2008, June 11th, Brussels Conference : “Logistics in Russia: Outlook, challenges & solutions”, organized by Ahlers

1. 1
Outlook, challenges & solutions
Logistics in Russia:
11th June, 2008
Brussels
MAIN CHALLENGES IN
RETAIL & FMCG

2. Serge Rivet
Logistics
in Russia
2
 Graduated from the Bordeaux Management School
(France).
 Started his career in Russia, in 1997.
 Has been working for foreign and Russian companies
in the area of logistics and supply-chain management.
 Worked for international logistics operators such as
FM Logistic and Kuehne & Nagel.
 Conducted projects in large companies, such as
Eldorado, and Mosmart (retailers).
 Animated a "Pooling" project from Moscow to the
regions for ECR Russia
 Created Conseo CIS in summer 2007 in Moscow
 Consulting, Project Management, Interim
 in Logistics and Supply Chain

3. Professional Track record
Logistics
in Russia
3
10+ years of
experience
in logistics
in CIS

4. 4
INTRODUCTION

5. What is talking about …
Logistics
in Russia
5
…Retail & FMCG in Russia ?

6. 1/ Drivers of logistics
Logistics
in Russia
6
FMCG and Retail drive logistics today

7. Logistics
in Russia 2/ Ambitious project
7

8. Logistics
8
in Russia
Summary

9. 9
FACTS : RETAIL IN RUSSIA

10. Logistics
in Russia
Fact 1 : A young market
History of Retail in Russia
1994 : 1998 : 2001 : 2004 :
First retail Russia’s coming of 1st Visible
Soviet Style
chains Default big foreign Regional
Retail
appearing Retailers Retail
in Moscow Expansion
• 1% Of the Moscow Retail Great impact onto retail • The Relationship between • Retails becomes a real economic
• State Monopoly • 0% of Russian Retail market the retailers and suppliers sector, with its rules, trends and players
• Recurrent deficit • Great part of imported • Re-orientation towards turn to retailers advantage • Retail becomes a consumption habit
• Small assortment products discounter format • Did not accelerate the on federal level
• No import • Expensive Prices • Re-orientation towards coming of foreign retailers
• Small Formats • Sadko Arkada ‘s National Products • Metro, Auchan, Remarks :
• Specialized margins = 100 – (development of foods product
Formats Ramstore, Ikea, • The entry ticket to the retail market
200 % industry)
• Almost no Self Service • No Tesco, No gets more and more expensive for new
• As a result, in 2000, most of Carrefour, No retailers, as big players has already
• Foreign companies take
over Eastern Europe Retail the today’s big players and Casino, No Ahold, come and developed infrastructure
Market but do not touch formats are already created No WalMart (Specialists, Logistics, Regional
Russia • Moscow shows • Appearing of local regional Network, etc..)
mainly super and operators (magnit, MDM, • The next solutions to enter are mainly :
hypermarket Edelweiss, …) • Development of new formats,
development underdeveloped in Russia
• ST Petersburg shows • Acquisition of existing
mainly discounters networks (Federal or Regional)
• Franchising
Source : Renaissance Capital

11. Fact 2 : A small market
Logistics
in Russia
11
 Russia remains
undersupplied in terms of
modern retail space,
 only 150 m2 of shopping-
centre space per 1,000
inhabitants in Moscow and St
Petersburg,
 and as low as 40 m2 per
1,000 in Novosibirsk.
(end of 2006)

12. Fact 3 : Small Players
Logistics
in Russia
12
FY ’06 Net Sales
Russian Food Retail Market Evolution
Company
USD mln
1 X5 Retail 3,551 Top-10
Other modern formats USD 449 bln
2 Metro 2,544 The rest
30%
3 Magnit 2,504 Total Russian food retail
market estimated
4 Auchan 2,016 CAGR of 10%
5 Dixi 1,080 USD 280 bln 10%
10%
6 Lenta 1,060 9%
7 Kopeyka 980
8 7 Continent 958
9 Victoria 900
10 Ramstore 635
Total Top-10 16,228
In UK the top 4 of retailers represent 85% of the market
In Germany the top 4 of retailers represent 80% of the market
Source : Pricewaterhouse Coopers and Datamonitor

13. Logistics
in Russia
Fact 4 :
13
A Large geographical scope
Russian Regions
Real Estate Markets in 2007 Knight Frank

14. Logistics
in Russia
Fact 5 : Modern retail is complex
14
 One hypermarket
 From 700 to 1500 suppliers
 From 100 to 250 orders a day
 More drivers in store
 Up to 50,000 sku’s
than clients !!!
 One convenience store
 High transport cost
 From 150 to 450 suppliers
 From 40 to 100 orders a day
(last mile)
 Up to 10,000 sku’s

15. Fact 6 : A High Speed Market
Logistics
in Russia
15
Windows of opportunity Analysis (Based on GRDI ranking for 1995 – 2006)

16. Fact 6 : A High Speed Market
Logistics
in Russia
Windows of opportunity Analysis (Based on GRDI ranking for 2008)

17. Logistics
in Russia
Fact 6 : A High Speed Market
A very important European market
17
 4th largest retail market
in Europe
 (kingsturge)
 The largest in Eastern
Europe
 (Retail and
Consumer Worlds –
PWC - January
2008)

18. Logistics
in Russia
Fact 7 : Poor Suppliers service
18
 Assortment is a  Poor supplier
key to success service
 thisis a supplier
market
20,00%
18,00%
Out of Shelve 17,70%
16,00%
??? 14,00%
12,00%
10,00% 8,30% 8,60%
7,90%
8,00%
6,00%
4,00%
2,00%
0,00%
All countries European North Russia
Union America
Source: Roland Berger / ECR Europe

19. Retail in Russia
Logistics
in Russia
19
 A great opportunity for Western
Investment :
 Differentiation through know how
to the market
 Really effort-worth opportunities
 A fast moving market

20. 20
FACTS :
LOGISTICS IN RUSSIA

21. Logistics
in Russia
Foreword : History of WW Logistics
IT
Revolution Modern
Military Retail
Logistics
WW II Industry Globalization
Operational Revolution
Researches Revolution
Caesar -> 1939 1939 -> 1945 1945 -> 1970 1960 -> 1980 1980 - 2000 Future
• Supply lines • Speed of supply • MRP • Managing • Distribution • Global
• Warehouses (transport, cross • Planning thousands of center Networks
positioning docking)) SKUs • Outsourcing • Supply Chain
• First • Logistics Preparation • Just in Time • Globalization of Management
Logisticians • Standardization (pallets, • TQM flows • Reverse
jerrycans) • Cross Docking Logistics
• E-commerce
• Role of IT
See : See : See : See : See :
• Van Creveld • Overlord • Forrester (MIT) : • M. Ohno works • ECR
Industrial
Dynamics (1962)

22. Logistics
Fact 1 : A specific history of
in Russia
Logistics in Russia
IT
Revolution Modern
Industry
Operational Revolution
Researches
Military 60 years Retail
WW II Globalization
Logistics ? Revolution
Caesar -> 1939 1939 -> 1945 2000 - Future
22

23. Logistics
in Russia
Fact 2 : The Infrastructure issue
23
Infrastructure barriers
• Lack of retail space and rising prices for retail
space in large cities.
especially critical in Moscow
• Lack of warehouse facilities: This is a
common issue faced by retailers in all of
Russia’s largest regions. Many overcome
this problem by constructing their own
distribution centers;
• Limited transportation infrastructure:
Retailers face the problem of deliveries
delay and longer transit periods due to
poor roads and heavy traffic. The situation
 45% of retail executive is forecast to worsen in the next two to
three years;
consider that problems with
infrastructure influence their • Lack of electricity and poor lines of
business communications in the regions
 Third factor

24. Logistics
in Russia Sea
In eastern Russia at the Pacific Ocean, the capacity
of the seaports has not met the rising demand for
years.
 size of the ships has steadily increased
over the past decades, but much of the
equipment in these ports has remained
the same restricting handling capacities.
 scarcity of Russian ships,
 poor integration of ports into the
railway system.
 Russia’s neighboring countries profit from
Russian capacity problems,
 Finland
 Baltic States
 Ukraine,.
most freight needs to be shipped from west to
east or vice versa. However, Russian
waterways flow mostly from south to north.
 the inland waterways’ share of total
transportation fell from 3.6% in 1991 to
1.6 % in 2005 (in ton/km) (Rosstat,
24
2005).

25. Logistics
Air
in Russia
Parallel to the economic growth in Russia, air freight
prices are rising and capacity utilization is at its limit
due to a poor infrastructure :
 1302 airports in 1992 vs approximately 421 in
2003.
 About 50% of all civil aircrafts are more than
15 years old.
 620 to 820 new aircrafts will be needed in
the next few years in Russia, not counting
regional airlines (estimates by Russian
Ministry of Transport 2003, Economist 2005,
Boeing and Airbus)
 Most ground handling equipment is technically
outdated and
 56% of all air cargo is handled via the three
Moscow airports (Domodedovo,
Sheremetievo and Vnukovo). Of these, only
Domodedovo has been renovated and fully
25
meets western requirements.

26. Logistics
in Russia Roadway
 940,000 km of roads in 1995 / 871,000 km today
 (France = 891,290 km)
approximately 85% only of the roads are hard

surface
weight restriction for about one third of the total

network; consequently its use by trucks is limited
Russian roads remain dangerous; approximately

35,000 Russians are killed every year in road traffic
 Furthermore, low speed limits in Russia, constant
traffic jams in and Moscow, as well as the c’ by the
Russian police, hamper transportation..
 prefered transportation up to 1,500 km. This fact
contributes to the high importance of road haulage
in distribution logistics in Russia.
26

27. Logistics
in Russia Railway
The Russian railway accounts for 75.4 % (or US$ 29.6 billion)
of the entire revenues of the freight industry,
– (importance for the transportation of natural resources)
Largest railway network in Europe with 87,000 km
(USA = 226,605)
in regular use,
– 10 % of railways are defective in some way (the
Economist)
– half of the system needs urgent modernization (the
Economist) .
– Only 50 % of the network used In common carrier
service Is electric.
The major player on this market is the national railway
operator, JSC Russian Railways (RZhD),
– By 2010, the company shall be privatized
– The investments made are marginal, with a growth of
just 8.5% in 2006. not enough to reach western
standards.
– Due to the railway’s significant importance as the
backbone of transportation, the poor condition of the
27
Russian railway network could have a negative impact
on economic growth.

28. Logistics
in Russia
Warehousing
significant growth of the Russian economy caused the warehousing
prices in Moscow to increase dramatically.
The price per square meter in 2005 was just below the level in
London: up to USS 135 per square meter (JonesLangLassalle 2006).
demand exceeds supply, storage, cross-docking areas for
commissioning. Logistics can not be assured, in particular for
perishable or sensible goods.
It is expected by specialists that the warehouse market will be growing
during the next 10 years
Strong fragmentation of LSP - No Market leader in Russia
 Even not the Russian Post
 Only pioneers : FM Logistics and NLK
Low level of service
 Lack of experience
 Heavy documentation rules in Russia
28

29. Logistics
in Russia
Infrastructure
29
Warehouses Vacancy Rates
12%
10%
8%
6%
4%
10% 5-7% 1,5%
2%
% Quality Warehouse Space
0%
USA Europe Russia 80%
70%
60%
50%
40%
30%
67% 11% 22%
20%
10%
0%
Москва и МО Санкт Петербург Регионы

30. Logistics
in Russia
Transport availability
30
 In the future, 20t trucks Will transport logistics in
Russia pose a challenge for
fleet will increase at ca. FMCG sector development?
9-11%, but trucks Market studyMoscow
May 2007
shortage risks remains

31. 31
CHALLENGES

32. Logistics
in Russia
Challenge #1 :
Rare federal operators
32
 Logistics companies in
Russia:
 4000 - 6000
 Around 100 companies can
be rated as logistics service
providers.
 The market share of LSPs in
2006 :
 Top 20 LSP in Russia = 9 %
 Top 10 LSP In Germany = 12 %
 Russia’s logistics market is
very fragmented,
DEVELOPMENT STRATEGIES OF LOGISTICS
Industrial, Warehouses and Land Department
SERVICE PROVIDERS IN RUSSIA 2007 Actuals
Frank Straube, Peter Franke Knight Frank - October 2007
Berlin Institute of Technology -2008

33. Logistics
in Russia
Challenge #1 :
33
Rare federal operators
Responses to
Logistics Tender
no answer
 19 LSP contacted
10%
16% no space
 Would
be 5 to 6 in
Europe
37% no resource
37% or limited
range of
services
in scope

34. Logistics
in Russia
Challenge #1 :
34
Rare federal operators
 The difference between  The winner has no
the 2 top offerts > coeff space
1,5 !  Some respondents
have been at the limit
of politeness
 The market is till not
stabilized  The entrepreneurial spirit
is missing on this market
 Tender process delayed by 1 month
 Answer rate = 10%
 Would have been be 80% in Europe

35. Logistics
in Russia
Challenge #2 :
The “3S” challenge
35

36. Logistics
in Russia
Challenge #2 :
36
The “3S” challenge
 High control culture  Best Practice
 Control vs efficiency
Security Speed Smartness
Security Speed

37. Logistics
in Russia
Challenge #2 :
The “3S” challenge
37
What we want What we do

38. Challenge #3 :
Network Management
38

39. Challenge #3 :
Network Management
39

40. Challenge #3 :
Network Management
?????
40

41. executives expressed that within the next 10 years, they expect a shift of the
center of logistics activity towards Nizhny Novgorod and Ekaterinburg
Source : Dynamic Supply Chains ion Russia
Christopher Jahns - Inga-Lena Darkow - Tobias Weigi 41
German Logistics Association - 2006

42. Is it a reason for panicking ?

43. 43
THE KEYS TO
SUCCESS

44. Logistics
Key to success #1 : A reactive government :
in Russia
Undertaken Measures
44
the Russian government ignited several Sea
programs among :  The government plans to double the
 the federal program “Modernization of the capacity of the existing 43 seaports by
Transport System in Russia (2002-2010)” 2010.
 the “Transportation Strategy of the
Russian Federation” (2005 – 2020) Railways
 “To create the conditions necessary for a  By 2010, JSC Russian Railways (RZhD), shall
new development model in a global be privatized
economy, transportation is the instrument
for realizing Russia’s national interests Roadways
and providing a suitable place for the  The Russian government initiated several
country in the world economy.” roadways projects :
 an investment fund in 2006 of US$ 2.5
 “stimulate the creation of Russian multi-
modal transit operators.” billion to improve and extend the roadway
network by 27,000 km by 2010.
 public-private-partnerships to improve the
Air
network by using.
 Logistics centers already are being created at
 Since Moscow is the major bottleneck for
airports in Moscow, Novosibirsk and
transport in Russia, the Moscow city
Krasnoyarsk. government agreed upon one of the largest
 the government is creating the conditions to projects in June 2005: an orbital motorway
attract private capital from both Russian and with 8 lanes and a total length of 500 km
foreign investors. will be built around the city. This urgently
 For instance the Krasnoyarsk airport, the needed project should be finished by 2015.
Swiss company Swiss Port,

45. Logistics
Key to success #2 : A reactive business community :
in Russia
Unlocked strategic possibilities
Logistics Operator of the 90’s
FM Logistic, NLK, Molkom
Foreign FMCG
outsourcing
of the 90’s
Unilever, Eldorado, etc
Russian Traditional New Trend
Vertical Integration
of the 90’s on the market
Kuehne + Nagel
Producers
Distributers
Owning
Clients
the Product
Operating 3PL – Logistics Operator
Logistics
Developing
Logistics Developers
Infrastructure
Financing
Logistics $$$ Pension Funds
Infrastructure

46. Logistics Key to success #2 : Privatization & Professionalisation
in Russia
Changes in the Russian Logistics Market Structure
46
• FM Logistic
• NLK • Cat Logistics is a new comer on the market
• Ahlers
• DHL • DHL and Relogix operating in Pushkino
Operating • Relogix
Logistics • Excel
• FM Logsitcs renting out facilities in the regions
• Kuehne + Nagel
• Cat Logistics
• Schenker
• PLE
• Multinational Logistics Partnership announces the construction of 1 000
• Multinational Logistics Partnership 000 m2 in CIS
• Kulon Espro • Rosevrodevelopment announces the construction of warehouses in
• Ros Evro Development biggest regional centers
• Giffels (Canada) • Giffels (Canada) Preparing about 550,000 square meters of Class A
Developing • A.M.G. Group (US) space.
Logistics • Megalogiix Eurasia is planning to bring to the market anywhere between 1.0-1.2 million
Infrastructure • Eurasia square meters of warehousing space within the next 2-3 years.
• Ghelamco • Capital Partners preparing 500,000-600,000 square meters to market
• Aig Lincoln within the next couple of years.
• Belaya Datcha • A.M.G. Group (US), Plans the development of a chain of specialty
• Bouygues warehouse facilities throughout Russia for 250,000-350,000 square meters
to the market within the next 2-3 years.
• Hypo Real Estate International financed MLP for the construction of two
• Hypo Real Estate warehouse complexes at a cost of $300 Mln.
• International
Financing
• AIG European Real • The AIG European Real Estate Fund has acquired the FM Logistics
Logistics
Infrastructure • Estate Fund complex, located in the town of Khimki and offering approximately 65,000 sq
m of warehouse space, for over $60 million. First sale and leaseback
• Raven Russia Limited
investment transaction between foreign companies in the warehouse sector
of the Moscow market.

47. Logistics
Key to success #3 :
in Russia
Channels in-depth evolution
Distributor
Supplier Retailer
(Wholesaler)
Supplier Supplier Retailer Retailer

48. Logistics Key to success #3 :
in Russia
Channels in-depth evolution
Supplier Supplier Retailer Retailer
Key account Logistics Bonus
management
Consolidation &
Cross Docking
Strategies
Barycentric Barycentric
reviews reviews
Outsourcing Outsourcing

49. Logistics
in Russia
Key to success #3 :
Channels in-depth evolution
Wholesalers turn 3PLs
 Avalon (Tea)
 Alidi (Procter&Gamble’s wholesaler)
 “Ulkom“ – (Krokus Cosmetics)
 Bee logistics (Perfume Group)
 Direct Logistics (Food FMCG Wholesaler)

50. Logistics
in Russia
Key to success #4 :
50
Focus onto the right issue
Looking at western business Looking at Russian Business
 Stagnant demand : master plans  Durable double-digit growth, namely in the
conducted with constant volumes regions
 Tougher competition : higher standards  Providing everyday reliable service is an
with reduced margins everyday challenge
 Doing better than standard 97/98% is a  Focusing onto capacity is the challenge
costly and risky bet

51. Logistics Key to success #5 :
in Russia
Avoid the Copy/Paste syndrome
Adaptation of your
solutions
Парад неудачников // “Черная Грязь. Белые В 2007 году российская компания ООО "Метро
перчатки” Вэрхаус Ногинск" начнет строительство в
Ногинском районе Московской области
(…) Один из крупнейших международных логистического центра - объекта складского
девелоперов – американская компания назначения. Основной функциональной
ProLogis – был вынужден отказаться от задачей комплекса является центральное
строительства в Подмосковье складского складирование и распределение товаров по
терминала и свернул бизнес в России. (…) складам-магазинам.
Автор: Милена Бахвалова (См. в Яндексе)
Источник: ''Компания‘’

52. Key to success #6 : PEOPLE
Logistics
in Russia
 The real issue may
be PEOPLE !

53. Logistics
in Russia
 real need 1,000+ logistics specialists per annum.
 currently talent pool available 100 logistics specialists per
annum
53

54. 5 High leverage opportunities
Logistics
in Russia
54
1. People and knowledge
2. Business partners
3. Stock deployment
Alain Katz,
4. Capex Metis consulting
05th June 2008, Moscow,
Freight 2008 Conference
5. Top Management buy-in

55. 55
CONCLUSION

56. Logistics
in Russia
The gain is worth the effort
56
 The largest new floorspace pipeline,
 (kingsturge)
 Retail sector growing 30% per
annum
 (Economist Intelligence Unit –
Feb 2007)
FY 2007 Retail Revenue Growth
 Food retail sales are rising 45% per
annum
 (Economist Intelligence Unit –
Feb 2007)
 by 2010, it is expected to exceed the
UK, France or Germany.
 (Retail and Consumer Worlds –
PWC - January 2008)
Source: Companies’ Data

57. Logistics Relative problems for absolute successes :
in Russia
It is not a matter of keeping patient
57
It is taking 5-7 years in Russia,
to do what took 20-30 years to happen in
Europe

58. Portrait of a winner
Logistics
in Russia
58

59. Questions & Answers
59

60. Thank You for attention!
Serge Rivet ООО «Conseo»
s_rivet@conseo-cis.com
+ 7 916 453 30 55 www.conseo-cis.com
Skype : rivetmoscow