Food & Drinks Industry Day

Converting Opportunities to Business:

Russian and Ukrainian

Markets Overview 2008

RUSSIAKey Facts

• Real GDP growth in the first half of 2008: 8%. Real GDP Growth averaged 6.5% annually over 2000-2007. Nominal GDP in 2008 estimated at € 1,135 bln

• Inflation in 2007: 11%

• Unemployment in 2007: 6%

• Currency – Ruble: €1 = 35.4 Rubles (as of October 2008)

• Population - 142 million people

• GDP/cap, 2007: € 8,100.

• GDP composition by sector: agriculture, 4.6%; industry: 39.1%; services: 56.3%.

Russian

consumption

• Income inequality higher than in Europe, but lower than in the US. Top 10% Russian earners are responsible for 30% of consumption in Russia.

• In 2007, the average Russian disposable income increased by 10.4%. In 2008 over 60% of the population had a disposable income of €275 ($350) after household costs.

• Urban dwellers consume significantly more than their provincial counterparts. Consumers in Moscow and St Petersburg spend the most on consumer goods and services; other regions with high levels of consumption include Yekaterinburg, Kazan, Krasnodar, Novosibirsk, Tyumen and Rostov on Don

Top Consumer Trends

• “Quality is worth the money”. Consumers’ desires fuelled by easier access to

credit.

Spenders rather than savers. Growth of premium products.

• Exponential development of retail sector

• “Conspicuous consumption”; Consumption seen as a means to acquire

status. Russians, and Muscovites in particular, are extremely brand-conscious.

• Growth of the food service industry: half of men and women aged 16-50 eat outside of home at least once a week

• Russians have more of an international outlook on consumption: one third of Russians are able to afford holidays abroad.

• Growing importance of advertising in determining Russian consumers’ choices.

(Euromonitor 2008)

Food & Drinks Sector: Main Trends

• According to AEB, Russia is the fastest growing market for Food & Drinks in Europe, and should be the first F&D retail market in Europe by 2015.

• Food & Drinks represented 45% of total retail turnover in Russia in 2007, i.e.

€ 140 million.

• Russia’s Food & Drinks sector is to a large extent dependant on imports (up to 70% in some categories).

• The HoReCa sector has also registered a boom especially in the lower-priced end of this category (cafes). The premium segment (luxury restaurants) is highly competitive and quite saturated in Moscow.

Irish Export Performance

In 2007 Irish F&D exports to Russia amounted to €84,486,444.

Key export sectors include:

- Live pigs (including pure breed pigs), frozen/chilled pork meat: €18,991,331

- Seafood (including mackerel, oysters etc): € 3,002,680

- Alcoholic beverages: € 23,127,564

Retail Market Overview

• In cities with over 100,000 inhabitants, modern retail outlets account for around 60% of all purchasers' visits. Open-air markets account for a large share of the remaining, but their share is decreasing. In the countryside and for some categories of food such as horticulture, open-air markets prevail.

• The value of modern retail sales in Russia has increased by 60% over the past 5 years. (Euromonitor)

•Russia is no. 9 in the world for grocery retail sales value. Sales in modern retail outlets in 2007 amounted to €120 bln.

• Carrefour has announced plans to open its first Russian outlets in 2009 in Moscow, Krasnodar and Rostov on Don. Foreign chains such as Metro Cash and Carry, Real, Ramstore and Auchan are already well implanted in the largest urban centers and are expanding in the regions.

• The retail market is highly fragmented: the Top 10 Russian retailerscontrol only 5% of the Russian retail market. Leading retailers in Russia include the X5 Group (which appeared as a result of the merger of Pyaterochkaand Perekryostok), Metro Cash & Carry, Tander and Auchan Russia.

Retail Market Overview

(Source: IMCA 2008)

Retail Market Overview

Retail Strategy Overview

• Growth of the market share of premium outlets such as AzbukaVkusa and Globus Gourmet in order to cater for the supply of premium F&D goods. The majority of goods in those shops are imported as shoppers are extremely brand-conscious.

• Format diversification is currently at the core of the retail chains’strategy for Russia. Following on the success of premium shops, retail chains are diversifying their retail formats by trying out smaller shops with a better quality of service. Others such as X5 are trying out large Cash &Carry formats to appeal to a more popular base.

-Main trends in Russian retail industry

The Grocery Retail Market- Structure By Format

• The Russian retail market remains highly fragmented. The structure includes open markets, street kiosks, pavillions, small served independents (Gastronoms, Produkti) and supermarkets/hypermarkets

• Modern developments have so far focused on the two major cities of Moscow and St.Petersburg. Expansion in the most dynamic regions is now underway.

• Retail activity remains localized by city and by region, with no retailer approaching national coverage.

• Local retailers are stepping up their expansion. They benefit from first-mover advantage and an understanding of both Russian consumers and the bureaucratic system

Retail Market Overview

- Opportunities -

• Strong growth: An opportunity for strong growth is what Russia offers. Growt50% are still commonplace for retailers, who are seeking to expand their operat an incredible pace. New entrants such as Carrefour will also be looking forand could provide opportunities for Irish exporters.

• Consolidation: Retail consolidation is well underway (e.g. merger of PyateroPerekrestok which gave rise to the X5 group) and is set to increase further

• Premiumisation: Premium shops are currently the most dynamic segment osector, even though they are currently concentrated in Moscow and St Petersthem are planning on expanding in the regions and in other countries of the CAzbuka Vkusa, for example, is planning to spend $230 mil in the next three expansion plans. This retail format could be highly advantageous for Irish pre

Russian Food service market

• The HoReCa sector is one of the fastest growing segments in the Russian economy and experiencing growth rates of 20-30% per year

• Growth of Russian Food service market: 2005 – €9.97 bn, 2006 –€11.36 bn Euro, 2007- €13.36 bn Euro

9,07

11,36

13,36

0

2

4

6

8

10

12

14

Euro (bn)

2005 2006 2007

Foodservice Market Overview

• The majority of HoReCa customers are price sensitive, but very interested in new and innovative products. As the Russian restaurant culture grows in sophistication, the demand for different products increases.

• Russians now spend more of their income on food than any other country in Europe and dining out is beginning to replace home asthe preferred venue for entertaining.

• New shopping centres also play a central role, as all large shopping centres have ‘food courts’ with low-priced restaurants.

-Consumer trends -

Food service Market overview-Subsectors in Moscow-

One quarter of all Russian restaurants are in Moscow

In Moscow, low-priced restaurants are the most successful with 60% of the catering market share, followed by elite restaurants (14%) and fast-food outlets (11%):

BudgetRestaurants

Elite dining

Fast Food

Other HoReCa

Foodservice Market Overview

• Russian restaurants’ turnover for 2007 amounted to €14.2 bln.

• This represented an increase in profits of 29% by comparison with 2006, or a net profit increase of 18% (if taking inflation into account).

• 2007-2008 saw the entry of global chain Starbucks on the Russian market as well as the café chain Costa Coffee. The cafésegment is the most dynamic, especially in Moscow, where annual profits increased by 37% in 2007.

• In the area of food catering, the most popular catering formats are cafes offering ‘lunch deals’ and with a buffet option; as for the menu, European and Asian cuisines are the most popular.

• For the first time since the late 1990’s the fine dining elite sector did not register an increase in profits in 2007. Profit growth was of 7%, which was negated by inflation.

• However, there are still opportunities for Irish exporters in this segment, especially for seafood products, meat and alcoholic drinks.

• The mid-range, low priced restaurants and cafes are the ones developing the fastest. Imported products there can make up to 85% of the menu; however, they are much more price conscious. Furthermore, budget restaurant chains often do not act as a unified entity; each catering outlet often has its own suppliers.

Food Service Market Overview

Foodservice Market Overview-Fast Food-

• Fast food restaurants tend to use a higher percentage of local ingredients (around 50%).

• Many chains use imported sauces, breads, and occasionally fruit. Some may import meat and some produce.

• The number of independent stands is decreasing, but sales and the number of outlets are increasing.

• National chains such “Kroshka Kartoshka” (baked potatoes), “Stardog” (hot dogs), and “Teremok” (pancakes) are ubiquitous in the major cities and are expanding regionally as well.

Main challenges in supplying Russia

• Finding an experienced and trustworthy distributor

Big distributors are better suited to commodity exporters, small distributors are more suited to high end and branded products that need marketing attention and brand management.

• Strong competition from other importers. European competitors established in many niches.

• Although improving, distribution and logistics remain underdeveloped outside of the largest urban centers, making distribution of imported products to cities in the regions difficult.

• However, the entire spectrum of categories and niches (high end/limited and mass market) are still open to new suppliers.

Why Target the Russian Market

• Rising disposable income of Russian consumers and growth in retailing

• Highly urban population – geographically concentrated demand

• One of the world’s largest retail markets

• Imported food estimated to account for 90 percent of total HoReCa use

• Location: Easy Access through European Supply chain

• European foods and cuisine have wide market penetration and the Russian consumers are familiar with these products.

• Russia’s future access to WTO should reduce tariffs on a wide range of imported products

Bord Bia Services in the Russian Market for 2009

• Develop an information seminar on the Russian market for Irish clients to be held in conjunction with Enterprise Ireland in February.

• Support the market activities of Irish companies targeting Russia with strategic advice, buyer profiles and contact details

• Assist Irish companies at the Prodexpo Trade Fair February 09

• Pursue Russian Media exposure of Irish products

• Provide reports on strategic F&D categories

• Market information will focus on supplying timely and accurate information on market trends, product innovation, and developments in the Russian market.

UKRAINEKey Facts

• Second largest market of Eastern and Central Europe after Russia with a population of 47 million.

• Real GDP growth: 7-8% a year

• Unemployment: 7%

• Currency: Hryvnia.100 Hryvnia= €13.24 (As of October 2008)

• Inflation rate (2007): 11%

• GDP/ capita (2007): € 5600

UKRAINIAN CONSUMPTION

• The average salary in Ukraine remains quite low (€ 236/mth) but the average disposable income rose by 30% in 2007.

• Ukraine has a growing middle-class which represents between 15 and 20% of the population and a small proportion of well-off residents (2-3% of the population).

• On average, Ukrainians spend 60% of their income on food (including eating out), alcohol and tobacco products.

Why target Ukraine?

• Ukraine became a WTO member in May 2008. This will have repercussions on customs duties for the import of food and drinks products, and should ease complex legal procedures for import.

• Ukraine is a major holiday destination, with over 23 million visitors in 2007. The growth of the Ukrainian HoReCa sector in particular is fostered by this trend.

• Ukraine is set to co-host the 2012 Euro Football Championships; this event is set to draw in at least $23 billionof FDI and improve infrastructure as well as attract more international attention and tourism.

The Ukrainian Retail Market Structure Overview

• Modern retail outlets (supermarkets) account for around 40% of the volume of all Food & Drinks purchases in Ukraine.

• Open-air markets account for the same share of all F&D purchases.

• Small convenience shops and kiosks account for the remaining 10-20%.

• Depending on the category of product and the localisation, theseestimates tend to change; for example, in large urban centres around 80% of all purchases are made in modern retail outlets; but someproducts such as honey or vegetables are still predominantly bought in open-air markets.

Ukrainian Retail Market

• In 2007, the Ukrainian retail market was estimated at €19.5 bln. Retail-sales growth rates are spurred by higher personal incomes and have exceeded GDP growth for the past several years.

• Food retail accounts for almost half of the entire retail market.

• International retailers began to enter the Ukrainian market in the early 2000’s. Metro and Spar are already well established there; Auchan has invested in a local chain, Fourchette.

• Ukraine ranked 5th on A.T. Kearney’s 2007 Global Retail Development Index after India, Russia, China and Vietnam.

The Ukrainian Food Service Sector

(Source: USDA)

• Spending on HRI in Ukraine has registered annual growth rates of 30% for the past several years, and the fact that Ukraine will host the 2012 Euro Championships should keep this trend going. ‘Very positive growth’ expected for the next 5 to 10 years.

• Population spending by different HoReCa channels (as of 2005: €641 million).

The Ukrainian Food Service: Localisation

• Food Service Outlets have a high-density localisation in large urban centres. (Source: Independent consulting company)

The Ukrainian Food Service Industry

• The presence of international fast-food chains remains limited, and Ukrainian budget catering chains are developing fast.

• The elite dining segment is mostly represented by independent restaurants but also two large groups (The Royal Card and The World Map) which use a single food procurement and distribution centre.

• However, hotels are under-developed in Ukraine and the majority of tourists usually prefer to stay in rented apartments.

BEST PRODUCT PROSPECTS

• Meat: Pork and Beef

The Ukrainian red meat industry is currently undergoing a crisisand red meat production is at an all time low, which drove prices up so sharply that the Ukrainian government had to initiate red meat imports in 2008.

• Alcoholic Drinks & Beverages

Licensing fees for the import of alcohol into Ukraine have been adjusted to WTO requirements since membership was gained in May 2008. In 2007 Ireland exported alcoholic drinks to Ukraine to a value of €3.5 million.

CHALLENGES IN SUPPLYING THE UKRAINIAN MARKET

• Strong competition from other EU and CIS exporters. Currently over 30% of finished and raw products in Ukraine come from the EU, and almost 19% from CIS countries (mainly Russia).

• Complex legal and sanitary requirements for some food categories.

• As Ukraine remains a country where personal contacts are necessary in business endeavours, it is highly recommended to choose a large,

well-established domestic import company, preferably with experience dealing with Western clients.

Bord Bia Services in Ukraine for 2009

• Meetings with Ukrainian state and veterinary officials in order to get access to the Ukrainian meat market.

• Attending the World Food exhibition in Kiev to identify prospective importers and wholesalers and make contacts.

• Supporting the market activities of Irish companies targeting Ukraine with market advice, buyer profiles and market details.