, which is centred around fresh assortment, in-store gastronomic experiences and attractive offers to loyal customers. Perekrestok successfully piloted a large supermarket format that will feature cafes, in-house cooking facilities and a larger assortment of premium food products. Stores transformed from Karusel hypermarkets will be opened in this format. The net promoter score (NPS) in Perekrestok stores reached 21 points and for the online service 82 points.

In the proximity segment, we worked on the assortment in 2019 to boost LFL sales: we revised the 28 main product categories to make our offer within these categories more relevant to customers, we launched initiatives aimed at improving the freshness of goods in several traffic-building categories, and we continued to develop new private-label products. We expect these initiatives will further increase the attractiveness of our product range to clients in X5’s proximity and supermarket formats. During 2019, we also achieved greater engagement among personnel in our stores, which enabled us to improve service and keep the format’s NPS positive.

To further cement our leadership in the prox- imity segment, the Pyaterochka team, after careful piloting of innovative new store features, opened the first proximity store using a new CVP in September 2019 in Moscow. Over the course of Q4 2019, we opened 32 new-concept Pyaterochka stores. Regardless of location (by traffic, income or region), the first results of the new CVP proximity stores are encouraging. We see solid customer traffic pickup in these stores, which feature a completely new look and feel, as well as expanded fresh categories and a ready-to-eat assortment, an in-store bakery and a coffee point, plus innovative retail solutions such as self-checkouts and electronic price tags. One of the main challenges for our team in 2020 will be to deliver the planned number of new store openings, all of which will use the new CVP, plus the renovation of 1,300 existing Pyaterochka stores to the updated format. Keeping capex per store at levels that will boost our ROIC is another challenge the team will have to address.

Market environment

We operate in an industry that is undergoing a significant change. Consumer behaviour is shifting towards even greater convenience, competition from online players is rising, and advanced technologies are reshaping the ways in which consumers can satisfy their demand for food.

The macro backdrop for Russia’s food retail sales in 2019 was generally positive. GDP expanded by about 1.3% p.a. in real terms. Real wage growth was firmly in positive territory each month of the year, with annual growth of 2.9%. Food inflation averaged 5.9% for H1 2019 and 4.3% for H2 2019, staying healthy overall, but normalising towards 2.6% by the year end. The consumer confidence index improved from -16% to -13% over the course of 2019, and the VAT increase from 18% to 20% did not have a significant impact on food demand. Retail sales overall grew year-on-year by 6.2% in nominal and 1.6% in real terms. Food retail sales (excluding online and ready-to-eat deliveries) increased by 6.7% year-on-year in nominal terms in 2019, which is a moderate expansion rate.

The share of the top five retailers in 2019 increased to 29%. Some retailers, including X5, continued organic expansion at a pace faster than market average, while others either slowed or opted for mergers as a way to consolidate their market share. Two large mergers took place in the sector. One of them created Russia's third-largest food retailer through the merger of Red & White, Dixy and Bristol. Another was the merger of the offline Lenta hypermarkets with the online grocery operator Utkonos, which has created a new omnichannel player. In addition, we saw active development of online and tech players in the Russian food market, including Yandex.Lavka, Samokat and others.

X5 has chosen a strategy of balanced organic growth, with a focus on efficiency, innovation and technological advancement, while keeping our customers at the centre of everything we do.

The regulatory framework in the food retail indus- try did not materially change during 2019. Going into 2020, the market expects liberalisation of certain alcohol retail regulations, which may give a boost to online sales of this product category.

Customers in focus

As the CEO, I strongly believe that the right way for X5 Retail Group to further strengthen its market leadership is through continued customer-centricity and technological advancement.

We spent considerably more time in 2019 digging deeper into our customers’ needs and their shopping missions. We strengthened our Strategy department and redefined our addressable market to the food service market from just food retail.

Customer data from our loyalty cards and our big data team and their capabilities were the main pillars of this process. By the end of 2019, we had issued over 130 million loyalty cards and had 40.6 million active loyalty card holders across our retail formats. These loyal customers con- tributed 70% of our net retail sales even though they represent only 55% of customer traffic. We already service 14–16 million customers on a daily basis in our stores but want to continue attracting new customers and increasing the base of highly valuable loyal clients through personalised offers. Our ability to do this is constantly growing thanks to the roughly 7 million data points we receive every day to use for data analytics.

In order to address more customer missions based on new technologies, we launched express delivery of ready-to-eat and groceries from our network of physical stores. Demand for express delivery of food and discretionary consumer products is growing in large cities, and we have already started to build our team and internal expertise to address this new trend.

In hypermarkets, customer trends are different. A number of Russian hypermarket operators, including Karusel, are either downsizing their operations or continue to suffer from a customer outflow to the online and proximity segments. We will offer our Karusel customers the opportunity to stock up with Perekrestok online instead of 54 Karusel stores — X5 will close 20 of these stores and transfer the remaining 34 to Perekrestok. In Q4 2019, we combined the loyalty programmes of Perekrestok and Karusel so that consumers could redeem their points in either of the two formats or online. There are an additional 37 Karusel stores that will continue operating as our branded hypermarkets, as their customer traffic and operating metrics are satisfactory.

We continued our work in 2019 to expand our fresh assortment and offer more healthy prod- ucts, with greater variety, on our shelves. This was achieved partly by introducing private-label health food brands to our assortment. Within this framework, we increased the share of private-la- bel goods to 13.9% in the proximity segment

and to 7.9% in the supermarket segment by the end of 2019.

To better adjust the assortment in stores to customer needs, our formats worked with their in-house big data colleagues on an assortment review process powered by advanced analytics. We should expect a positive impact on sales from the introduction of automated assortment reviews across our retail formats.

Margin performance

The commercial and operating departments of our retail formats delivered solid results in 2019 through more efficient procurement, and also by reducing inventory shrinkage, maintaining a stable level of promo activity and achieving greater efficiency in promo. Among these factors, reduction of shrinkage was the largest contributor to X5’s 43 b.p. gross margin expansion year-on-year in 2019. This result was possible thanks to a renewed focus on operational excellence, supply chain and in-store business processes, as well as new quality control initiatives in fresh product categories that we introduced last year. At the same time, we operate in a competitive environment against a stagnating consumer income backdrop. For these reasons and in order to support our attractive price positioning in the Pyaterochka and Perekrestok formats, manage- ment of our retail operations resolved to be more price-aggressive in H2 2019, which resulted in lower gross margin performance during this period but enabled the Company to maintain positive LFL traffic throughout the period.

In 2019, we successfully developed and introduced a new pricing system that provides centralised pricing solutions with higher-quality decision-making and greater speed based on advanced analytics. When rolled out in 1,700 Pyaterochka stores in Moscow, the use of this system yielded an improvement in commercial margin performance. The rollout of the system across all Pyaterochka stores is planned for Q1 2020.

The main source of operating leverage within our operating costs is in-store personnel. Their motivation and compensation, as well as the resulting engagement and labour productivity, were among the KPIs for the formats and for X5 Retail Group top management in 2019. I consider the results achieved in this area to be very encouraging: in the proximity format, we reduced personnel turnover by 24 percentage points during 2019; in the supermarket format, turnover was down by 14 percentage points. We continued to invest in compensation of our retail personnel, closely monitoring labour market benchmarks for the sector. We believe that fair compensation, training and motivation for our employees are crucial for our stores to generate sustainable positive LFL traffic.

In order to support and enhance the efficiency of our operations, X5 opened three distribution centres, increasing the total count to 42 as of the end of 2019. We also purchased 468 new trucks (including smaller cargo vehicles for client deliveries in our online operations and heavy trailer units for the truck fleet). We invested RUB 5.1 billion in logistics and transportation in 2019, including efficiency projects to reduce supply chain operating costs, optimise empty-run rates for our fleet and cut CO2 emissions by replacing truck engines with hybrid-gas ones. Our logistics costs as a percentage of revenue decreased by 14 b.p. year-on-year in 2019.

New regions of our operations in Russia, where our local market share is still below 10%, continued to demonstrate a positive trend in per store cash EBITDA margin and ROI evolution over 2019. This result was achieved due to our stricter requirements for new store openings, more detailed post-investment analysis of previous openings and use of big data tools for new location selection. We will continue expanding our store network at a reasonable pace in order to minimise cannibalisation, and will rely on data analytics for greater accuracy of decision-making.

Sustainable development

In 2019, the Supervisory Board approved a three-year sustainable development strategy. We worked out a detailed plan and will be setting measurable targets next year that will incorporate sustainable development principles into all business processes. When the strategy was approved in December, we had already identi- fied areas where we have systems in place to measure performance, and we identified those areas where management processes need to be introduced in order to establish targets and measure performance.

More and more of our customers want to know where our products come from and how they are produced. We are committed to offering the best-quality products for affordable prices in our stores. Addressing key environmental, social and governance issues will also be part of our core activities going forwards.

In line with our business profile, X5 has identified four key sustainable development goals (SDGs) where we can have the greatest impact:

  • zero hunger,
  • good health and well-being,
  • decent work and economic growth,
  • responsible consumption and production.

Beyond these four key objectives, X5 will also focus on seven additional SDGs that it con- tributes to indirectly: climate action, marine ecosystem preservation, terrestrial ecosystem preservation, affordable and clean energy, gender equality, reduced inequalities, and sustainable cities and communities.

I am pleased that X5 can now integrate sustain- able development into our strategic objectives. We have already embarked on a mission to reduce our environmental footprint, promote responsible consumption, support efficient resource use and protect vulnerable groups in society. Our vehicles are now greener and produce less emissions, and the energy-saving equipment in our stores is more efficient. X5 is also one of the leading Russian companies when it comes to waste recycling, having sent nearly 600 kt of cardboard, polyethylene and plastics to recycling facilities in 2019. As part of our sustainability strategy, we are also establishing targets to reduce the solid waste and food waste generated by our activities. We leverage our scale to support food aid programmes and to run our own social initiative called the Basket of Kindness. All of this is just a fraction of what we are doing in the area of sustainable development.

Strategy evolution — new initiatives

Our strategy has three main pillars: ongoing improvements to the efficiency of the existing business, digital transformation and develop- ment of new businesses based on new technol- ogies and innovation. Following the adoption of our sustainability strategy in 2020, we will also be integrating sustainability targets into our overall business strategy.

We have advanced in the main part of our current strategic plan, which is strengthening the existing business. We slowed the pace of our expansion so that we could improve the quality of new openings and investment returns. We focused on driving sales densities in our stores higher, and this will remain the priority for our offline opera- tions. We understand what our target client looks like today, but more importantly, we have a vision of how this client will look and act 10 years from now, driven by technological change. This knowledge directs us towards greater adaptation of the assortment to local needs, more automation of our business processes and increased integration of advanced analytics in our decision-making across all business processes within X5.

Within our digital transformation, we continue to develop our big data capabilities, now tested with several applications and successful pilots. Our online business will be expanding into several new regions in 2020. To further move towards satisfying demand from customers with a stock-up mission via online, we will continue to downsize our Karusel operations, aiming to capture most of the traffic from closing stores through our online business.

The 5Post fulfilment business has increased its number of strategic e-commerce partners and will be expanding its network of lockers and fulfilment points in our stores.

We set a strategic target to develop competitive advantage of a new kind that will be based on deep predictive analytics and knowledge of our client, on the one hand, and our ability to offer an attractively priced adequate selection of quality products in the most convenient manner, on the other.

Finally, I am sure that our strategic approach to sustainable development will enable us to scale up our sustainable development projects for the clear benefit of all stakeholders.

Outlook

Our outlook for the Russian consumer remains constructive, and we saw no signs of deterioration in consumer demand or consumer co fidence before the COVID-19 pandemic and oil market weakness.

In 2020, we will continue our transformation into a more client-centric and more technologically advanced retailer. This path is not without challenges, but I believe we have the team with the skills and knowledge to identify them and move ahead with innovative solutions. It will be important, as ever, not to lose focus on our profitable current operations, while constantly making decisions in order to prioritise the investments that generate the best returns, but also those that will help X5 to secure its position in the next-gen retail landscape.

We updated our strategy in 2019 to cover new client needs with express delivery and an expanded ready-to-eat assortment. We

will be offering express deliveries from our physical stores, which will be managed separately from Perekrestok Online or Pyaterochka offline operations.

We confirm our target to open up to 2,000 new stores in 2020, gross, in the proximity and supermarket formats. The number of Karusel hypermarkets will decrease in line with the 20 stores that we will close and the 34 stores that will become large Perekrestok supermarkets. In addition to network expansion, we plan 1,300 proximity store refurbishments. While this will require additional capital expenditure, returns on the first refurbished stores that we have launched are above even the returns seen in X5’s previous refurbishment cycle in 2013–2017.

We will further strengthen our digital capabilities, which should help us to support margins in the fast-changing and challenging food market in Russia, both online and offline. Big data-enabled and automated pricing, assortment and promo planning processes should support our net retail sales and the gross margin.

We have the ambition to maintain the sustainable growth of our business and to adhere to strict capital allocation discipline while making smart investments in new businesses. Our focus on efficiency of existing operations will support our annual dividend payments, which we expect to grow steadily.

Our future-ready strategy

X5’s strategy is constantly evolving, with the main objective being to operate an efficient and profitable business today while preparing for changes and opportunities that will arise in the future driven by continued market consolidation and technology‐driven changes to the food retail market landscape.

The first core principle of our strategy is to strengthen the existing business, focusing on initiatives with a horizon of one to two years, examples of which include the ongoing adaptation of our CVP, updated store concepts, further improvements in efficiency, as well as the reduction of shrinkage and staff turnover. In these areas, we continue to make good progress, as demonstrated by X5’s operating and financial performance for 2019. Customer experience and feedback remains our key source of information for continuous improvement. We maintain a constant focus on customer needs in order to meet and exceed expectations.

Our second core strategic workstream is digital transformation. Within this priority area, we are implementing and expanding our use of big data analytics, automating processes and improving the information we have available for decision‐making. Our loyalty programmes are a key element of our digital transformation, providing data that feeds our advanced analytics and giving us a channel through which we can provide our customers a more personalised experience. We seek to invest 80% of our effort into internal digital transformation projects that will improve the way we do business now, such as automated assortment planning or automated pricing. The remaining 20% will be committed to customer‐facing projects, including further development of our omnichannel service model.

The third area of our strategy is next‐gen retail. We are aware of how fast consumer trends and retail business models are changing the market, and we invest significant efforts into preparing X5 to maintain leadership into this next strategic period. We expect a dramatic increase of sales through digital channels, and we are building out our digital CVP to address all customer missions from express food delivery to regular stock‐up purchases. We also see a growing preference among our customers for ready‐to‐eat products, and we aim to achieve strong growth in this category by both improving our own production and establishing strategic partnerships. Finally, we have started our journey beyond food with 5Post, а parcel delivery service for e‐commerce. Thanks to our federal logistics and retail infrastructure, we aim to become a preferred choice in Russia for local and international marketplaces. New innovative technology solutions give us the opportunity to establish personal relationships with each customer and not only make personalised offers but also collect valuable feedback to improve and further develop our business.

Looking ahead to 2020, we plan to introduce a meaningful update to our strategy, which will further strengthen our customer‐centricity, expand current initiatives and enumerate new ones in order to address emerging customer needs to ensure X5’s sustainable leadership in food retail and beyond.

Vladimir Salakhutdinov
DIRECTOR OF STRATEGY
2029 Vision
2019
  • Today, X5’s market share is 11.5%
  • X5 is the largest food retailer in Russia.
  • X5 continues its expansion, while implementing projects to improve operational efficiency.
  • X5 strives to meet new customers’ needs by enhancing its CVP with digital services.
  • X5 is already launching new businesses (online, 5Post, ready-to-eat production).
  • Started development of long-term sustainable development initiatives.
2029
  • Market share will be c. 20%
  • LFL is significantly higher than competitors.
  • Excellence in operational KPls (shrinkage, logistics).
  • Up to 50% of revenue is generated through digital channels, including personalised promo through CVM.
  • Up to 20% of the company’s revenue is from the new businesses (online, 5Post, logistics services, food delivery and other new businesses to be launched).
  • X5 is a leader in sustainable development among Russian retailers.
A fit-to-purpose business strategy
With our strategic principles, we seek to maintaina constant focus on further improving and adapting our value proposition for customers while also increasing efficiency and preparing for the future. We set our strategic goals based on three core principles aimed at creating value for all stakeholders in our Сompany in the short, medium and long terms.
OUR STRATEGY
IS EVOLVING
1–2 YEARS
STRENGTHEN THE CURRENT BUSINESS
1–3 YEARS
CREATIVE NEW INNOVATIVE CAPABILITIES
1–5 YEARS
NEXT-GEN RETAIL
Digital transformation at every level
X5’s digital transformation is well underway, with new technologies enabling us to further improve our customers’ experience. This includes automated systems that improve operational efficiency, as well as customer‐facing innovations that improve the in‐store experience. As we search for new ideas and innovations, we are driven by the goal of improving our business in ways that create value for our customers. We expect that 80% of our digital transformation will concern X5's internal operations, while 20% will be aimed at the outside world: how we communicate with our customers, suppliers, which digital services to offer and which tools to develop for feedback.
20%
X5 external processes
80%
X5 internal processes
1
Big data
  • Automation of assortment, pricing and shop promo
  • Development of personalized promo
2
Online & marketplace
  • Perekrestok.ru
  • Express delivery from Pyaterochka
  • Click & collect
  • Growth of online sales
  • First omnichannel clients
3
Mobile
  • Development of mobile apps
4
Innovation & operating performance
  • Video analytics
  • Electronic price tags
  • Self-checkouts
  • Smart-shelves
5
Feedback
  • Development of feedback line and feedback response
6
Automation of business processes
  • at the Corporate Centre
  • in Commercial Management
  • in Finance
  • in Logistics
  • in HR
7
Efficiency
  • Back-office automation
  • Service centre automation
8
IT
  • Architecture development
  • Digital CVP
9
Logistics
  • Automation of transport
  • Automation of direct import
10
Storing
  • Automation of distribution centers
  • Video analytics for fresh goods
11
HR
  • Training a new kind of team
  • Teaching digital services to personnel
Strategic progress
In 2019, we delivered strong operational and financial results implementing these strategic business priorities:
Inaugural sustainable development strategy approved
In December 2019, X5’s Supervisory Board approved the Company’s first‐ever sustain- able development strategy. The document focuses on establishing targets for X5 Retail Group based on the UN’s 17 Sustainable Development Goals, with the aim of establishing measurable targets and integrating applicable SDGs into our overall business strategy in its next iteration.
Detailed information about our sustainability strategy is presented in the Sustainable development section
1
No
poverty
2
zero
hunger
3
good health
and well-being
4
Quality
education
5
Gender
equality
6
clean water
and sanitation
7
affordable and
clean energy
8
decent work and
economic growth
9
industry, innovation
and infrastructure
10
reduced
unequalities
11
sustainable cities
and communities
12
responcible
consumption
and production
13
climate
action
14
life
below water
15
life
on land
16
peace, justice
and strong
institutions
17
partnerships
for the goals
Primary Goals
Secondary Goals
In order to fully embrace these SDGs, we will draft new policies and develop metrics to assess our performance in each of the four areas. We expect this process to be complete by the end of 2022. At present, our overall strategic goals with regard to the SDGs are as follows:
Geography of operations
X5 today
Russia’s #1 food retailer
X5’s 16,297 stores and 42 DCs operate in 65 Russian regions. With a population of over 146 million people living in 11 time zones, Russia presents both significant opportunities and challenges. In order to ensure a reliable assortment of high‐quality goods to every single store, we maintain extensive logistics operations, including distribution centres and a fleet of modern trucks.
Online business
Perekrestok.ru currently operates four dark stores and a fleet of 283 delivery vehicles that serve customers in Moscow, the Moscow region and St Petersburg. Our e‐grocery offering provides customers in Russia’s two largest metropolitan areas with a convenient way to access a growing assortment of goods (27,000 SKUs at the end of 2019, with an 11.1% share of non‐food in 2019 online revenue) that can be delivered directly to their doors.
Omnichannel business
We are developing new business opportunities using our existing stores and logistics infrastructure by launching services like 5Post, through which third‐party e‐commerce platforms can offer their customers deliveries to convenient pickup points and parcel lockers at 9,957 X5 stores in 63 regions of Russia.
Store dynamics
As of 31 december
RUSSIAN MACROECONOMIC INDICATORS,
YEAR-ON-YEAR COMPARISON,
2019 2018 2017 2016 2015
Central 6,301 5,822 5,198 4,077 3,262
North-Western 1,836 1,668 1,416 1,095 845
Central and North-Western 8,137 7,490 6,614 5,172 4,107
Volga 4,306 3,820 3,169 2,468 1,848
Ural 1,358 1,168 999 764 551
Southern 1,501 1,222 874 606 418
Siberian 702 479 277 40
North Caucasus 293 252 188 137 96
Total 16,297 14,431 12,121 9,187 7,020
Share of net retail sales in 2019
%, BY FEDERAL DISTRICT
Central 51.1
Volga 18.8
North Western 14.5
Ural 6.4
Southern 6.0
Siberian 2.2
North-Caucasus 1.0
Multi-format presence in seven federal districts
16,297
Total stores
15,354
Pyaterochka
proximity stores
852
Perekrestok
supermarkets
91
Karusel
hypermarkets
Number of stores and DCs
1
Central FD
Pyaterochka
5,759
Perekrestok
503
Karusel
39
Distribution centers
16
Dark stores
3
Pickup stores /
Parsel lockers
6,757
2
Volga FD
Pyaterochka
4,153
Perekrestok
128
Karusel
25
Distribution centers
8
Dark stores
Pickup stores /
Parsel lockers
1,798
3
North-Western FD
Pyaterochka
1,703
Perekrestok
116
Karusel
17
Distribution centers
6
Dark stores
1
Pickup stores /
Parsel lockers
1,310
4
Ural FD
Pyaterochka
1,306
Perekrestok
48
Karusel
4
Distribution centers
6
Dark stores
Pickup stores /
Parsel lockers
898
5
Southern FD
Pyaterochka
1,447
Perekrestok
49
Karusel
5
Distribution centers
4
Dark stores
Pickup stores /
Parsel lockers
1,522
6
Siberian FD
Pyaterochka
702
Perekrestok
Karusel
Distribution centers
2
Dark stores
Pickup stores /
Parsel lockers
193
7
North Caucasus FD
Pyaterochka
284
Perekrestok
8
Karusel
1
Distribution centers
Dark stores
Pickup stores /
Parsel lockers
275
Leadership team
Our top management team is responsible for X5’s overall management and is accountable to the Supervisory Board for delivering financial and operating targets, as well as achieving the Company’s long-term strategic goals.
Igor Shekhterman
CHIEF EXECUTIVE OFFICER, CHAIRMAN AND MEMBER OF THE MANAGEMENT BOARD, CHAIRMAN AND MEMBER OF THE EXECUTIVE BOARD
Igor has served on X5’s Supervisory Board since 2013. He has been Managing Partner and CEO of RosExpert, which he co‐founded in 1996 and subsequently successfully developed into the Russian alliance partner of Korn Ferry International. Igor started his career as finance manager at the Russian branch of Beoluna, the Japanese jewellery producer. Igor holds a degree in Economics from the Kaliningrad Technical Institute (1992) and degrees in Business Administration from the Institute d’Administration des Enterprises (France, 1994) and the Danish Management School (1995).
Svetlana Demyashkevich
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE BOARD
Svetlana joined X5 in June 2017. Since 2005, she has held several senior positions at AlfaBank, including head of audit and IFRS reporting. She also created and led the financial control service, investor and rating agency relations, the business intelligence centre, and the centralised purchasing service. From 2002 to 2004, she audited financial institutions at PricewaterhouseCoopers and was the Financial Controller at UNICEF Russia. Svetlana graduated with honours from the Financial University of the Government of the Russian Federation and is an ACCA qualified accountant.
Sergei Goncharov
GENERAL DIRECTOR OF PYATEROCHKA, MEMBER OF THE EXECUTIVE BOARD
Prior to joining X5 in March 2018, Sergei had been in charge of Magnit Cosmetics stores and had managed Magnit’s pharmacy division from 2013. From 2005 to 2013, he was in charge of Sony Corporation’s development strategy in Russia and the CIS. Sergei has a proven track record in Russian and US investment companies and holds an MBA from the Wharton School of the University of Pennsylvania.
Vladislav Kurbatov
GENERAL DIRECTOR OF PEREKRESTOK, MEMBER OF THE EXECUTIVE BOARD
Vladislav joined Perekrestok in 2015 as Operations Director. Throughout the format’s transformation, he made a huge contribution to the development of Perekrestok, and in particular to the current CVP, store efficiency improvement and further development of the banner’s customer‐centric approach. Vladislav has extensive experience in retail, having led operations at O’Key for over 13 years before joining Perekrestok. Vladislav graduated from the Leningrad Higher School of Military Topography.
Vladimir Salakhutdinov
DIRECTOR OF STRATEGY, MEMBER OF THE EXECUTIVE BOARD
Vladimir joined X5 in May 2019. From 2014, he served as Deputy CEO for Finance at Russian Post and was a Supervisory Board member at Pochta Bank. In 2002– 2014, he held senior management positions at Western Union and American Express. Prior to that, he served in various positions at the Moscow Exchange for over five years. Vladimir is a graduate of the Moscow Engineering Physics Institute (MEPhI) and the Financial University under the Government of the Russian Federation. He also holds an MBA degree from the Kellogg School of Management at Northwestern University.
Anton Mironenkov
DIRECTOR OF BIG DATA, MEMBER OF THE EXECUTIVE BOARD
Anton joined X5 as Deputy Director of the M&A Department in September 2006. In March 2011, he was appointed Director for M&A and Business Development and in 2012 became the Director for Strategy and Business Development. In February 2014, he was appointed as General Director of the Express convenience store format. From 2005 to 2006, Anton managed various projects at Alfa Group, including the merger of Pyaterochka and Perekrestok. He began his business career in 2000 as an auditor at PricewaterhouseCoopers and subsequently spent four years as an investment banker at Troika Dialog before transferring to the Vice President position at Troika Dialog Asset Management in 2005. Anton graduated with honours from Moscow State University in 2000 with a degree in Economics.
Anton Valkov
CHIEF INFORMATION OFFICER, MEMBER OF THE EXECUTIVE BOARD
Anton has extensive experience supervising the launch of digital services, as well as business and change management. Before joining X5, he was involved in developing the Beru marketplace and served as Chief Operating Officer at Yandex.Market, a subsidiary of Russia’s largest internet company, Yandex. Prior to that, he held top management positions at Walmart, an American multinational retail corporation, where he was in charge of e‐commerce development strategy, big data analysis for logistics, innovation services, and implementation of the express delivery service. Anton also gained substantial management experience at McKinsey, a global consulting firm, and several startups in analytics, financial services and logistics. Anton graduated from the Faculty of Mechanics and Mathematics of Moscow State University. He holds a PhD in Applied Mathematics and an MBA from the Massachusetts Institute of Technology (the MIT Sloan School of Management).
Tatiana Krasnoperova
DIRECTOR OF HUMAN RESOURCES AND ORGANISATIONAL DEVELOPMENT, MEMBER OF THE EXECUTIVE BOARD
Tatiana joined the X5 team in February 2016 and has a proven track record in organisational development and HR management. She has over 10 years of experience in executive positions at major domestic and international companies, including EVRAZ, TNK‐BP and Integra Group. Tatiana graduated from the Izhevsk State Technical University with a degree in Economics and Business Administration and was awarded an MBA from the RUDN University.
Elena Konnova
CORPORATE COMMUNICATIONS DIRECTOR
Elena joined X5 in January 2015. She has 15 years of experience handling public relations with some of Russia’s largest companies. Before joining X5, Elena worked for Volga Group, Gazprom Neft, NIS (Naftna Industrija Srbije), and Ilim Group (a Russian pulp and paper holding). Prior to that, Elena spent more than 10 years working as a journalist for the Russian business press, including at Kommersant and Expert. Elena graduated from St Petersburg State University with a degree in Sociology and Economics. Elena’s responsibilities include overseeing X5 Retail Group’s external and internal communications activities, as well as the Company’s implementation of its sustainability strategy.
Alexander Ilyin
GOVERNMENT RELATIONS DIRECTOR
Alexander joined X5 Retail Group in April 2019. He has vast experience in working with the government, law enforcement services and NGOs. Over the last seven years, he has served as the Deputy General Director for Legal Affairs and Institutional Development at Sheremetyevo International Airport, where, in addition to cooperating with government and law enforcement officials, as well as NGOs, he provided support during audits by governmental and regulatory bodies. Alexander graduated from the Krasnoznamenny Military Institute of the USSR Ministry of Defence with a degree in military law.
Dmitry Agureev
HEAD OF CORPORATE SECURITY
Dmitry has 23 years of experience working in government and corporate security, including leading Russian and international companies. He started his career in the Intelligence Service of the Russian Federation. Prior to joining X5, he was the security director for Volvo Group Russia, Ukraine and Belarus and also held security positions at Gazprom and Transneft. Dmitry holds degrees from the Moscow Suvorov Military School, the Serpukhov Military Command‐Engineering College of Nuclear Missile Forces and the Russian Academy of Intelligence Service, as well as a Volvo MBA.
Ekaterina Lobacheva
GENERAL COUNSEL
Ekaterina joined X5 in October 2016 as the Head of the Corporate Law and X5 Corporate Structure Department. She has over 15 years of successful mana- gerial and practical experience in the field of law. Before joining X5 Retail Group, Ekaterina worked for over five years at Evraz Holding, where she implemented a number of large‐scale projects in legal support for business. During her term at Evraz Holding, she held numerous positions, including Director of Corporate and Property Relations; Vice President, Legal, Law; and Corporate Law Director. Ekaterina worked at MDM Bank as the Corporate Secretary from 2007 to 2011. She began her professional career in the legal field in 1999, working in several private and government entities before joining MDM Bank. Ekaterina graduated from the Russian Academy of State Service with a degree in Law in 2005 and received an additional degree in Finance and Credit from the Plekhanov Russian University of Economics in 2011.
Svetlana Volikova
DIRECTOR OF BUSINESS SUPPORT, MEMBER OF THE EXECUTIVE BOARD
Svetlana joined the X5 team in 2007. Today she is responsible for overseeing the business units that handle transportation and direct import, as well as the construction, leasing and development of real estate assets. Svetlana has held various positions within X5’s Corporate Centre and retail formats, including the General Director of Karusel. From 1996 to 2007, she held positions at Auchan and Danone. Svetlana graduated from the Higher Institute of Management in Paris, France. She qualified as an ACCA accountant in 2009.
Improved employment duration for management team
We have worked hard to make X5 a great place for the professional development of talented individuals. In the last two years, we have significantly improved retention rates for CEO‐1 positions from 22 months on average in 2016 to 56 months in 2019. We have promoted internal candi- dates for 71% of the CEO‐1 vacancies. At the CEO‐2 level, we have achieved similar progress, with an average tenure of 54 months in 2019, compared to 19 months in 2016, and internal promotions accounting for 67% of positions.
Average length of employment of
CEO-1
MONTHS
71%
Internal promotions for CEO-1
CEO-2
 
67%
Internal promotions for CEO-2

One of the important areas of focus for ensuring the sustainable development of X5 Retail Group is providing real and meaningful career opportunities for skilled and knowledgeable employees who share our values and who are already familiar with our strategic priorities. By building an internal talent pool we are able to further ensure the sustainability of our business.

The creation of an internal talent pool gives employees a clearer understanding of their potential development within X5 Retail Group, and encourages them to further develop their skills and remain loyal to the company. It has also proven effective as a way to manage change when there is turnover that creates new opportunities. We have been pleased with the results of our efforts to decrease turnover and ensure greater consistency in management, as illustrated by the charts above.

Personnel Development
We continue to make investments in our workforce in order to ensure that they have the skills and knowledge needed to contribute to achieving X5’s strategic goals in the short and long term. Such initiatives include tailored educational programmes that have been developed for managers of the Company in cooperation with educational institutions like the IMD and Skolkovo business schools. In addition to this, we have developed our own in‐house training programmes to enhance employee skills, such as the X5 Digital Academy.

Training and education programmes have also contributed to improving employee loyalty and decreasing turnover, with a variety of programmes aimed at helping our team to develop new skills and ensure that they are prepared for future developments.

These programmes have helped to increase interaction between different business units, especially between our two core retail formats, while also improving management and professional skills. By providing the knowledge and skills needed to achieve X5’s digital transformation, we are helping to secure our success, and to share that success with our team.

REVIEW BY FORMATS
Pyaterochka proximity stores
In line with our strategic priorities, Pyaterochka has succeeded at making further improvements in operating efficiency, with measurable progress in reducing staff turnover, decreasing shrinkage and bringing down inventory turnover days. This progress was possible thanks to the commitment and hard work of the format’s management team to Pyaterochka’s success in the years ahead.

One of our top priorities is earning our customers’ trust and doing everything we can to change the traditional attitude to food retail in Russia. Our core focus areas to achieve this are amazing convenience, providing fresh goods that our customers can trust, staying in our customers’ price comfort zone and being a source of care and inspiration for the community.

We ramped up our efforts to support the communities where we operate during 2019. In addition to recycling of packaging waste generated by our stores and food charity through the Basket of Kindness, we launched a new project with Liza Alert that provides a safe spot for lost people to seek help from our specially trained store staff.

We operate in a constantly changing market, and Pyaterochka has in place a business model that enables us to quickly identify, pilot and roll out innovations that will help to further improve our performance. Key developments on the innovations front include the introduction of self-checkout terminals, which are part of the new store concept approved in 2019, the roll-out of electronic price tags that are wirelessly updated and will eliminate the risk of price discrepancies, as well as several big data–driven projects that will support our operations and CVP.

Looking ahead to 2020, we will be launching the new store concept approved in 2019. The new concept will be used for all new Pyaterochka stores and for planned refurbishments of existing stores. The new concept features a more attractive store design for a cosy and convenient shopping experience, with a greater focus on fresh and ready-to-eat, as well as expanded availability of new in-store technologies and omnichannel services.

Pyaterochka will continue to adhere to a strategy of balanced growth, focusing on further efficiency gains, increasing sales density and LFL performance, while adapting our CVP on an ongoing basis in response to customer demand.

Sergei Goncharov
GENERAL DIRECTOR OF PYATEROCHKA
2019 performance highlights
Pyaterochka is Russia’s largest food retail banner by revenue. Our proximity store format continues to innovate as it further expands its market presence across the Russian Federation. The average Pyaterochka store has 389 square metres of selling space, with more than 4,500 SKUs on offer. In addition to an all-new store concept that was approved in 2019, the format is piloting and rolling out AI-powered video monitoring systems and big data–driven engines to automate processes like assortment, pricing and purchasing.
Stores in operation:
↑13.2% 2018/19
15,354
Proximity stores
+12.9% 2018/19
5,975 THOUSAND SQM
Selling space
 
1,832
New stores added
and 684 thousand square metres
of new selling space added
+14.1% 2018/19
1,367 BLN RUB
Net retail sales
+14.0% 2018/19
4.5 BLN RUB
Customer visits
Pyaterochka Helps loyalty programme:
›102 BLN
Cards issued
more than 31 million active users
54%
Traffic penetration
and 68% of retail sales attributable
to loyalty card holders
2019 sustainability highlights
Up to 100% of recyclable solid waste generated by stores and DCs sent for recycling.
Food that was unsold before its expiry date was sent for processing into animal feed. As part of the pilot, Pyaterochka was able to increase the volume of food sent for recycling to 2.5 kt per month, which is up to 30% of the potential waste from over 5,000 stores.
A healthy lifestyle project was launched in 2019 in order to create specific shelving units for health foods.
Pyaterochka launched the First Division programme aimed at improving managerial skills and business vision of middle management and has engaged around 700 employees.
2019 strategic highlights
Smart
expansion
Opened 1,832 net new stores in 2019, compared to 2,297 in 2018.
New CVP
development
Increasing focus on freshness and low prices, as well as earning customers’ trust through convenience and care for the community.
Loyalty
programme
Continued to expand the Pyaterochka Helps (Vyruchai-Karta) loyalty programme with 31 million active users (up 7% year-on- year) and further pilots of personalised offers based on big data analysis.
Focused
on fresh
Improved quality of fruit and vegetables supplied to Pyaterochka, established in-store quality standards, improved accuracy and frequency of orders.
Piloted big
data tools
Piloted in-house tools to automate assortment and pricing, as well as ordering of certain common groceries.
Launched new store
concept
Following pilot testing of new stores, we finalised our new store concept, with rollout started in late 2019.
Reduced
shrinkage
Ongoing measures by the management team reduced shrinkage by 62 b.p. year-on-year.
Reduced
staff turnover
Adjustments to motivation package for in-store staff and further investments in training and education helped to bring staff turnover down by 24 p.p. year-on-year to 49.5% 2019 annual average.
Optimised
organisational
structure
Created three macro-regions and decreased the number of direct reports to the General Director from 21 to 12. Three new executive directors supervise operating activities, while the General Director focuses on strategic development.
Favourable
environment
for retail employees
Based on a survey of 21,000 retail employees, we identified key areas for improving working conditions and customer service, built a new role-based model for operations management, and assigned areas of responsibility in two areas. We developed a new standard for store employees, which became part of the new concept.
Private-label
assortment rose
to 1,771 SKUs
At year-end 2019, the share of private- label products in Pyaterochka’s 2019 revenue reached 13.9% with a target of 18% by the end of 2020.
Key operating results
2019 2018 2017 2016 2015
Number of stores, eop 15,354 13,522 11,225 8,363 6,265
Selling space, '000 m² eop 5,975 5,291 4,427 3,329 2,423
Net retail sales, RUB bln 1,367 1,198 1,001 776 585
Customer visits, mln 4,460 3,913 3,267 2,543 1,990
Pyaterochka net retail sales by region, %
Strategic priorities
Operational efficiency
Operational efficiency is a constant area of focus at Pyaterochka as well as one of our key advantages for future sustainable performance. During 2019, we were successful in improving key performance indicators like staff turnover, shrinkage and inventory turnover.
Shrinkage
  • Introduced shrinkage committees in macro-regions
  • Remote fruit and vegetable acceptance launched at DCs
  • Smart reduction in assortment
Logistics
  • Continued development of multilayer logistics infrastructure
  • Focus on improving efficiency of transportation between own DCs
Lean Store
  • Audit of store processes to simplify operations
  • Decrease in inventory via audit on SKU level and audit of promo
  • Optimal staff planning
  • Efficient use of capex to open new stores
Rent
  • Further optimisation of rent costs with a focus on revenue-linked rent
Personnel turnover, %
2019
2018
Shrinkage level, % of sales
2019
2018
Inventory turnover, days
2019
2018
Smart expansion
In line with our strategy of balanced growth, the Company opened 20.2% fewer stores year-on-year in 2019. This had a positive effect on our ROIC, which is one of our key priorities as we seek to ensure the long-term sustainability of our business. The main principles that we focused on to achieve smart, balanced growth are:
Slower pace
of store openings:
while Pyaterochka continues to expand organically, we are gradually slowing down the pace of openings in order to focus on the quality and long-term sustainability of each additional store and always account for the potential self-cannibalisation effect on existing stores.
Prioritise ROIC
and profitability:
our key investment criteria for new stores are the expected return on investment and long-term contribution to X5’s profitability.
Prioritise sales
densities:
we were successful at stabilising sales densities in 2019. We aim to achieve sales density growth in the years ahead.
Focus on existing
regions:
our expansion has naturally focused on the most attractive regions for growth, and our goal is to further solidify our position in these areas instead of seeking to stretch our network into new regions.
Consolidation
of smaller players:
roughly 50% of our new openings in 2019 were Pyaterochka stores replacing smaller players. We see this consolidation as one of the key opportunities for growth in the years ahead.
New CVP with focus on trust
At Pyaterochka, our main priority is to improve our customers’ shopping experience and to restore trust by providing products of the highest quality at reasonable prices. We aim to be the most caring, smart, fresh convenience store. Using data from customer surveys, we have updated our CVP with a focus on the following areas:
Trust
Leader in convenience
Pyaterochka has always been a neighbourhood store that is conveniently located nearby for customers to get their daily shopping done. We have developed the Pyaterochka concept based on the understanding that customers come to our store expecting a quick, seamless and efficient shopping experience.
Freshness you can trust
We constantly adopt our assortment to changing customer needs and customise it based on location. We also maintain a continuous focus on improving the quality and freshness of our products. Our ambitious target is to be the best among key competitors and to be on par with local fresh markets in terms of the quality and freshness of the fruit and vegetables we sell.
Care for the community
We are a community store. Our customers expect us to act in a responsible way and to offer sustainable and traceable products. Our social and environmental initiatives include recycling waste generated by our stores, Basket of Kindness food drives and a joint project with Liza Alert to help lost or disoriented persons get help.
Low prices
Low prices remain a key part of our CVP and are especially important given the challenging macro environment in which we function. As we succeed in cutting operating costs with the help of efficiency measures and new technologies, we aim to pass these savings on to our consumers. We believe that building a reputation for quality, care and convenience, combined with low prices, is the key to success.
A convenient, fresh, caring and efficient store for everyday purchases
New concept launched
During 2019 we piloted and approved a new concept for our Pyaterochka stores that will be rolled out across the network and used for all newly opened stores. The updated CVP offers customers greater convenience, with a redesigned store that creates a more comfortable and cosy shopping environment.
Improved design, cosy and convenient store layout
Fresh arena and bakery zones generate more traffic
Self-checkout terminals, electronic price tags
and last-mile services in store
Expanded assortment of fresh and ready-to-eat
1,832
New-concept Pyaterochka stores launched in 2019
We plan to refurbish 1,300 stores in 2020
At the end of 2019, we had 32 Pyaterochka stores operating under the new concept, and we plan to open all new stores and update 1,300 of our existing stores to the new concept in 2020. The first stage of this rollout will focus on Moscow, St Petersburg and the Pyaterochka “Centre” macro-region.
New Pyaterochka
The new Pyaterochka concept features a convenient layout that will give our customers more of what they expect from a convenient local shopping experience: an expanded fresh arena with a larger assortment of fruits and vegetables, and convenient routes through the store that enable shoppers looking to grab a quick bite to eat to get what they need quickly, with a longer route for those looking to stock up with larger purchases.
1
In-store parcel lockers
In addition to day-to-day shopping, customers can collect online orders from in-store parcel lockers.
2
Reverse vending machine
Pyaterochka cares about the environment: new stores are equipped with baskets made from recycled plastic and reverse vending machines for recycling.
3
Fresh arena
We are focused on our fresh offering: the fresh category has doubled in size, and we expanded our “fresh arena” located at the front of the store.
4
Self-checkout
Customers in a hurry can now pay at convenient self-checkouts.
5
Seasonal products
We expanded the seasonal products zone, with lower prices and an attractive assortment.
6
Fresh juice and coffee
Customers can now have a fresh juice or coffee, get a snack and charge their devices in Pyaterochka stores.
7
Bakery
We now offer baked goods that are made in-store.
8
Kids' zone
We also took care of our youngest visitors by creating a special children's zone.
Loyalty programme
Loyalty card programmes play an important role in our ability to understand our customers, personalise their shopping experience and effectively adapt our CVP to their needs over the long term.

Our Pyaterochka Helps (Vyruchai-Karta) loyalty programme had 102 million issued cards and 31 million active users as of 31 December 2019. Penetration of the loyalty programme in Pyaterochka traffic was 54% during 2019, compared to 48% in 2018.

We estimate that half of Russia’s population visits Pyaterochka stores, and the number of daily visits in 2019 amounted to over 12 million people. At the same time, our customers spend only about 10% of their total food budgets at Pyaterochka stores. Currently, loyal customers account for approximately 68% of Pyaterochka sales, and our goal is to turn more guests into loyal customers while incentivising loyal customers to increase their spending with us. We think that this can be achieved by further adapting our assortment to client needs and increasing penetration of personalised promotions.

↑6.8% 2018/19
31 MILLON
Active card users
as of the end of 2019
Loyalty card penetration
Active cards, mln
Turnover penetration, %
Traffic penetration, %
Digital transformation and innovation
Part of our digital transformation involves automating business processes to improve efficiency and leveraging technology-based solutions to better understand our customers.

We piloted automated pricing in 2019, with more than 3,700 stores in the Moscow and Urals regions using a big data-powered pricing system that was developed in-house (more detail on automated pricing is available in section "Big Data"). At the pilot stores, we have seen increases in both revenue and gross margins, and we are confident that automated pricing will deliver positive results as we roll it out to the entire network.

Another area where we are successfully undergoing a digital transformation is in automation of assortment. Using tools developed in-house by X5’s big data team, we have piloted automated assortment planning across the entire proximity network for 28 pilot categories (more detail on automated assortment is available in section "Big Data"). Our aim is to roll this out in the first half of 2020 to include Pyaterochka’s remaining 52 product categories.

Other key projects in innovations that we piloted at X5 stores in 2019 included:
  • A self-service check-out developed fully in-house.
  • Electronic price tags.
  • Video monitoring of product availability on shelves.
  • Customer loyalty terminals providing personalised offers.
  • Remote fruits and vegetables quality control at stores.
  • New technological solution aimed at reducing electricity costs.
  • Smart scales that can automatically identify the products that are being weighed.
Human resources and recruitment
Staff turnover decreased by more than 24 percentage points year-on-year in 2019 as a result of improved working conditions for in-store personnel, optimisation of business processes and changes in compensation and motivation schemes for our employees. This has reflected positively on the level of service in our stores.
↑12% 2018/19
230+ THOUSAND
Employees
As of 31 December 2019

Our new-concept stores feature improved design not only for our customers, but also in employee-only zones, making the work environment more pleasant.

Pyaterochka seeks to be an attractive employer. In 2019, we adjusted remuneration programmes for in-store staff. We increased the fixed portion of salaries, giving employees a higher guaranteed monthly wage, and we simplified the bonus system to make it easier to understand and better reflect the business results of each store.

Perekrestok supermarkets
We delivered another set of strong results in 2019, with 92 new stores opened during the year and LFL traffic remaining positive for 16 consecutive quarters. Our commitment to customer-centricity continues to pay off as we increase the share of private-label assortment in sales and as Perekrestok’s ready-to-eat and ready-to-cook offerings get a boost from the launch of our Smart Kitchen.

As part of our revamped CVP, Perekrestok has piloted a new store concept. The new stores will offer expanded fresh assortment and more convenient shopping routes, as well as more in-store services like cafes, wine and craft beer bars, and other features that will attract traffic. We are also piloting a ‘large supermarket’ concept as we prepare to integrate 34 hypermarkets from Karusel following the decision to transform that format.

Innovation and digital transformation are key elements to achieving our goals: we continue to automate processes behind the scenes, including assortment planning and pricing, while also introducing customer-facing innovations like loyalty terminals, self-checkout and scan & go options in store. Our omnichannel business is also growing successfully, with Perekrestok.ru increasing its net retail sales by 234% year-on-year in 2019 and new services like click & collect and express delivery being piloted as well.

Our customers’ priorities are also our priorities. We are working to engage with our customers on issues that are important to them, like the environment and supporting people in need. In addition to ongoing measures to reduce energy consumption and waste generated by our stores, Perekrestok supermarkets have begun installing recycling machines for bottles and other plastic household packaging at stores, Perekrestok.ru has started collecting bags used during delivery for recycling, and we continue to participate in the Basket of Kindness food bank project along with Pyaterochka.

Looking ahead, we aim to begin the rollout of our new store concept in the first half of 2020 and start a network-wide refurbishment programme, while continuing to grow Perekrestok.ru, which we expect to become the #1 online food retailer by the end of 2020.

Vladislav Kurbatov
GENERAL DIRECTOR OF PEREKRESTOK
2019 performance highlights
Perekrestok is Russia’s first modern-format supermarket operator and today is Russia’s largest supermarket chain by number of stores and revenue. Perekrestok operated 852 stores as of 31 December 2019, with a focus on Russia’s most affluent regions. We have updated our CVP and are piloting new store concepts as we prepare to launch a new stage of refurbishments. Committed to innovation and next-gen retail, Perekrestok has improved efficiency and customer service with the help of new technologies and big data–driven tools. We operate the Perekrestok.ru online supermarket, which was launched just two years ago and is already Russia’s second-largest online food retailer by revenue. Perekrestok supermarkets offer an assortment of 8,000–15,000 SKUs, with an average selling space of 1,056 square metres, while Perekrestok.ru offered 27,000 SKUs as of year-end 2019.
+18.3% 2018/19
273 BLN RUB
Net retail sales
+12.1% 2018/19
852
Stores in operation
+15.1% 2018/19
900 THS SQM
Selling space
+16.7% 2018/19
589 MLN
Customer visits
 
32
Stores refurbished
 
5.0%
LFL traffic growth
the highest growth rate among X5 Retail Group formats for the third year in a row
2019 sustainability highlights
About 72% of the recyclable solid waste Perekrestok generates is recycled.
Perekrestok.ru piloted the collection of plastic delivery bags for recycling.
Rollout of an automated control and monitoring system in stores that will help cut power consumption by 10% on average.
Regular employee net promoter score (eNPS) surveys launched in 2019.
2019 strategic highlights
Fastest pace
of expansion
among all X5 formats with LFL sales and traffic growth above competitors and other X5 formats.
Second-largest player
in online food retail
by market share
with a total of 408 thousand orders fulfilled in 2019 and revenue growth of 234% year-on-year.
Positive response
from customers
reflected in NPS level increasing by 3 points year-on-year and positive LFL traffic for 16 consecutive quarters.
Developed new
CVP
and opened first stores in new concepts, including large supermarket format (based on conversion of suitable Karusel hypermarkets)
Continuous adaptation
of assortment and CVP
with a focus on quality and assortment in ready-to-eat, ready-to-cook, fresh, fruits and vegetables categories.
Focus
on efficiency
led to better performance in terms of operational expenses, shrinkage and selling, general and administrative (SG&A) expenses.
Private-label
assortment
accounted for 7.9% of revenue in 2019, up from 6.5% in 2018.
Loyalty
programme
continued to grow, with 7.1 million active cards and 59% penetration in traffic in December 2019.
Supported rational
consumption
introduced recycling points for household plastics where customers can return plastic bottles and other containers; Perekrestok.ru began offering to recycle bags used during order delivery.
Key operating results
2019 2018 2017 2016 2015
Number of stores, eop 852 760 638 539 478
Selling space, ’000 m² eop 900 782 637 549 484
Net retail sales, RUB bln 273 231 187 155 130
Customer visits, mln 589 505 407 350 304
Perekrestok net retail sales by region, %
Strategic priorities
Customer-centric approach
Perekrestok remains one of the fastest-growing supermarket chains in Russia thanks to our constant focus on adapting and expanding our assortment to offer customers highquality goods at reasonable prices.
We seek to be customer-centric in all our decisions and to provide excellent service in our stores: our success in achieving this is reflected in the 16 consecutive quarters of positive LFL traffic as of the end of 2019. With the rollout of the new Perekrestok store concept starting in 2020, we expect to see further growth as we have further adapted our offering and in-store experience to meet customer needs.
Transforming Karusel hypermarkets
into large-format supermarkets
As part of the transformation of Karusel, 34 hypermarkets will be turned into large Perekrestok supermarkets.
This means that nearly a third of the new Perekrestok openings planned for 2020 will be large supermarkets. Pilots of large-format supermarkets have shown good average check performance in the short time since they were reopened. These refurbished stores have also achieved the best NPS among local competitors. Large-format supermarkets have managed to retain the most loyal (and affluent) customers from Karusel, while also attracting new traffic. Some of the key focuses for these new stores will be to increase sales densities and efficiency.
New CVP and store concept
Perekrestok’s new CVP reflects changing trends in the food retail market, including increasing attention to healthy lifestyles, more demand for ready-to-eat and ready-to-cook food offerings and the growing importance of engaging in sustainable business practices.
Price/quality
  • Improvement of promo and targeted marketing efficiency
  • Improved quality in perishable goods and private labels
Atmosphere
  • Updated CVP and new store concepts
  • Positive NPS and eNPS dynamics
Sustainable approach
  • Implementation of social and environmental initiatives
Assortment
  • Automation of category management, pricing and improving the effectiveness of promo
  • Expansion of assortment in ready-to-eat, healthy lifestyle products and development of private-label offerings
Convenience
  • Development of ready-to-eat strategy
  • Development of digital projects
During 2019 and continuing through the beginning of 2020, we have been piloting a new concept for Perekrestok stores that will support the updated CVP. We aim to complete the pilot phase of the new store concept and begin rollout in the first half of 2020.
Deli products: The revamped deli area offers an updated assortment
Bakery: In-store bakeries mean customers will have a wider assortment of fresh bread and pastries to choose from
Cafe: In-store cafes offer customers a place to grab a quick cup of coffee or to take a break while stocking up
Fresh arena: The expanded fresh arena will help us to offer the best assortment of fresh produce available
New Perekrestok
Starting in 2018, we took a conscious decision to decelerate our expansion in order to focus on quality and sustainability, and to ensure that we achieve our target returns on investments in new stores. At the same time, our new supermarket concept reflects the fact that our customers expect greater convenience and a focus on ready-to-eat.
1
Deli meats
The expanded selection of deli meats will address a wide variety of tastes.
2
Meat and poultry
A wider variety of highquality fresh meat and poultry will help make delicious meals.
3
Fish and seafood
A special and healthy offering for customers looking to add further variety to their diets.
4
Own production
A wide range of privatelabel brands offer customers reliable quality at comfortable prices.
5
Fruits and vegetables
We aim to offer fruits and vegetables that can compete with local fresh markets.
6
Self-checkout
A fast and convenient option for customers making smaller purchase who are in a hurry.
7
Bakery
Choose from a wide variety of high-quality baked goods and pastries that have been prepared in-store.
8
Cafe
Take a break from shopping by stopping for a bite to eat or a cup of tea at the in-store cafe.
Increasing customer satisfaction
We work hard to increase customer satisfaction. We highly value feedback, and in 2019 there were 1.4 million interactions with our customers through various communication channels including our mobile app and website.
1.4 MILLON
Interactions with our customers

We work hard to increase customer satisfaction. We highly value feedback, and in 2019 there were 1.4 million interactions with our customers through various communication channels including our mobile app and website. In addition to ensuring a reliable supply of high-quality goods on our shelves, we seek to ensure that our staff who interact with customers have the right skills and motivation to perform their jobs well.

In addition to ensuring a reliable supply of high-quality goods on our shelves, we seek to ensure that our staff who interact with customers have the right skills and motivation to perform their jobs well.

This has been supported by the introduction of innovative in-store systems like AI-driven video monitoring of the fruits and vegetables section, of shelf availability and of queues. These systems automatically notify store staff when action is required. Similarly, tablets located throughout stores make it possible to ensure that store managers spend more time out in the store in order to complete checklists on store operations.

Net promoter
score (NPS)
Perekrestok has achieved positive NPS performance, primarily due to continued efforts to adapt the supermarket's CVP, through investments in prices as well as working on our staff engagement. Taking into account new needs and expectations of customers, we are constantly changing our CVP, developing “emotional” stores that meet customers' demand for frequent purchases of fresh and ready-to-eat products.
Employee net promoter
score (eNPS)
We believe that it is impossible to provide quality service to our customers without engaged personnel. In 2019, we began measuring eNPS, reflecting the loyalty of our employees. From the beginning of the year, this indicator reached 30 points, while staff turnover in 2019 decreased by 14 percentage points year-on-year to a 40% annual average, and labour productivity increased. In the years ahead, this will remain a focus area for improving customer loyalty.
Private labels
Perekrestok's private-label assortment accounted for 7.9% of revenue in 2019, up from 6.5% in 2018.
↑1.4 p.p.
Share of private-label net sales
2019 compared to 2018

Our private-label goods cover all price segments, from Prosto! at the lower end to exclusive offerings like Verkhovye dairy products and Green Line health foods, which focuses on health foods that are increasingly in demand. Our Green Line assortment was expanded into new categories, including baked goods, drinks, snacks and cured meats. Now offering 160 SKUs, we have expanded the number of stores offering Green Line products to 511.

Our Verkhovye line of dairy products also helps us to differentiate ourselves from competitors by offering an exclusive and high-quality dairy brand that has been very popular with customers. Exclusive private labels like this are an important part of our strategic partnerships with suppliers.

In response to growing demand for ready-to- eat and ready-to-cook foods, Perekrestok has adapted its assortment and expanded its capacity to produce products for these categories. One of the key initiatives was the opening of the Smart Kitchen in 2019, which will have the capacity to produce 120 tonnes of ready-to-eat food per day that will be supplied to Perekrestok supermarkets in and around Moscow.

The new Perekrestok CVP will include an expanding ready-to-eat assortment and also focus on other priority areas like health foods. At the same time, a new core concept was developed to offer convenient services to enhance the shopping experience, such as in-store cafes or coffee stations.

Ready-to-eat
120 TONNES
Of ready-to-eat food per day
For Perekrestok supermarkets
in and around Moscow

In response to growing demand for ready-to-eat and ready-to-cook foods, Perekrestok has adapted its assortment and expanded its capacity to produce products for these categories.

In 2019, we launched our Smart Kitchen, which will have the capacity to produce 120 tonnes of ready-to-eat food per day for Perekrestok supermarkets in and around Moscow. We aim to expand our own ready-to-eat assortment, while continuing to develop the offering to include in-store cafes or coffee stations.

Operational efficiency

Digitalisation continues to help us to increase convenience and efficiency for our customers, while automation of processes has improved our operating efficiency.

Perekrestok is implementing new automated processes like category management, pricing and targeted marketing, as well as piloting innovative solutions in stores such as video monitoring of shelves, electronic price tags, as well as scan & go. At present, we are piloting and considering the effectiveness of investing in these solutions. We try to approach everything carefully, while not missing new opportunities.

Lean store initiative
The lean store project consists of five main initiatives:
  1. Transition to trust acceptance of deliveries from our own DCs in order to minimise the unnecessary workload in stores, while maintaining a focus on shrinkage levels.
  2. Transition to storage of goods in roll cages and shelving from roll cages has reduced the amount of time required for employees to track inventory.
  3. Tablet-based checklists regarding the condition of store operations are located throughout the store, requiring store managers to walk around the store in order to complete the required checks.
  4. A new shelf layout that has improved the display of cheeses and sausages and increased sales from shelves.
  5. Changes at checkout desks: card scanners, stickers for problematic bar codes, improved transparency of employee motivation, improved planning of breaks and others have helped to increase checkout speed.
Digital transformation
Perekrestok’s digital transformation spans a wide range of our operations, from logistics to marketing. Increasing our use of digital technologies helps us to work better and more efficiently. Some of the highlights of this work are listed on the right:
Marketing
  • Automated targeted marketing with machine learning that is enhanced with external data
  • Digital communication for sales and promos
  • Digitised mechanism for accumulative promos
Commercial department
  • Automated commercial department processes
  • Category management based on big data analytics
  • Demand forecasting using big data analytics
  • Automated pricing
  • Dynamic pricing
In-store operations
  • Video monitoring of shelf availability
  • Video monitoring of queues
  • Electronic price tags
  • Scan & go
Personnel
  • Tracking of personnel in-store
  • Training programmes that utilise virtual reality
Network expansion
  • Machine learning introduced to GIS system
Perekrestok.ru
Perekrestok.ru is one of the core elements of our omnichannel strategy. For 2019, Perekrestok.ru reported net sales of RUB 4.3 billion, which represents year-on-year growth of 234% and makes Perekrestok.ru the second-largest e-grocery player in Russia.

↑234% 2018/19

4.3 BLN RUB
Net sales

as of the end of 2019

Key highlights of Perekrestok.ru's
2019 performance include:
  • Average ticket of RUB 3,584 is almost seven times higher than in offline Perekrestok supermarkets.
  • Average online + offline customers spend 70% more than pure offline customers in our stores.
  • Number of orders totalled 1.4 million in 2019, three times more than in 2018, with over 8,000 orders per day during peak times in December.
We plan to rapidly grow our online
business and have ambitious targets:
  • Become #1 in online food retail in Russia by the end of 2020.
  • Increase the number of dark stores from 4 to 12 by 2022.
  • Increase assortment and develop sales in external marketplaces.

Perekrestok.ru launched testing of a B2B service with cashless payment for offices, small and medium-sized businesses, restaurants, cafes, individual entrepreneurs and other corporate clients. The average ticket for this service is about 50% higher than for individuals. In 2019, all customer transactions were on a prepayment basis.

We are piloting other online, omnichannel businesses, including click & collect and express delivery. Click & collect will offer another convenient option for busy shoppers to save time and add flexibility compared with home delivery by a courier. Express delivery will enable us to establish our own position in the rapidly developing market for ready-to-eat same-day food delivery, as more and more customers want food delivered to their door without having to wait.

Net sales, RUB mln
Number of orders and average ticket
Average ticket, RUB
Number of orders, ths
Loyalty programme
Perekrestok’s loyalty programme reached 7.1 million cards issued as of the end of 2019, with 59% penetration in traffic and 72% penetration in sales in December 2019. By leveraging big data, the Perekrestok loyalty card enables us to better understand our customers, who are increasingly using the Perekrestok mobile app to manage their loyalty programme. Fifteen per cent of our loyalty card holders predominantly use it via the mobile app.

As we seek to expand user engagement, we have launched additional elements of the Perekrestok Club card, such as the “O, Vino!” wine club and quest games for members. Our mobile app, which saw significant user interface upgrades during 2019, now features stories instead of static banners.

The Perekrestok Club loyalty programme is a core element of our focus on better understanding our customers and their needs. With deep integration into the Perekrestok mobile app and in-store promo tablets, customers get attractive offers and a personalised experience.

↑29.7% 2018/19
7.1 MILLON
Active card users
as of the end of 2019
In 2020, the Perekrestok app, which is an integral part of the loyalty programme, will be significantly overhauled, as we want to create a “supermarket in your pocket” to: Collect regular feedback at all stages of interaction (products, supermarkets, support services, offers provided).
  • Offer cost–benefit analysis to users.
  • Launch automated push notifications (reminders/offers/events).
  • Make the entire assortment available via the app.
  • Collect user preferences and lifestyle characteristics.
  • Personalise offers based on user profiles.
  • Give users the ability to preselect their favourite supermarket.
  • Add click & collect and express delivery options from a favourite supermarket.
Targeted marketing
We continue to develop personalised promotions, which creates automatic offers for customers based on their preferences and buying patterns.

With the ability to create more precise and targeted offers, we are able to encourage greater customer loyalty, increase turnover from loyal customers by giving them more of what they want while retaining a higher commercial margin compared with general promo campaigns.

Personalised promos are delivered through the Perekrestok loyalty card programme and brought Perekrestok an additional RUB 6.0 billion in retail turnover during 2019. Targeted promos represented 2.7% of turnover from loyal clients for the year.

Compared to 2018, the impact of targeted marketing on turnover increased by 32%. Looking ahead to 2020, the Perekrestok format aims to further increase the share of targeted marketing in overall net retail sales. We aim to develop predictive campaigning models to increase the effectiveness of offers, and to do an even better job of tailoring offers to customers’ consumption patterns.

Karusel
hypermarkets
During 2019, X5 Retail Group management took the decision to transform the Karusel hypermarket format based on an analysis of current market and consumer trends. One of the factors behind this decision was the changing outlook for the food retail market, with little or even negative growth expected for hypermarkets. Another important factor behind this decision was growing pressure from e-commerce players that can meet customers stock-up missions and increasingly attractive offerings from competitively priced proximity stores in particular.
91
Stores in operation
›2 MLN
Active loyalty card users
364 THS SQM
Selling space
87 RUB BLN
Net retail sales
121 MLN
Customer visits
95%
Retail sales attributable to loyalty card holders
Key operating results
2019 2018 2017 2016 2015
Number of stores, eop 91 94 93 91 90
Selling space, '000 m² eop 364 382 385 387 390
Net retail sales, RUB bln 87 91 89 84 77
Customer visits, mln 121 132 135 134 129
Karusel net retail sales by region, %
Karusel transformation plan
In 2019, Karusel worked to prepare for the transformation of the format, while also continuing to develop the stores that will remain in operations as hypermarkets in the immediate future.

Throughout the transformation of Karusel, X5 will seek ways to employ the hypermarket format’s employees in our supermarkets and proximity stores, as well as in other business units.

We are conducting a variety of activities for Karusel employees, including career counselling for office and retail personnel, as well as providing assistance in finding employment outside X5.

When closing hypermarkets and when transferring facilities to Perekrestok, X5 acts in strict accordance with the requirements of Russian legislation.

Over the course of 2020–2021, the transformation
will focus on the following three changes:
34
Karusel stores

Based on pilots, 34 Karusel stores are due to become large supermarkets under the Perekrestok brand.

The conversion of all 34 stores (eight leased, 26 owned) is expected to be completed by early 2021.

As of 18 March, 2020, nine hypermarkets were already transferred to the Perekrestok and one to Perekrestok.ru to be used as a DC.

20
Karusel stores

Will be closed by 2022 (all leased).

As of 18 March, 2020, seven hypermarkets were already closed.

37
Karusel stores

(14 leased, 23 owned), while continuing to operate as Karusel hypermarkets, will be evaluated with a view to their being repurposed, sold or closed, subject to further test pilots and management analysis.

Efficiency and optimisation

As the format prepared for its transformation, the office headcount was also optimised during 2019.

Centralised commercial departments’ processes for promo, pricing and local procurement.

Karusel remains focused on continuously improving efficiency and optimising business processes. During 2019, the hypermarket format continued to benefit from synergies by sharing DC capacities and purchasing part of its assortment with Perekrestok. Additional cost savings were achieved by outsourcing operations to Pyaterochka in some regions where Karusel stores are located.

A number of business processes were automated, in line with X5’s strategic priority of digital transformation. In 2019, this included the automation of in-store task checklist management, store analytics and some procurement processes.

Loyalty programme

In line with X5’s transformation plans, the Karusel loyalty programme was combined with the Perekrestok loyalty programme in 2019.

Karusel has enjoyed a very high level of loyal customers, with loyalty card penetration in sales at 95.3% and 82.4% penetration in traffic in 2019. As of 31 December 2019, Karusel customers held 2.4 million active loyalty cards.

While the transformation is ongoing, Karusel has continued to maintain and develop the format’s mobile app. In December 2019, sales through the app represented 7.5% of the format’s total retail sales, and 11.1% of Karusel’s active customers used the app during the month.

In line with X5’s strategy of using big data analytics to increase the efficiency of promo activities, Karusel also continued to develop targeted marketing during 2019.

Adapting CVP

Karusel sought to adapt its CVP to customer needs while also leveraging best practices from other X5 formats during 2019 by introducing a selection of Perekrestok and Pyaterochka private-label brands during the year. The overall assortment was optimised, with a number of inefficient items removed from the matrix. In addition, a new pricing solution was introduced in 2019 that should help Karusel be perceived as a price leader in its segment.

FINANCIAL REVIEW
Financial
review
In 2019, X5 Retail Group delivered consistent performance and achieved the strongest operational and financial results among all listed Russian retailers, despite stagnation in Russian consumer income and continued strong competition from both traditional retailers and sector disruptors. X5 achieved 13.2% year-on-year growth in revenue to RUB 1,734 billion. This was possible thanks to continuous improvement of our customer value proposition in our stores and balanced expansion. Leveraging our leadership position to further improve commercial terms with suppliers and targeting global benchmarks of efficiency allowed X5 to sustain healthy profitability, with an adjusted EBITDA margin under IAS 17 reaching 7.3% for the full year.

The core strategic priority for 2019 has been to strengthen our existing business. Efficiency measures across our operations, including automation of processes ranging from energy usage in stores to data analytics for assortment and pricing, helped to maintain a competitive edge. As part of X5’s digital transformation, the financial function has and will continue to automate processes, test new technologies, as well as centralise and optimise routine processes, all of which will enable us to concentrate our resources on developing new digital capabilities, enhancing business partnerships and driving a culture of ownership.

During 2019, we maintained a strong balance sheet and succeeded at reducing our borrowing costs yet further: X5’s net debt/EBITDA ratio under IAS 17 at the end of 2019 was 1.71x, and the weighted average effective interest rate on our total debt under IAS 17 decreased to 7.94% for 2019, compared to 8.39% for 2018. In line with the Company’s dividend policy, the X5 Supervisory Board recommended a 2019 dividend of RUB 30.0 billion, or RUB 110.47 per GDR, which represents 115.8% of net profit under IAS 17 (153.8% under IFRS 16).

Capital expenditure is a key part of our strategic development. As we see further opportunity for organic growth in the Russian food retail, we continue to invest in the current business — 81% of 2019 capex was allocated to our existing operations. At the same time, we understand that it is critical to invest in IT and digital transformation (16% of 2019 capex), and develop new businesses (3% of 2019 capex). Going forward, the share of investment into strategic projects that focus on digital transformation and new digital businesses that will support our development as a next-gen retailer will increase. The finance function plays an important role in ensuring the right balance between speed of transformation and appropriate controls in order to safeguard the sustainability of returns for our shareholders.

The RUB 16 trillion Russian food retail market remains fundamentally attractive, especially for large players able to leverage economies of scale. With leading positions in two of the largest market segments — proximity and supermarkets — and quickly developing businesses in promising new areas like e-commerce and express delivery, X5 is well positioned to deliver profitable growth in the years ahead.

Svetlana Demyashkevich
CHIEF FINANCIAL OFFICER
Key highlights
The financial and operational information contained in this financial review comprises information about X5 Retail Group N.V. and its consolidated subsidiaries (hereinafter jointly referred to as “we”, “X5” or the “Company”).
The following is a review of our financial condition and results of operations as of 31 December 2019 and for the years ended 31 December 2019 and 31 December 2018. The consolidated financial statements and related notes thereto were prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union.
↑13.2% 2018/19
1,734 RUB MLN
Revenue
↑43 b.p. 2018/19
24.6%
Gross profit margin
(under IAS 17)
4.9% under IFRS 16
↑18 b.p. 2018/19
7.3%
Adjusted EBITDA margin
(under IAS 17)
12.4% under IFRS 16
↓3.1% 2018/19
81.1 RUB MLN
Capital expenditure
 
1.71x
Net debt / EBITDA
(under IAS 17)
3.28x under IFRS 16
↑20.0% 2018/19
30,000 RUB MLN
Dividends
RUB 110.47 per GDR
115.8% of IFRS net profit (under IAS 17)
153.8% of IFRS net profit (under IFRS 16)
Capital expenditure structure, %
81.1
BLN RUB
83.7
BLN RUB
New store openings
Maintenance
Logistics
Refurbishments
IT
Other
Results of operations
for the year ended 31 December 2019 compared to the year ended 31 December 2018
The following table and discussion provide a summary of our consolidated results of operations for the years ended 31 December 2019 and 31 December 2018.
Profit and loss statement: highlights
IFRS 16 IAS 17
Russian roubles (RUB), millions 2019 Impact on 2019 2019 2018 % change, y-o-y
Revenue 1,734,347 1,734,347 1,532,537 13.2
Incl. net retail sales 1,727,714 1,727,714 1,525,015 13.3
Pyaterochka 1,366,657 1,366,657 1,197,772 14.1
Perekrestok 273,181 273,181 230,848 18.3
Karusel 87,397 87,397 90,818 (3.8)
Gross profit 432,479 6,681 425,798 369,720 15.2
Gross profit margin, % 24.9 39 b.p. 24.6 24.1 43 b.p.
Adj. SG&A (230,008) 80,741 (310,749) (271,641) 14.4
Adj. SG&A, % of revenue 13.3 (466) b.p. 17.9 17.7 19 b.p.
Adj. EBITDA 215,720 88,340 127,380 109,871 15.9
Adj. EBITDA margin, % 12.4 509 b.p. 7.3 7.2 18 b.p.
Operating profit 89,398 29,147 60,251 58,154 3.6
Operating profit margin, % 5.2 168 b.p. 3.5 3.8 (32) b.p.
Adj. net profit 29,668 (6,817) 36,485 28,642 27.4
Adj. net profit margin, % 1.7 (39) b.p. 2.1 1.9 23 b.p.
Net profit 19,507 (6,401) 25,908 28,642 (9.5)
Net profit margin, % 1.1 (37) b.p. 1.5 1.9 (38) b.p.
Revenue and net retail sales

In 2019, X5’s revenue increased by 13.2% year-on-year to RUB 1,734 billion. Net retail sales for 2019 grew by 13.3% year-on-year, driven by a 4.0% increase in like-for-like (LFL) sales and a 9.3% sales growth contribution from a 12.0% rise in selling space.

The Company’s proximity store format, Pyaterochka, was the main driver of growth in 2019: Pyaterochka’s net retail sales rose by 14.1% year‑on‑year, driven by a 3.7% increase in LFL sales and a 10.4% contribution to sales growth from a 12.9% expansion in selling space.

The Company’s supermarket format, Perekrestok, had the highest pace of growth among the Company’s formats, thanks to continued successful measures to tailor the CVP to consumer needs: Perekrestok’s net retail sales rose by 18.3% year-on-year, driven by a 7.3% increase in LFL sales and an 11.0% contribution to sales growth from a 15.1% expansion in selling space.

Karusel experienced a 3.8% decline in net retail sales, driven by changing consumer behaviour towards making large purchases online and in proximity formats, as well as the beginning of the Karusel transformation, which envisages gradual closure of 20 and transfer of 34 stores to the Perekrestok format.

Gross profit

The Company’s gross profit margin under IAS 17 in 2019 increased by 43 basis points year-on-year to 24.6%, supported by a healthy level of food inflation (averaged 5.1% for the year), improvements in commercial terms with suppliers, successful measures to decrease shrinkage levels and better logistics efficiency. The format mix with proportionally more sales at Perekrestok, which has a higher commercial margin than the X5 average, was also a positive factor for gross margin performance.

Operational results analysis
Summary of operational result
2019 net retail sales results, % change y-o-y Average
ticket
Number of
customers
Net retail
sales
Pyaterochka 0.9 14.0 14.1
Perekrestok 2.2 16.7 18.3
Karusel 5.6 (8.0) (3.8)
X5 Retail Group 1.0 13.1 13.3
Selling space end-of-period, square metres 31-Dec-19 31-Dec-18 % change, y-o-y
Pyaterochka 5,975,147 5,291,421 12.9
Perekrestok 899,893 781,538 15.1
Karusel 364,077 382,024 (4.7)
X5 Retail Group 7,239,117 6,463,735 12.0
2019 LFL results   , % growth y-o-y Sales Traffic Basket
Pyaterochka 3.7 1.9 1.8
Perekrestok 7.3 5.0 2.3
Karusel (0.3) (4.5) 4.5
X5 Retail Group 4.0 2.0 1.9

The Company demonstrated positive LFL traffic for both core formats, Pyaterochka and Perekrestok, reaching 2.0% at the Group level in 2019.

Total net retail sales increased by 13.3% year-on-year (14.2% year-on-year, including VAT) in roubles (RUB), driven by:

  • a 4.0% increase in LFL sales; and
  • a 9.3% sales growth contribution from a 12.0% rise in selling space.

Karusel experienced a decline in net retail sales following a 4.7% reduction in selling space as part of the Karusel transformation initiative.

Selling, general and administrative (SG&A) expenses analysis
Adjusted selling, general and administrative (SG&A) expenses
IFRS 16 IAS 17
RUB mln 2019 Impact
on 2019
2019 2018 % change,
y-o-y
Staff costs (141,123) (141,123) (119,883) 17.7
% of revenue 8.1 8.1 7.8 31 b.p.
Incl. LTI and share-based payments (2,838) (2,838) (2,243) 26.5
Staff costs excl. LTI % of revenue 8.0 8.0 7.7 30 b.p.
Lease expenses (7,949) 78,101 (86,050) (75,392) 14.1
% of revenue 0.5 (450) b.p. 5.0 4.9 4 b.p.
Utilities (36,387) (36,387) (31,942) 13.9
% of revenue 2.1 2.1 2.1 1 b.p.
Other store costs (17,932) 927 (18,859) (17,208) 9.6
% of revenue 1.0 (5) b.p. 1.1 1.1 (4) b.p.
Third-party services (13,123) (350) (12,773) (12,463) 2.5
% of revenue 0.8 2 b.p. 0.7 0.8 (8) b.p.
Other expenses (16,332) 2,063 (18,395) (16,996) 8.2
% of revenue 0.9 (12) b.p. 1.1 1.1 (5) b.p.
SG&A (excl. D&A&I and the impact
of the Karusel transformation)
(232,846) 80,741 (313,587) (273,884) 14.5
% of revenue 13.4 (466) b.p. 18.1 17.9 21 b.p.
Adj. SG&A (excl. D&A&I, LTI, share-
based payments and the impact
of the Karusel transformation)
(230,008) 80,741 (310,749) (271,641) 14.4
% of revenue 13.3 (466) b.p. 17.9 17.7 19 b.p.

In 2019, adjusted SG&A expenses under IAS 17 as a percentage of revenue increased year-on-year by 19 basis points to 17.9%, mainly due to increased staff costs and lease expenses.

Staff costs (excluding LTI, share-based payments and impact from the Karusel transformation) in 2019, as a percentage of revenue, increased year-on-year by 30 basis points to 8.0% due to the Company’s decision to increase compensation for in-store personnel in line with market benchmarks in 2019.

Lease expenses under IAS 17 as a percentage of revenue in 2019 increased year-on-year by 4 basis points to 5.0%, mainly due to the growing share of leased space in X5’s total real estate portfolio, which accounted for 78% as of 31 December 2019, compared to 76% as of 31 December 2018.

Utilities expenses under IAS 17 as a percentage of revenue changed immaterially in 2019 compared to 2018, totalling 2.1%.

In 2019, other store costs under IAS 17 as a percentage of revenue declined year-on-year by 4 basis points to 1.1%, driven by lower materials and maintenance expenses.

In 2019, third-party services under IAS 17 as a percentage of revenue declined year-on-year by 8 basis points to 0.7%, driven by lower marketing and consulting expenses.

Other expenses (excluding the impact of the Karusel transformation) under IAS 17 as a percentage of revenue declined year-on-year by 5 basis points, totalling 1.1%.

Long-term incentive (LTI) programme

Accruals have been made in the consolidated financial statements for the year ended 31 December 2019 related to the old LTI programme in the amount of RUB 327 million, which focused on achieving leadership in revenue terms, and the new LTI programme aimed at maintaining leadership in revenue terms and achieving leadership in terms of enterprise value multiple relative to peers. In total, RUB 2,771 million was accrued in 2019 for both LTI programmes.

The new LTI programme is a cash incentive programme over a three-year period until 31 December 2020, with an extension component of deferred and conditional payouts in order to maintain the focus on long-term goals and to provide for an effective retention mechanism. In comparison to the old LTI programme, it is designed for a wider group of participants within the Company and aims to create a greater balance between short- and long-term compensation for the programme participants.

Targets under the new LTI programme are structured to align the long-term interests of shareholders and management, with a focus on maintaining leadership in terms of revenue and, as an additional long-term objective, leadership in terms of enterprise value multiple relative to peers. Additionally, the LTI programme includes triggers relating to the EBITDA margin to ensure that profitability is not sacrificed and the net debt/EBITDA ratio to retain focus on prudent financial and balance sheet management.

As described in the Remuneration Report, the targets under the second stage of the old LTI programme were achieved in 2017. Therefore, an accrual of RUB 327 million has been made in the consolidated financial statements for the year ended 31 December 2019 related to the old LTI programme.

The Company also accrued a liability of RUB 2,444 million for the probable achievement of the targets to maintain revenue leadership and achieving leadership in terms of enterprise value multiple relative to peers from the new LTI programme. From the start of the new programme through Q4 2019, accruals were made only related to the goal of maintaining leadership in revenue. Starting from Q4 2019, the accrual also includes the goal related to the achievement of leadership in terms of enterprise value multiple. All LTI accruals and attributable social taxes since the beginning of the old programme are summarised in the table below.

LTI programme expense (including social security contributions (SSC))
RUB mln 2019 2018 2017 2016 2015
Old programme 327 1,552 2,876 3,053 3,607
New programme 2,444 619
Total lti 2,771 2,171 2,876 3,053 3,607
EBITDA and adjusted EBITDA analysis
IFRS 16 IAS 17
RUB mln 2019 Impact
on 2019
2019 2018 % change,
y-o-y
Gross profit 432,479 6,681 425,798 369,720 15.2
Gross profit margin, % 24.9 39 b.p. 24.6 24.1 43 b.p.
Adj. SG&A (excl. D&A&I, LTI, share-
based payments and the impact
of the Karusel transformation)
(230,008) 80,741 (310,749) (271,641) 14.4
% of revenue 13.3 (466) b.p. 17.9 17.7 19 b.p.
Net impairment losses on financial assets (215) (215) (501) (57.1)
% of revenue 0.0 0.0 0.0 (2) b.p.
Lease/sublease and other income
(adjusted for the effect of the
Karusel transformation)
13,464 918 12,546 12,293 2.1
% of revenue 0.8 5 b.p. 0.7 0.8 (8) b.p.
Adj. EBITDA 215,720 88,340 127,380 109,871 15.9
Adj. EBITDA margin, % 12.4 509 b.p. 7.3 7.2 18 b.p.
LTI, share-based payments and
other one-off remuneration
payments expense and SSC
(2,838) (2,838) (2,243) 26.5
% of revenue (0.2) (0.2) (0.1) (2) b.p.
Effect of the Karusel transformation (1,399) 558 (1,957) n/m
% of revenue (0,1) 3 b.p. (0.1) n/m
EBITDA 211,483 88,898 122,585 107,628 13.9
EBITDA margin, % 12.2 513 b.p. 7.1 7.0 5 b.p.
Lease/sublease and other income

As a percentage of revenue, the Company’s income from lease, sublease and other operations under IAS 17 decreased by 8 b.p. year-on-year, totalling 0.7%.

EBITDA analysis

As a result of the factors discussed above, X5’s adjusted EBITDA under IAS 17 in 2019 grew year-on-year by 15.9% and totalled RUB 127,380 million, while the adjusted EBITDA margin under IAS 17 increased by 18 b.p. year-on-year to 7.3%. EBITDA under IAS 17 in 2019 grew year-on-year by 13.9% and totalled RUB 122,585 million, while EBITDA margin under IAS 17 increased by 5 b.p. year-on-year to 7.1%

Analysis by segments

Upon adoption of IFRS 16, the Management Board continued assessment of the performance of the operating segments based on a measure of sales and adjusted EBITDA under IAS 17.

The accounting policies used for segments are the same as accounting policies applied for the consolidated financial statements, except for the accounting of leases under IAS 17 instead of IFRS 16.

Pyaterochka

Pyaterochka’s EBITDA margin under IAS 17 increased by 13 b.p. year-on-year to 7.9% due to lower shrinkage levels and better logistics efficiency.

RUB mln 2019 2018 % change, y-o-y
Revenue 1,370,414 1,200,457 14.2
EBITDA (under IAS 17) 107,907 92,910 16.1
EBITDA margin (under IAS 17), % 7.9 7.7 13 b.p.
Perekrestok

Perekrestok’s EBITDA margin, adjusted for the online business, improved in 2019. Due to ongoing development and scaling up, Perekrestok.ru’s EBITDA margin was negative, as forecast.

RUB mln 2019 2018 % change, y-o-y
Revenue 274,761 232,490 18.2
EBITDA (under IAS 17) 17,981 15,550 15.6
EBITDA margin (under IAS 17), % 6.5 6.7 (14) b.p.
Karusel

Karusel’s EBITDA margin under IAS 17 declined by 230 b.p. year-on-year to 2.5% on the back of the format's transformation.

RUB mln 2019 2018 % change, y-o-y
Revenue 88,459 92,458 (4.3)
EBITDA (under IAS 17) 2,198 4,423 (50.3)
EBITDA margin (under IAS 17), % 2.5 4.8 (230) b.p.
Other segments

Other segments include Perekrestok Express. In 2017, X5 made the strategic decision to sell this format. In Q1 2019, the Company closed all remaining stores.

RUB mln 2019 2018 % change, y-o-y
Revenue 713 7,132 (90.0)
EBITDA (under IAS 17) 14 (235) n/m
EBITDA margin (under IAS 17), % 2.0 (3.3) 526 b.p.
Corporate Centre

Corporate expenses rose by 9.9% year-on-year in 2019, mainly due to the expansion of X5’s in-house Big Data Department and the creation of other departments related to X5’s digital transformation.

RUB mln 2019 2018 % change, y-o-y
EBITDA (under IAS 17) (5,515) (5,020) 9.9
Depreciation, amortisation and impairment costs

Depreciation, amortisation and impairment costs under IAS 17 in 2019 totalled RUB 62,334 million (RUB 49,474 million for 2018), increasing as a percentage of revenue by 37 b.p. year-on-year to 3.6%. This was due to impairment of non-current assets related to the Karusel transformation.

Non-operating gains and losses analysis
Non-operating gains and losses
IFRS 16 IAS 17
RUB mln 2019 Impact
on 2019
2019 2018 % change,
y-o-y
Operating profit 89,398 29,147 60,251 58,154 3.6
Operating profit margin, % 5.2 168 b.p. 3.5 3.8 (32) b.p.
Net finance costs (56,903) (38,823) (18,080) (18,667) (3.1)
Net FX result 2,203 1,671 532 (447) 1,298.1
Profit before tax 34,698 (8,005) 42,703 39,040 9.4
Income tax expense (15,191) 1,604 (16,795) (10,398) 61.5
Net profit 19,507 (6,401) 25,908 28,642 (9.5)
Net profit margin, % 1.1 (37) b.p. 1.5 1.9 (38) b.p.
Effect of the Karusel transformation
and tax accruals related to previous
periods, including X5's reorganisation
10,161 (416) 10,577
% of revenue 0.6 (2) b.p. 0.6 61 b.p.
Adj. net profit 29,668 (6,817) 36,485 28,642 27.4
Adj. net profit margin, % 1.7 (39) b.p. 2.1 1.9 23 b.p.

Net finance costs under IAS 17 in 2019 amounted to RUB 18,080 million, a 3.1% decrease from 2018 driven by the decreased weighted average effective interest rate on X5’s total debt under IAS 17 from 8.39% for 2018 to 7.94% for 2019 as a result of declining interest rates in Russian capital markets, the solid credit quality of X5 Retail Group and actions taken to minimise interest expenses.

In 2019, income tax expense and net profit under IAS 17 were mainly affected by the effect of other non-deductible expenses, tax accruals related to previous periods, including X5's reorganisation, as well as by the effect of the Karusel transformation. In 2019, income tax without other non-deductible expenses under IAS 17 grew by 10.2% y-o-y to RUB 10,969 mln.

Net profit in 2019 under IAS 17 included one-off adjustments of RUB 10,577 million related to the Karusel transformation (mainly due to impairment of non-current assets) and tax accruals related to previous periods, including X5's reorganisation.

Сash flow analysis
Consolidated cash flow
IFRS 16 IAS 17
RUB mln 2019 Impact
on 2019
2019 2018 % change,
y-o-y
Net cash from operating activities
before changes in working capital
211,650 87,424 124,226 107,827 15.2
Change in working capital (10,649) 1,375 (12,024) 19,609 n/m
Net interest and income tax paid (70,538) (38,739) (31,799) (29,402) 8.2
Net cash flows generated
from operating activities
130,463 50,060 80,403 98,034 (18.0)
Net cash used in investment activities (81,151) (1) (81,150) (92,760) (12.5)
Net cash used in financing activities (55,139) (50,059) (5,080) (8,436) (39.8)
Effect of exchange rate changes
on cash and cash equivalents
61 61 (75) n/m
Net decrease/(increase) in
cash and cash equivalents
(5,766) (5,766) (3,237) 78.1

In 2019, the Company’s net cash from operating activities before changes in working capital under IAS 17 increased by RUB 16,399 million, or 15.2%, year-on-year, totalling RUB 124,226 million and reflecting the overall growth of the business. The negative change in working capital was primarily due to calendarisation of payable days at year-end, growth of inventory in line with the business expansion, which was partially offset by an improvement of 0.9 days in inventory turnover.

Net interest and income tax paid under IAS 17 in 2019 increased year-on-year by RUB 2,397 million, or 8.2%, totalling RUB 31,799 million driven mostly by tax payments related to historical periods. The effect from increased gross debt under IAS 17 as of 31 December 2019 compared to 31 December 2018 was partially offset by the lower weighted average effective interest rate on X5’s debt for 2019.

As a result, in 2019 net cash flows generated from operating activities under IAS 17 totalled RUB 80,403 million, compared to RUB 98,034 million for the same period in 2018.

Net cash used in investing activities under IAS 17, which generally consists of payments for property, plants and equipment, totalled RUB 81,150 million in 2019, compared to RUB 92,760 million in 2018, reflecting the slower pace of new openings.

Net cash used in financing activities totalled RUB 5,080 million in 2019, compared to RUB 8,436 million in 2018.

Liquidity analysis
Liquidity update
RUB mln 31-Dec-19 % in total 31-Dec-18 % in total 31-Dec-17 % in total
Total debt 227,933 207,764 194,296
Short-term borrowings 74,755 32.8 60,435 29.1 58,674 30.2
Long-term borrowings 153,178 67.2 147,329 70.9 135,622 69.8
Net debt 209,331 183,396 166,691
Net debt/EBITDA 1.71x 1.70x 1.73x
Lease liabilities (IFRS 16) 484,795

As of 31 December 2019, the Company’s total debt under IAS 17 amounted to RUB 227,933 million, 32.8% of which was short-term debt and 67.2% was long-term debt. The Company’s debt under IAS 17 is 100% denominated in Russian roubles. As of 31 December 2019, the majority of X5’s debt had fixed interest rates. The net debt/EBITDA ratio under IAS 17 was 1.71× (3.28x under IFRS 16) as of 31 December 2019.

As of 31 December 2019, the Company had access to RUB 415,592 million in available credit limits with major Russian and international banks.

Dividends

The dividend policy was approved by the X5 Supervisory Board in September 2017. When considering a dividend recommendation to the General Meeting of Shareholders, the Supervisory Board is guided by a target consolidated net debt/EBITDA ratio of below 2.0x under IAS 17, in line with the Company’s financing strategy.

Based on the Company’s 2019 financial results, the Company’s Supervisory Board has made a recommendation to pay dividends for 2019 in the amount of RUB 30,000 million/RUB 110.47 per GDR (RUB 25,000 mln/RUB 92.06 per GDR in 2018), which represents 115.8% of X5 Retail Group’s 2019 net profit under IAS 17 (153.8% under IFRS 16) compared to 87.3% in 2018. This proposal will be considered by the AGM, which will be held on 12 May 2020.

Effect of IFRS 16 on X5 Retail Group’s financial statements
Effect on gross profit

Gross profit and gross margin are higher by RUB 6,681 million and 39 b.p., respectively, under IFRS 16 compared to IAS 17 in 2019 due to the lease for distribution centres, which was previously part of cost of sales, but has been excluded from the gross profit calculation in order to align the presentation of depreciation of ­right-of-use assets and other assets.

Effect on EBITDA, operating profit and finance costs

Lease expenses, other store costs, third-party services and other expenses in the total amount of RUB 80,741 million were excluded from SGA expenses in 2019 under the new standard. Additional depreciation of RUB 59,751 million related to leased assets was added to SGA costs in 2019 under IFRS 16.

Financial costs increased by RUB 38,823 million under the new standard compared to IAS 17 due to the interest expense on lease liabilities in 2019.

The implementation of IFRS 16 increases the Company’s EBITDA significantly, as lease expenditure previously recognised in the income statement is excluded. Adjusted EBITDA margin is 509 b.p. higher under the new standard compared to IAS 17 in 2019. Interest expense on liabilities is recognised in finance costs, below the EBITDA level.

Effect on net profit

The positive net FX result is RUB 1,671 million higher under IFRS 16 compared to IAS 17 in 2019 due to revaluation of foreign currency liabilities resulting from lease contracts denominated in foreign currencies.

IFRS 16 resulted in lower income tax expense due to lower profit before tax. The effective tax rate under the new standard was 43.8% in 2019.

Net profit and net profit margin are impacted by the IFRS 16 standard as a result of additional depreciation and interest, and are lower by RUB 6,401 million and 37 b.p. under the new standard compared to IAS 17 in 2019.

Effect on cash flow statement

The implementation of the new standard affects cash flow statement presentation but not the net change in cash result, as principal payments on leases will be classified as financing activities, prepayments are classified as investing activities, and interest payments are considered interest paid in operating activities.

Information on alter­native performance measures
In this report and other public disclosures, X5 Retail Group presents certain alternative performance measures (APMs) that it believes provide readers with a more detailed and accurate understanding of the Company’s financial and operating performance. In accordance with European Securities Markets Authority guidelines, a list of definitions, explanations of the relevance of APMs, comparatives and reconciliations are provided below.
EBITDA (including EBITDA margin)

Earnings before interest, tax, depreciation and amortisation (EBITDA) is a measure of the Company’s operating performance. It is a way to evaluate X5 Retail Group’s performance exclusive of financing, accounting and taxation factors. X5 believes that showing EBITDA and EBITDA margin performance provides greater detail about the Company’s performance.

EBITDA (including EBITDA margin)

IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Operating profit 89,398 29,147 60,251 58,154
Depreciation, amortisation and impairment 122,085 59,751 62,334 49,474
EBITDA 211,483 88,898 122,585 107,628
IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Revenue 1,734,347 1,734,347 1,532,537
EBITDA 211,483 88,898 122,585 107,628
EBITDA margin, % 12.2 513 b.p. 7.1 7.0
Adjusted EBITDA (including adjusted EBITDA margin)

Adjusted earnings before interest, tax, depreciation and amortisation (adjusted EBITDA) is a measure of the Company’s operating performance. It is a way to evaluate a company’s performance exclusive of financing, accounting and taxation factors, and also excluding the effects of the LTI programme and the effect of the Karusel transformation, which do not represent ongoing costs of doing business. X5 believes that showing adjusted EBITDA and adjusted EBITDA margin performance provides a more accurate reflection of the Company’s ongoing performance.

IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
EBITDA 211,483 88,898 122,585 107,628
Adjustments:
LTI, share-based payments
and other one-off
remuneration payments
expense and SSC
2,838 2,838 2,243
Effect of the Karusel
transformation
1,399 (558) 1,957
Adj. EBITDA 215,720 88,340 127,380 109,871
IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Revenue 1,734,347 1,734,347 1,532,537
Adj. EBITDA 215,720 88,340 127,380 109,871
Adj. EBITDA margin, % 12.4 509 b.p. 7.3 7.2
Adjusted net profit (including adjusted net profit margin)

Adjusted net profit is a measure of the Company’s profitability. It is a way to evaluate a company’s performance exclusive of one-off factors, including the effect of the Karusel transformation and tax accruals related to previous periods, including X5's reorganisation, which do not represent ongoing costs of doing business. X5 believes that showing adjusted net profit and adjusted net profit margin performance provides a more accurate reflection of the Company’s ongoing performance.

IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Net profit 19,507 (6,401) 25,908 28,642
Adjustments:
Effect of the Karusel
transformation and
tax accruals related to
previous periods, including
X5's reorganisation
10,161 (416) 10,577
Adj. net profit 29,668 (6,817) 36,485 28,642
IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Revenue 1,734,347 1,734,347 1,532,537
Adj. net profit 29,668 (6,817) 36,485 28,642
Adj. net profit margin, % 1.7 (39) b.p. 2.1 1.9
Adjusted SG&A (including adjusted SG&A as % of revenue)

Selling, general and administrative expenses (SG&A) are reported on the income statement as the sum of all direct and indirect selling expenses and all general and administrative expenses of the Company. X5 Retail Group reports adjusted SG&A, which excludes the effects of the LTI programme, the effect of the Karusel transformation as well as depreciation, amortisation and impairment. The Company believes that adjusted SG&A provides additional detail regarding the long-term SG&A costs of the business.

IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
SG&A 356 890 (20,988) 377,878 323,358
Adjustments:
LTI, share-based payments
and other one-off
remuneration payments
expense and SSC
(2,838) (2,838) (2,243)
Effect of the Karusel
transformation
(1,959) (2) (1,957)
Depreciation, amortisation
and impairment
(122,085) (59,751) (62,334) (49,475)
Adjusted SG&A 230,008 (80,741) 310,749 271,641
IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Revenue 1,734,347 1,734,347 1,532,537
Adjusted SG&A 230,008 (80,741) 310,749 271,641
Adjusted SG&A expenses as % of revenue 13.3 (466) b.p. 17.9 17.7
Net debt / EBITDA

The net borrowings to earnings before interest depreciation and amortisation (EBITDA) ratio is a measurement of leverage. It is calculated as the Company’s long-term and short-term borrowings, minus cash and cash equivalents, divided by EBITDA. The net debt to EBITDA ratio is a commonly used indicator that provides additional clarification regarding the Company’s debt burden.

IFRS 16 IAS 17
RUB MLN 2019 IMPACT ON 2019 2019 2018
Total debt, incl.: 227,933 227,933 207,764
Short-term borrowings 74,755 74,755 60,435
Long-term borrowings 153,178 153,178 147,329
Lease liabilities 484,795 484,795
Cash and cash equivalents 18,602 18,602 24,368
Net debt 694,126 484,795 209,331 183,396
EBITDA 211,483 88,898 122,585 107,629
Net debt/EBITDA 3.28x 1.57x 1.71x 1.70x
Net retail sales

Net retail sales shows the amount of sales generated by the Company after the deduction of revenue from franchise services, wholesale operations and other services. Because food retail is X5 Retail Group’s core business, net retail sales is provided to give a clearer picture of the performance of the Company’s core business activity.

RUB mln 2019 2018
Revenue 1,734,347 1,532,537
Adjustments:
Revenue from wholesale operations and other services (6,630) (7,480)
Revenue from franchise services (3) (42)
Net retail sales 1,727,714 1,525,015
Like-for-like (LFL)

LFL comparisons of retail sales between two periods are comparisons of retail sales in the local currency (including VAT) generated by relevant stores. The stores that are included in LFL comparisons are those that have operated for at least 12 full months. Their sales are included in the LFL calculation starting from the day of the store’s opening. We include all stores that fit our LFL criteria in each reporting period. This is a commonly used indicator in the retail industry that helps illustrate the sustainability of a company’s growth by focusing on the performance of stores that have already been operating for more than 12 months by removing the effect of new stores opened during the period.

% 2019 2018
Net retail sales growth 13.3 18.5
Less contribution from an increase in selling space 9.3 17.0
LFL 4.0 1.5
Retail infrastruc­ture
The retail infrastructure that supports our operations plays an essential role in achieving our strategic goals. We seek to ensure that our logistics, transport and IT systems properly serve our business needs today and are ready to support X5’s development as it grows and adapts to a changing market.
Our retail infrastructure also plays an important role in our sustainability strategy, as we seek to contribute to rational consumption of resources by reducing the environmental impact of our operations, support health and well-being by ensuring the quality and freshness of the food we sell and provide a safe and fair workplace for employees of our retail infrastructure operations.
Logistics
Our logistics infrastructure spans from direct import hubs to distribution centres, satellite DCs and crossdocking stations. With our comprehensive transport management and automated warehouse management systems, we are able to ensure smooth operations and reliable supplies from international, federal and regional suppliers to customers of Pyaterochka, Perekrestok and Perekrestok.ru.

We operated 42 DCs with a total floor space of 1,202 thousand square metres as of 31 December 2019, and we have maintained excess capacity to support the ongoing growth of our store network.

In line with our focus on efficiency and quality of service, X5 Retail Group’s company-wide service level target (SLT) level (order processing based on timely deliveries) was 90%, and centralisation was at 95% in 2019.

How we manage logistics
Logistics are managed from the Business Support unit in the X5 Corporate Centre. The role of centralised management is to set standards and monitor the performance of our DC operations. This also supports the sharing of best practices and technologies between formats, as well as the centralised analysis and planning for logistics infrastructure expansion. X5 Retail Group DCs all utilise an automated warehouse management system (WMS) that includes features like voice picking and weighing technology.
General approach to Logistics and Transportation Strategy development
CVP
ELEMENTS RELATED
TO THE SUPPLY CHAIN
Demand forecast
2019–2025
Logistics and Transportation Strategy
Network
optimisation
Transport
Strategy
KPIs
(standar­disation)
End-to-End Logistics and Transportation Strategy
  • Analysis of current situation
  • Future requirements
  • Gaps in competencies
  • Roadmaps
Logistics and Transportation Strategy
X5 Retail Group has adopted a Logistics and Transportation Strategy to 2025 that focuses on efficiency, delivery times and ensuring the availability of a wide assortment of goods on our stores’ shelves. This strategy aims to:
  • Support the CVP of each of our formats.
  • Respond to forecast demand through 2025 for each specific location.
  • Enable the formats to achieve their targets in terms of market share, growth and efficiency of logistics.
  • Allow formats to manage their own supply chain operations while in parallel seeking and implementing opportunities to achieve synergies.
Pyaterochka
Pyaterochka’s logistics operations supported the activities of 15,354 stores in 65 Russian regions as of 31 December 2019 via 31 DCs, enabling the format to ensure the reliable supply of goods for our customers. While expanding DC space by 66 thousand square metres year-on-year in 2019, we also focused on efficiency and automation in our Pyaterochka logistics operations.
2019
highlights
  • Processed 3.5 million boxes for X5’s large formats, an increase of 66% year-on-year.
  • Launched 5Post operations, with 5.3 million packages processed during the year.
  • Piloted in-house packaging of fruits and vegetables.
  • Rostov DC reached productivity level of 10.7 boxes per square metre, up by 5.7% from the previous record.
  • Improved operational efficiency, with cost per box declining by 2% year-on- year and an OWR of 111 boxes per hour achieved at the Vidnoe DC.
Digital
transformation
  • Our DCs continued to undergo a digital transformation in 2019, with a new Manhattan WMS launched at the Saratov DC.
  • The Manhattan WMS is currently being adapted to meet specific Russian regulations (EGAIS, Mercury, brand-based record-keeping).
  • Adapting our DC management system to work with self-driving carts.
  • Developed a mobile application for warehouse management, with three modules launched and convenient dashboards that greatly increase the speed of working with personnel changes.
Personnel
development
  • We have developed a training programme for the DC management system that takes into account quality, food safety and good manufacturing practices as required by the British Retail Consortium Global Standard Storage & Distribution.
  • In 2019, 2,200 warehouse staff were trained through workshops and online modules. External auditors have verified that this programme meets BRC requirements.
Improving
processes
  • We are constantly working on ways to automate and improve the efficiency of our transport operations.
  • In 2019, a full 73% of route planning was automated, up from 50% in 2018. This helped to increase the vehicle activity rate from 73% in 2018 to 77% in 2019.
  • The introduction of “contactless” night-time acceptance of goods at 900 stores, which saved RUB 182 million.
  • A new model for managing tariffs for Pyaterochka’s own fleet resulted in RUB 188 million in savings.
Plans for 2020
and beyond
  • Full-scale rollout of Manhattan to Pyaterochka DCs is planned for Q2 2020.
  • Introduction of self-driving carts at our large regional DCs in the second half of 2020.
  • Development of an automated tool for calculating the standard fruit and vegetable inventory at DCs that takes into account shelf life, supplier discipline, and forecasting accuracy.
  • Development of an automated tool for calculating fruit and vegetable orders that reduces the impact of the human element during the collection of data and involves a streamlined calculation logic for all regions.
  • Together with the Corporate Centre team, pilots are being launched to automate the placement of orders with suppliers in order to restock DCs.
Perekrestok and Karusel
Perekrestok and Karusel operated 11 DCs at the end of 2019, supporting the operations of 852 supermarkets and 91 hypermarkets in 45 regions. With a focus on the reliable and efficient supply of high-quality goods across our network, we are also making progress on digital transformation and personnel development.
2019
highlights
  • Increased productivity by 24% (62 boxes/hour in 2019 compared to 50 boxes/hour the previous year) and increased service levels to 93% (+2.7 p.p. year-on-year).
  • Opened one new DC in Tatarstan, increasing total warehouse space by 3%.
  • Expanded to new geographies by sharing space with Pyaterochka in Orenburg and Ufa.
  • Renovated freezer storage in Ekaterinburg and St Petersburg to improve efficiency and reduce energy consumption.
  • Focused on increasing share of regional suppliers in order to reduce inter-regional deliveries to optimise costs and increase inventory turnover.
Digital
transformation
  • Started a pilot project based on CPFR (collaborative planning, forecasting, and replenishment model) aimed at improving the accuracy of forecasts.
  • Completed the implementation of the JDA system for the entire assortment range.
  • Launched a project with the Big Data Department to forecast required inventory levels and improve accuracy of forecasts. Launched in June 2019, we plan to complete the project in Q1 2020.
  • Introduction of Transportation Management System and standardisation of transport management processes has enabled us to increase inventory turnover, reduce logistics costs and reduce CO2 emissions by optimising transport routes.
  • Began implementation of a new WMS with testing of the conceptual design.
  • Launched a general registry of suppliers (Supplier Portal) that standardises communications.
Personnel
development
  • Decreased staff turnover in 2019 by 42 percentage points, accompanied by eNPS growth.
  • Continued to run Logistics Academy “Supply Chain Leaders. Development without borders!”, organised jointly with Coca‑Cola Russia, METRO Cash & Carry, Danone, Unilever and FM Logistic. The Academy aims to develop participants’ functional skills as well as leadership capabilities and includes training on effective communication, project management and other topics.
Improving
processes
  • Automated lead time calculation from the supplier to the DC and from the DC to the store. Overall, lead time for orders was reduced by 0.3 days and averaged 4.8 days nationwide.
  • Continued development of direct imports.
  • Managed capacity uniformity at DCs, reaching the threshold value for intra-week volume fluctuations of not more than 10%.
  • Increased availability of goods from the top 30 contributors to turnover by 1.2% year-on-year.
  • With a focus on the availability of goods, we achieved the target level of availability of promo goods.
  • Reduced overall level of inventories in stores by 4.8%, or 1.1 days.
Plans for 2020
and beyond
  • Focus on improving the efficiency of the end-to-end supply chain together with suppliers.
  • Complete implementation of the WMS.
  • Launch new Laishevo DC in Kazan.
  • Further development of the JDA system as part of product planning.
Supply chain infrastructure
Our supply chain infrastructure spans from direct import hubs to distribution centres, satellite DCs and cross-docking stations. With our comprehensive transport management and automated warehouse management systems, we are able to ensure smooth operations and reliable supplies from international, federal and regional suppliers to customers of Pyaterochka, Perekrestok and Perekrestok.ru.
5,946
Suppliers
4,124
Owned trucks
42
Distribution Centres
5
Import hubs
Transport
Our own transport operations help us to maintain our pace of growth and operate smoothly across five time zones in Russia, ensuring the efficient and reliable supply of goods to our growing network of stores. X5’s transport fleet consisted of 4,124 trucks as of 31 December 2019, and we were capable of handling 77% of our transportation needs during the year.
Innovations play a growing role in our transport operations, as we implement and pilot innovations to achieve greater efficiency and improve safety. Our sustainability goals are being integrated into our transport operations, as we seek to rationalise our resource consumption, decrease emissions and prevent pollution caused by maintenance operations.
Progress in our strategy
We approved a Logistics and Transportation Strategy in 2017. This strategy focuses on contributing to the sustainable growth of our food retail business, with the following key goals:
Focus on service quality:
Our goal is to achieve a 98% success rate in meeting delivery windows and temperature requirements for deliveries, and we have established business processes that enable us to respond quickly to the changing requirements of X5’s retail formats.
The best offering in a competitive market:
We have invested in equipment, technology and people to help ensure that our own transportation services are at the forefront of what the market has to offer.
Establish 4PL operations in remote regions:
We are successfully developing our own integrated multimodal logistics operations in order to support our regional expansion, including in remote regions of Russia that are not accessible by road.
Technology-driven:
We are using technology for a variety of applications, from improved route planning to delivery services and the ability to source trucks, drivers and trailers separately in order to increase efficiency and reduce idle or excess capacity.
Supporting new businesses:
Our transport infrastructure is also being used for the 5Post parcel delivery service, which provides data-enabled delivery services for e-commerce providers, utilising our network of in-store parcel lockers.
How we manage transport

The director for transport operates from X5’s Corporate Centre as part of the Business Support unit. The director is responsible for implementing and monitoring performance targets, as well as implementing the strategic goals that have been set for X5’s transport operations.

The Transport Department is divided into six macro-regions that are aligned with X5’s organisational structure in order to synchronise operations with the format’s retail operations.

X5’s centralised management systems give us a real-time view of the location, condition and storage temperatures of our entire fleet. We use automated route planning to increase efficiency with the help of GPS/ GLONASS systems, which also enable us to monitor the movement of shipments from DCs, help stores plan for arrivals and be alerted to delays.

Average age of truck fleet
2019 highlights
  • In 2019, 468 new trucks were purchased.
  • More than 180 trucks had gas–diesel engines installed, and we are prioritising dual-fuel trucks for new purchases.
  • Updated our fleet of tandem trailer trucks (more than 300) to address the needs of our retail chains, with 21- and 41-pallet trailers purchased, increasing the efficiency of long-distance transport.
  • Piloted use of liquefied natural gas (LNG), confirming its effectiveness in enabling trucks to drive longer distances without refuelling. Further development of LNG refuelling in Russia will make it possible to switch to liquefied gas.
  • Developed regional network, with cross-docking centres in Krasnoyarsk, Velikiye Luki, and Tver region. Launched the transfer of business processes (including Go-Cargo) to a unified digital platform and a paperless workflow called X5.Transport.
  • The development of self-delivery by suppliers directly to stores, with volumes doubling in 2019.
  • Automated truck monitoring, which enables us to remotely track a full range of technical characteristics, such as fuel levels, mileage, time that cooling or heating elements have been working, etc.
  • Launched joint pilot project with Kamaz to start predictive analysis of maintenance needs. In December 2019, 10 trucks were equipped with the necessary hardware and software, which is being used to gather data for the AI-driven solution.
  • Tested various driver assistance technologies to improve safety and efficiency, such as video cameras, smart sensors and systems that utilise big data.
Plans for 2020
  • Continue to convert our transport fleet to more efficient and environmentally friendly gas–diesel equipment.
  • Further development and implementation of the X5.Transport platform, which makes it possible to increase efficiency and reduce transportation costs
  • Expansion of geography — access to a new cluster in Kaliningrad.
  • Testing of various driver-assistance technologies aimed at improving efficiency and safety, such as video cameras, smart sensors and big data–driven systems.
  • Based on the results of pilots, we plan to introduce predictive analytics for repairs, which is expected to reduce downtime due to breakdowns and reduce repair costs.
  • Further development of our LTL (less than load) service and pickup for suppliers and manufacturers.
Direct imports
As X5’s formats continue to evolve their value propositions, our direct import operations have become increasingly important. Direct import also plays an important role in achieving our overall business strategy, including sustainability goals. With the ability to monitor our import operations across the entire supply chain, we are able to optimise costs at all stages of transportation and ensure the high quality of the products we sell.
Direct import operations are part of the Business Support unit. After establishing a separate direct import business unit in 2018, we achieved the following results:
  • The share of direct imports in X5’s total sales increased at twice the rate of overall business growth in 2019.
  • Initiated projects to develop infrastructure and import hubs.
  • Expanded assortment in categories like fruits and vegetables, ultra-fresh, grocery and non-food products.
  • New assortment added: fresh frozen seafood, canned fruits, coffee, etc.
  • Improved quality of imported products, which enabled us to reduce the number of returns.
Our key strategic goals for direct imports are:
  • Develop infrastructure: to open key hubs (South, Centre) to support development of imports in the alcohol and groceries categories, as well as expanding coverage of remote regions.
  • Improve efficiency: to optimise structure and create a basis for the digital transformation process by identifying processes in our direct import operations that can be automated.
  • Develop sourcing and new categories.
  • Build long-term strategic partnerships with import producers.
  • For 2020, our direct import operations will focus on the following geographies: CIS countries, South and Latin America, China.
Share of direct import
TOTAL
 
FRUITS AND VEGETABLES
Information
technologies
X5’s IT infrastructure plays a critical role in supporting and strengthening our existing operations, while also contributing to the digital transformation of our business. This includes backbone infrastructure to big data analytics and automation. The Information Technologies Department is managed from X5’s Corporate Centre. The head of the IT Department has responsibility for both the reliability and integrity of existing infrastructure, as well as the scalability and flexibility to meet business needs in the years ahead and works closely with the heads of our core business units.
2019 highlights
2019 highlights

In 2019, we ensured 100% uninterrupted operation of our critical business systems and 99.84% uptime for all IT services.

Growth potential:

Together with X5’s business units, we developed and approved strategies to develop IT systems that will enable us to develop our IT infrastructure in a way that takes into account the growth plans for our current core business and supports the development of new businesses.

A number of strategically important projects for the Company’s growth were successfully completed, such as the automation of our Smart Kitchen and 5Post, and a number of major projects are ongoing, such as the transition of all formats to a single store management system.

2019 highlights

With the introduction of new platforms for veterinary and alcohol-related record-keeping that provide support for alternative types of records required by state systems to ensure traceability, we were able to provide a high level of service for veterinary and alcohol-related record-keeping.

X5 became one of the first retail companies in Russia to sign a binding commitment with the Federal Tax Service as part of a state programme on digitalisation and electronic document management.

Finally, in 2019 we created our own fiscal data operator that will enable us to maintain control over X5 data.

Efficiency and innovation:

To optimise and improve the efficiency of processes aimed at stabilisation, acceleration, robotisation and automation, the IT Department created new competence centres in 2019 for DevOps, testing, microservice architecture and development management. New IT services and systems were introduced that improve the efficiency and speed of IT-related operations.

An X5 development centre was opened at Innopolis, which helped to reduce the cost of development-related resources. It also helped reduce the amount of development work that is outsourced. Our focus on in-house development aims to ensure the growth of internal expertise and competencies.

A unique proprietary business monitoring system (BMS) was also developed and implemented (a patent for the invention was obtained), which helped reduce losses by RUB 1.7 billion in 2019.

Plans for 2020
In 2020, the key focus will be on accelerating and improving IT efficiency, supporting the Company’s digital transformation projects, developing internal competence centres and implementing a new IT platform to support digital initiatives.
Acceleration and improvement of IT efficiency:
The acceleration, robotisation and automation of IT processes remain priority areas of focus for the IT Department in 2020. We are going to continue working on both new and ongoing projects to accelerate production processes, create self-service functionality, automate and roboticise IT processes, develop business monitoring and analysis systems for IT processes, reduce the amount of outsourcing and develop internal competencies, etc.
Digital transformation projects:
The implementation of digital transformation projects will substantially improve the Company’s digital maturity. The IT Department pays a great deal of attention to supporting digital transformation projects by creating dedicated teams for key digital transformation projects, launching Agile product teams in conjunction with business operations, and developing new technical competencies and approaches to IT-related work.
New IT platform:
Within the framework of the Company’s new IT platform, solutions are being developed for self-service functionality when working with infrastructure and for dynamic infrastructure management; the refactoring of existing monolithic IT systems and a transition to microservice architecture are being carried out. Some key projects under development that will utilise this new platform include a new loyalty management platform, solutions for managing the infrastructure of stores and for network automation, as well as an access management platform.
Innovations
Innovation remains at the core of our long-term development strategy. In 2019, we focused on finding, piloting and implementing solutions aimed at optimising our business processes and reducing costs, as well as solutions that would increase customer satisfaction and store capacity, such as self-service systems and personalised offers.
How we manage innovations
The X5 Lab project office implements dozens of innovative pilot projects for the X5 retail formats and various departments of the Corporate Centre for the purposes of testing business cases and bringing projects to the rollout stage. The main focus is the delivery of ready-made and tested cases with a proven business impact so that the formats can concentrate on rollout.
Scouting and implementation of innovative technologies

Stage 1
scoping

Stage 2
business case

Stage 3
pilots

Stage 4
rollout

December
2019

1133
startups

565
startups

134
startups

19
startups

Added
in 2019

+574

+278

+64

+10

Apr 2017 –
dec 2018

559
startups

287
startups

70
startups

9
startups

Geographical expansion
In 2019, X5 expanded the geography of its scouting for technological solutions, going beyond the borders of the Russian Federation to Israel, China, and Europe. At the end of the year, an agreement was signed with Plug & Play, the world’s leading accelerator, on X5’s participation as an anchor partner at its Retail Hub in Paris. In 2020, this will give X5 access to global best practices and opportunities to exchange experiences with leading retailers from around the world on the application of technologies, as well as access to startups in more than 10 countries, including the United States, European countries, Singapore, China, Japan and others.
Proprietary solutions
In 2019, the Innovation Department significantly accelerated the launch of innovative pilot projects, as well as the launch of internal R&D. The X5 Lab products last year included proprietary self-checkout machines, the design and price of which make it possible to scale the solution in most X5 stores, as well as loyalty terminals and loyalty tablets that make it possible to increase the conversion of coupons and boost retail sales. We aim to patent proprietary products as industrial designs.
2019 highlights
In 2019, the innovation team reviewed several thousand technological solutions from startups, more than 500 of which were added to the X5 Lab knowledge base as relevant to X5’s business; more than 270 solutions advanced to the stage of in-depth evaluation with the involvement of business units from the retail formats and the Corporate Centre. Of these, 64 were advanced further to pilot projects, while 10 projects moved on to the rollout/implementation stage.
64
Pilot projects
launched in 2019
Pilots across the X5 value chain

for customers

store

supply chain

back office

Number
of pilots

20

20

13

11

Plans for 2020
In 2020, we plan to maintain the pace of searching for, piloting and implementing of innovations at X5. We will continue the scouting programme and will drill down into the new directions discovered in 2019. In addition to Russia, we will focus on such countries as France, Germany, Israel, China, and the United States. We will also continue to implement pilot projects and develop our own products, such as self-scanning, mobile scanning and a loyalty tablet for more convenient shopping and improving the quality of customer service, smart scales to increase the speed of customer service, innovative solutions for transport to reduce fuel consumption and environmental emissions, as well as to improve road safety, smart trash cans to improve the environmental friendliness of our stores, automation of DCs to increase the efficiency and speed of logistics processes and others.
Examples of the innovations
we are currently rolling out
Robotic process automation (RPA)
In 2019, we launched our own robotic process automation laboratory. The RPA helps to improve productivity, speed up processes and reduce errors. In 2019, 20 processes were automated, equalling over 40 full-time employees. In 2020, we plan to automate over 60 processes that require at least 120 full-time employees.
+60 in 2020
20
Processes were automated
as of the end of 2019
Electronic price tags
Some 136 thousand electronic price tags have already been installed in X5 stores, with more than 1 million to be installed in 2020. Electronic price tags can free up staff to improve the quality of customer service and to reconcile price inconsistencies, which often result in lower NPS for stores.
+1 mln in 2020
136 THOUSAND
Electronic price tags installed
as of the end of 2019
Loyalty terminals and tablets
Loyalty terminals were developed in-house as a way to improve conversion for personalised promos in-store. Loyalty card holders can get personalised offers, and one terminal can generate more than RUB 1 million in incremental sales per year. Thirty-one terminals were already installed in Perekrestok stores in 2019, with 600 to be installed in 2020. In around 50 Pyaterochka stores, we have installed tablets that serve multiple purposes. Store employees can log in when they arrive at work or access information related to training and assignments. For customers, the tablets provide richer communications, including personalised offers, promotions and feedback.
Cashierless store
X5 introduced the first working prototype of a cashierless store in Russia. Currently available to all employees (more than a thousand) on the grounds of the Perekrestok Smart Kitchen.
Self-checkout
X5 Lab's proprietary self-checkout machines cost several times less than similar third-party solutions. This supported an increase in retail sales in the pilot area due to a 3% increase in traffic. These self-checkout machines have been included in the Pyaterochka standard. More than 250 self-checkout machines are already in operation. Some 12,000 self-checkout machines are scheduled for installation in 2020 across X5's network.
12,000
Self-checkout machines
to be installed in 2020

250+ are already in operation

Big data

The use of advanced data analytics enables us to be more customer-centric and to improve efficiency by making better and more precise decisions. With over 7 million data points collected per day through our loyalty programmes, we are using our in-house capabilities to develop analytics products and services that help to differentiate X5 from its peers.

Our Big Data Department, which is part of the Corporate Centre, employed 340 professionals as of 31 December 2019.

Data-driven culture

Data quality and availability is one of the key factors in our success, and X5 pays significant attention to the organisation and culture of data management. The Big Data Department implements a data-driven management culture and data governance processes in which all of the business units and functions are involved.

A unified corporate policy for working with Company data was approved in 2016. In order to create a data-driven management culture, a data democratisation policy has been implemented: a single data catalogue has been created providing a single version of the data and showing its origin; self-service analytics tools are being introduced.

Thanks to ongoing changes like this, obtaining, clearing and structuring data now takes significantly less time.

7 MILLION
Data points collected per day
through our loyalty programmes
From experiments to rollout
Correctly utilising big data to support our business strategy requires constant experimentation, prototyping and searching for insights in our data. A number of our big data products have already completed this stage of development and are now being used systematically in our business.
Assortment
We have succeeded in making the assortment review process more customer-centric through automated assortment and category analysis capabilities. Our automated assortment product helps to manage our assortment across 28 categories of goods that account for over 60% of net retail sales. New assortment matrixes are developed based on our understanding of client demand, the roles of each category and their contribution to net retail sales.
Pricing
Our automated pricing system has enabled X5 to make more accurate and timely decisions regarding prices. This has helped us to improve pricing perception and our price positioning. Using algorithms and regular price monitoring of our peers, we are able to automate our own pricing decisions.
Promo
We are enhancing our promo process with advanced analytics based on big data tools and analysis of historical performance to drive more precise and efficient decision-making. This system has helped to optimise regular promo activities during piloting in the North‑West region, and will be soon rolled out.
Customer value management

Customer value management (CVM) is currently being piloted at Perekrestok as a means of forecasting turnover in promo campaigns and will develop into forecasting of regular demand using predictive models that will enable us to improve logistics efficiency by increasing the timeliness and precision of deliveries.

The CVM system aims to further increase value for loyal customers of X5 stores, while also maximising the value of each loyal customer for the Company. Effective customer value management enables X5 not only to better meet customer needs, but to shape them.

Examples of CVM usage
  • Cross-selling
    SELLING ADDITIONAL PRODUCTS
  • Upsell
    SELLING ADDITIONAL PRODUCTS
  • Increasing the likelihood that a customer will return to a store
  • Increasing the frequency of purchases
5Post
5Post is a new business unit established in 2019 within X5 Retail Group that is developing a service to deliver parcels from e-commerce retailers and online marketplaces to parcel lockers and pickup points at Pyaterochka proximity stores and Perekrestok supermarkets. 5Post leverages X5 Retail Group’s own logistics capacity and is designed to piggyback on existing routes and schedules of our own fleet. This means that parcels are delivered to a store together with standard inventory. We expect that our parcel delivery service will help to reduce emissions and make more efficient use of resources by better utilising existing transport capacity.
Key highlights
›5 MLN
Parcels delivered
with more than 350,000 via X5’s own logistics
63
Regions covered
by the X5 store network
7
Strategic partners
Ozon, Lamoda, Beru!, Cianiao, IML, Unitrade, Sovcombank
CA. 10,000
Stores are serviced by 5Post
 
12
Sorting centres
were established at Pyaterochka DCs
Strategic goals for 2020
  • Increase number of pickup points to 12,000 and number of sorting centres to 15.
  • Develop mobile app for end consumers and expand functionality of fivepost.ru website.
  • Automate and optimise delivery process.
  • Add ability to pay for goods at checkout desks.
  • Further development of IT systems to support 5Post’s development and efficiency.
  • Connect and integrate new partners into the 5Post IT infrastructure.
  • Significantly increase number of parcels delivered.
  • Upgrade sorting equipment at all existing 5Post sorting centres.
Sustainable development
Sustainable development at X5 includes a wide range of activities, from supporting the health and well-being of our customers to providing a safe, fair and comfortable workplace, as well as contributing to the communities where we operate and doing our part to minimise our environmental footprint.
Our sustainability
goals
Since adopting our new sustainability strategy in December 2019, we have been working to establish specific targets and to integrate our sustainability goals into our overall business strategy. The following section of this report reflects X5’s key sustainable development goals, which were approved by the Supervisory Board in December 2019. We have also created a separate section on our corporate website dedicated to our sustainable development strategy in order to publicly demonstrate our commitment to these goals.
1
No
poverty
2
zero
hunger
3
good health
and well-being
4
Quality
education
5
Gender
equality
6
clean water
and sanitation
7
affordable and
clean energy
8
decent work and
economic growth
9
industry, innovation
and infrastructure
10
reduced
unequalities
11
sustainable cities
and communities
12
responcible
consumption
and production
13
climate
action
14
life
below water
15
life
on land
16
peace, justice
and strong
institutions
17
partnerships
for the goals
Primary Goals
Secondary Goals
We are currently in the process of determining the indicators that we will employ to set targets and measure progress in achieving our sustainability goals.
Stakeholder
engagement
We interact with a wide range of stakeholders as part of our day-to-day business, and we believe that maintaining a regular dialogue with them will enable us to create value and grow our business in a sustainable and profitable way. Among our key stakeholders are customers, employees, shareholders and investors, suppliers, local communities, as well as regulators and government officials. Below is a description of our key interactions with each group.
Compliance
and ethics
When conducting business, X5 Retail Group is committed to a corporate culture of shared values based on ethical standards, mutual respect and compliance with applicable laws and regulations. These values and principles are reflected in our Code of Business Conduct and Ethics (the “Code”), underlying policies and procedures, and through learning and training programmes.
Key policies
Code of Business
Conduct and Ethics
Code of Interaction
with Business Partners
Policy on Countering Miscounduct, Including Fraud and Corruption
Declaration on Human
Rights Protection
Compliance
Policy
Policy on Processing
Personal Data
Inside Information
and Dealing Code
Policy highlights
Code of Business
Conduct and Ethics

The Code of Business Conduct and Ethics and its underlying policies describe the standards of conduct that support our commitment to integrity, and how our employees are expected to treat each other, our suppliers and our customers, outlining a set of basic principles that guide our business practices.


The Code covers areas such as fair competition, fighting bribery and corruption, care for the environment, protection of personal data and company assets, avoiding conflicts of interest, equal opportunities for employees and safe working conditions, and how to deal with customers, suppliers and competitors. Furthermore, the Code includes a whistleblower policy describing the process for reporting violations of the Code. The provisions of the Code apply to all employees regardless of their position or function; they are made familiar with the provisions of the Code through periodic, interactive learning programmes.


Practical guidance on specific topics outlined in the Code is given in additional policies described below.


Code of Interaction with
Business Partners

As an industry leader, we are aware of our responsibility to the government, society, our shareholders and business partners, and we aim to fully comply with legal and ethical standards, as well as best corporate practices, in order to serve as an example for other market participants. The Code of Interaction with Business Partners contains provisions regarding compliance with trade and competition laws, anti-corruption and fraud legislation, legislation on the quality of products and services, legislation in the field of environmental protection, laws in the field of labour relations and labour protection. This policy also covers prevention of discrimination, transparency in interaction with business partners, communication standards, information protection, prevention of conflicts of interest, etc. Employees and business partners are encouraged to adhere to these provisions in their work for and with X5. Violations of the Code of Interaction with Business Partners are handled by X5’s dedicated Conciliation Commission (see below).


Policy on Countering
Misconduct Including Fraud
and Corruption

X5 and its brands are committed to conducting business in an ethically responsible manner and complying with all applicable laws and regulations. This commitment specifically includes compliance with laws relating to anti-corruption and bribery. In addition to the Code of Business Conduct and Ethics, X5’s Policy on Countering Misconduct Including Fraud and Corruption (the "Anti-Corruption Policy") prohibits any form of corruption or bribery, including facilitation payments. It aims to create a culture of honesty and zero tolerance for illegal behaviour among staff, and also to eliminate any risks of involving the Company in corrupt activities. Our anti-corruption system includes a set of mechanisms, procedures and tools aimed at preventing, uncovering, investigating and responding to all possible cases of misconduct. Furthermore, it establishes roles and responsibilities for departments and management bodies within the anti-corruption system. Our aim is to conduct business only with those partners that share X5’s principles of zero tolerance for corruption and fraud, and relevant provisions are included in the agreements with our suppliers and other business partners.


Declaration on Human
Rights Protection

X5’s Declaration on Human Rights Protection defines principles and rules in respect of compliance with, and promotion of, high international standards for the protection of human rights at every level of the Company’s operations. These principles and rules are based on the recognition of every human being’s dignity, and the freedom and equality of all humans, including:


  • Prohibition of discrimination and forced labour;
  • Prohibition of harassment;
  • Respect for cultural diversity and values;
  • Respect for cultural diversity and values; Respect for the right to freedom of assembly and association;
  • Occupational health and safety.

As a complement to the Code of Business Conduct and Ethics, the Declaration on Human Rights Protection is a binding document for all X5 employees and business partners.


Policy on Processing
Personal Data

In accordance with legal requirements of the Russian Federation on personal data, we have a Policy on Processing Personal Data in place that applies to all processes involving the collection, storage, retrieval and transfer of personal data within the Company.


Compliance Policy

In order to ensure compliance with the requirements of regulators, stakeholders, established business practices, voluntarily adopted standards and rules of business conduct and ethics, X5 has adopted a Compliance Policy in accordance with ISO 19600:2014 (Compliance Management Systems). Compliance risks are assessed and reassessed on an ongoing basis.


Inside Information
and Dealing Cod

The Inside Information and Dealing Code reflects the provisions of the EU Market Abuse Regulation, which entered into force in 2016. Its purpose is to ensure that X5 employees do not abuse, and do not place themselves under suspicion of abusing, inside information and comply with their obligations under the applicable rules on inside information and securities trading.


Compliance and ethics systems
Ethics Committee

The Ethics Committee is chaired by the CEO and includes the General Counsel, the Head of Corporate Security, the Director for Business Support and the Director of HR and Organisational Development. The Ethics Committee is responsible for:

  • Objective review of (alleged) violations of the Code of Business Conduct and Ethics, the Declaration on Human Rights and the Anti-Corruption Policy;
  • Resolving conflicts of interest;
  • Approving anti-fraud and corruption measures;
  • Adopting further rules and policies in the areas of business conduct and ethics.

While the responsibility for investigating (alleged) violations of the Code of Business Conduct and Ethics is generally assigned to the Security Division, the specific responsibility for handling (alleged) violations in the areas of human rights, labour rights and occupational health and safety is assigned to the Directorate of Human Resources and Organisational Development.

Reporting violations and whistle-blowing policy

Employees are encouraged and obliged to report any actual or suspected violations of the Code of Business Conduct and Ethics and the Declaration on Human Rights Protection. Various communication channels are available to employees for reporting violations: reports can be made through the ethics hotline or by e-mail, as well as through Company websites and intranet portals. The Compliance Department is responsible for review and follow-up of such reports in accordance with the internal procedure for considering complaints. Reports via the ethics hotline can be made anonymously and without fear of retaliation, even in cases when it cannot be confirmed that a violation has taken place. The Company guarantees confidentiality of any report made.

All reports of corruption or human rights violations are subject to an internal investigation. When conducting internal reviews, all collected information is treated equally and analysed. If necessary, following a thorough investigation, the Company may take disciplinary and other measures against the responsible employees, ultimately leading to termination of employment. In accordance with X5’s remuneration policies, the application of disciplinary measures may affect the employee’s variable remuneration components, which increases the effectiveness of the Code at all levels of operation within X5. In 2019, our whistle-blowing lines received 7,124 reports, over 65% of which were related to routine HR issues. Approximately 7% of the reports were made anonymously.

In 2019, the Company automated the ethics hotline, which enabled us to respond more quickly to reports regarding potential violations. On average, reports were investigated and resolved within 20 days. In 2019, there were no substantiated reports of significant financial reporting, accounting, fraud or ethical violations.

In addition to the whistle-blowing channels for employees, the Company also operates a reporting channel for business partners and other third parties. Violations of the Code of Interaction with Business Partners are handled by X5’s Conciliation Commission, which serves as a corporate arbitrator in disputes with business partners. The Commission is established in accordance with the Code of Good Practice, which regulates interaction between retailers and suppliers. The Conciliation Commission’s tasks furthermore include improving the efficiency of contractual work done for the Company, creating a platform for direct dialogue with suppliers and other business partners, and identifying and preventing violations in working with contractors. Violations can be reported via the feedback form posted on X5’s website.

Conflicts of interest

Our internal procedure for declaring, monitoring and resolving conflicts of interest enables managers and employees to disclose situations involving any potential conflict of interest, and establishes procedures for the purpose of resolving conflicts of interest. The Compliance Department is responsible for the proper functioning of the reporting procedure and for dealing with reported conflicts of interest. During 2019, employees were required to redeclare conflicts of interest through a renewed digital reporting channel.

Training

As stated above, new employees are required to familiarise themselves with the Code of Business Conduct and Ethics. The main provisions of the Code can be found on the Company’s intranet site as part of a distance learning programme. In 2019, more than three thousand employees throughout the Company took part in this training, the majority of whom are employed in X5's retail chains.

Employees who interact directly with business partners also receive training on interaction with business partners. In 2019, about 3,000 employees took part in this training.

In 2019, a distance learning course on anti-corruption rules and behaviour, called “X5 Ethical Principles: Business without Corruption”, was developed and launched. All staff, with the exception of store employees, were required to take part in this training course, more than 10 thousand employees completed this training. We plan to develop a separate course for store employees in 2020 that takes into account the specifics of their work and focuses on typical situations that might arise in any of our retail formats.

Training on human rights and the application of the Declaration on Human Rights Protection is an integral part of the training on the Code and in the “X5 Ethical Principles: Business without Corruption” training course.

The determination of standards and requirements, and the development of training programmes in the areas of compliance and ethics are entrusted to the Compliance Department.

Health
and safety
Product safety and quality

One of the keys to maintaining the sustainability of our business is upholding consistently high standards of product safety and quality. Our goal is to ensure that every store we operate offers customers fresh and high-quality goods that are safe for consumption.

We continuously refine and develop our systems and policies in this area, and our work on product safety and quality will be an important part of X5’s new sustainability strategy. This is aligned with UN SDG 3 (Good Health and Wellbeing), which is one of the priority goals where X5 Retail Group can have the most impact through its activities.

Our aim is to implement a system that enables us to track goods “from farm to fork” in order to understand the social and environmental impact of their production, as well as to ensure that the means of production, transportation and storage comply with relevant legislation and our own quality and safety standards.

Product quality system
Pyaterochka

Pyaterochka upholds robust product safety and quality standards throughout the supply chain with the goal of providing customers with fresh, safe and high-quality products. To this end, we have developed a set of rules and regulations that encompass the entire supply chain from production to consumption. Pyaterochka’s quality control practices are governed by internal bylaws. In order to ensure that products are safe for human consumption and for the environment, and also that they comply with retail standards and customer needs, we take an approach based on the principles of hazard analysis and critical control points (HACCP). In addition to HACCP principles, ensuring product quality also involves the following:

  • lab testing and analysis at recognised research centres and accredited research laboratories;
  • regular staff training on requirements for the Customs Union, the Federal Law on Standardisation, food labelling requirements, food safety management requirements and other rules and regulations regarding quality control;
  • safe storage and transport of products;
  • use of state-of-the-art monitoring methods and innovative technologies;
  • supplier audits.

As part of our multi-format operating model, each retail format has its own Quality Department that, together with the Commercial Department and the Category Management Department, oversees all stages of the product life cycle. Pyaterochka’s head office has a Quality Department that is responsible for, among other things, ensuring that quality-related legislative requirements are taken into account in internal regulations. The Quality Department also provides expert assessments of draft laws in order to facilitate our constructive participation in the legislative process and, together with the Government Relations Department, interacts with oversight and supervisory bodies in order to ensure we properly understand requirements and can have a say in the consideration of new standards, as well as industry associations and producers’ unions, including the Consumer Market Participants Union, the Russian Union of Industrialists and Entrepreneurs, the All-Russian Association of SMEs (Opora), the Civic Chamber of the Russian Federation, the National Dairy Producers Union, the RusBrand Association of Branded Goods Manufacturers, the Seafood Processors Union and the RusProdSoyuz Association of Food Manufacturers and Suppliers.

Ensuring that our products are of high quality is one of the most important tasks of all our commercial departments. Suppliers are regularly audited by independent, accredited international organisations. We continue to work on the preparation of quality specifications for food products, our private labels, and packaging materials as well.

Количество наград, полученных продукцией СТМ

2017 2018 2019
Pyaterochka 0 11 21
Perekrestok 1 1 1
Perekrestok

Perekrestok has its own Quality Department that, together with the Commercial Department and the Category Management Department, oversees all stages of the product life cycle. Quality control at Perekrestok is governed by internal bylaws.

The Perekrestok Quality Department undertakes comprehensive efforts in its work with suppliers, distribution centres, the Logistics Department, stores and consumers in order to prevent risks related to the quality and safety of goods.

All stages of product movement (from supplier to consumer), which are overseen by managers, are defined and have clear criteria for evaluating critical indicators.

Group-wide initiatives

In 2019, we were part of a wide-scale legal review process initiated by the Russian federal government to review and abolish obsolete regulations applied to business. As part of this process, we worked actively with various authorities, including Rospotrebnadzor (Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing), the Ministry of Industry and Trade, and the Ministry of Justice. The review included the framework for sanitary and epidemiological legislation. We believe that this work will help to improve the regulatory environment for retailers like X5.

X5 participated in pilot experiments on the implementation of labelling and traceability (shoes, light industry, milk, tobacco) organised by the Ministry of Industry and Trade. The system that has been implemented makes it possible to track the path of each individual unit of goods from the manufacturer to retail sale. This approach is intended to help reduce the share of counterfeit goods, primarily in traditional retail trade. By participating in these experiments, we helped to establish reasonable rules for labelling in various product categories.

Quality control at all stages
of the product life cycle
Introducing goods into our product range

Prior to signing a contract, our suppliers must provide product samples and documents confirming the quality, safety and origin of the goods to authorised specialists (quality experts) to confirm their compliance with legal requirements and the Company’s internal regulations.

In 2019, we increased the number of quality control personnel responsible for introducing private-label goods into the product range, including outside Moscow and St Petersburg. This enabled us to reduce the time needed for approval of requests to add or introduce changes to private-label goods.

In 2019, some 10,948 items were checked and added to our assortment at Pyaterochka and some 10,144 products at Perekrestok. This represents the number of goods that were checked before being added to our assortment matrix.

Number of PLUs from verified suppliers

2017 2018 2019
Pyaterochka 10,100 12,554 10,948
Perekrestok 14,625
(including 386
private-label goods)
8,841
(including 354
private-label goods)
10,144
(including 383
private-label goods)
A product benchmark is a document that describes in detail the manufacturing process for a private-label product, including what is on the packaging, as well as defining organoleptic, physical, chemical, microbiological and product safety indicators. The product benchmark is an integral part of the supply contract.

Number of product benchmarks established

2017 2018 2019
Pyaterochka * 128 232
Perekrestok 386 354 383

* In 2017, Pyaterochka did not track the number of product benchmarks established.

Acceptance at distribution centres

Upon arrival at a distribution centre, all incoming food products undergo mandatory organoleptic testing in terms of their appearance, consistency, taste and smell, as well as testing for compliance with the standards of the Customs Union and other applicable federal standards. Fruits and vegetables are also tested to measure their nitrate levels and sugar content. X5’s quality control of fruits, vegetables and exotic fruits meets Russian national standards, European standards (UNECE), as well as Pyaterochka’s own quality certificates and acceptance criteria, including in respect of their calibre, size and ripeness.

In 2019, we began installing equipment for remote acceptance from suppliers. This equipment is currently installed at the site of a major apple producer, and it will be installed at the sites of five more fruit and vegetable producers in the near future. This remote acceptance equipment enables our employees to conduct quality control remotely, and only goods that pass a quality control check are sent to a distribution centre. This initiative has enabled us to improve the efficiency of acceptance while also decreasing shrinkage.

Quality control in stores

In 2019, Pyaterochka launched the Freshness project, which is a strategic project for the format that aims to transform the entire quality control and freshness monitoring process. Changes include the introduction of a new stage of control over the freshness of products when they are dispatched from DCs to stores, store employees are responsible for removing damaged or spoiled products every hour and sorting fruits and vegetables three times a day. Furthermore, goods are now removed from the shelf before the end of the day of their expiry date. This pilot has been successful, with more than a quarter of shoppers noting improvements in fruits, vegetables and fresh products.

In addition, the Quality Department regularly audits stores for compliance with quality and safety standards, which allows us not only to address quality issues quickly but also to improve the quality of the service we offer our customers. This enables us to create an environment of continuous training for store employees, who, based on practical examples, can learn about innovations and adopt best practices.

In 2019, the number of store audits conducted at Pyaterochka and Perekrestok declined year-on-year, partly due to the sharp increase in private-label suppliers and a decision by the Quality Department to focus on fruit and vegetable supplier audits. At Pyaterochka, the significant decline in the number of quality audits by the Quality Department was largely due to the internal reallocation of responsibility for regular store audits to the Security Department, while the Quality Department focused only on audits of “problem stores”. Store inspections are conducted on a regular basis by territorial security managers, whose checklists include questions about product quality and storage conditions, as well as expiry dates. Items that do not meet the required conditions are disposed of.

Number of internal quality audits conducted in stores

2017 2018 2019
Pyaterochka 2,268 1,240 516
Perekrestok 907 880 854
Interaction with сustomers

Pyaterochka has an efficient, streamlined process in place for dealing with consumer claims and complaints. All claims and complaints received through a variety of communication channels, including email, social networks, the customer hotline, online and from store directors are carefully reviewed. In case of suspicions about a potentially unsafe product, product samples are taken for testing to verify the validity of the claim. If a product of insufficient quality is discovered, it is immediately removed from store shelves and returned to the supplier.

In addition, a system was launched to collect and process complaints from buyers of private-label goods; statistics are maintained, and producers whose goods receive regular complaints are barred and replaced. Unscheduled audits and lab inspections are also initiated in response to complaints. All customers are given feedback on their complaints. Social networks, online forums and blogs, and periodicals are monitored on a regular basis for information on product quality.

Number of quality-related customer complaints reviewed

2017 2018 2019
Pyaterochka 1,360 587 2,438
Perekrestok 446 470 418

Complaints included claims regarding the quality and safety of products. For example, organoleptic indicators (taste, colour, smell, etc.), the presence of parasites, foreign matter, etc. Complaints regarding selling space, quality of service, etc. were not considered. Complaints of this kind are transmitted to other functions.

The year-on-year increase in the number of complaints was due to several factors, including changes in the methodology for handling complaints in 2018 and in 2019, as well as continued growth in the number of stores and new communication channels. The change was also driven by the launch of the Best Private Label project, which led to more attention being paid to customer requests.

Supplier audits

As part of the selection and rating of suppliers, a supplier audit is required. The Supplier Audit Programme is available on the supplier portal along with a requirements checklist. All new suppliers must undergo a mandatory audit to confirm that their production facilities are compliant with regulatory quality and food safety requirements, as well as cleanliness and hygiene guidelines in production and storage areas upheld by X5 Retail Group. Suppliers whose facilities did not meet the Company’s standards and whose products were considered potentially unsafe and a threat to consumers were barred from selling their goods to stores.

In 2019, 1,890 supplier audits were conducted at Pyaterochka and Perekrestok, including 404 audits of facilities producing private-label goods.

As a result of supplier audits conducted in 2019, 139 suppliers to Pyaterochka and eight suppliers to Perekrestok whose facilities did not meet the Company’s standards and whose products were considered potentially unsafe and a threat to consumers were barred from selling their goods to X5.

Number of supplier audits
including audits of private-label goods

2017 2018 2019
Pyaterochka 977 1,085 1,696
Perekrestok 174 225 194

Number of suppliers barred as a result of an audit

2017 2018 2019
Pyaterochka 35 190 139
Perekrestok 2
(both private-label
suppliers)
2
(including 1 private-
label supplier)
8
(including 7 private-
label suppliers)

Number of cases where products were not permitted to be added
to the product range as a result of an audit

2017 2018 2019
Pyaterochka * 412 592
Perekrestok 20 20 20

*In 2017, Pyaterochka did not track cases where products were not permitted
to be added to the product range as a result of an audit.

In addition, the following actions were taken in 2019:

  • The provision on supplier audits was updated.
  • All Pyaterochka quality specialists and production managers were trained and approved to conduct audits, which made it possible to significantly increase the frequency of audits conducted by employing more personnel in the Quality Department.
  • Pyaterochka, Perekrestok and Karusel signed an agreement on quality audits of private-label goods.
  • A project to automate all stages of the supplier audit process was launched: audit requests, audit planning and scheduling, completion of checklists, consolidated reporting and dashboards, and automatic barring of category D suppliers, who are considered to be potentially unreliable or unsafe. A process of submitting and processing audit requests is to be implemented in 2020. The automation project is expected to be completed in Q3 2020.
Continuous product quality testing

In 2019, 6,045 quality tests were conducted, with non-conformities identified in 168 samples. This analysis was aimed at verifying products’ organoleptic, physical, chemical and microbiological properties and, in some cases, the declared ingredients, specifically to identify any that had been replaced with cheaper alternatives, as well as any use of food additives, artificial colourants, sweeteners or preserving agents not indicated on the label.

A procedure for management of non-conforming products was developed, which made the decision-making process in response to non-conformities much faster. This decision-making algorithm involves the resampling of products for laboratory research; fines are set for suppliers in the framework of private-label contracts, suppliers are blocked, products are returned to the supplier, etc.

Number of samples of own production
goods undergoing quality testing

2017 2018 2019
Pyaterochka 2,596 2,980 4,246
Perekrestok 10,634 10,409 11,339
The number of quality tests at Pyaterochka increased due to tighter controls on cheese products.

Number of product samples from suppliers
that underwent quality testing

2017 2018 2019
Pyaterochka 2,797 1,623 1,799
Perekrestok 1,031
(all private-label
goods)*
2,285
(including 1,068
private-label goods)
2,940
(including 1,116
private-label goods)

* In 2017, Perekrestok did not track the number of samples of non-private-label goods.

Number of product samples in which non-conformities
were found as a result of analysis

2017 2018 2019
Pyaterochka 533 250 168
Perekrestok 266
(private-label
goods)*
337
(including 241
private-label goods)
291
(including 190
private-label goods)

* In 2017, Perekrestok did not track the number of samples of non-private-label goods.

Tasting is an assessment of the organoleptic properties (appearance, aroma, taste) of products that are planned for private-label production and are an integral part of any tender. Tasting is carried out in order to determine the leader for the subsequent selection of a private-label supplier.

Number of tastings of private-label goods

2017 2018 2019
Pyaterochka —* 214 649
Perekrestok 121 127 236

* In 2017, Pyaterochka did not track the number of tastings of private-label goods.

Number of inspections by Rospotrebnadzor

2017 2018 2019
Pyaterochka —* —* 424
Perekrestok 314 246 750

* In 2017, and 2018 Pyaterochka did not track the number of inspections by Rospotrebnadzor.

Work with suppliers

When introducing products into our product range, samples undergo comprehensive testing for compliance with our internal requirements and the laws and regulations of the Russian Federation:

  • We verify a range of documents that certify the quality and safety of products, as well as the protection of consumer rights.
  • A tasting commission conducts a blind organoleptic evaluation of products and raw materials and assigns a score to each item.
  • Accredited laboratories check compliance with the established requirements (microbiology, physical and chemical indicators), determine whether or not products are genuine, and issue test reports. Tests are carried out both for new products and during the process of monitoring goods that have already been supplied.
  • Production status and a producer’s ability to deliver the required amount of a given product while meeting quality and safety standards is assessed (audited) by certified, independent experts together with Quality Department staff. Based on the results of an audit, a checklist with a comprehensive assessment is completed. Audits are divided into primary audits (pre-contract) and inspections (during the supply process).

Based on the results, the Quality Department decides whether or not to introduce a product into the Perekrestok assortment. The Quality Department pays particular attention to the quality of private-label goods: for these goods to be introduced into the product range, a separate checklist is completed, and a different procedure is followed that involves more in-depth and stricter testing of suppliers.

Perekrestok has harmonised its approach to supplier evaluations (a single checklist and common evaluation criteria) with the Karusel and Pyaterochka Quality Departments, and the three formats share a database of supplier audits and product samples. A tripartite agreement on the mutual recognition of supplier audits and product testing has been developed and implemented.

2019 highlights
  • To check the quality and safety of products in the overall product range, the Quality Department revised and launched for testing (for six months) a regulation on adding products to the assortment in order to optimise the process.
  • DCs are monitored on a daily basis to check sanitary conditions and compliance with product storage regulations (checklist).
  • In order to improve quality control and analysis of product acceptance at DCs, a product acceptance procedure using a tablet was developed and implemented in cooperation with the Logistics Department.
  • Thirteen specifications for tenders were developed for conducting incoming quality control of products at DCs.
  • The Quality Department monitors stores’ compliance with established public health regulations regarding the storage, production and sale of products.
  • The Quality Department introduced a procedure for auditing the Company’s commercial facilities, including a follow-up assessment of their condition.
  • Some 418 private-label goods received declarations of conformity, and the technical specifications for the production of three new products were developed, while the specifications for 14 others were updated.

The Quality Department is constantly updating its working and methodological instructions for the production and sale of products. Store personnel and store managers receive training on sanitation and hygiene through a programme in preparation of regulatory inspections as part of the Mercury product verification system.

Promoting healthy lifestyles
In line with our Sustainability Strategy and UN SDG 3 (Good Health and Well-being), as well as in response to growing consumer demand for foods that support a healthier lifestyle, we defined and introduced new healthy lifestyle categories for our retail formats. These include:
  • Gluten-free
  • Organic
  • Vegan
  • Natural / Wholesome ingredients
  • Fresh from the farm
  • High-protein
  • Low-calorie
  • No added sugar
  • Other healthy lifestyles
Pyaterochka
Нealthy lifestyle project launched in 2019

The Pyaterochka healthy lifestyle project was launched in October 2019 and involved creating specific shelving units for healthy foods. We used special signage to inform customers about the location of health foods in stores.

This project was designed to better inform people looking for healthy foods about the assortment available at Pyaterochka, and to help customers to find the full selection of goods that Pyaterochka offers.

Perekrestok

Our Perekrestok supermarkets launched a pilot project to set up special zones featuring products for healthy lifestyles and good nutrition in 2019. We aim for Perekrestok to become recognised as a supermarket for customers with healthy habits.

The project included piloting of special zones for healthy and environmentally friendly products as one of the first steps in the format’s implementation of its new healthy lifestyle strategy.

In order to develop Perekrestok’s health food offering, a Health Working Group has been set up. This includes a private-label manager and employees in the Health business area, such as a brand manager, commercial manager, independent consultant and a project manager.

As part of the pilots for Perekrestok’s health lifestyle strategy, the Company launched “healthy lifestyle corners” in 20 stores and expanded its Green Line private label across categories and regions.

Rational consumption
of resources

Our business strategy has for many years included targets to reduce costs related to solid waste disposal and energy consumption. We have also encouraged our customers to participate in various initiatives to recycle or reduce the use of non-reusable packaging for some time. Under the new Sustainable development strategy approved in December 2019, we are continuing to implement current practices aimed at supporting UN SDG 12 (Responsible Consumption and Production), which we have identified as a priority for X5, as well as secondary UN SDGs listed in section "Our sustainability goals". In order to continue to improve our performance in these areas, we are also piloting and introducing new and innovative ways to optimise our own resource consumption and further encourage our customers to reduce, reuse and recycle.

Based on surveys of consumer priorities among our target groups in Russia, we believe that our priorities in this area are fully aligned with those of our customers, who increasingly want to see the companies they do business with acting in a responsible way in terms of environmental footprint.

Waste management
Solid waste аnd recycling
Our approach to solid waste aims to minimise the volume of solid waste that is sent to landfills by reducing the overall volume of waste we generate and maximising recycling volumes. This is achieved through, among other things, more accurate inventory planning, which includes big data–driven demand modelling along with more frequent product deliveries, better adaptation of the product mix to customer needs and smaller minimum order quantities (MOQs) negotiated with suppliers as well as meeting all temperature requirements during transportation.
Pyaterochka

Pyaterochka stores sort the solid waste they generate, with plastics, paper and cardboard, and plastic film compacted separately. Recyclable materials are shipped from stores back to our DCs, where they are sent for recycling.

During the course of 2019, Pyaterochka worked with government-approved regional operators for waste disposal. All non-recyclable solid waste is handled by these approved operators.

Perekrestok

Perekrestok continues to recycle all useful types of waste, including packing cardboard and polyethylene, plastic boxes for fruits and mushrooms, polystyrene for chilled fish, banana boxes, used shopping carts, waste vegetable oils and wooden containers. About 72% of the waste Perekrestok generates is recycled. For the remaining 28%, Perekrestok is actively looking for ways to start recycling. As a pilot project, we began recycling wooden pallets last year from the stores in our Central divisions, which reduced the amount of trash sent to landfills.

With the introduction of a record-keeping and monitoring system for recyclables, Perekrestok’s income from the sale of recyclables increased by 18% both in monetary and volume terms.

Perekrestok also continues to implement a project aimed at the return of reusable containers from stores to DCs, including pallets, plastic boxes and more.

Central office
Giving paper a new life
The format’s offices launched a project for the collection of waste paper. The Operations Department installed 10 special boxes for collecting paper, and we are now receiving around 200 kg of paper every month for recycling.
After installing a container for used batteries, we collected about 100 kg of used alkaline batteries and handed them over for recycling.

Amount of recyclable waste sold from stores, ths tonnes*

2017 2018 2019**
Cardboard 256 280 301
Pallet scrap 124 189 220
Shrink wrap 16 19 39
Banana boxes 16 12 21
Plastic 7 7 9
Total 419 507 590

* Restatements of previous periods are due to the refinement of the methodology.
** Excluding Karusel.

Income from the sale of recyclable waste from stores, RUB mln

2017 2018 2019
Pyaterochka 1,386 1,817 2,107
Perekrestok 172 314 386
Total 1,558 2,131 2,493
Food waste

As a food retailer we seek to both minimise the volume of waste generated and the impact of its disposal. All food waste generated by X5 stores is sent to third parties for landfilling or recycling. We are looking for opportunities and piloting technological solutions to transfer food waste for further processing.

Pyaterochka launched an initiative at its proximity stores to transfer unsold food and merchandise that becomes unsaleable before its expiry date for recycling into animal feed. The chain plans to roll out this initiative across all its stores by April 2020, with ca. 70% of such items to be sent for processing. The decision was made following a 10-month pilot project covering nearly all the regions where Pyaterochka operates. As part of the pilot, the chain was able to increase the volume of food sent for recycling to 2.5 kt a month, which is up to 30% of the potential waste from over 5,000 pilot stores. For this purpose, Pyaterochka launched a new business process for sorting, packing and sending a portion of unsold stocks to the project partners on a daily basis. The partners are 10 companies from across Russia that collect fruit, vegetables, pastry and groceries that have become deformed and unsaleable before their expiry date in order to turn them into animal feed. In 2019, Pyaterochka sold 13.2 thousand tonnes of unsold stock.

Perekrestok arranges centralised monthly removal of food waste for recycling. Previously, every store was equipped with special refrigerators for the temporary storage of food and biological waste, which made it possible to introduce a procedure for the collection, storage and removal of biological waste in accordance with Russian regulations. Some regions have begun selling some unsold food for animal feed, which greatly reduced the cost of disposal. As a cost-saving measure, the Company has stopped the storage and handover of biological waste at stores. Instead, a procedure was introduced for the thermal processing of animal waste. Thermal-processing equipment was acquired, and instructions for handling waste and the aforementioned equipment at Perekrestok stores were prepared and circulated.

Packaging

We are working on various initiatives to reduce the amount of consumer packaging we use, ranging from the development of a new category of products without packaging to the use of reusable and/ or recycled packaging. Some of the practices we already have in place to reduce packaging include the following:

  • X5 does not give out free plastic bags at checkout counters in its stores, which reduces consumption of disposable packaging.
  • X5 offers customers reusable bags as an alternative to disposable ones.
  • In some regional stores, we offer paper bags as an alternative to plastic ones.
  • In order to minimise plastic waste, the online supermarket Perekrestok.ru piloted the collection of plastic delivery bags for recycling. Customers can return plastic bags used during delivery to the courier.
  • Pyaterochka successfully piloted and is rolling out the use of reusable bags for weighing fruits and vegetables.
  • Perekrestok started preparing a pilot programme to use plastic bags that are made from 35% recycled plastic.

X5 constantly reviews proposals from innovative vendors who offer production and supply of environmentally friendly packaging for stores. X5 has also teamed up with R&D centres and manufacturers of eco-friendly packaging to explore new ways to reduce packaging waste.

Facilitating recycling of consumer packaging

As part of a pilot project to collect used plastic and aluminium beverage containers of any size and colour for recycling, reverse vending machines were installed at 10 Pyaterochka stores in Moscow. The project is being implemented in partnership with the Coca-Cola system in Russia. For each bottle and/or can returned, the machine issues a coupon for 15% off a range of Coca-Cola drinks.

Ten reverse vending machines were also installed in seven Perekrestok supermarkets and three Karusel hypermarkets in Moscow as part of a pilot project to collect used plastics for recycling. The project is being implemented in partnership with Unilever. In order to encourage consumers to sort their waste, a coupon is issued for each item of packaging that is returned, offering 10% off a selection of Unilever products at Perekrestok and Karusel stores.

Energy consumption

Electricity consumption accounts for about 80% of X5’s total utility costs, which makes it a priority. We regularly pilot and introduce new energy-efficient technologies that enable us to reduce energy consumption. As part of our energy-efficiency programme, X5 is gradually reducing electricity consumption per square metre of retail space. We do this with the help of automated monitoring systems that record electric energy consumption, as well as a monitoring and control centre for these systems. Some of our key initiatives to optimise energy use include:

  • setting up an automatic data collection system across Pyaterochka stores to reduce electricity consumption, analyse the data flow and calculate optimal tariffs. As of 31 December 2019, 97% of Pyaterochka stores were providing real-time data on electricity consumption through this system. All new stores have smart meters in place. We are expecting annual savings of at least RUB 150 million as a result;
  • rolling out the extended Smart Store pilot in the Pyaterochka retail chain to cut energy consumption at retail outlets by 5%. From 2020, all newly opened and refurbished Pyaterochka stores will be equipped with this technology;
  • using remotely controlled refrigeration systems in all Pyaterochka stores;
  • rolling out a comprehensive system in Perekrestok stores that helps to improve the energy efficiency of supermarkets. The automated control and monitoring system will help cut power consumption in stores by an average of 10%. The energy-efficiency system regulates equipment and lighting loads based on the operating mode of the retail facility, current temperature indoors and outdoors, and CO2 content in the air. The new technology has already been piloted and is now being integrated into every new store;
  • launching the Improving the Energy Efficiency of Automated Electricity Fiscal Metering project across Perekrestok stores to enable checking of electricity meters at the point of metering and to enter into direct power supply contracts based on multiple tariffs;
  • Perekrestok took the decision to extend its “Energy-Efficiency Upgrade of the Automated Commercial Energy Metering System” (ACEMS) project into 2020. The ACEMS project provides us with reliable information on electricity consumption, enables us to check meters on the spot and to conclude direct contracts for energy supply on the basis of multi-tariff payments. All new and refurbished stores are equipped with ACEMS and all new lease agreements have an option to switch to direct electricity contracts;
  • installing LED lighting in all Perekrestok and Pyaterochka stores.

Pyaterochka and Perekrestok have completely switched to LED lighting in their stores. We have stopped using all mercury-containing fluorescent bulbs. As a result, in addition to consuming less energy, we no longer generate class 1 waste (such as used fluorescent bulbs), which is extremely hazardous for the environment. Consequently, there are no costs for their disposal and removal. LED lamps are classified as low-hazard waste in terms of their environmental impact, and they do not require special processing.

Savings from remote refrigeration monitoring sycomp at Pyaterochka, MW·h/year

2017 2018 2019
Reduction in electricity
consumption
9,444 11,430 11,984

Consumption at Pyaterochka, MW·h/year

2017 2018 2019
Consumption 1,888,858 2,285,948 2,396,869

Energy intensity at Pyaterochka, kW·h/100 m²

2017 2018 2019
Energy intensity 24.80 24.48 22.73
X5 Retail Group's greenhouse gas emissions

X5 Retail Group closely monitors its impact on the climate. In 2019, we launched a Group-wide greenhouse gas emissions assessment in line with the GHG Protocol Corporate Accounting and Reporting Standard (Revised Edition), with a base year of 2018.

We have developed a GHG inventory for our key business units, i.e. Pyaterochka proximity stores, Perekrestok supermarkets and Karusel hypermarkets, as well as associated distribution centres, logistics hubs (RVI), the Smart Kitchen (Fabrika-Kukhnya), Company-owned trucks (Agro-Avto) and the administrative department (Corporate Centre).

Gross GHG emissions, kt of CO2e
GHG emissions structure in 2019, %
GHG emissions dynamics

Compared with the 2018 base year, Scope 1+2 (2,645 kilotonnes of CO2e), GHG emissions increased by 8.7% year-on-year in 2019. This growth is associated primarily with extensive growth in the number of stores and total selling space. We aim to reduce greenhouse gas emissions by increasing energy efficiency and replacing refrigerants with high global warming potential with more climate-acceptable alternatives.

Optimising logistics performance
In line with UN SDG 12 (Responsible Consumption and Production), which is part of our Sustainability Strategy, we undertake to optimise our logistics operations by reducing consumption of energy and materials and waste generation. Key elements of our work in this area are described below, in line with the separate logistics functions run by Pyaterochka and Perekrestok.
Distribution centres
Pyaterochka

In its DC operations, Pyaterochka seeks to reduce the consumption of energy and materials, while also improving the quality of buildings and reducing operating costs. As a result of the following initiatives, we expect to reduce the impact of the construction of distribution centres on the environment.

Pyaterochka DCs and stores recycle wastepaper, plastics and polyethylene for processing. In 2019, we processed 158 thousand tonnes of recyclable waste. In addition to recycling, we are taking measures to reduce waste generation, such as recycling reusable boxes that are used for deliveries of smaller shipments to stores. We are also testing pooling of boxes for fruit and vegetable suppliers, and we aim to start testing the pooling of pallets in March 2020.

Energy consumption is another area of continued focus in our logistics operations. During 2019, we took a number of measures to further decrease energy consumption:

  • Energy-saving lighting and motion sensors were installed at all DCs.
  • Refrigeration units were upgraded at three distribution centres (Forpost DC, Lobnya DC and ZTL DC) to enable them to use free cooling technology, which uses outside air to maintain temperature ranges across the various zones in DCs during the winter period.
  • Electricity was purchased in the wholesale market for four distribution centres (Podolsk DC, Bogorodsk DC, Samara DC and Lobnya DC).
  • A solar collector was installed at the Rostov DC.
  • A telemetry project was launched in 2019 in order to increase transparency in accounting and improve the manageability of energy costs at the Company’s DCs; the system was deployed at nine DCs in 2019.
  • In order to reduce the amount of loading and unloading equipment used, a monitoring and access control system for loading equipment was introduced at Pyaterochka DCs.

In 2019, external environmental regulations applicable to Pyaterochka DCs were identified, and compliance with these requirements is monitored on an ongoing basis using audit checklists.

In addition to further measures aimed at recycling and reducing waste generation, as well as energy conservation, we will begin introducing elements of ISO 14001 (environmental management) at DCs in 2020.

Perekrestok

Perekrestok plans to introduce a system that enables us to track products “from farm to fork” in order to improve freshness, increase productivity and efficiency, as well as enable us to ensure the use of efficient, safe and healthy production and transportation throughout the supply chain.

Some highlights of Perekrestok’s supply chain environmental protection activities include the following:

  • Perekrestok sorts solid waste at all stores and DCs, and sent over 1,700 tonnes of waste for recycling in 2019.
  • Some 125 batteries for DC loading equipment were sent for processing and further disposal.
  • Perekrestok’s fleet of diesel loaders was upgraded to more energy-efficient ones, which enabled the format to reduce fuel consumption and CO2 emissions by up to 10% without a decrease in performance.
  • All DCs use energy-saving LED lighting: the final refitting of LED lighting at a DC was completed in February 2020.
  • To increase the efficiency and productivity of loading and unloading equipment, a system for monitoring and access to loading equipment has been introduced at the Sofino and St Petersburg DCs.
  • The Smart Circuit Board project has been introduced at the Sofino DC for effective heat supply management in order to reduce heat losses and energy costs.
Transport

Since our most significant environmental impact comes from our transport unit, we use a variety of approaches to minimise the footprint of transporting goods from our DCs to stores. Our fleet covered 77% of our transport needs in 2019, and it is newer than the fleets of most of our external contractors, making it possible to decrease emissions and prevent pollution caused by maintenance operations. Contractors are responsible for compliance with environmental requirements, and our transport service agreements stipulate that trucks must meet all legislative requirements, including environmental requirements.

We use certified service stations to provide regular maintenance for our trucks in line with legislation and the norms established by truck manufacturers based on either the number of kilometres on the odometer or the vehicle’s working life. Daily monitoring of the condition of our vehicles, including their exhaust systems, is part of our mechanics’ and drivers’ responsibilities. If serious failures are detected in a vehicle, it is withdrawn from service and sent for repair.

In addition, we do not purchase used or outdated vehicles, nor do we use vehicles that have reached the end of their service life in accordance with the manufacturer’s recommendations. As of the end of 2019, the average age of vehicles in the Company’s fleet was 2.6 years. Ninety-three per cent of X5’s vehicles comply with Euro 5 and Euro 4 standards, and 7% are Euro 3–rated. Since 2018, we have been purchasing only Euro 5–rated or higher-class vehicles, and we have been using only high-quality fuel from leading producers.

Our main areas of focus and goals for 2020 are the following:

  • reducing empty run mileage;
  • reducing emissions and switching to petrol–diesel engines;
  • using mobile electronic bills of lading to reduce paper workflow;
  • piloting predictive analytics aimed at reducing emissions and expenditures on spare parts, as well as improving driving safety;
  • selling 100% of batteries and tyres for recycling and reuse.
Unit 2017 2018 2019
Share of transportation needs provided by its own fleet * % 71% 74% 77%
Share of own fleet vehicles that meet Euro 5 and Euro 4 standards % 75% 88% 93%
Number of vehicles with a hybrid (petrol–diesel) engine purchased per year Units 100 150 219
Number of vehicles with a hybrid engine (petrol–diesel) as of the end of the year * Units 100 250 469
Number of Euro 5–rated trucks as of the end of the reporting period Units 1,122 2,012 2,468
Number of Euro 5–rated trucks purchased per year Units 597 910 468
Number of old, Euro 3–rated vehicles written off during the year Units 194 361 192
Total mileage mln km 345 444 507
Empty run mileage (of total mileage) * % 44% 41% 40%
Number of tyres sold for recycling and reuse Units 3,136 3,976 8,082
Batteries sold for recycling and reuse kg 48,756 64,227 68,426

* Restatements of previous periods are due to the refinement of the methodology

Air emissions

Unit 2017 2018 2019
CO tonnes/year 4,741 5,570 6,109
Nox tonnes/year 10,058 10,734 10,695
HC tonnes/year 1,471 1,717 1,878
PM tonnes/year 140 116 102
Total tonnes/year 16,410 18,137 18,784
During 2020, we aim to maintain the share of empty run mileage at 2019 levels while increasing the percentage of transport between branches. We also plan to achieve 100% sales of recyclable materials and 100% sales of batteries and tyres for recycling and reuse.
People review
Decent working conditions
and equal opportunities
for all employees

One of our primary goals under our new Sustainable development strategy is to support UN SDG 8 (Decent Work and Economic Growth). The main ways that we can do this is by employing people from the communities where we operate and by offering our employees safe, productive and fulfilling jobs.

We also aim to support UN SDG 5 (Gender Equality) and UN SDG 10 (Reduced Inequalities) by implementing a human rights policy that bars any form of discrimination in the workplace and provides mechanisms to ensure that these principles are upheld.

In determining the priorities of our human resources strategy, we are guided by staffing requirements that will enable us to implement our strategy and by feedback we receive from employee surveys and other channels, which are described in more detail below.

+29,045 2018/19
307,444
Headcount
Key highlights
Headcount Number of training
participants
Investments in
training, RUB mln
Male / Female, %
2019

307,444

703,961

199.8

26 / 74

2019

278,399

422,846

150.7

27 / 73

2019

250,874

234,899

139.3

26 / 74

Full-time equivalent

2018 2019
Pyaterochka 181,176 201,135
Perekrestok 40,642 42,854
Karusel 14,806 13,769
Corporate centre 2,607 3,016
Other business units 7,594 8,526
Total 246,825 269,300

Percentage of women and men in
management positions

Management level % of women
Management Board / CEO-1 36%
Senior management / CEO-2, 3 40%
Middle management / CEO-4 42%
Personnel structure in 2019, %
Staff turnover, %
Our HR strategy

In 2019, X5 Retail Group focused on achieving its strategic goals, including in the area of human resources (HR). Our goal is to become a best-in-class employer for both current and future employees in the context of ongoing changes within the Company, in the market and among customers. To achieve this, our HR strategy is aimed at enhancing employee engagement, digitising key HR processes and services for employees and working with HR data, while also increasing the Company’s flexibility in terms of organisational development and approaches to working with personnel.

Thanks to the successful implementation of our HR strategy, we achieved a decrease in retail staff turnover of 21.6 p.p. year-on-year in 2019.

Highlights of X5’s HR strategy:
  • Engaged employees = satisfied customers: improving customer service by meeting the needs of staff;
  • Systematic work on the competencies of employees and managers;
  • Productivity growth (innovative technologies, HR metrics and services);
  • Digital transformation: maintaining and supporting the implementation of digital initiatives.
Engaged employees  = satisfied customers
Based on the results of the “Your Voice” employee survey conducted in 2018 (please see the 2018 Annual Report, page 161), we took a number of steps to enhance the engagement of office and retail personnel, such as improving working conditions, updating our motivation system and getting regular feedback from employees.
Feedback from employees

We introduced new technologies and changed our internal processes in order to expand the channels available to employees for providing feedback, which is the basis for decision-making, including with regard to staff.

  • Pyaterochka integrated an instant-feedback module into its Personal Account mobile application, which is available to all retail personnel. In conjunction with the Big Data Department, a polling platform was introduced that enables us to get responses from the largest number of Pyaterochka employees possible, and at all levels. We are planning to scale up the platform to cover other X5 business units in 2020.
  • Regular employee NPS surveys were launched at Perekrestok and in the Transport business unit.
  • We are developing projects to collect and review staff initiatives: Pyaterochka has a system in place for collecting ideas and efficiency proposals (over 2,000 ideas were submitted for consideration in 2019: approximately 1,200 have already been implemented, and 400 are in the process of implementation); the Transport business unit has developed a process for gathering expert advice within the framework of its Idea Factory (195 ideas were submitted for consideration in 2019, 17 of which were implemented, and 26 are in the process of implementation).
  • X5 conducted its first-ever internal customer satisfaction index, in which staff were able to assess the work of other departments and functions.
Effective motivation and fair remuneration

In line with market practice, X5’s processes are designed to uphold a fair, consistent and transparent remuneration and motivation system related to individual performance and team results.

Personnel assessments with 100% coverage include:

  • monthly, quarterly and semi-annual performance evaluations;
  • employee ratings at X5 stores;
  • annual evaluations of KPIs for all administrative staff, as well as for certain categories of retail and logistics personnel;
  • performance assessment for project teams based on the results of project stages.

Key achievements in 2019:

  • Remuneration systems were revised for personnel at Pyaterochka and Perekrestok, as well as for X5 drivers. Motivation systems focused on productivity growth were simplified and made easier for staff to understand.
  • A new approach to KPIs was developed for 2020 that will enable us to increase the involvement of employees in achieving corporate targets and to share in the success of implementing them.
  • In 2019, we continued our transition to a cross-format grading system, and we attached to it a percentage of annual bonuses, voluntary health insurance and life insurance programmes, business trips, corporate mobile communications, etc. Bonus programmes were developed for new digital business units.
  • A successful pilot was conducted involving two elements: remote work by office staff and using unassigned workplaces in the office. Scaling of this project will begin in 2020.
  • The PrimeZone corporate privilege programme, which is used by 90% of X5 office employees throughout Russia, was expanded to include Perekrestok store managers.
  • Some 11,878 employees took parental leave in 2019.
  • As part of a conceptual update for Pyaterochka and Perekrestok stores, we changed the way we arrange and design staff break areas. We have started designing our staff rooms in the same comfortable and attractive manner as our shopping areas.
Recruitment and adaptation
  • Pyaterochka conducted a successful pilot of the Skillaz cloud-based system for large-scale recruitment and launched a minimum viable product (MVP) for monitoring the salary market in all regions where the Company operates. The recruitment time for one member of line personnel was reduced from 10 to 5.5 days.
  • Perekrestok uses an algorithm to create a stream of applicants for priority locations, as well as an adaptive chatbot. The processes of calculating staffing needs, placing vacancy notices, collecting applicant responses and contact details, and planning and requesting temporary staff have all been automated.
  • A special focus in 2019 was on bolstering the position of X5’s HR brands for applicants at all levels. Processes for developing value propositions for Pyaterochka as an employer and for X5 Retail Group began, with emphasis on the technological potential of X5 as a company that is developing the future of retail.
New hires structure in 2019
Corporate culture and values

Continuous, rapid change is part of our cultural DNA. This is what makes us flexible and allows us to maintain our leadership in an aggressive, competitive environment. It enables us to launch products and solutions demanded by customers faster than our peers, and it allows us to be exactly where shoppers want to see us — both online and offline. Uniform values, shared traditions, an open information environment and excellent opportunities for development help us to remain unified and to maintain X5’s consistency of operations.

In 2019, we continued implementing shared corporate values. These values have already been integrated into the majority of the HR processes in our business units, from assessing the suitability of external candidates to practices involved in evaluating the quality of teams and the formation of a staff reserve. In 2019, the winners of X5’s cross-format Most Valuable Employee award from all retail formats and business units were, for the first time, nominated and selected by employees through an open vote.

X5’s HR Department was one of the first corporate functions to launch a product approach. Since September, the product team has been developing a product called the “Unified Information Environment”, which is creating a fast and user-friendly state-of-the-art corporate portal. The MVP was tested at the end of 2019, and we plan to launch a new version of the portal for all office employees in Q1 2020.

In line with the product approach, a single mobile platform (application) is being developed for Perekrestok staff, the MVP for which was also introduced at the end of 2019. The X5 Transport app was launched for drivers in 2019, and Pyaterochka employees gained access to the Personal Account mobile application for Android and iOS.

Events for employees

X5 supports traditional corporate events, while also developing new ones. In 2019, the entire Company was united by happy.x5, a virtual platform for holidays. During the year, more than 90,000 people visited the platform.

In total, 64 events were organised in 2019, which were attended by nearly 670,000 people. At Pyaterochka, this included a Transformation roadshow, which was held for the first time with the participation of top management. The roadshow visited seven cities and involved 2,400 participants. Throughout the entire year, emphasis was placed on a culture of trust and teamwork. Based on feedback from employees, Pyaterochka revised the format of its sports competition, which involved 23 events for 28,000 employees from 211 cities. Perekrestok held a corporate volleyball tournament in all regions where it operates and arranged a presentation for the employees of the new Smart Kitchen division timed to coincide with X5’s anniversary.

Professional recognition and non-financial motivation

One of our main goals for 2019 included non-financial motivation for staff and improving the attractiveness of the HR brands of our retail formats and of X5 as a whole. More than 160,000 employees from 14,500 stores and 32 Pyaterochka distribution centres took part in the “Pyaterochka Masters” contest. Perekrestok again held its “Logistics Superman” competitions, as well as “Victory at the Till” and “Culinary Duel” competitions for cashiers and cooks, respectively. Transport launched a comprehensive long-term programme called “Champions League Drive X5”, with internal ratings and awards for the top drivers; a professional skills competition called “League of Professional Drivers”; and contests for drivers and their families.

Professional development

In order to achieve the ambitious goals laid out in our business strategy, we need a strong team in which everyone is capable of rising above their own interests and seeing the potential of teamwork. Our goal is to enhance career ladders, provide various tools for impactful work and development, and create an open, innovative environment that supports the path to a digital business transformation.

Training and development
  • Various training and development programmes are available to X5 employees at all levels, from cashiers to top managers. Each programme is based on our business needs, on the one hand, and plans for employee development, on the other. We use state-of-the-art training formats and support the development of lifelong learning.
  • The range of training programmes varies depending on job duties and assessments of work quality and goals. We constantly strengthen our team by hiring talented new employees with great potential, and we offer staff a variety of opportunities for professional growth and development.
  • In 2019, our efforts were focused on developing strong leaders who can work collectively in the interests of X5 and who are capable of building a next-generation retailer together. To this end, about 100 X5 executives were trained as part of the cross-format “X5 Leaders” programmes at IMD and Skolkovo. The programmes will continue in 2020.
  • Comprehensive work aimed at improving managerial skills and the business vision of middle management helped in greatly reducing turnover. Pyaterochka launched a programme called “First Division” for operations managers, supervisors, shift supervisors and distribution centre managers (673 people). In addition to existing programmes, Pyaterochka also launched a Logistics Academy and an HR Academy, while Perekrestok used a gaming format to train managers in its “Management Cycle” course.
  • Perekrestok launched an annual programme for the development of retail personnel. It includes blocks such as “Engagement”, “Effective Management”, “Team Development” and “Coaching”.
  • In April–May 2019, an employee engagement event was held at Perekrestok that included the following topics: a tool selection algorithm, corporate values, situational leadership, group influence techniques, feedback principles and interviews on values. Some 675 store managers were trained.
  • A training concept for retail personnel was developed at Pyaterochka. Several training courses were carried out, including “Service Navigator”, “PROservice”, and “Service Expert”. A project was implemented to develop our internal trainers.
Hours of training per employee
Internal growth

At X5, talented employees with a great deal of potential have a wide range of opportunities for professional and career growth. The rapid development of new business areas within the Company, including digital businesses, the start of a digital transformation and the introduction of a unified system of grades/bands reinforced the trend towards horizontal and vertical movements at X5.

A staff reserve programme is being developed that now covers retail personnel as well. For example, Perekrestok’s staff reserve increased by 8% during the year. At X5’s Corporate Centre, we began holding personnel committee meetings in all departments to discuss prospects for the development of line managers and to determine the staff reserve for more senior positions. As of the end of 2019, 60% of vacant positions within X5 at the level of CEO-1 and CEO-2 were filled by internal candidates. In 2019, 77% of managerial vacancies within the Company as a whole were filled by internal candidates.

Improving efficiency and productivity

One of our goals is to increasingly digitise X5’s HR function, including the standardisation and automation of HR processes and of processes involved in analysing personnel data to make proper, informed decisions, while also improving the quantity and quality of HR services for staff.

In 2019, we switched to an automated, centralised system of HR metrics. With the system’s help, 38 personnel and business indicators are calculated on a daily basis, which enables us to quickly receive information with a detailed breakdown by individual stores and departments, and also to develop analytical models for making personnel-related decisions.

The Personal Account application, which provides electronic HR services for staff, was greatly expanded during 2019. In addition to requests for a variety of personnel documents, the system also gives personnel access to other functions, such as vacation planning, digital signatures, access to Company bylaws and much more. Mobile applications available to all employees, including store staff, are being improved.

Perekrestok ran a pilot project during 2019 to replace the system used to track the working hours of line personnel, which used to use fingerprint access, with a video recording system that monitors employees at work in different areas of stores. The retail format also uses flexible scheduling, i.e., a system of automated staff scheduling that takes into account stores’ needs on any given day and throughout the week.

One of the Company’s key HR projects in 2020 will be the launch of a common Human Resource Management service centre located at X5’s service centre in Nizhny Novgorod. Sixty-five personnel-related business processes and services for more than 43,000 staff members have already been transferred to the HR service centre, and a plan for transferring Pyaterochka’s transactional personnel processes in 2020 has been prepared.

Digital transformation

Digital transformation, which is one of the core goals of our business strategy, played an important role in all of our HR activities in 2019, from organisational structure to training and recruitment. This included the creation of an institution for HR business partners to support newly created digital businesses and new areas for the Company’s development.

We also began to use a product approach methodology for the creation and scaling of agile internal development. This is being used for the establishment and work of all X5 product teams.

The first modules of X5’s Digital Academy were also launched. These are platforms for online and offline staff development, knowledge and skills training necessary for the implementation of digital initiatives, and for X5’s transformation and growth. A school for product owners is in place, with schools for scrum masters, Python and data analysts next in line. Employees will have access to courses on digital transformation, the basics of the X5’s product approach, digital technologies, data management and others.

Human rights

We support the four fundamental principles outlined in the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work. We prohibit the use of forced and child labour. In addition, we do not tolerate discrimination on the basis of gender, skin colour, ethnicity, religion, sexual orientation or disability in our operations or our supply chain.

Our Declaration on Human Rights is updated as necessary, in line with changes in the legislation, strategy and values of the Сompany.

In the framework of regulatory risk management, all risks associated with violations of labour legislation are allocated to a separate group of risks, which are assessed on an annual basis. The result of the assessment affects the priority of the organisation of compliance activities (the complexity and number of such activities depend on the level of risk). Information on critical risks, as well as the most significant risks with a high impact (according to the approved risk assessment methodology) and a plan of compliance measures aimed at mitigating these risks, is reported to the CEO and the Audit and Risk Committee of the Supervisory Board twice a year.

Information about X5’s activities that protect fundamental human rights is available in the relevant sections of this Report.

On ensuring equal rights and freedoms regardless of gender, race, nationality, language, origin, property and official position, place of residence, religion, beliefs, membership of public associations (Article 19 of the Constitution of the Russian Federation), see the "People review" section.

The following were the key initiatives in the reporting period:
  • Various training and development programmes were available to X5 employees at all levels, from cashiers to top managers.
  • A wide range of opportunities were provided for professional and career growth for talented employees.

On securing the right to work in conditions that meet the requirements of safety and hygiene (Article 37 of the Constitution of the Russian Federation), the right to protection of one’s health and medical care (Article 41 of the Constitution of the Russian Federation), see the "Occupational health and safety" section.

The following were the key initiatives in the reporting period:
  • Our OHS management system was regularly updated in response to changes in Russian regulatory requirements.
  • Implementation of OHS measures was constantly monitored, and impact assessments were carried out on a regular basis.
  • The OHS-related qualifications of personnel have improved thanks to ongoing training courses and seminars.

On ensuring the right to remuneration for work without any discrimination and at a level that is not lower than the minimum wage established by federal law, the right to rest (Article 37 of the Constitution of the Russian Federation), and also on voluntary social security (Article 39 of the Constitution of the Russian Federation), see the "People review" section.

The following were the key initiatives in the reporting period:
  • Remuneration systems were revised for personnel at Pyaterochka and Perekrestok, as well as for X5 drivers. Motivation systems focused on productivity growth were simplified and made easier for staff to understand.
  • A new approach to KPIs was developed for 2020 that will enable us to increase the involvement of employees in achieving corporate targets and to share in the success of implementing them.

On the prevention of economic activity aimed at monopolisation and unfair competition (Article 34 of the Constitution of the Russian Federation), see the "Compliance and ethics" section.

The following were the key initiatives in the reporting period:
  • Training of employees whose responsibility includes the management of anti-corruption activities and ensuring compliance with anti-corruption principles;
  • Automation of the ethics hotline, which enabled us to respond more quickly to information about potential violations.

On securing the right to a favourable environment (Article 42 of the Constitution of the Russian Federation), see the "Rational consumption of resources" section.

The following were the key initiatives in the reporting period:
  • Piloting and introducing new and innovative ways to optimise our own resource consumption and to further encourage our customers to reduce, reuse and recycle.

On charitable activities recognized as a form of voluntary social security (Article 39 of the Constitution of the Russian Federation), see the "Local communities" section.

The following were the key initiatives in the reporting period:
  • Donations and volunteer activities including city-wide food marathons.
  • The launch of a joint project by Pyaterochka retail chain, the Centre to Search for Missing People (CSMP) and the Liza Alert search-and-rescue team. The project will set up “safety zones” in retail stores across Moscow and the Moscow region to help lost elderly people and children find their way home as soon as possible.
Regulatory requirements

We fully align all of our personnel policies with Russian labour law, and we provide the appropriate rights, benefits and compensation to all employees.

SpartaSport
One of our key employee engagement activities is our annual SpartaSport competition. With the aim of supporting healthy lifestyles and promoting a culture of teamwork, we organise a series of events for our employees across Russia.
100
Days of sports festivals
were held all over the country from 15 June to 1 October where Pyaterochka stores operate
Key highlights
288,000
From
Employees
participated in TURBOSTARTs
211
Cities
5,084
In
Athletes
Indoor football, volleyball, CrossFit, athletics and table tennis
5
Sports
23
Sporting events
were held as part of the TURBOSTART competitions
55,000
Viewers
of the online broadcast of the finals. And as many as 2,200 employees attended stadium events.
736
Referees
were involved in all the cities hosting TURBOSTARTs
Occupational health and safety
Our Occupational Health and Safety (OHS) management system is designed to enable management at every level to implement our OHS policy, including the identification of potentially dangerous incidents in a timely manner, taking corrective measures to ensure safe working conditions and making informed management decisions. Our Company-wide corporate safety standards, as well as training, medical examinations and professional risk assessments, are compliant with Russian Federation regulations and our own OHS Policy.

We have also implemented an internal audit system to ensure that our activities comply with applicable OHS legislation and other regulations. Internal OHS audits are a means of preventing violations of employees’ labour rights. Obligatory internal oversight is carried out by the Corporate Centre’s Occupational Health and Safety Department and by the OHS service in each of the retail formats.

Over the last three years, X5’s lost time injury frequency rate (LTIFR) decreased from 0.611 to 0.357, which reflects the impact of our OHS system and a decrease in workplace injuries during the reporting period.

LTIFR among employees
Occupational health and safety strategy

Our main strategic goals in the area of occupational health and safety are to protect the health and safety of employees in the workplace, reduce injuries and eliminate accidents, and prevent occupational diseases.

The main objectives of our OHS strategy are:

  • to minimise risks to human life and health at X5 Retail Group and at third-party suppliers of goods and services;
  • to develop our leadership in OHS matters and a sustainable culture of safety among management and personnel;
  • to improve working conditions and equipment safety;
  • to constantly seek ways to further improve OHS management systems and to further reduce the number of accidents and injuries;
  • to provide training and monitor the knowledge and skills of employees on OHS matters;
    to incentivise employees to adhere to the principles of a sustainable culture of safety and to comply with safety regulations;
  • to develop a knowledge-based environment and an OHS best practices platform.
OHS policy highlights
  • We comply with the laws of the Russian Federation and other regulatory acts concerning occupational health and safety. We also monitor compliance with OHS legislation and other regulatory acts. Monitoring is carried out for the purpose of establishing safe and healthy working conditions for employees and preventing workplace accidents and occupational diseases.
  • We inform every employee about any identified hazards and risks to their health and safety in the workplace. We ensure that every employee is engaged and has access to reliable information regardless of their position.
  • We are constantly improving our OHS management system to ensure that it meets the Company’s needs.

Company management is responsible for implementation of the Policy by establishing targets and objectives, as well as planning and ensuring adequate financial resources are available to achieve them.

We have put in place KPIs for the heads of business units and the OHS service based on the following set of goals related to our OHS system:

  • successful implementation of the key areas of our OHS policy and development of proposals for its improvement
  • development and implementation of programmes to improve working conditions and workplace safety
  • ensuring compliance with OHS legislation, including ensuring the safe operation of buildings and structures, equipment, instruments and technical equipment
    ensuring safe working conditions
  • monitoring compliance with OHS requirements
  • training and testing of knowledge on OHS policies and regulations
  • accident prevention
  • protection and promotion of employee health

Our OHS service is responsible for ensuring that the targets and objectives of the OHS Policy are met. OHS management and coordination of OHS-related activities are the purview of the Corporate Centre’s Occupational Health and Safety Department in conjunction with key OHS managers in our retail formats. Each retail format has its own OHS service comprising up to fifty people, depending on the number of personnel employed by the format. All OHS service employees regularly attend seminars and training courses, and they have certificates of advanced training in the area of occupational health and safety.

OHS organisational chart
CORPORATE CENTRE
HEAD OF HEALTH
AND SAFETY
PYATEROCHKA
HEALTH AND SAFETY
MANAGER
PEREKRESTOK
HEALTH AND SAFETY
OFFICER
KARUSEL
SENIOR HEALTH AND
SAFETY ENGINEER
AGRO-AVTO
(TRANSPORTATION)
SENIOR HEALTH AND
SAFETY ENGINEER
OTHER
BUSINESS
UNITS
MACRO REGION
HEALTH AND SAFETY
ENGINEER
DIVISION
HEALTH AND SAFETY
ENGINEER
REGION
HEALTH AND SAFETY
ENGINEER
FLEET OPERATORS
HEALTH AND SAFETY
ENGINEER
HEADS OF BUSINESS UNITS
OHS activity highlights
Training

All X5 Retail Group personnel must undergo required OHS training in a timely manner. We carry out employee training on an ongoing basis, including OHS briefings and training on general OHS issues, as well as processes and procedures related to the OHS management system. All managers, specialists and staff responsible for OHS issues at the departmental level also take part in external professional development training through accredited organisations.

All specialists and line employees take part in in-house training through corporate distance-learning courses that supplement legally required training on OHS issues. Training aims to improve the qualifications of personnel in accordance with internal standards and OHS best practices. Employees responsible for building maintenance are required to participate in training on topics relevant to building use, including gas and electric safety (maintenance service employees represent 2–3% of total employees). Other employees are provided workplace safety training in line with their job responsibilities (cooks, bakers, cashiers, etc.), as well as first-aid training.

Number of employees taking part in OHS training (excluding compulsory briefings)
Managing occupational risks and preventing injuries

Our occupational risk management system consists of three main aspects: ongoing hazard identification, risk assessment and choosing the necessary means of oversight.

A methodology for identifying risks was developed, and all risks have been evaluated. Registers of occupational risks have been created for every workplace, and assessments are conducted on an annual basis. Corrective measures have been developed for identified hazards that will help reduce the risk (and practically eliminate the risk in the case of certain hazards) of work-related injuries or occupational diseases.

Our workplace risk assessment procedures have helped reduce unplanned expenses for sick leave, as well as repairs to damaged equipment as a result of accidents that would require the purchase of new equipment.

Our main objective in preventing workplace injuries is to transition from reacting to violations or incidents to preventing them. The main measures that we implement to prevent workplaces injuries are:

  • conducting an objective evaluation of working conditions and a risk assessment
    providing workers employed in hazardous areas with personal protective equipment, as well as special footwear and clothing
  • conducting periodic medical examinations
  • conducting a workplace audit for compliance with OHS requirements and process safety
  • conducting work safety briefings in accordance with legal requirements and Company regulations
  • purchasing safe, state-of-the-art production equipment, as well as safety equipment
    improving professional qualifications in the area of occupational health and safety, etc.
Protecting the health of employees and customers

Our OHS management system involves carrying out preventive measures to protect the health of our employees and customers, such as the following:

  • All employees who come into contact with food products in the workplace must undergo mandatory medical examinations both upon being hired and on an annual basis thereafter.
  • Drivers must undergo medical examinations before operating transport and industrial vehicles.

The main purpose of medical examinations is to determine whether an employee’s state of health is adequate for the work assigned to him or her, and also to identify and prevent occupational or infectious diseases in a timely manner. During medical examinations, specialists give employees recommendations concerning a variety of health issues, as well as advice about timely preventive and rehabilitative measures aimed at maintaining workers’ health or rehabilitation. Vaccination campaigns are carried out during peak flu season.

Percentage of employees undergoing a medical exam

2019
Corporate Сentre n/a
Pyaterochka 95%
Perekrestok 95%
Karusel 96%
Transport 94%
Direct import n/a
Smart Kitchen 100%
Service centre n/a
5Post n/a
Total 95%

(excluding women on maternity
leave and office employees)

Safety management for external contractors

We uphold a corporate standard that ensures a common approach to relations with our external contractors. This standard determines suppliers’ responsibility for occupational health and safety. Agreements concluded for the performance of contract work must, without fail, include a declaration of issues related to the safety of the contract work to be performed, as well as requirements concerning workers’ qualifications, the provision of protective equipment and other issues related to ensuring safety during contract work. All employees of contractors working at X5 Retail Group property must undergo a mandatory briefing on occupational health and safety for third-party organisations.

Investigating incidents and accidents

Our procedures for investigating and responding to workplace accidents are compliant with applicable labour laws. Major incidents resulting in serious injury or fatality or injuries to several people are reported to the state prosecutor’s office and labour inspectorate.
In response to every incident, the causes of injuries are ascertained and corrective measures taken.

In terms of compensation for personnel who have suffered injuries due to adverse working conditions, the following measures are taken:

  • Employees, including injured persons, are insured against workplace accidents and occupational diseases through the Social Insurance Fund.
  • An insurance indemnity is paid out to injured employees in case of serious accidents or to their family members in the event of a fatal accident.
  • Employees injured in workplace accidents are provided with rehabilitation and/or treatment.
  • We provide financial assistance in case of serious or fatal accidents.
Monitoring compliance

Constant monitoring for OHS compliance is one of the main management functions for ensuring occupational health and safety and an effective means of preventing workplace injuries and occupational diseases. OHS compliance is systematically monitored, as is the degree to which the Company’s OHS targets are being fulfilled; data and the results of monitoring and investigations are kept in order to facilitate the subsequent analysis of corrective and preventive actions.

In 2018, the Russian Federation Ministry of Labour introduced control questions for inspections carried out by the State Labour Inspectorate. Based on control questions, we developed checklists for our WRS-3 system. Conducting internal checks using the checklists in the WRS-3 system enabled the Perekrestok OHS service to conduct more checks (2019: 926; 2018: 738). At the same time, the number of inspections at Pyaterochka decreased (2019: 3,078; 2018: 6,227) due to the reorganisation of the format’s OHS service in retail operations (2019: 18 people; 2018: 22 people). At Karusel, the OHS service was reduced in size from three people in 2018 to two people in 2019.

The severity of violations decreased because serious technical violations were eliminated in the first year of the launch of the audit project. The remaining violations were mainly organisational in nature.

Number of inspections (external and internal)

2017 2018 2019
Corporate Centre n/a n/a 10
Pyaterochka 4,122 6,227 3,078
Perekrestok 838 741 936
Karusel 94 77 90
Transport 186 343 193
Direct import n/a n/a 7
Smart Kitchen n/a n/a 21
Service centre n/a n/a 2
5Post n/a n/a 0
Total 5,240 7,388 4,337
Incl. internal inspections 64 38 67
Pyaterochka 56 31 49
Perekrestok 5 3 7
Karusel 1 2 4
Transport 2 2 7

Number of identified violations

2017 2018 2019
Corporate Сentre n/a n/a 0
Pyaterochka 8,938 11,334 7,178
Perekrestok 5,527 6,346 8,274
Karusel 134 35 540
Transport 536 1,576 202
Direct import n/a n/a 26
Smart Kitchent n/a n/a 169
Service centre n/a n/a 5
5Post n/a n/a 0
Total 15,135 19,291 16,394

Share of violations resolved within 5 days

2017 2018 2019
Corporate Сentre n/a n/a n/a
Pyaterochka 88% 76% 87%
Perekrestok 61% 58% 93%
Karusel 90% 71% 87%
Transport 67% 59% 89%
Direct import n/a n/a 85%
Smart Kitchen n/a n/a 100%
Service centre n/a n/a 100%
5Post n/a n/a n/a
Total 77% 68% 90%
2019 OHS highlights:
  • Our OHS management system was regularly updated in response to changes in Russian regulatory requirements.
  • Implementation of OHS measures was constantly monitored, and impact assessments were carried out on a regular basis.
  • The OHS-related qualifications of personnel improved thanks to ongoing training courses and seminars.
  • Thanks to our participation in a state programme that provides financial support for preventive measures to reduce workplace injuries, medical examinations carried out in 2019 that were financed by the Social Insurance Fund of the Russian Federation enabled us to save about RUB 20 million.
  • Internal OHS audits using electronic checklists in the WRS-3 system continued, enabling us to reduce the number of working hours needed to carry out inspections, as well as to identify, in a timely manner, and rectify non-compliance issues.
  • Our compliance with OHS and sanitation standards meant that we reported zero occupational diseases in 2019.
  • Work-related injuries, health impairments, illnesses and incidents were investigated in a timely manner, as was their impact on OHS-related activities.
  • A public awareness campaign is being carried out at our retail formats with the aim of developing and supporting values of safety and health maintenance throughout employees’ working life.
  • GLONASS/GPS systems have been installed on all Company vehicles. All vehicles are equipped with tachographs, which makes it possible to monitor drivers’ compliance with requirements on work and rest periods.
  • A decrease in work-related injuries was achieved thanks to improved working conditions; at the same time, stricter disciplinary measures were imposed for violations that posed a direct threat to the life or health of employees. This was also made possible thanks to equipment upgrades, the introduction of new technologies and the addition of state-of-the-art production facilities.
  • A project was developed to automate the process of documenting OHS training through employees’ personal accounts; implementation of the project is planned for 2020.
  • Working conditions for retail and logistics employees have improved as a result of the renovation of stores.
Our OHS performance

We undertake a comprehensive quantitative and qualitative analysis of workplace injuries (identifying the causes of workplace accidents). Administrative and technical measures taken to minimise risks and prevent accidents have had positive results: despite an increase in the number of properties we own and in the number of employees in 2019, injury rates decreased.

To measure the injury situation, we use the main indicators adopted in Russian legislation: the accident severity rate and the accident frequency rate. A comparative analysis of injuries showed that both rates per 1,000 employees decreased during the period from 2017 to 2019.

Accident severity rate
Accident frequency rate
-1.5 2018/19
43.8
Accident severity rate
45.3 in 2018

X5 injury statistics, number of accidents

Fatal Severe Minor Total
2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019
Corporate Centre n/a n/a 0 n/a n/a 0 n/a n/a 0 n/a n/a 0
Pyaterochka 0 0 2 9 13 9 107 127 100 116 140 111
Perekrestok 0 0 0 2 1 0 11 24 23 13 25 23
Karusel 0 0 0 3 1 1 35 12 16 38 13 17
Transport 0 1 0 4 2 10 17 18 37 21 21 47
Direct import n/a n/a 0 n/a n/a 0 n/a n/a 0 n/a n/a 0
Smart Kitchen n/a n/a 0 n/a n/a 0 n/a n/a 1 n/a n/a 1
Service centre n/a n/a 0 n/a n/a 0 n/a n/a 0 n/a n/a 0
5Post n/a n/a 0 n/a n/a 0 n/a n/a 0 n/a n/a 0
Total 0 1 2 18 17 20 170 181 177 188 199 199
Local communities
X5 Retail Group has sought to contribute to the health and well-being of the communities where it operates since its creation, and we will continue to do so under our Sustainable development strategy, in line with the UN SDG 2 (Zero Hunger) and 3 (Good Health and Wellbeing). The community-oriented projects that we implement have been developed based on our understanding of priority areas where we are best able to make a meaningful contribution to the general health and well-being of local communities.

Our Charity Policy defines the general principles and rules of our charity activities and describes the priority areas for our charitable giving, as well as the roles and responsibilities of employees involved in our charity programmes. This policy applies to all divisions of X5 Retail Group.

Our goal is to contribute to the implementation of national programmes for socio-economic development, poverty reduction and support for socially vulnerable groups of the population. We are aware of the impact of our activities on society and voluntarily provide assistance to the population in the areas where X5 Retail Group operates.

We have identified the following priority areas in the field of charity:

  • food assistance;
  • care for children;
  • support for people with disabilities.

We have engaged the following partners, with whom we implement our charitable programmes:

  • Foodbank Rus for providing food assistance;
  • The Life Line Foundation to assist with providing care for children;
  • the Unity deaf–blind support foundation to provide support for people with disabilities.

We do not donate money and do not provide other forms of assistance to organisations that are not charities (including commercial organisations, political parties, movements and associations) or for events organised by non-charitable organisations. We also do not provide direct financial assistance to individuals.

We aim to provide transparent access to information about our charitable activities and to inform citizens about how our expectations and applicable legal requirements are integrated into our charitable activities. We aim to adhere to the following rules:

  • to publish information on our charitable activities as part of the sustainability section of our annual report;
  • to monitor the use of funds on a regular basis;
  • to monitor and analyse the requests of NGOs and beneficiaries on a regular basis;
    to conduct outreach campaigns through the media.
Number of employees taking part in social projects (volunteer activities)
The fluctuation in employee participation in social projects was due to the fact that the majority of participants are employees who run in a marathon, which is a paid event that has strict medical requirements.

Number of people receiving support through X5 social initiatives

2017 2018 2019
Basket of Kindness ca. 24 ths ca. 40 ths ca. 57 ths
Life Line Foundation 107 34 62
Unity Deaf–Blind Support Foundation 1,648 1,849 2,023
Liza Alert 271

Donations to initiatives to help those in need, RUB million

2017 2018 2019
Total donations 37.9 63.5 70.0
Incl. in-kind donations 0.8 2.0
Community investments account for 98% of donations. These are long-term strategic partnerships with community organisations and charity funds that aim to address pressing social issues.
Food assistance
Charity fairs for employees

Every year, Company employees take part in charity fairs that X5 arranges in conjunction with its partners. In 2019, more than RUB 140 thousand was collected at the fairs and donated to Foodbank Rus.

Food banks

In August 2015, X5 and Foodbank Rus, a nationwide charity organisation and Russia’s first food bank, which provides food and non-food aid to socially vulnerable groups, launched the Basket of Kindness project to collect and donate food aid to those in need. Some 1,560 stores participated in the project in 2019, and a total of 173 tonnes of food was collected and given to the elderly, large families and the disabled. More than 1,500 volunteers took part in the project, and more than 57,000 people in need received assistance in 2019.

Citywide food marathons

In 2019, as part of the Basket of Kindness programme, X5 and Foodbank Rus held city-wide food marathons in four metropolitan areas: Rostov-on-Don, Moscow (twice), Novosibirsk and Samara (online).

The first event, held on 2 March in Rostov-on-Don, collected more than 5 tonnes of groceries. On 18 May, Moscow took over the “baton of kindness”, with residents donating around 20 tonnes of food at Perekrestok stores. On 19 October, a food marathon was held in Novosibirsk, where more than 3 tonnes of food was collected. On 29 November, an event timed to coincide with New Year’s and Christmas celebrations at Pyaterochka stores in Moscow brought in about 43 tonnes of food aid. In Samara, the marathon was organised online on the official website of the Basket of Kindness project, корзинадоброты.рф. As a result of the event, which ran from 1 August to 1 October, pensioners in need of assistance received 1,500 grocery packages (9.2 tonnes of food).

Value of grocery products donated through charitable programmes
RUB MILLION
Basket of Kindness results
Number of participating stores
 
Amount of collected groceries
TONNES
Number of families who received support
THS
Supporting overall well-being
Life Line Foundation
Donation boxes
Special boxes are placed in our stores for donations to the Life Line Foundation to help children with serious illnesses. In 2019, this initiative collected RUB 14.6 million at our stores, which enabled 43 children to receive the treatment they needed.
Candies of Kindness
Through this initiative, shoppers at all Pyaterochka stores can purchase Candies of Kindness at checkout counters. RUB 5 from the sale of every candy helps cover the cost of operations for those under the care of the Life Line Foundation. In 2019, the initiative raised more than RUB 8.9 million for the treatment of 11 seriously ill children and for the purchase of equipment for the Krasnoyarsk Children’s Clinical Hospital No 1.
Run for Life charity marathon
Every year, X5 employees take part in the Run for Life charity marathon, which is organised by the Life Line Foundation for the treatment of seriously ill children. In 2019, 226 Company employees, along with their children, took part in the marathon. The RUB 2.7 million raised was donated to the Life Line Foundation for charitable purposes.
Points for Children programme
For three years now, participants in the Perekrestok Club loyalty programme have been helping seriously ill children by donating points accumulated on their bonus cards to be used for charitable purposes. Perekrestok converts the donated points into cash at a rate of 1 RUB for every 10 points and then doubles the total amount. In 2019, RUB 1.2 million was donated to the Life Line Foundation through this initiative, which allowed three children to receive highly specialised medical care.
Good Waffles initiative
Since 2016, a charity initiative called Good Waffles has been carried out at all Perekrestok supermarkets, with RUB 1 from the sale of every package of Bonté waffles donated to the Life Line Foundation. In 2019, this initiative raised around RUB 1 million, which covered the costs of operations for five children.
Food support for quiet homes
Since January 2017, the Company has been making weekly grocery deliveries to residential institutions for people with visual and hearing impairments. Products are provided to three institutions near Pyaterochka stores in Troitsk and in Lyubertsy. In 2019, nearly RUB 2 million worth of groceries was provided.
The Centre for Missing Persons (CMP) and the Liza Alert search-and-rescue team
Safe spaces
Every Pyaterochka store has a safe space marked by distinctive signage in the form of an orange geolocation pin, which acts as a reference point for anyone who is lost or disoriented. Anyone in such a situation can enter a Pyaterochka store and make contact with a store employee or wait until help is offered. Then, the store manager calls the CMP hotline, where an operator will, depending on the situation, either call an ambulance or the police or send a Liza Alert representative to the proximity store. This joint initiative was launched in March 2019; in nine months, 271 people from 77 communities were given assistance returning home, more than 20 of whom were in a life-threatening situation. For Rescue Worker Day on 27 December, X5 Retail Group donated 400 uniforms for search-and-rescue workers, as well as 27 Pyaterochka cards with points already accumulated. The cards will help provide food for rescue teams.
World Wildlife Fund
Russia (WWF)
 
“Buy a toy animal, help a real one”
This initiative collected RUB 1.5 million for implementation of the project “Let’s Create and Preserve a Russian National Forest Together”, which aims to designate the first protected forest zone in the north-western part of Russia. As part of a donation drive, RUB 5 from each stuffed toy purchased at Karusel hypermarkets from 24 June to 27 October was donated to the WWF. As a result of the WWF project we supported, a precious forest area covering more than 100,000 hectares in the Leshukonsky district of the Arkhangelsk region will be designated as a national forest by the end of 2020. Northern taiga forests in the north-western part of Russia are of great importance for regulating the climate, maintaining water conditions over large areas, and also for preserving rare animal species and biological diversity in general.
Adjusted EBITDA is EBITDA before costs related to the LTI programme, share-based payments, other one-off remuneration payments expense and one-off impact from Karusel transformation.
Figures shown for the following initiatives: Basket of Kindness, Life Line Foundation, Connection Deaf–Blind Support Foundation, Liza Alert (figures for 2019 only)
Please note that in this and other tables and text, immaterial deviations in the calculation of percentage changes, subtotals and totals are explained by rounding.
Net of VAT and revenue from wholesale operations and revenue from franchise services and other services.
Adjusted SG&A is SG&A before depreciation, amortisation and impairment costs as well as costs related to the LTI programme, share-based payments and other one-off remuneration payments and the one-off impact of the Karusel transformation. For more information on alternative performance measures, see pages 132–135.
Adjusted net profit is net profit before the effect of the Karusel transformation and tax accruals related to previous periods, including X5's reorganisation.
LFL comparisons of retail sales between two periods are comparisons of retail sales in the local currency (including VAT) generated by relevant stores. The stores that are included in LFL comparisons are those that have operated for at least 12 full months. Their sales are included in the LFL calculations starting from the day of the store’s opening. We include all stores that fit our LFL criteria in each reporting period.
A significant part of the risks related to human rights within the Company are associated with violations of labour law.

WRS-3 is our automated OHS monitoring system that helps us to monitor workplace safety across our operations on an ongoing basis.

At Perekrestok, OHS service representatives use a tablet computer to complete OHS checklists (about 50 questions). These are uploaded to the WRS-3 system. The checklist includes issues such as training and briefings, the existence of internal rules and regulations, instructions on workplace safety, the technical condition of premises and store equipment. During an on-site inspection of a store, the OHS service representatives fill in the checklist using the WRS-3 mobile app.

For all identified violations found based on the checklist, corrective actions are automatically generated and assigned to the Store Director. The WRS-3 system allows us to track corrections of violations and, if necessary, return them for revision. The WRS-3 system can be accessed by either the head of the OHS service or by operational, regional and other levels of management in order to track performance.

Accident severity rate:

days not worked / number of accidents

Accident frequency rate:

number of accidents x 1,000/number of employees

Direct beneficiaries including donations in cooperation with X5 suppliers.