1) Regional retailers have an opportunity in the next strategic period to gain competitive advantages in non-scale areas as Russian giants slow growth and global retailers lose interest in the Russian market. 2) Understanding local stores and adapting assortment, pricing, and marketing strategies on a regional level can help build competitive edges for regional retailers. 3) Key areas for regional retailers to focus on include operational efficiency, sourcing locally, customized assortments and promotions, and service levels tailored to regional customer needs.

1. Non-scale related competitivnes
Moscow, 4th of February 2011
Igor Maroša

2. Regional retailing has a perspective in the next strategic
period
1. Food retail market consolidation levels depend heavily on size of population and GDP per
capita
2. Russian giants will slow down their growth, Russian market is becoming less interesting for
global retailers
3. Key to maintain market position and profitability is to find competitive edge in non-scale
related areas
4. Understanding the store, adapting assortment and pricing strategies are the key pillars to
build local/regional competitive edge
5. Stores need to be understood from the perspective of consumers and competitors
6. Once understanding your stores, assortment can be adapted on store/cluster level
7. Smart pricing can help you be competitive and maintain margin
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3. Food retail market consolidation levels depend heavily on
size of population and GDP per capita
Food retail market consolidation:
GDP/PPP per capita
60
Norway
55
United states of America
50
45
Switzerland
40 United arab emirates
Canada Germany Belgium Sweden
Netherlands
35 United kingdom Spain
Japan DenmarkFinland
30 Greece France Slovenia
Italy
25
Czech republic
Poland Slovakia
20 Croatia Hungary
Bulgaria Russia
15 Mexico
China Turkey
10 Serbia
Romania
Brazil Ukraine
5
India
0 Market conc.
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Bubble size represents the size of the population
Sources: Planet retail, A.T. Kearney, www.infoplease.com
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4. Russian giants will slow down their growth, Russian
market is becoming less interesting for global retailers
Russian retailers YOY Russia ranking on GRDI(1):
projected selling space growth:
35%
31.7%
Magnit X5 Dixy 2007 2008 2009 2010
30%
2 3 2 10
24.8%
25%
22.7%
20%
17.7%
16.2%
11.7% 15.3%
Additional consolidation barriers:
15% 13.3% 12.0%
11.0% 10.5%
9.5% 10.1% • Country size
10% 9.2% 8.7%
8.4%
6.7% 7.4% 8.0%
6.2%
• Dispersed urban areas, low logistics
5.2% synergies
5%
• Only 40% of modern trade formats
0%
2010F 2011F 2012F 2013F 2014F 2015F 2016F
Regional retailers have their window of opportunities open for the following
strategic period
(1) GRDI – Global retail development Index by A.T. Kearney
Source: VTB Capital, A.T. Kearney
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5. Key to maintain market position and profitability is to find
competitive edge in non-scale related areas
Non-scale related focus areas of local and regional retailers:
Category Formats and Retail
Sourcing Logistics
management Marketing ops/service
• Create alliances • Manage • Manage • Adapt • Take the
especially on complexity complexity in communication advantage of
private label assortment strategy to understanding
Opera- • Outsourcing vs. local/regional local/regional
tional insourcing • Manage specifics labor market
efficiency decisions inventory
• Use and • Service level vs. • Smart pricing • Understand • Adapt service
promote local cost locations and levels to
sources • Localized adapt local/regional
Compe- extensively • Use logistics as assortment formats/types habbits
titive additional accordingly
edge • Take advantage potential service • Focused • Add services
of understanding promotions • Stress with high value
local local/regional added (home
habbits/tastes characteristics delivery,
pick&pay…)
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6. Understanding the store, adapting assortment and pricing
strategies are the key pillars to build local/regional
competitive edge
Introduce the price elasticity
concept to the assortment
29,90
Pricing
Introduce store/cluster based
assortmnet structures Assortment
Who are your competitors? Understanding of stores
Who are your customers?
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7. Stores need to be understood from the perspective of
consumers and competitors
Store service area Employed cluster model
with constraints
2 Average household income
Medium
High
Low
Household composition
Client store
service area; With kids
primary (black)
and secondary
(red)
Mixed
• Each store has a primary, secondary and
sometimes even a tertiary service area defined Without kids High
Low
• Demographic data can be linked to service area
• Competitors can be clasified by different
dimension: 3
– Formats (discount vs. SM vs. HM 1 Model segment; every client store will land in one of the
– Distance (primary vs secondary vs. terciary segments. A store cluster is formed by multiple model
segments
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8. Once understanding your stores, assortment can be
adapted on store/cluster level
Build the
assortmnet
ladder
Distribute “Clean”
right the assor
SKU‟s to the -tment
right stores
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9. PAQ analysis reveals the item-level NSV and AGM
performance within a category in order to be able to make
“cleaning” decisions
Example: Canned Meat & Fish
PAQ Analyses by SBS3 & Top SBS6 Categories
(12.2008 – 11.2009, M, %-NPV & %-AGM )
Total Canned Meat and Fish
% of
257 (227) SKU„s
AGM Questionable
77% Acceptable
49 (3) SKU„s
45%
19 (1) SKU„s Active
Performing Non-active (..)
14%
5 SKU„s % of
20% 50% 80% NPV
…-03-03-01 Tuna …-02-01-01 Meat Pate …-02-03-01 Fish Pate & Spreads
% of % of % of
63(98)
AGM
Q 41(51) AGM
Q AGM
A Q 19 (9)
74%
78% A 80%
A 14 (2) 4
9 (2)
57%
50%
38% 6 4
P 3
P P
14% 20% 2 18% 1
1 % of % of % of
30% 52% 81% NPV 21% 51% 80% NPV 30% 52% 81% NPV
Source: client data-warehouse, A.T. Kearney
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10. The assortment matrix helps to structure the category
accross various dimensions
Normalized Price
A.T. Kearney Assortment Matrix Example: Deodorants
(12.2008 – 11.2009, €, M)
Price • Currently the deodorant assortment in
5,42 market formats consists of 211 (active)
1 1 SKU„s
-0,4%- -0,6%- - -
[2 / 0,2%] [-] - -
-
X - # of SKU‘s • Within that range there are only four
1
4,41 %
[..]
-
-
Share in NPV
Inactive ass.
private label products
4 Y - # of Spar SKU‘s
-1,4%- - - - • There is a significant amount of non-
[1 / 0,0%] - - -
active items (247) that were sold during
1
3,40 the 12 month under consideration –
82 30 6 4 overall those represent 12% of NPV
-19,9%- -23,4%- -8,1%- -7,9%-
[31 / 3,3%] [-] [-] [-]
• The client generates most of it‘s
52 22 5 3
2,38 revenues with low-to-mid priced
71 (4) 9 2 1 products
-14,8%- -7,0%- -2,6%- -1,9%-
[198 / 7,9%] [1 / 0,7%] [-] [-]
• According to client data Spar tends to
34 6 1 1
1,37 have a smaller assortment with
NPV comparable/ slightly higher prices in the
250 16.549 32.847 49.145 65.443 deodorant category
Source: client data-warehouse, A.T. Kearney
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11. The assortment scatter helps us to optimize the
distribution of SKU‟s on store level
Deodorant Scatter Plot Example: Deodorants
(12/2008– 11/2009, MNE1))
# of stores sold
480
# of months sold
420 2 7 10
3 8 11
4 9 12
360 AGM (%)
[Ø-40,0%]
300
240
180
120
60
LN
NPV
0
Note: (1) Only active products considered
Source: client data warehouse, A.T. Kearney
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12. Smart pricing combines competitivness, perception and
elasticity to optimize volume sales, value sales and margin
Competitvness – who am
I competing against, what is
the distance range
Pricing in
retail
Perception – how do Elasticity – how
my consumers perceive sensitive are my
my price position consumers towards
price in different
categories
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13. Price perception does not always coincide with actual price
competitiveness
Price competitiveness vs. Price perception
Price competitiveness Index, Price perception,
2004–2009 2004 – 2009
Price gap to Retailer A (% of average price The cheapest retailer is…
difference) (% of consumers)
2% 60%
0% 50%
-2% 40%
-4% 30%
-6% 20%
-8% 10%
-10% 0%
2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009
Retailer A Retailer B Retailer C Retailer A Retailer B Retailer C
Retailers are often neglecting other price perception elements: in-store positioning and
promotion management
Source: A.T. Kearney example
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14. Price elasticity reflects how consumers react to a change
in price of a single item
Price Elasticity and its Impact on Revenues
Price Elasticity Elasticity
Price elasticity (elasticity of demand)
Price
is the measure of responsiveness in As a price of an
the product quantity demanded as a x article in the elastic
result of change in price of the same range decreases,
product. It is calculated as revenue increases.
Sales
Example: E = -13,4
% Change in quantity demanded
Ed = x
% Change in price
Inelasticity
Value Meaning
E=0 Perfectly inelastic.
Price
As a price of an article
−1 < E < 0 Relatively inelastic. in the inelastic range
x decreases, revenue
E = −1 Unit (or unitary) elastic.
decreases. Example:
−∞ < E < −1 Relatively elastic. E = -0,21
Sales
E = −∞ Perfectly elastic.
x
Source: A.T. Kearney, client
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15. Target price positioning is segmented according to item
elasticity: KVI = Competitor B+ 1 %, Inelastic = Competitor
B + 10%
Quantity
3. Target price position sold
• As retailer A has a larger
market share and a worse
cost structure, price-war
should be avoided
• Price competitiveness
% gap to competition
should be improved on
items, where consumers Rank of items by volume
perceive the difference -10
(KVIs) Target
0
• Inelastic items should 10
compensate for the margin Today
loss prices should be
KVI Destination cat. Seasonal/Apparel Inelastic
increased
Invest margin Neutral margin Gain margin
KVI price Inelastic price ∆ price ∆ price
Focus ∆ AGM € ∆ NPV € ∆ AGM % # KVI # Inel.
position position KVI(1) inel.(1)
1% above 10% above
Balance 0.15% 1.43% -0.47% -2.5% 5,261 +3% 13,632
retailer B Retailer B
1) Average of all articles in the elasticity range
Source: A.T. Kearney example
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16. Regional retailers have a window of opportunity open,
 Invest into areas with low level of modern trade formats
 Operational excellence is a must
 Analyze and understand your consumer
 Localize assortment
 Promote regionality
 Keep price competitiveness with an eye on a margin
Thank you!
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