Russia Consumer Market

April 20, 2010

EM Consumer & Retail

Industry Overview

Russia’s consumer stats keep improving

Russian Federation Consumer

Mikhail Terentiev, CFA +44 20 7102 7747 mterentiev@nomura.com NI plc, Moscow

Investment Conclusion

Russia's statistics agency (Rosstat) has released consumer stats for March. All measures of consumer spending and wellbeing, including retail sales, wages and unemployment, have continued to get better, which is welcome news for all Russian consumerrelated stocks. Our core BUYs in the sector remain X5 Retail Group, Magnit and Pharmstandard.

Consumption keeps recovering, thanks to rising wages, restoring confidence and stabilised unemployment (Figures 1-2). • • • • • In March, retail sales were up +2.9% y-o-y in real terms, versus a revised +0.9% improvement in February and flat y-o-y performance in January. Food retail continued to grow faster than non-food, not least because of the increased pensions and social benefits, though non-food is seeing more rapid m-o-m improvement off the lower base. In March, food retail rose for the fourth month in a row (+4.2% y-o-y in real terms, versus +3.8% y-o-y in February and +3.7% y-o-y in January). Non-food turned positive in March (+1.8% y-o-y in real terms), after declining y-o-y in each of the previous 13 months (February: -1.8% y-o-y, January: -3.3% y-o-y). We see Russia’s retail growing 4.5% in real terms this year and accelerating to 5.5-6.0% in the next two years. Slower CPI and rising social benefits should be among the key short-term drivers, while from late 2010 onward, we expect recovery in wages and consumer lending to lead the way. Closer to the end of this year and into 2010, we see non-food starting to outpace food, reflecting a deeper slump during the downturn and expected recovery in consumer credit and demand for discretionaries.

Figure 1: Real retail sales

30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08...