Consolidation of Retail in Ukraine: Role of Logistics 1.Prerequisites for retail to consolidate 2.When does a retailer need a 3PL-operator? 3.Case study 4.Interaction within ‘developer – 3PL-operator – retailer’ Retail in Ukraine 2009: Kiev, 02-Apr-2009 Oleg Kalensky Director for Strategic Marketing & Development UVK Group

From a 3PL viewpoint, retail can be divided into these segments: 1)Food / nonfood: i.Modern trade (hyper-, super-, discounter etc.) ii.HoReCa iii.Street retail iv.Special (temperature) categories v.Re-packing categories (bulk etc.) 2)Automotive 3)DYI 4)Pharma 5)Chemicals 6)IT & Electronics 7)Fashion & Wear 8)Fine arts Retail in Ukraine 2009: Kiev, 02-Apr-2009 Prerequisites for Retail to Consolidate

General factors featuring all retail market segments: Consumers’ capacity slowing down (15-60%) Competition getting even more tough (often – dumping) ‘Manual’ procurement management (leading to out-of-stock / over-stock) Weak / unbalanced state policy (customs duties, UAH ratio, lack of financial sources) Revenues (turnover) going down –> In-house optimization (refuse from non-core assets and long-term investments, revision of prospective development plans) Prolongation of trade credits Search of (often – any available) sources to finance working capital Strengthening of marketing (category management, PL, innovations) Outsourcing of non-core activities Retail in Ukraine 2009: Kiev, 02-Apr-2009 Prerequisites for Retail to Consolidate

While in crisis, “the weak are going to die, and the strong are going to become even stronger” Factors and trends in favour consolidation of retail: 1)Capitalization of retail chains decreasing 2)Trade formats restructuring 3)“Those with access to financial sources are going to have success” (for investments, crediting, M&A) 4)Opportunities to acquire competitive advantages cheaper (consumers’ flows, location of stores, material and non-material assets) 5)Buyers’ pools (for both merchandise and services) Retail in Ukraine 2009: Kiev, 02-Apr-2009 Prerequisites for Retail to Consolidate

Logistics (factory –> store’s shelf) = 4-8% of turnover (a top 3 line in retailer’s costs) What does a retailer need from 3PL-operator: 1)Stock management (a professional and dedicated management of DC) 2)Guaranteed and timely deliveries (often – requiring large coverage and deep penetration) 3)Intra-chain distribution 4)Value added services 5)Joint strategic planning (development) and operational flexibility (in high / low season) Often, interaction between a retailer and a 3PL-operator grows from freight forwarding to a complete management of supply chains (savings up to 25% of logistics associated costs, or -2% of a ‘shelf price’; A.T.Kearney, Dec-2007) Retail in Ukraine 2009: Kiev, 02-Apr-2009 When does a retailer need a 3PL-operator?

Retailer’s advantages of outsourcing logistics operations: 1)Merchandise on shelves increase (+1-2% of a DC’s turnover) 2)Extra discounts from suppliers due to direct supplies to DC (-3-4% of prices) 3)Reduction of costs due to processing merchandise through DC (up to -1% of prices, depending on a ratio of centralization and IT-systems used) 4)Reduction of stock in stores (leading to each store’s better selling effectiveness) 5)Turnover increasing and stock management becoming more efficient 6)Guaranteed merchandising in stores (while in peaks and promo activities) 7)Guaranteed quality of merchandise due to centralization of quality assurance 8)Logisitcs turns into operating costs (not fixed) 9)Benefit from operator’s network services (operator’s normal standards of work) 10)Focus on own core business (sales, marketing, development projects) Retail in Ukraine 2009: Kiev, 02-Apr-2009 When does a retailer need a 3PL-operator?

Calculation of logisitcs costs (per month) with these operational inputs: 1)Imports from Turkey (30 ’’HC cont., purchase price of merchandise = 4.5 mln UAH, gross margin = 60%) 2)Customs clearance 3)Storage & warehousing: i.Manual unloading & acceptance (35,000 boxes) ii.Storage (450 pallet-places, turnover = 1:1) iii.VAS: stickering (1,000 units), promo-sets (5,000 units) iv.Loading of picked pallets 4)Warehouse-door FTL-delivery across Ukraine (600 pallets) 1)645,000 UAH 2)??? (requires: q-ty of contracts, articles, duties etc.) 3)35,700 UAH, namely: i.17,500 UAH ii.900 UAH iii.100 UAH (stickering) & 10,000 UAH (promo-sets) iv.7,200 UAH 4)60,000 UAH 5)+ supplementary services (returns, return of documents, insurance, FEFO, crediting etc.) Total (invoice idea): 740,700 UAH (=10% for the whole chain, or =1.5% for in-Ukraine logistics; % of a ‘shelf price’) Retail in Ukraine 2009: Kiev, 02-Apr-2009 Case study

Under Colliers International, logistics operators are the best lessees (67%) 3PL-operator offers these options for such interaction: 1)Long-term lease of warehouse premises to provide Clients with logistics services (core business) 2)Product ‘sublease + logistics services’ 3)Retail subleasing 4)Management of improvements (dedicated for Clients & increasing valuation of premises) 5)Realization of logistics projects on own land plots 6)‘Anchor’ lessee in new projects / while expanding Retail in Ukraine 2009: Kiev, 02-Apr-2009 Interaction within ‘developer – 3PL-operator – retailer’