Mail Order Business in Russia and the Role of the Catalogue

Mail Order Business in Russia and the Role of the Catalogue ERA Annual Meeting 2007 22-24 October, Verona, Italy Zafer Toker, Deputy Managing Director Mir Knigi, Moscow e-mail: ztr@mirknigi.ru

What is your association with Russia? Page 2

What is your association with Russians? Page 3

What is your association with Russian Consumers? Page 4

Macroeconomics Page 5

Comparasion with other Emerging Markets in 2006 During Mr. Putin s presidential period has the Russian economy has performed perfect. The political and economical stability encouraged a lot of foreign investors to enter into the market Country Russia Turkey Bulgaria Hungary Poland Ukraine China Area (km2) 17,075,400 780,580 110,910 93,030 312,685 603,700 9,596,960 Population, million 142.8 70 414 7 385 9 981 38 537 46 711 1 313 974 Density of population 8.4 90 67 107 123 77 137 Urban population ratio, % 73 67 70 65 63 68 40(30) Population growth, % -0.4 +1.1-0.9-0.3-0.05-0.6 +0.59 Literacy, % 99.6 86.5 98.6 99.4 99.8 99.7 90.9 FDI, $ billion 28.4 18 5.1 5.2 10 6.8 63 GDP, $ billion 1 723 551.6 77.13 172.7 542.6 355.8 10 000 GDP/capita, $ 12 100 8 900 10 400 17 300 14 100 7 600 7 600 Real GDP growth, % 6.6 5.2 6.5 3.8 5.3 7 10.5 Inflation, % 9.8 9.8 4.5 3.7 1.3 11.6 1.5 Unemployment rate, % 6.6 10,2 9.6 7.4 14.9 9 4.2 Internet users, million 23.7 16 2.2 3.1 10.6 6.5 123 Sources: The World Fact book, Countries' statistical officials, Eurostat Page 6

Russian economy is doing well GDP amounted to 26.781 bln. RUR in 2006 GDP, bln. RUR Real GDP growth, y-o-y % 8944 10831 13243 17008 21665 26781 26800 21800 16800 11800 6800 5 4.7 7.3 7.2 6.4 6.8 7 5 2001 2002 2003 2004 2005 2006 1800-3200 2001 2002 2003 2004 2005 2006 3 Page 7

Foreign Direct Investments increasing from year to year Foreign Direct Investments in Russia amounted to 28.4 bln. USD in 2006 FDI, bln. USD 28.4 30 FDI growth to base year, % (Index: 2001 = 100%) 714 980 880 780 20 680 580 3.98 4 6.78 9.42 13.07 10 Base= 100 101 170 237 328 480 380 280 180 2001 2002 2003 2004 2005 2006 0 2001 2002 2003 2004 2005 2006 80 Page 8

Active Trade balance due to the Oil/Gas Price Immense Increase of Export Value within last 4 years Export and Import, in bln. USD Export and Import growth to base year, % (Index: 2001 = 100%) Import Export 136 102 107 54 61 76 2001 2002 2003 183 95 2004 245 125 2005 305 164 2006 300 250 200 150 100 50 0 Base= 100 2001 Import Export 180 177 141 114 133 105 2002 2003 2004 241 2005 233 304 2006 299 295 195 95 Source: Ministry of Economic Development and Trade Page 9

Population s welfare is growing Both people s incomes and expenditures are growing by similar rates Average monthly incomes per capita growth to base year, % (Index: 2001 = 100%) 324 Average monthly expenditures per capita growth to base year, % (Index: 2001 = 100%) 256 295 257 316 290 209 208 129 169 195 129 166 190 Base= 100 2001 2002 2003 2004 2005 2006 Base= 95 100 2001 2002 2003 2004 2005 2006 90 Source: Ministry of Economic Development and Trade Page 10

Page 11 Source: Ministry of Economic Development and Trade 123 100 226 182 147 281 90 190 290 2006 2005 2004 2003 2002 2001 Base= Consumers are spending more and more Retail trade turnover amounted to 8627.5 bln. RUR in 2006. 6934 5598 4515 3764 3069 8627 017.4 34.8 52.2 69.6 87 104.4 121.8 139.2 156.6 174 191.4 208.8 226.2 243.6 261 278.4 295.8 313.2 330.6 348 365.4 382.8 400.2 417.6 435 452.4 469.8 487.2 504.6 522 539.4 556.8 574.2 591.6 609 626.4 643.8 661.2 678.6 696 713.4 730.8 748.2 765.6 783 800.4 817.8 835.2 852.6 870 887.4 904.8 922.2 939.6 957 974.4 991.8 1009.2 1026.6 1044 1061.4 1078.8 1096.2 1113.6 1131 1148.4 1165.8 1183.2 1200.6 1218 1235.4 1252.8 1270.2 1287.6 1305 1322.4 1339.8 1357.2 1374.6 1392 1409.4 1426.8 1444.2 1461.6 1479 1496.4 1513.8 1531.2 1548.6 1566 1583.4 1600.8 1618.2 1635.6 1653 1670.4 1687.8 1705.2 1722.6 1740 1757.4 1774.8 1792.2 1809.6 1827 1844.4 1861.8 1879.2 1896.6 1914 1931.4 1948.8 1966.2 1983.6 2001 2018.4 2035.8 2053.2 2070.6 2088 2105.4 2122.8 2140.2 2157.6 2175 2192.4 2209.8 2227.2 2244.6 2262 2279.4 2296.8 2314.2 2331.6 2349 2366.4 2383.8 2401.2 2418.6 2436 2453.4 2470.8 2488.2 2505.6 2523 2540.4 2557.8 2575.2 2592.6 2610 2627.4 2644.8 2662.2 2679.6 2697 2714.4 2731.8 2749.2 2766.6 2784 2801.4 2818.8 2836.2 2853.6 2871 2888.4 2905.8 2923.2 2940.6 2958 2975.4 2992.8 3010.2 3027.6 3045 3062.4 3079.8 3097.2 3114.6 3132 3149.4 3166.8 3184.2 3201.6 3219 3236.4 3253.8 3271.2 3288.6 3306 3323.4 3340.8 3358.2 3375.6 3393 3410.4 3427.8 3445.2 3462.6 3480 3497.4 3514.8 3532.2 3549.6 3567 3584.4 3601.8 3619.2 3636.6 3654 3671.4 3688.8 3706.2 3723.6 3741 3758.4 3775.8 3793.2 3810.6 3828 3845.4 3862.8 3880.2 3897.6 3915 3932.4 3949.8 3967.2 3984.6 4002 4019.4 4036.8 4054.2 4071.6 4089 4106.4 4123.8 4141.2 4158.6 4176 4193.4 4210.8 4228.2 4245.6 4263 4280.4 4297.8 4315.2 4332.6 4350 4367.4 4384.8 4402.2 4419.6 4437 4454.4 4471.8 4489.2 4506.6 4524 4541.4 4558.8 4576.2 4593.6 4611 4628.4 4645.8 4663.2 4680.6 4698 4715.4 4732.8 4750.2 4767.6 4785 4802.4 4819.8 4837.2 4854.6 4872 4889.4 4906.8 4924.2 4941.6 4959 4976.4 4993.8 5011.2 5028.6 5046 5063.4 5080.8 5098.2 5115.6 5133 5150.4 5167.8 5185.2 5202.6 5220 5237.4 5254.8 5272.2 5289.6 5307 5324.4 5341.8 5359.2 5376.6 5394 5411.4 5428.8 5446.2 5463.6 5481 5498.4 5515.8 5533.2 5550.6 5568 5585.4 5602.8 5620.2 5637.6 5655 5672.4 5689.8 5707.2 5724.6 5742 5759.4 5776.8 5794.2 5811.6 5829 5846.4 5863.8 5881.2 5898.6 5916 5933.4 5950.8 5968.2 5985.6 6003 6020.4 6037.8 6055.2 6072.6 6090 6107.4 6124.8 6142.2 6159.6 6177 6194.4 6211.8 6229.2 6246.6 6264 6281.4 6298.8 6316.2 6333.6 6351 6368.4 6385.8 6403.2 6420.6 6438 6455.4 6472.8 6490.2 6507.6 6525 6542.4 6559.8 6577.2 6594.6 6612 6629.4 6646.8 6664.2 6681.6 6699 6716.4 6733.8 6751.2 6768.6 6786 6803.4 6820.8 6838.2 6855.6 6873 6890.4 6907.8 6925.2 6942.6 6960 6977.4 6994.8 7012.2 7029.6 7047 7064.4 7081.8 7099.2 7116.6 7134 7151.4 7168.8 7186.2 7203.6 7221 7238.4 7255.8 7273.2 7290.6 7308 7325.4 7342.8 7360.2 7377.6 7395 7412.4 7429.8 7447.2 7464.6 7482 7499.4 7516.8 7534.2 7551.6 7569 7586.4 7603.8 7621.2 7638.6 7656 7673.4 7690.8 7708.2 7725.6 7743 7760.4 7777.8 7795.2 7812.6 7830 7847.4 7864.8 7882.2 7899.6 7917 7934.4 7951.8 7969.2 7986.6 8004 8021.4 8038.8 8056.2 8073.6 8091 8108.4 8125.8 8143.2 8160.6 8178 8195.4 8212.8 8230.2 8247.6 8265 8282.4 8299.8 8317.2 8334.6 8352 8369.4 8386.8 8404.2 8421.6 8439 8456.4 8473.8 8491.2 8508.6 8526 8543.4 8560.8 8578.2 8595.6 8613 8630.4 8647.8 8665.2 8682.6 8700 2006 2005 2004 2003 2002 2001

Mail Order: Risks and Chances in day-to-day Business Page 12

Big Challenges and Big Opportunities 5 4 3 2 1 0 Density of the Population Inhabitant per 1 km² Swi ss Russi a Czech Repub. GB France Germany USA Number of Post office per 10.000 inhabitants Population 142,7 million, (43 Mio HH) Area : 17 Mio.. km² The highest density in highly developed regions (average 8,4 persons per km 2 ) Great potential in low populated regions Still underdeveloped retail structure besides large cities Over 100 Mio. Russians, Total more than 100 Nationalities 76% live in the European part of the Country 55% - Residents of small towns 13 Mega cities (the largest one is Moscow, over 14 Mio.) Receptive to mail-order Over 42.000 post offices across Russia The Bank system (e.g. Sberbank with more than 20.000 retail branches) Page 13

Share & Value of the Mail Order Market in Russia Books is the main segment in the structure of sales via mail order according to its share (38%). According to NAMT s estimation, in 2005 market volume reached $1 bln. The share of sales in Distance Selling Others 6% Book книги 38% Consumer Goods 15,5% ТНП (вкл. одежду, обувь) косметика Cosmetics 15% 230 Value of mail-order market, In Mio USD +52% 350 +86% 650 +15% 750 +33% 1000 семена Seeds 7,5% периодические Periodicals издания 7,5 % Vitamins БАДы, витамины 11% 2001 2002 2003 2004 2005 Source: National Association of Mail-order Trade Page 14

Threats, Risks in Operations and day-to-day Business Creation, Design, Printing and Lettershop Databases and Lists Fulfillment Payment Telemarketing,Telesales, SMS, e-commerce Legal Issues (Data Protection Law, Lottery, Sweeps etc.) Post and other Delivery Systems Human Resources / Management Page 15

Russian Printing Industry Page 16

Market structure Main Indicators Consolidation after the Big Collapse in 1998 and a steady dynamic growth since 2000 Total market volume is about 2,7 bln USD Forecasted growth until 2012 is supposed to achieve 3,64 bln USD value Average Market growth rate is minimum around 2,6% per year Today more than 6.700 licensed printing companies are operating on the market The printing industry is one of the interesting markets for (financial) investors, though investments rate of growth is reducing. Yearly Return on Equity between 10-15% Technical Equipment is too old. Already depreciated share of printing plants on the market amounts more than 80% of all existing infrastructure Page 17

Does Market Structure reflect Business as Usual? Market Value after segments, in Mio. USD Segment Shares of the whole volume, in % Other, 5% Advertising, 18% Magazines Labels and packing Labels, 12% Packing, 19% Advertising Newspapers Books Corporate Publishing Magazines and catalogues, 19% Books, 13% Newspapers, 14% Source: Heidelberg CIS There is no strict specialization / diversification among companies on the market. Each company aims to expand and print everything The largest shares of the market belong to Magazines and catalogues (19%) and Packing segments (19%) Page 18

Highly fragmented Market dominated by private firms Total number of licensed printing companies 6.700, including 60 large federal companies, 1.800 local municipal companies and the rest private owned firms Companies are concentrated in Moscow and St. Petersburg (80% of magazines-production and 35% of newspapers-production) The dominant printing technology offset The weight of printed production per capita in 2005 amounted to 34 kg Institutional structure of printing industry The structure of printing production according to technology Non-state companies s; 84,6% State companies The majority form of ownership - private property (84,6%) letterpress printing; 3,6 flexographic printing; 6,7 digital; 3,2 offset; 84,4 s; 15,4% stencil screen printing; 2,2 Page 19

Typology of the Market Structure Old Russian printing plants are national enterprises constitute 1% of the enterprises total number produce 50% industry output produce not very profitable literature Printing plants created by large Russian companies have a large productive capacity provide a wide range of high quality services specialize in large orders Small but fast developing printing plants family enterprises or enterprises created by the professionals from printing industry Who will win at the end, who will make it? Russian market is early adaptive: what is at the end USP of the service provider? What kind of added value are you going to offer to be different than the local partner? What are the rule of the game? Are you under- or overestimating your chances/capabilities? Are you interested in marriage or one-night-stand? Page 20

High competition for the half of the Market Volume More than half of all magazines, leaflets and books are printed abroad (same service is 15-20% more expensive in Russia) According to experts estimations, this import amounts to 0,6-1 bln USD The rate of market growth is about 20% a year, and foreign companies get the main share of it The key problem a lack of enameled stock, imported into Russia from 30 factories of the world Belarusian prices are lower than our dumping prices by 15%! Belorussia Lithuania, Latvia The main competitors on the markets of glossies & leaflets. China German Italy RUSSIA South Korea Slovakia is actively capturing the segment of printing art literature Slovakia, Czechia Turkey Turkey is increasing its share on the market of corporate publishing - High costs - Low costs - High quality - Low quality Page 21

Needed Investments for the basic Infrastructure is still not done Investment requirement into the Russian printing industry is 450 million USD while real annual investments (both in federal and private sectors) do not exceed never the 110 million USD border The key restrictive factors of investments: expensive equipment complexes; problems with getting necessary loans & financing; revoke of privileges for investments into the basic manufacture; privatization of federal companies is long lasting and in many cases on hold Dynamics of Private Sector Investment Dynamics of Federal Sector Investment 100 85,7 40 35,2 80 60 40 20 25,6 38,6 63,2 70,3 73,2 30 20 10 5,8 11,7 24,8 21,3 26,7 0 2000 2001 2002 2003 2004 2005 0 2000 2001 2002 2003 2004 2005 Page 22

Russian printing industry Chance and Risk Profile STRENGTHS New printing plants in Russia provide higher quality than the majority of foreign enterprises WEAKNESSES Numerous limitations of the market (see the next page) The advertising market rate of growth is high&dynamic Professional associations of polygraphists create favorable conditions for this branch development (e.g. Moscow printing Union) OPPORTUNITIES Magazines and catalogues segment are developing in Russia and companies will obviously aim to decrease risks and logistic costs The print runs & volumes are increasing Growth of the magazines and newspapers market The 2 digit growth in direct-marketing industry All-Russian newspapers transition to the color-printing Enterprises standardization by ISO-standard Using of the foreign capital THREATS Absence of the printing plants maker / builders and undeveloped production of the materials A lack of high-qualified staff Problems and the disproportion in paper industry (a lack of the enamel-paper and excess of the news-print) Entrance into WTO will open market for foreign companies Page 23

Limits of the Printing Market High barriers to entry (large-scale investment expenditure are needed) Long pay-back period (3-5 years) Features of the tax and custom legislation in Russia Foreign paper and equipment are liable to customs duty up to 15% and VAT (18%). For editions printed abroad there are no customs duties and VAT is only 10%. Thus printing abroad is 23% cheaper than in Russian. Insufficient range of provided services (finishing and direct-marketing services are not developed) Old and not efficient equipment / infrastructure Lack of well qualified and experienced professionals Page 24

Market Tendencies - Outlook Growth rate of the digital printing share is 10% a year. This dynamic trend will continue. The forecast for 2012 still 4% growth The majority of enterprises plan to install digital printing systems for high speed production of color limited order During the nearest five years federal enterprises will keep the gravure equipment for producing large volume orders. However, the most likely tendency in the printing industry will be gradual replacement of gravure in favor of rolled and sheet offset The main reasons of this are: in Russia gravure is perceived as outmoded, ecologically unsafe, very work intensive with low quality; and the maintenance of the equipment is costly and expensive At the same time there is rather high demand on this type of printing because of packaging needs and magazines and catalogues of large edition, which sometimes are printed on thin paper The capacity of the Russian gravure market is about 36 ths tones in a year. At the average price 6$/1 kg., the monetary market value has exceeded 220 million dollars Page 25