Russian Food Retail Market Overview

1,290

6,332

8,565

3,595

5,379

4,988

2007 2014 2016E

MGD market Non-Organized market

Accelerated MGD Growth

2 Source: Euromonitor, VTB, PMR and Beragua

Organized vs. traditional retailers – market evolution 2007-2016E – RUR bn

MGD

+25.5%

Organized vs. traditional retailers – market evolution 2007-2016F – %

Organized vs. traditional retailers market – benchmark

Non-Organized

+5.9%

Total market

+13.3%

CAGR 07-14 CAGR 14-16E

MGD

+16.3%

Non-Organized

-3.7%

Total market

+7.6%

26% 29% 32% 35% 40% 45% 49% 54% 57% 59%

74% 71% 68% 65% 60% 55% 51% 46% 43% 41%

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Organized % Non-organized %

Evolution of MGD – pp per annum

MGD market has been progressing at a accelerated pace during the last years (25.5% CAGR 2007-2014 vs. 13.3% of the total food retail market), based on:

Shift from traditionals (which have reduced their participation in the market from 74% in 2007 to 54% in 2014). The decline of the share of traditionals in 2014 (c.5pp) is one of the reasons supporting double digit LFL sales of organized players (despite the market only growing by 10%).

Accelerated expansion pace imposed by leading retailers (especially Top5 and proximity players).

While there is still space for further decline of non-organized players, Russia is approaching CEE peers and thus we envisage a slowdown on the MS reductions of traditionals (2.6pp per annum 2015-2016 vs. 4pp in 2007-2014).

+4.0pp +2.6pp

83% 81% 80% 73% 68%

59% 54% 53%

26%

17% 19% 20% 27% 32%

41% 46% 47%

74%

Germany France Hungary Spain Poland Russia

2016

Russia

2014

Romania Russia

2007

Organized Non-organized

358 339

300

224

199

170

142

Germany Poland Spain France Romania Russia 2016 Russia 2014

A benign competitive situation – Market still underpenetrated

SQM per 1,000 inhabitants – Benchmark – 2013(*) SQM per 1,000 inhabitants – Grocery pc adjusted benchmark – 2013(*)

Russia – SQM per 1,000 inhabitants – evolution 2010-2016

423

393

316

253

170

142

103

Germany France Spain Poland Russia 2016 Russia 2014 Romania

Avge 298

+28

-156

Avge 284

86

97

112

127

142

157

170

2010 2011 2012 2013 2014F 2015F 2016F

1.7x 1.2x

Despite the strong progression of the MGD sqm density (+1.7x in the period 2010-2014) Russia still lags behind the average of our benchmark (both in nominal and adjusted terms) being also below top CEE peers (Poland and Rumania).

This fact indicates that competitive pressures are still moderate in the Country and will keep increasing in the next years.

Note: (*): Average excluding Russia.

Source: Euromonitor, ROSSTAT, PMR, Companies info and Beragua

Food retail segments – international benchmark

4 Source: Euromonitor

In line with most Western countries, supermarkets in Russia have the highest share of sales of the market. However, it is worth noting that Russia also has one of the highest shares of discounters (only below Germany, Poland and Turkey)

% market share by segments in sales – international benchmark – 2013 (*)

France Germany Italy Portugal Spain Poland Turkey UK Russia Average

Convenience 3.7% 0.4% 14.7% 2.3% 1.5% 19.5% 3.3% 17.5% 2.5% 7.3%

Discounters 10.3% 43.3% 14.3% 13.4% 10.6% 33.8% 29.4% 5.6% 25.8% 20.7%

Hypermarkets 52.0% 22.1% 22.5% 22.2% 19.4% 22.9% 9.1% 50.8% 26.8% 27.5%

Supermarkets 34.1% 34.2% 48.5% 62.1% 68.5% 23.7% 58.2% 26.0% 44.9% 44.5%

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

3.7% 0.4%

14.7%

2.3% 1.5%

19.5%

3.3%

17.5%

2.5% 7.3%

10.3%

43.3% 14.3%

13.4% 10.6%

33.8%

29.4% 5.6%

25.8% 20.7%

52.0%

22.1%

22.5%

22.2% 19.4%

22.9%

9.1%

50.8%

26.8% 27.5%

34.1% 34.2%

48.5%

62.1% 68.5%

23.7%

58.2%

26.0%

44.9% 44.5%

France Germany Italy Portugal Spain Poland Turkey UK Russia Average

Convenience Discounters Hypermarkets Supermarkets

Note (*): Discounters (Magnit, Dixy, Pyaterochka, Monetka, Holdi…), Convenience (Perekrestok Express, Krasnoe & Beloe…).

23.2% 17.7% 17.2% 17.0%

13.1%

Dixy Magnit X5 O'key Lenta

High margins in the sector

30.3% 28.9% 24.4% 23.9% 21.4%

Dixy Magnit X5 O'key Lenta

GM benchmark – % sales – 2014(*) OPEX benchmark – % sales – 2014(*)

EBITDAR margin benchmark – % sales – 2014(*) EBITDA margin benchmark – % sales – 2014(*)

11.2%

8.3% 7.2% 7.1% 6.9%

Magnit Lenta X5 Dixy O'key

13.9% 13.0% 11.7%

9.4% 8.8%

Magnit Dixy X5 O'key Lenta

Source: Companies information

Note: (*): Magnit: Full year 2014; X5, Dixy and Okey: 9M2014; Lenta: 6M2014

5

GM 24.1% 27% +2.9pp

Benchmark Russia Dif. pp

Opex 17.5% 17.8% +0.3pp

EBITDAR 9% 12.6% +3.6pp

EBITDA 6.4% 9.2% +2.8pp

The still benign competitive situation allows Russian retailers to

operate with higher EBITDA margins supported by higher GM

and same OPEX structure (despite the lower average salaries) compared

to Western retailers

However, the sector is not increasing its profitabilty

Source: Companies information

Note: (*): Magnit: Full year 2014; X5, Dixy and Okey: 9M2014; Lenta: 6M2014

Note (**): Not taking into account X5

6

GM 25.9% 27% +1.1pp

2012 2014* Dif. pp

Opex 17% 17.8% +0.8pp

EBITDAR 12.4%** 12.6% +0.2pp

EBITDA 8.9% 9.2% +0.3pp

Average financials of listed Russian food retail companies – 2012-2014*

Top players continue to compensate higher OPEX with GM increases while EBITDA margins remain virtually flat

1,883

1,362

1,834 1,645

2,206 2,160 2,254 2,024

1,872

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Supply demand balance starting to be unfavourable

7 Source: Euromonitor, VTB, Rosstat, PMR and Beragua

New openings of MGD sqm - 2008-2016E – sqm th

24%

11%

16%

19%

22%

12%

7% 3% 4%

26%

15% 18%

13%

16%

13% 12%

10%

8%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Demand % Supply %

Supply and demand analysis – 2008-2016E evolution – % nominal terms

Supply and demand analysis – 2008-2016E evolution – % constant prices

43%

22% 23%

30%

26%

19%

17%

13% 12%

26%

15% 18%

13% 16%

13% 12%

10% 8%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

Demand % Supply %

Demand in nominal terms has been progressing significantly above supply in 2008-2013 (27% CAGR vs. 16.9%) despite the strong opening pace of MGD players (c.1.9 mn of new sqm p.a).

We envisage this trend will continue in the next two years but with a narrower gap, due to a decline in the growth of the food retail market, the slowdown of the shift from traditionals and the still strong opening pace of modern players.

However, in real terms (excluding inflation), supply and demand had been balanced until 2013 and started to diverge in 2014: in the period 2014-2016 supply will be progressing above demand in real terms indicating declining LFL volumes, which will affect the weakest and least price oriented retailers.

CAGR 27.0%

CAGR 16.9%

CAGR 12.6%

CAGR 9.1%

Avge: 1,906

Avge: 2,050

CAGR 15.6%

CAGR 16.9%

CAGR 3.7%

CAGR 9.1%

Differentiation factors in food retail – Russia vs. Western Europe

8

Price

LOW Importance as a differentiation driver HIGH Benchmark

Price is a key element of competition, a ‘must’ to survive in the long term and has to be consistent with the value proposal of the Company. However, except in HD, it is not a differentiation factor.

Private Label PL is substantially underdeveloped in Russia both in

penetration and quality terms.

Fresh produce

Fresh is a key element of differentiation (especially for proximity players). In Russia, given the overall low level of quality and poor execution, it becomes even more important.

Rest of assortment

In Russia the proper development of certain categories (Health and Beauty) can be substantially differential.

In-store ambiance

Lay-out, decoration and other elements of the in-store ambiance are currently a differential factor in Russia.

Others: loyalty,

additional services…

Loyalty schemes are quasi-commodities in WE (with few exceptions). In Russia a good and innovative system can create some additional differentiation.

In the current state-of-the art of the retail segment in Russia, there are two differentiation drivers with significantly higher importance than in more developed markets: Private Label and in-store ambiance (shopping experience). However, value

proposals in Russia remain undifferentiated.

Oil prices and currency exchange rate

9 Source: Rosstat, Oanda, Investing.com

Average exchange rate EUR-RUR vs. Inflation – 2013 and 2014

Brent Oil Historic data, USD/bbl. – 2013 and 2014

116 111 110

102 100 102

108 114

108 109 110 111 106 109 108 108 109 112

106 103 95

86

70

58 50

4.0%

-3.6%

-1.2%

-7.0%

-1.9%

1.8%

5.4% 5.9%

-4.9%

0.4% 0.8% 1.0%

-4.0%

2.5%

-1.2% 0.3%

1.2% 2.7%

-5.6%

-2.7%

-8.3% -9.3%

-18.3% -17.9% -13.7%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014 Dec2014 Jan2015

% growth

40.2 40.4 40.0 40.8 40.6 42.5 42.8 43.9 43.5 43.7 44.1 45.0 45.8 48.1 50.0 49.2 48.0 46.8 47.0 48.1 49.0 51.7 57.5

69.5

7.1% 7.3% 7.0% 7.2% 7.4% 6.9%

6.5% 6.5% 6.1% 6.3% 6.5% 6.5%

6.1% 6.2% 6.9%

7.3% 7.6% 7.8% 7.5% 7.6% 8.0% 8.3%

9.1%

11.4%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014 Dec2014

Exchange Rate Inflation

The combination of the impact of the ban on EU food imports and the plunge of the oil price (Brent barrel has dropped

by 55% in January 2015 vs. June 2014) have provoked a strong depreciation of the Ruble (-50% in December 2014 vs.

June) which has pushed CPI up to 11.4% YoY in December

Inflation in Russia – Food and Non-Food

10 Source: Rosstat

Food and Non-Food inflation in Russia – 2013-2014 – In % to December of the previous year

Inflation in Russia – Food and Non-Food – In % to the corresponding period of the previous year

8.6% 8.7% 8.3%

8.8% 9.2%

8.0% 6.8% 6.5% 6.3%

6.9% 7.5% 7.3% 6.5%

6.9% 8.4%

9.0% 9.5% 9.8% 9.8% 10.3%

11.4% 11.5%

12.6%

15.4%

5.1% 5.3% 5.2% 5.1% 5.0% 4.9% 4.8% 4.9% 4.7% 4.5% 4.5% 4.5% 4.3% 4.3% 4.6%

4.9% 5.1% 5.3% 5.6% 5.5% 5.5% 5.7% 5.9%

8.1%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014 Dec2014

Food Non-food

7.3%

4.5%

15.4%

8.1%

Food Non-Food

2013 2014

The inflationary impact has been very strong in food: 15.4% YoY in December 2014 compared to 7.3% in December

2013

GDP per capita – recent evolution and prospects

11 Source: IMF October 2014

Evolution of Russian GDP per capita – 2008-2016F – Constant prices (*)

Note (*): GDP per capita in national currency.

The current political and economic situation has substantially damaged the GDP prospects: according to IMF, between 2014-2016F the Russian GDP per capita will show a significant slowdown (CAGR -2% 2015-2016 compared to 3-4% in

the period 2010-2013)

GDP per capita evolution – 2008-2014 CAGR – Constant prices – Benchmark (*)

GDP per capita evolution – 2014-2016F CAGR – Constant prices – Benchmark (*)

2.6%

2.2%

1.4%

1.1% 0.8%

-0.1% -0.1% -0.3% -0.4%

-0.8%

-1.1%

-1.6% Poland Turkey Romania Germany Russia Hungary France Czech

Republic UK Portugal Spain Italy

Note: Data for Germany, Russia, France, UK, Spain and Italy for the period of 2014-2016 from IMF January 2015

3.4% 3.2%

2.5% 2.3% 2.3% 2.3%

1.9% 1.6% 1.4%

1.1%

0.6%

-2.0%

Poland Romania UK Czech Republic

Turkey Hungary Spain Portugal Germany France Italy Russia

5.3%

-7.9%

4.4% 4.2% 3.2%

1.0% 0.6%

-3.0%

-1.0%

2008 2009 2010 2011 2012 2013 2014 2015F 2016F

11.6%

11.4%

13.1%

12.7%

13.3%

12.2%

12.3%

11.6%

10.1%

10.9%

12.1%

10.1%

8.7%

9.3% 9.6%

10.7%

9.6%

9.0%

9.5%

10.6%

11.1%

10.6%

10.3%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014

Consumption in Russia

12 Source: Rosstat

Consumption – Food – YoY growth, % – 2013 and 2014

Consumption – Non-Food – YoY growth, % – 2013 and 2014

12.6%

10.6%

11.5%

11.3%

8.2%

9.2%

9.8%

8.9%

8.1%

8.3%

9.4% 9.5%

8.0%

9.8%

11.2%

8.9%

9.8%

7.9% 8.3%

8.7%

9.4%

9.1%

10.9%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014

11.7%

9.9%

2013 11M2014

Food consumption – Average growth, %

Non-Food consumption – Average growth, %

9.7% 9.3%

2013 11M2014

Both food and non-food markets are performing strongly, however, it seems that the devaluation of the Ruble has initially impacted more favorably non-food due to the anticipation of consumers to the loss of value of their savings

Nominal salaries vs. inflation

13 Source: Rosstat

Inflation in Russia and nominal salaries evolution – average %

Inflation in Russia and nominal salaries evolution – YoY %

Nominal salaries have been progressing above inflation during 2012 and the first half of 2014. Currently they are

growing in line or slightly below CPI indicating that households have stopped gaining purchasing power

13.0%

10.7%

12.6%

16.4%

12.7% 12.7% 13.3% 13.6%

12.9% 12.2%

10.4%

8.8%

10.0% 9.9% 9.7% 9.7%

8.6% 8.8%

7.6%

5.3%

8.8% 7.9%

9.2%

7.1% 7.3% 7.0% 7.2% 7.4% 6.9%

6.5% 6.5% 6.1% 6.3% 6.5% 6.5%

6.1% 6.2% 6.9%

7.3% 7.6% 7.8% 7.5%

7.6%

8.0% 8.3% 9.1%

Jan2013 Feb2013 Mar2013 Apr2013 May2013 Jun2013 Jul2013 Aug2013 Sep2013 Oct2013 Nov2013 Dec2013 Jan2014 Feb2014 Mar2014 Apr2014 May2014 Jun2014 Jul2014 Aug2014 Sep2014 Oct2014 Nov2014

Nominal salaries Inflation

6.8% 7.5%

12.3%

8.7%

2013 11M2014

Inflation Nominal salaries

High inflation is equaling proximity retailers performance

14

While in 2011-2013 Dixy and Pyaterochka were massively underperforming Magnit’s LFLs, current economic situation and high food inflation are boosting sales of proximity players. This fact was not seen in 2011 where FPI also reached

double digit figures.

Quarterly LFLs 2012-2014 Sales

Source: Companies info and Rosstat

12.0%

9.0%

3.0%

-1.0%

-2.4%

2.1% 2.6%

-0.1% -0.2%

-1.7% -2.6%

5.2%

8.2%

11.1%

17.7%

15.7%

20.7%

17.6%

8.1%

2.9% 3.8%

2.7%

6.7%

8.0%

4.5%

6.1%

4.4%

2.1%

6.0%

12.2%

17.2% 17.1%

5.3% 6.0% 6.0%

2.3% 2.7%

-0.8%

1.6%

-2.3%

0.7%

2.4%

-0.3%

0.8%

4.8%

13.7%

17.7% 17.0%

Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Pyaterochka Magnit Dixy

Volumes are positive for first time in the last 5 years

Top proximity players have posted positive volumes in 2014 for the first time (except for Magnit) in the last 5 years. In the period 2011-2014 only Magnit gained volumes while Pyaterochka (-7.7%) and Dixy (-12.3%) performed negatively

Quarterly LFL volumes 2013-2014 – proximity players Quarterly LFL volumes 2010-2014 – proximity players

Source: Companies info and Rosstat

6.1%

-5.3%

-4.0%

-7.2%

3.0%

-7.7%

1.7% 1.2%

0.8%

-4.0%

3.4% 2.9%

-0.8%

-5.0%

-3.8%

-6.3%

3.2%

-12.3%

2010 2011 2012 2013 2014 Cum. 11/14

Pyaterochka Magnit Dixy

15

Volumes: Sales growth ex-food inflation

-2.1%

-4.3%

-5.9% -6.2%

-4.1%

-0.2%

-3.9%

-7.5%

-8.7%

-10.4%

-9.3%

-2.3%

0.9%

1.7%

7.2% 6.6%

4.3%

-0.8%

-2.3%

2.1%

0.4% 0.2% 0.6%

-4.0%

-2.6% -2.3%

-5.4%

-1.3%

2.8%

6.7%

-8.8%

-7.3%

-2.9% -2.9%

1.0%

-3.1%

-4.9%

-9.7%

-7.8%

-6.3% -7.0% -6.7%

-2.5%

4.3%

7.2%

Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014

Pyaterochka Magnit Dixy

Discounters Moscow Saint Petersburg

Magnit Dixy Pyaterochka Non-organized Magnit Pyaterochka Dixy Non-organized

Basic basket 0% 17% 12% 33% 1% 4% 0% 20%

Fresh basket 0% 24% 37% 58% 12% 50% 0% 23%

Non-food basket 0% 12% 4% 15% 0% 15% 31% 33%

Value-adding basket 0% 9% 14% 46% 21% 0% 24% 15%

Total basket 0% 14% 15% 39% 0% 1% 2% 10%

Magnit remains the price leader in the market

16 Source: Bank of America Merrill Lynch ‘4Q14 Russian food retail pricing survey’

According to BofA, when considering the total basket, Magnit is the cheapest player amongst Russian discounters, in both Moscow and Saint Petersburg. However, while the Company enjoys a substantially higher price advantage in the

capital, both Pyaterochka and Dixy show a similar price level in Saint Petersburg

Note: The tables represent a summary of relative basket prices for each format (discounter, hypermarket and supermarket) in 4Q14. 0% is the cheapest product offered which was used as a base.

Moscow Saint Petersburg

Discounters Non-organized

Price gap between organized and non-organized discounters – Moscow and St P

+27%

+9%

There is a strong price disadvantage of non-organized retailers which anticipates further decline of this segment

during the foreseeable economic downturn in the next years

Price changes – Q42014/Q32014

17 Source: Bank of America Merrill Lynch ‘4Q14 Russian food retail pricing survey’

The strong food inflation in Russia has led to significant price increases (between 15%-23% YoY) amongst the main modern food retail formats in 4Q2014.

15% 16%

23%

Discounters Hypermarkets Supermarkets

Average price increase 4Q2014 YoY by format - %

However, discount players have shown the lowest increase in prices (c.8pp lower than supermarkets) which explains (along with increase bias towards proximity) their outperformance in terms of LFLs

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