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)