June 2019

Digital era in retail:

Future success depends on the ability to adjust to digitized environment now

PwC

Key global retail market

trends that have impact on

Russian retail environment

How to adapt business

to changing environment?

Content

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PwC

Key global retail market trends that have impact on Russian retail environment

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2 400

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2019 202320222020 20212017 2018

% of total retail salesB RUB

E-commerce is growing rapidly yet physical stores remain dominant shopping channel

Russian e-commerce sales

currently account for 4%of total retail sales, and this

figure is expected to reach

6% by 2023

On the global market,

e-commerce sales account

for a greater share of retail

turnover.

E-commerce sales in the

US in 2018 accounted for

around 10% of retail sales,

while 35% of China’s retail

sales occur online.

India

Russia 4%

China

18%

35%

Japan

6%

10%

UK

4%

France

9%

USA

Share of e-commerce sales in total retail sales volume,

2018

Source: PwC analysis, Data Insight, Statista

3%

4%

5%

6%

Despite the digital disruption in

retail, brick-and-mortar stores

still remain the prime shopping

channel for purchases.

Global leading digital retailers

as Amazon and Aliexpress

focus on integrating physical

stores to digital ecosystems.

Providing seamless omni-

channel experience is not an

option, it’s a must for retailers

who want to keep up.

E-commerce sales volume in Russia,

2017-2023

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PwC

Digitization has already turned customer behavior and needs - here’s where we’re at right now!

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Most active online audience

is young generation

of Generation Z shop less at

other retailers because of

online shopping experience

Social media highly influence

shopping behavior

of them use

smartphone

to shop online79%

of Young Millennials shop

online at least once a month

27%

86%

71% of Russian consumers

shop online at least

once a month

believe that social media

influenced their purchase

decisions in selected

categories

52%

have been influenced to buy

a product or service,

following positive reviews

on social media

39%

Russia is currently showing one of the highest

growth rates of online shopping

Source: Global Consumer Insights Survey, PwC, Russia, 2019

PwC

Future physical retail will be highly connected with digital experience & technology

Location Recognition

Recognize the

moment you enter

a store location,

greet you with a

personalized

welcome

message, show

you store

promotions of

interest, and

direct you through

the store.

It is like a

greeter in the

palm of your

hand.

Recommended Shopping Lists

Recommended shopping lists reduce time spent researching and browsing.

Shopping Cart

Build a shared

shopping list with

your partner or

roommate from

anywhere at any

time in the app.

You can also

scan items or

barcodes for

instantaneous

price comparison

Your shopping

cart will have

everything you

need at the best

price.

Community of Shoppers

Give and

receive product

reviews,

recommendatio

ns and

experiences, all

while earning

loyalty points for

constructive

contributions.

PersonalisedRecommendations

As you shop and build

your profile, the app

understands your

purchasing habits and

gives tailored product

recommendations.

Find the products that

are right for you! No

more tyranny of

choice.

Pick-up Options

Skip the time spent navigating the store and waiting in line. With built-in payment and pick-up options, you can just grab and go.

VISION

The vision of OMNI-channel

customer journey

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Seamless Payment

Once you’re satisfied with your cart, you’ll save time and avoid congestion as you head home.

Subscription and Delivery Prompts

The product subscription feature will ship items straight to your door at a chosen interval, making your routine shop that much easier.

In-Store Navigation

Shopping trips will

be more efficient

and timely when

you know exactly

where you need

to go.

On-Demand Information

You’ll be confident you’re making an informed purchase. You get the benefits of online information as well as touching and feeling the product in person.

Digital Receipt

For all your purchases in-store, a digital receipt will be made available on your account. Product returns become smoother as you won’t need to worry about losing proofs of purchase.

Re-Purchase Reminders

For items that you frequently purchase, you’ll be prompted with a friendly suggestion on when you should re-purchase. This eases the burden of remembering what to buy and when to buy.

VISION

Each interaction in the path to purchase is an opportunity

to bring constructive, audacious digital experiences and

wow moments.

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PwC

Exemplary evolution drivers

Retail has evolved towards omni-channel models and “pure-players” are on the path to extinction

~1950

Postal

Infrastructure

~1990

Internet

~2007

Mobile /

Social

~2010+

Digital (incl.

cloud, big data)

~20X0

AI / Robotics…

Brick&Mortar

Distance Selling

e-commerce

Multi/Omni

Digital Retail

Endangered

Close to

extinction

Aggressive push to offline

Current standard…for how long?

Next evolutionary step

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???

PwC

Russian retailers have to transform their businesses along with global trends

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Retail evolution is driven by the need to adapt to

a changing environment and respond to these challenges

In the process of

evolution, species

pass on favorable

genetic

characteristics in

their DNA to their

descendants

To survive, species

need to adapt to the

changing

environmental

conditions, for

example climate or

predators

PwC

74%

55%

35%

35%

32%

32%

32%

26%

19%

Direct-to-consumer business model development is at

initial stages

X5 OMNI – new branch for omnichannel development

Key products in omni:

Stores go to…

Magnit: close focus on omni

Partnerships with retailers from

different product categories (M.Video)

Personalized products, offers, services

Click&Collect

Expansion of pickup delivery

points (Russian Post,

OMS)

Pure digital and traditional retailers aimed to provide

omni-channel experience

Russian retailers adjust their business models & store operations

The shift from manufacturers to direct-to-consumer

in Russia is just starting to get off. Only 6 of top-100

leading online retailers are pure manufacturers.

The share of such companies in the e-commerce

turnover is less than 2%.

Russian D2C retailers sales channels, %, 2018 Key problems Russian D2C face when going online,

%, 2018

Source: Aero and e-Pepper, RBC

63%

24%13%

D2Cpartnerships+Marketplaces

Independent e-commercebrand store

Combined independentstore + partnerships & marketplaces

Regulatory restrictions

Hard to attract customers

Difficulties with distributors

Hard to cooperate differentlegal entities

Employees are against changes

Hard to adapt businessprocesses to e-sales channel

Hard to configure IT systemto new business processes

Lack of experience in e-commerce

Hard to build functional supply chain

Pure online

Classic retail

online

offline

Dressingroomsin-store

Online

storeClick&Collect

Dark

stores

Pickup points

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PwC

Jan,18 Apr,18 Jun,18 Jul,18 Sep,18 Nov,18 Dec,18

There is rapid growth of pick-up and locker

delivery in Russia

Shift in marketing models to development

of mobile apps/platforms channel

Azbuka Vkusa increased

sales by 25% through

mobile channel

1,2 M regular customers

use Krasnoye&Beloe

mobile app with

integrated loyalty card

Mobile app launch

increase sales up to 4

times in beauty segment

Traditional in-store retailers create new formats to meet

consumer demand for atmosphere and impressions

of companies have added

mobile channel direction

to marketing strategy

of online retailers plan

to increase mobile

marketing budget

Source: Omni Solution, Mobile Commerce in Russia, 2018

Concept store

Panasonic,

Catcher

Pop-up store

Tom Tailor,

Aizel

Showroom

Leroy Merlin,

IKEA

68%

32%

68%

70%

31%Do not plan

39%Slightly

31%Significantly

Lamoda

KupiVIP

Yulmart

Aliexpress

MvideoWildberries Citilink

Utkonos+1800

+33

+555+600

+56+1120 +500

+10

Mar,18

Number of pick-ups and lockers, opened by retailers themselves or in partnerships, 2018

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PwC

Future retailer will be closely integrated & partnered in digital ecosystem

Ecosystem

of Future

Retailer

EntertainmentCommunity

&sharing

Payment

&deliverySocial

Online

retail

Physical

retail

Examples:

Leroy Merlin used

dynamic Instagram

stories to announce

new store opening

Collaboration of

PepsiCo with Olga

Buzova resulted in a

catchy Instagram

hashtag

Use entertainment

platforms to fulfill

customers’ desire as 80%

Russian consumers are

active users of online

entertainment platforms

Examples:

M.Video offered customers a

one-year subscription to ivi.ru

with Smart TV installation

Yandex offers free delivery

from Beru for Yandex.Plus

users (more that 500 RUB)

Examples:

VkusVill has a blog dedicated to

customer lifestyle “School of

Consumer” with topics on

dietology, housekeeping,

medicine etc.

Sportmaster leads a blog on

sport agenda with

recommendations, interviews

and training techniques

Examples:

Sberbank, Tinkoff,

Alpha bank offer

cashback from

purchases in partner

retail chains

Moscow transport

card “Troyka” offers

loyalty program for

partner retailers

(Kari – 4%,

Aliexpress – 2,5%)

Use digital technologies in-store to

improve customer experience

Examples:

Mvideo implemented first AR in-store navigation

Perekrestok released a mobile application for purchases

with Self Scan technology

Examples:

Personalized products based on previous choices lead Aizel

to 11% estimated revenue change

OZON sales grew twice at Black Friday, Wildberries - 2,5

times

Create a community

over your company’s

vision, manage

customers’ questions &

device support

As social

media becomes a

marketplace, make

a presence on social

media platforms by

creating a brand page

or channel. Try

partnership with

blogger or influencer

Make payments

quick and easy as

majority of

consumers believe

it is key shopping

experience

element

Embrace an online shopping trend by adapting

your shop to smart devices, focus on

personalized offers

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PwC

How to adapt business to changing environment?

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Future survival depends on a retailer's ability to adjust to a digitized environment: Transform your DNA!

Digital retailers need to champion every element of their DNA

equally…

…omitting one element leads to extinction!

Customer

Understanding

Use data to anticipate

customer needs before

they even arise – then

create an individual

experience

Unique Culture

Intensify collaboration

and partnering, empower

decision makers and

embrace ‘launching and

learning’

Operational Excellence

Leverage technologies to

increase efficiency and

flexibility of operations

Skilled Workforce

Empower staff with the

technologies to be

excellent at their job

and build new, digital

capabilities

Winning Products &

Services

Personalize products

and embed them in

services that ‘wow’

the customer

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PwC

Transforming the DNA is a challenging move for many retailers – a greenfield approach will often be required

• Assess the degree of change

required to reach your objectives

• Decide whether a greenfield or

brownfield approach is suitable for your

process & IT transformation

With technology assets dating back to the 90s,

many retailers will have to start from scratch!

Step 1:

Determine your destiny

• Focus on your core strengths to

choose a distinct strategic direction

• Understand the capabilities required

to succeed in your target state

Service Innovation

Product quality

Customer access insight

Productprice

Efficient

operations

Partnerintegration

IT/

Digital

Reliableoperations

Price

Experience

Step 2: Select the right approach

VS

Step 3: Set up the team

• Chose a transformation orchestrator – transformative

capabilities are often not inherent for retailers

• Identify and select candidates for your partner

ecosystem

Convenience

Greenfield Brownfield

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PwC

Upskill your

employees

“Legacy” staff need to be trained to strive in a

digital environment

Use of technology and new processes

are key topics

Empower with

technology

Employees use new office infrastructure and

workplace models

Technology, apps and new ways of accessing and

sharing knowledge are used

Change your

workforce

“Technologists” make up a large percentage

of your team

Number of transactional staff is minimized

New capabilities come from deeply integrated

external partners

• Entitle technological decision-makers and

create cross-teams and integrated communities

Establish flat hierarchies to enable fast

decision making

Board

Business IT

Tech Lead

Reinvent ways

of working

Transform

organization &

governance

Establish new ways

of partnership

Turn analog workforce and silo thinking to digitally empowered ecosystem

Skilled Workforce Unique Culture

Re-think the way you partner - incorporate

external capabilities to complement your core

competencies

Benefit from outside-in perspectives to generate

new, unconventional ideas

Work result oriented (“find a way to achieve a goal”)

to ideally fulfil the needs of your customers

Change your internal collaboration and apply agile,

“launch and learn” and/or rapid prototyping

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Product-

centricity

Customer-

centricity

Intuition &

experienceInsight

Mass Individual

One size

fits all

Custom-

made

Planning

(“Guessing”)Prediction

Manual Automated

Sequential Agile

Silo Holistic

Closed

Shop

Open

ecosystem

As consequence, a complete paradigm shift of the retailer’s DNA is required

from

Unique Culture

Skilled

Workforce

Operational

Excellence

Winning Products

& Services

Customer

Understanding

DNA transformation Fueled by data & technology,

retailers evolve

to

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Based on the experience of dozens of retail transformations – here are the five key takeaways for your journey

Unique Culture

Skilled

Workforce

Operational

Excellence

Winning Products

& Services

Customer

Understanding

Digitize your DNA…

…but do it right!

Other than in evolution theory,

in business you can determine where

you go – so transform with purpose1Transform business-driven and

technology enabled – ensure strong

buy-in, alignment and discussions at

eye level between business and

IT/Digital

2

Invest in capabilities that

differentiate – stay close to proven

standard everywhere else to limit

complexity

3Don’t be afraid to bring in “the right

guys” - use the power and

capabilities of a partner ecosystem4“It’s not faith in technology, it’s faith in

people” (S. Jobs) – engage with your

employees and openly communicate

the change

5

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Contacts

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International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act

as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its

member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of

any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

Andreas Spaene

Partner

Vice President

PwC Strategy&

andreas.spaene@pwc.com

+49 170 2238 408

Martijn Peeters

Partner

Retail & Consumer leader,

PwC Russia

martijn.peeters@pwc.com

+7 (495) 967 6144