Magnit can once again take traffic from X5

Magnit’s CVP has visibly improved

In our view, Magnit’s offering started to improve a while ago, even before Sergey Galitsky left the company. We believe the positive trend continued after the management reshuffle and note the following key changes:

▪Assortment continues to expand, and we observe improvements in both width and depth in most of the key categories, with materially more choice in fruit and other fresh categories.

▪Pyaterochka’s assortment has also been expanding, however Magnit’s is now more comparable with X5’s in terms of choice.

▪Look and feel has improved a lot at Magnit – many features of fit-out, navigation and communication to a large extent have been copied from Pyaterochka but at the same time X5’s stores that were refurbished several years ago now look less attractive than new Magnit’s.

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Renaissance Capital

21 January 2019

Russian retail

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Renaissance Capital

21 January 2019

Russian retail

Figure 20: …and importantly this is also true in the fruit category (number of SKUs)

*Based on the sample of selected stores in Moscow

Source: Renaissance Capital

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Renaissance Capital

21 January 2019

Russian retail

Figure 21: Magnit’s refurbished stores are now comparable to Pyaterochka’s in terms of look & feel, with some of Pyaterochka’s older refurbishments looking less attractive to us

Source: Renaissance Capital

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Renaissance Capital

21 January 2019

Russian retail

Figure 22: Many features at Magnit look similar to Pyaterochka’s, in our view, including marketing communication

Source: Renaissance Capital

There’s still room for improvement at Magnit but further rollout of existing initiatives should lead to traffic regains

We do not think that Magnit stores are ideal and dramatically better than Pyaterochka’s.

For example, we still observe serious availability issues at some of Magnit’s stores, which is an important offset to all the positive changes achieved over the past couple of years. Magnit also has a lower share of private label goods and appears to be less active in promo (Figure 25) although the end-prices are broadly the same, with both retailers being cheaper than most of smaller competitors.

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Renaissance Capital

21 January 2019

Russian retail

Figure 23: There are still serious availability issues at some Magnit stores

Source: Renaissance Capital

Figure 24: Both retailers have scope to increase the number of private labels in total sales

Share of private label 2017

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

Source: Company data

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Renaissance Capital

21 January 2019

Russian retail

Figure 25: Pyaterochka is a leader in terms of share of SKUs on promo, while Magnit is significantly less active in promo…

*Only bananas, cucumbers, tomatoes and bread are LfL; the rest is analogues.

Note: Number in brackets and with * is a two-litre pack of juice. An average of 3 stores is used for both Magnit and Pyaterochka.

Source: Renaissance Capital

Figure 27: …however, the end-prices are similar at Magnit and Pyaterochka (pricing in selected stores in

Moscow/Moscow region, RUB)

Average basket price, RUB

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

Note: Basket consists of 12 SKUs. An average of 3 stores is used for both Magnit and Pyaterochka.

Source: Renaissance Capital

Nevertheless, overall we think Magnit has made significant progress improving its product and becoming more competitive with X5. As such, we expect Magnit to at least partially regain traffic lost to nearby Pyaterochka stores over the past few years. We believe it is

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Source: Company data

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