Russian_consumer_sector_Jun05

Aton LLC does business and seeks to do business with companies covered in its research reports. Investors should consider this report as
only one factor in their investment decision. For other important disclosures, please refer to the inside back cover of this report
Equity Research
Russia
Alexei Yazikov
yazikov@aton.ru
7 (095) 777-8877, ext. 3123
RUSSIAN CONSUMER SECTOR
June 27, 2005
SEEKING EXPOSURE TO RUSSIA’S SPENDING SPREE
Russia’s burgeoning consumer sector continues to be a direct beneficiary of the country’s
robust economic growth, underpinned by a high oil price and increasing foreign direct
investment. This has resulted in consumption increasingly becoming the focus theme for
portfolio and strategic investors wearied by the political vagaries of natural resource stocks and
seeking exposure to the trickle-down effects of high commodity prices.
Our consumer goods equities basket has substantially broadened and deepened over the
last year amid a slew of IPOs that allowed investors to diversify out of commodity stocks.
Five Russian consumer goods names and two international companies with extensive exposure
to Russia have listed either on local exchanges or abroad in the last 12 months. As a result of
this relatively full IPO pipeline, our portfolio of consumer and consumer-related plays now has a
combined capitalization of $24bn and is growing.
On the back of rising interest in consumer sector-related stories, the stocks in our universe,
with a few exceptions, have been priced aggressively for growth. Yet increased diversity also
provides greater choice, and investors – like Russian consumers – are becoming more
discerning, undertaking an increasingly forensic search for substantial indications of above-
average growth potential and efficiency and profitability improvements, rather than simply
opting for eye-catching plans. Although the sector as a whole is still attractively priced vs. its
global peer universe, several segments are trading at premium valuations due to their
exceptional growth rates and high quality of earnings.
We direct investors’ attention to Pyaterochka and Lebedyansky among our growth plays,
and Oriflame, Severstal-Auto and Avtovaz as our value stories. Superior growth rates and
profitability put Pyaterochka and Lebedyansky in a league of their own, while the market’s
lukewarm stance to Oriflame, Avtovaz and Severstal-Auto is not justified, in our view, by these
companies’ fundamentals. The remainder of our universe is trading at close to fair value – with
the exception of Apteka 36.6, which is the only Sell in our portfolio.
Valuation and recommendation matrix: We like Pyaterochka, Lebedyansky, Oriflame, Severstal-Auto, Avtovaz
EV/EBITDA P/E P/CFAs of 23/6/2005 Rec Free float,
%
Price
(com.)$
Target
price, $
Upside,
%
Mcap,
$mn
EV, $mn
2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Food & beverages
Wimm-Bill-Dann Hold 23.0% 16.6 18.6 12.1 779 1,004 10.4 9.9 7.7 33.9 37.2 19.4 10.4 6.7 5.2
Lebedyansky Buy 19.9% 41.6 50.8 22.2 848 860 7.7 6.3 5.6 15.9 11.6 9.2 17.6 12.2 9.0
Automotive
Avtovaz Buy 15.0% 24.2 30.8 27.3 766 1,306 2.8 3.2 2.7 6.6 9.5 5.6 2.3 2.5 2.0
Severstal-Auto Buy 37.4% 14.1 19.3 36.7 420 479 4.1 3.7 3.2 8.9 7.3 5.9 5.4 3.3 2.8
Brewing
Baltika Hold 12.8% 27.3 25.1 -7.9 3,463 3,548 12.4 11.0 10.0 23.9 20.0 19.0 13.8 12.1 13.2
EBI Hold 25.8% 34.5 31.3 -9.4 1,021 989 10.4 9.3 7.7 28.0 23.7 17.8 14.3 12.9 10.5
Retail
Pyaterochka Buy 30.0% 14.0 17.5 24.7 2,145 2,202 19.7 12.4 8.4 28.8 19.1 12.9 19.9 15.3 10.3
Seventh Continent Hold 12.8% 14.2 14.1 -0.5 913 835 19.5 12.2 9.6 33.4 21.4 17.3 19.0 14.3 12.2
Apteka 36.6 Sell 20.0% 20.8 16.9 -18.3 166 239 12.9 10.5 8.51 82.4 33.2 19.8 na 34.6 16.7
Personal care & household goods
Concern Kalina Hold 37.0% 26.5 26.0 -2.0 275 248 7.4 6.4 5.8 14.5 11.1 10.0 10.6 13.8 11.3
Oriflame (€) Buy 45.5% 18.23 21.9 20.3 1,082 1,139 9.4 10.0 9.2 13.7 13.9 12.6 12.0 11.4 10.4
Banking P/BV
Sberbank Hold 39.0% 661 667 0.9 12,616 18.7 13.7 11.2 2.6
Source: Company data; Aton estimates

Russian consumer sector
2 June 27, 2005
TABLE OF CONTENTS
INVESTMENT CASE................................................................................................................ 3
MACROECONOMIC BACKDROP........................................................................................... 13
FOOD & BEVERAGES: VALUE OVER VOLUME ................................................................... 24
AUTOMOTIVE SECTOR: MOVING UP A GEAR..................................................................... 40
RETAIL: RUSSIA GOES SHOPPING ...................................................................................... 51
COSMETICS: WEAPONS OF MASS ATTRACTION.................................................................. 60
MEDIA & ADVERTISING: MAJOR BENEFICIARY OF CONSUMPTION BOOM........................ 67
BANKS: SHOW US THE MONEY! .......................................................................................... 75
COMPANY PAGES ................................................................................................................ 80
WIMM-BILL-DANN .......................................................................................................... 80
LEBEDYANSKY................................................................................................................. 85
AVTOVAZ......................................................................................................................... 89
SEVERSTAL-AUTO............................................................................................................ 93
BALTIKA .......................................................................................................................... 97
EFES BREWERIES............................................................................................................ 101
PYATEROCHKA............................................................................................................... 105
SEVENTH CONTINENT .................................................................................................... 109
APTEKA 36.6.................................................................................................................. 113
KALINA .......................................................................................................................... 117
ORIFLAME COSMETICS................................................................................................... 121
SBERBANK ..................................................................................................................... 125
APPENDIX. M&A DEALS AND UPCOMING IPOS IN THE CONSUMER SECTOR ................. 131
DISCLOSURES.................................................................................................................... 135

Investment case
June 27, 2005 3
INVESTMENT CASE
Russia’s consumer sector continues to be a direct beneficiary of the country’s robust
economic growth, boosted by high commodity prices and increasing foreign direct
investment. This backdrop means consumption is becoming a focus theme for many
portfolio and strategic investors. Amid a slew of IPOs in the last 12 months we have sifted
through Russia’s consumer universe and sought to identify the top growth plays and value
stories among the stocks available to assemble our consumer equities shopping basket.
Russia is one of the world’s fastest growing economies, with improving sovereign
ratings, a large budget surplus and booming consumption, while relative political
stability and slow but steady implementation of structural reforms provide the basis for
further growth and open new horizons to investors. With more than 144mn people, Russia
is also one of the world’s biggest consumer markets in terms of size and growth potential.
The main driver behind the unbridled growth in consumption in recent years is the
increasing purchasing power of the population, which has allowed the national
consumer market to grow in both the scale and scope. Since 2000, real disposable income
has been rising in Russia at a rate exceeding real GDP growth. Statistics show that in the
last four years each percentage point in GDP growth has produced, on average, about a
1.75% increase in real disposable income. Going forward, we expect real disposable
income to continue to grow faster than real GDP before the two growth rates converge in
the course of the next five years. Coupled with ruble appreciation against the dollar, the
projected growth rates translate into Russia’s nominal dollar income per capita more than
doubling through 2010 to $6,087 by the end of decade.
Real disposable income growth has far outpaced GDP growth in recent years
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F
0%
2%
4%
6%
8%
10%
12%
14%
16%
Nominal disposable income per capita, $ pa
Real disposable income per capita, %, ch. y-o-y
Real GDPgrow th, %, ch. y-o-y
Source: Federal Statistics Service; Aton estimates
We expect growth in per capita consumption to be accompanied by a shift in
consumption structure from food to the non-food and services sectors. The service
sector is expected to be by far the largest beneficiary of rising disposable income. Apart
from housing services, which should claim the biggest chunk of disposable income in the
future, segments such as communications, repair and renovation services and entertainment

4 June 27, 2005
are expected to post the highest growth in the next five years. In the non-food sector the
fastest growing items are projected to be building and renovation materials, passenger cars,
home appliances and furniture and household products, highlighting rising demand for
better quality living.
Per capita household consumption growth in tandem with shift in consumption structure
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1997
1998
1999
2000
2001
2002
2003
2004F
2005F
2006F
2007F
2008F
2009F
2010F
Food, alcohol & catering, $ Non-food, $ Services, $
Apart from disposable income growth, the factors driving consumption include the
increasing availability of consumer credit, a lower tax burden for consumer goods
producers and retailers and the advent of new technologies enabling producers to expand
product range and quality, thus making them more competitive. Meanwhile, the major risks
for our consumption forecast, apart from a general economic slowdown, remain an
underdeveloped banking system opening up the possibility of a liquidity crisis, and a faster
than expected rise in utilities tariffs, housing rates and other mandatory payments that may
hinder the population’s propensity to spend on consumer goods and services.
Playing the consumption sector growth theme
In our report we have identified several major themes for the consumer sector and
consumer-related companies:
• The projected growth in consumption should benefit all the consumer sectors of
the economy. However, not everyone will be affected equally and the major
beneficiaries are less apparent than it appears at first glance. The positive effects are
particularly pronounced for services, retail, wholesale, trade and catering and
telecommunications, which as non-tradables also suffer almost no import pressure.
Manufacturing, light industry and food producers are indirectly negatively impacted as
foreign currency inflows lead to the real appreciation of the ruble, which hurts their
competitiveness. Increased costs undermine growth in these sectors, slowing the pace
of expansion and reducing economic diversification.
• The effect of an expanding economy on consumer sector industries is often
somewhat ambiguous since rising incomes are accompanied by increased labor
costs. This can have fairly pronounced effects on competitiveness if wages rise at a
higher rate than productivity. To the extent that labor productivity fails to keep pace
with employment costs, this could necessitate further restructuring to reduce headcount
and cut costs.
• Consumption patterns should experience both quantitative and qualitative
changes as Russians not only consume larger volumes of goods and services but
also demand better quality products – and are ready to pay higher prices with a shift

Investment case
June 27, 2005 5
to higher value-added products. This implies that segments such as the food market are
likely to grow more in value than volume as consumers spend more per calorie.
• Consumers remain highly price sensitive even as they gain affluence, demanding
both a wider choice and higher quality for their money.
• With the exception of a few sector segments, the consumer market remains highly
fragmented with many small- and medium sized companies often present only in their
own regional markets. This means that there is significant potential for consolidation at
a time when the growth rates of the biggest players are still highly attractive.
• Multinational companies are already either market leaders or significant players
in many segments of the Russian consumer sector. We believe that it is only a
matter of time before their presence will be felt in many others and in most sectors they
may become a driving force of consolidation.
• The advent of modern retail formats and the emergence of the fast growing retail
chain operators have a profound effect on the consumer sector companies. While
producers benefit from better information on consumer habits and the supply chain, as
well as faster volume growth and economies of scale, they are also seeing price
pressure and slimming margins amid the fast growing and increasing power of retailers
and emerging competition from private labels. As a result, they need scale and brand
power to be able to withstand the pressure of retailers and to preserve their margins.
• M&A activity pushes asset prices higher making it more challenging to achieve the
required return on capital.
Opportunities not without challenges
All these trends should noticeably affect major sectors in our consumer goods universe and
underscore our thesis that together with immense opportunities, Russian consumer goods
companies face many challenges:
• Consumer prices are likely to come under pressure as competition intensifies.
Therefore companies should focus on product mix optimization to maximize margins.
• Packaging and presentation of products is becoming of paramount importance
implying higher expenditure for companies to differentiate their products.
• Advertising expenditure is set to rise across the sector as the fight for market
share intensifies. Smaller companies are in a disadvantageous position in this respect
and could be squeezed out by larger players or forced to become niche players in their
respective segments.
• Innovation in the product range is becoming ever more important for luring
consumers and to exploit new, as yet untested, areas of potential demand.
• Efficient distribution is the key for fast expanding businesses, given the country’s
vast size. Investment into distribution is highly important for securing and enhancing
market share, maximizing return on brand investment and optimizing logistics costs.
• Consumer sector companies face the tough task of striking the right balance
between maintaining high rates of growth and focusing on profitability in an
environment of rising competition. Strong management skills therefore come to the
front of the agenda as execution risks are high.
• In both the food and non-food segments, retailers are best positioned to benefit
from the growing tide of disposable income, while the manufacturing segment is likely

6 June 27, 2005
to face growing competition from both imports and multinational companies
establishing local production.
Main sector trends
In view of the above, we have identified several sector-specific trends that are likely to
influence the companies in our consumer goods portfolio:
• In the brewing sector we expect sales of local premium and licensed premium
beers to far outpace the expansion of the broader market. Among brewers the race
is now on for market share while a fast shrinking asset pool and rising asset prices
mean there is a danger that acquisition multiples will reach value-destroying levels.
• In the dairy sector we should see a continuation of the trend towards higher
value-added products such as yogurts, desserts and cheeses. Innovation should play
a significant role in attracting new customers and move products up the price range.
However, margins are expected to come under pressure from high raw materials prices.
• The juice and water sectors should benefit from increasing health consciousness
and a corresponding rise in consumption. Drinks with high vitamin content and
enhanced nutritional qualities are expected to enjoy a particularly strong increase in
demand. The arrival of Coca-Cola in the Russian juice market is expected to heat up
competition among major players.
• The passenger car market should experience a trend towards new import sales
and growth in market share for foreign carmakers producing locally. Russian car
producers will not be able to cash in on overall growth unless they adapt to changing
market conditions, team up with Western partners and explore opportunities in modern
component production.
• In the cosmetics and toiletries segment, the highly brand conscious domestic
consumer base should benefit multinational companies with their large advertising
budgets, strong portfolio and continuous investment into new product ranges and deep
penetration of the main segments. Local players are likely to be increasingly forced to
become either niche producers or trend towards the commodity end of the market.
• Retail should see accelerating growth in the share of modern formats. Within this
we expect convenience stores to grow the fastest; however, their share of total retail
turnover should remain insignificant. We see discounters becoming the obvious choice
for everyday shopping and the dominant format in food retail as consumers remain
very price conscious, especially in the case of staple foods. The aggressive expansion
of major retailers should boost real estate prices further and force subscale chain
operators out of the market, paving the way for sector consolidation.
• The expanding consumer lending market should have a particularly pronounced
effect on the real estate market and the automobile, consumer electronics and
household appliance sectors.
• We expect a wave of consumer sector company IPOs as fast expanding businesses
seek capital injection to aid further growth. Furthermore, the wealth of additional
business opportunities should also prompt some majority shareholders to dispose of
part of their equity to reinvest in other business areas.
Further in the report we provide a detailed analysis of the major trends in the consumer
sector and identify the most dynamic sub-sectors and markets, which we expect to be the
major focus for portfolio and strategic investors alike. We have focused mainly on sectors
where we could find publicly traded securities, namely Food & Beverages, Banking,
Automotive, Retail, Media/Advertising and Personal Care/Household Goods.

Investment case
June 27, 2005 7
What’s in our consumer equities shopping basket?
The Russian consumer goods equities universe has broadened substantially over the
last year amid a slew of IPOs allowing investors to diversify away from the commodity
sectors. Five Russian consumer goods names and two international companies with
extensive exposure to Russia have listed either on local exchanges or abroad in the last 12
months. Thanks to the full IPO pipeline, our research portfolio of consumer and consumer-
related plays now has a combined capitalization of $24.3bn and is steadily growing.
So far this year consumer sector stocks have ranked among the best performers in our
equities universe and several segments are now trading at premium valuations to their
respective global peers due to their exceptional growth rates and quality of earnings.
Russian consumer goods stocks performed well in 2005
-20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
Avtovaz
Severstal-Auto
Oriflame
Pyaterochka
Wimm-Bill-Dann
Lebedyansky
Apteka 36.6
EBI
Sberbank
7th Continent
Baltika
Kalina
RTS
Source: Bloomberg; Aton estimates
On the back of rising interest in consumer sector related stories, the stocks in our
universe, with a few exceptions, have been priced aggressively for growth. As prices
reach ever-higher levels and the range of available plays widens, investors are becoming
more discerning and are looking carefully for concrete signs of above-average growth
potential and efficiency and profitability improvements rather than pinning their hopes on
eye-catching plans.
While the comparative valuation multiples for several stocks already look rather high
(vs. global peers), we believe the top picks in our portfolio still have a substantial gap to
the intrinsic value of their businesses.
Food & beverage
In the food and beverage sector we highlight juice maker Lebedyansky, which remains
one of the cheapest stocks in the consumer goods universe, while its forecast growth rates
and profitability warrant a premium rather than a discount to domestic and global peers.
Our relatively conservative model generates a target price of $50.8 for Lebedyansky
shares and we rate the stock a Buy.
In contrast, its main peer, Wimm-Bill-Dann has failed to live up to expectations and
although we see things improving down the track it does not warrant more than a Hold at
present given modest upside to our target of $18.6 per share and an expected average
performance in 2005.

8 June 27, 2005
Lebedyansky an eye-catcher among stocks in global consumer sector universe on EV/EBITDA, P/E multiples
Price (com.) MCap EV EV/EBITDA P/E P/CF
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Russia
WBD 16.6 779 1,004 10.4 9.9 7.7 33.9 37.2 19.4 10.4 6.7 5.2
Lebedyansky 41.6 848 860 7.7 6.3 5.6 15.9 11.6 9.2 17.6 12.2 9.0
Weighted average 9.2 8.2 6.7 25.6 25.4 14.7 13.7 9.2 7.0
Emerging markets
Nestle India 16.1 1,543 1,258 12.5 10.7 9.7 25.2 21.5 19.3 20.9 16.6 15.1
Fraser & Neave 9.2 2,143 4,319 10.2 9.9 9.4 12.5 12.4 11.5 7.8 10.5 10.0
Tiger Brands 16.2 2,736 2,628 6.7 7.4 6.6 11.4 12.9 11.1 11.3 9.8 8.7
Developed markets
Danone 89.4 23,458 25,668 9.1 8.8 8.3 20.7 17.9 16.6 11.7 10.8 9.9
Dean Foods 40.8 6,134 8,230 8.9 8.4 7.9 18.7 17.0 15.4 9.1 11.4 10.7
Nestle 260.6 104,419 99,886 9.1 8.9 8.3 20.8 17.3 15.8 12.0 12.0 11.1
Robert Wiseman Dairies 4.7 357 376 4.6 4.8 4.7 10.2 11.8 11.8 6.0 6.1 6.0
Yakult Honsha 18.6 3,278 3,144 12.7 12.6 11.9 26.3 24.4 22.8 15.9 15.5 14.5
Cadbury Schweppes 10.0 20,301 25,888 11.5 10.5 9.8 24.5 17.0 15.5 15.5 12.2 11.5
Coca-Cola 43.9 105,725 100,359 14.2 13.8 12.9 22.2 21.2 19.6 18.8 17.7 16.1
PepsiCo 56.0 93,775 89,106 13.2 12.2 11.3 23.1 21.3 19.6 18.5 16.9 15.3
Vermont Pure 1.8 40 98 9.9 9.2 7.7 50.3 40.7 19.6 5.4 N. A. N. A.
Weighted average 1.8 40 98 11.8 11.2 10.5 22.0 19.5 17.9 15.8 14.9 13.6
Automotive
Investors continue to have little faith in the prospects of the domestic car industry and
although we share some of their concerns, in our view the current valuations of the main
automotive sector stocks – Avtovaz and Severstal-Auto – do not reflect their strong market
position and potential gains from the new products they expect to launch. Competition from
foreign carmakers should intensify sooner rather than later but both carmakers are adapting
well to changing market conditions and should be able to harness the potential of their
current product range and new project launches. Our end-2005 target price of $30.8 for
Avtovaz shares provides 27% upside potential and our recommendation on the stock is
Buy. Severstal-Auto is our preferred choice in the sector though and with a target
price of $19.3 per share and 37% upside potential we also rate it a Buy.
Russian automakers trade at a an unjustifiably large discount to global peers
Price
(com.)
MCap EV EV/EBITDA P/E P/CF
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Russia
Avtovaz 24.2 766 1,1306 2.8 3.2 2.7 6.6 9.5 5.6 2.3 2.5 2.0
Severstal-Auto 14.1 420 479 4.1 3.7 3.2 8.9 7.3 5.9 5.4 3.3 2.8
Emerging markets
Tofas Turk 1.5 691 754 3.6 4.9 4.7 11.3 30.7 56.0 4.1 N. A. N. A.
Shanghai Automotive 0.6 1,856 1,687 5.3 8.8 8.3 7.4 9.6 10.3 15.9 N. A. 93.8
Ssangyong Motor 7.1 853 1,085 1.9 N. A. N. A. 3.1 2.7 N. A. 2.0 N. A. N. A.
Yulon Motor 1.2 1,641 1,977 6.6 N. A. N. A. 10.0 8.1 8.5 6.7 N. A. N. A.
Developed markets
DaimlerChrysler 41.2 41,748 121,605 7.1 8.1 7.2 13.1 15.4 10.6 2.6 2.9 2.6
Ford Motor 11.1 20,446 148,636 19.2 17.3 17.2 4.9 8.7 8.0 2.2 2.5 2.3
General Motors 35.8 20,255 256,221 25.8 35.1 28.6 5.7 N. A. 15.8 4.7 4.4 2.6
Honda 49.9 46,332 42,412 5.3 5.0 4.6 11.0 10.5 9.5 7.9 7.1 6.5
Peugeot 57.6 14,003 34,424 6.3 5.5 5.1 8.2 7.1 6.2 3.0 2.6 2.4
Toyota 35.9 129,671 115,369 4.7 4.7 4.4 11.6 12.0 10.9 6.5 6.4 5.9

Investment case
June 27, 2005 9
Brewing
Brewers’ shares were red-hot for much of the last 12 months but we believe momentum
in the stocks is now stalling as their near-term potential has been fully discounted by the
market. We have a Hold recommendation for both beer companies in our portfolio,
with price targets of $25.1 for Baltika and $31.3 for EBI.
Russian brewers trade at a premium that fully discounts their potential
Price
(com.)
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Russia
Baltika Brewery 27.3 3,463 3,548 12.4 11.0 10.0 23.9 20.0 19.0 13.8 12.1 13.2
Efes Breweries International 34.5 1,021 989 10.4 9.3 7.7 28.0 23.7 17.8 14.3 12.9 10.5
Emerging markets
Anadolu Efes 21.3 2,425 2,425 10.1 7.1 6.5 16.6 14.4 12.5 10.6 8.0 6.8
Grupo Modelo 3.1 10,172 9,667 6.6 6.3 5.7 17.3 16.2 14.5 9.6 9.4 8.3
Developed markets
Anheuser-Busch 46.7 36,249 84,257 19.3 19.8 19.2 16.4 17.0 16.4 12.2 13.1 12.0
Asahi Breweries 12.2 6,240 7,849 5.9 5.5 5.4 24.9 14.8 13.9 7.8 6.6 6.6
Carlsberg 51.5 3,803 7,670 7.7 7.7 7.3 38.2 16.1 13.2 5.7 5.9 5.6
Heineken 31.5 15,213 18,444 7.5 7.4 7.0 17.3 16.0 14.7 8.6 8.4 7.8
InBev 35.0 20,956 18,217 7.7 5.0 4.6 25.8 17.8 15.3 9.6 8.9 7.9
Scottish & Newcastle 8.6 7,575 10,855 11.0 10.1 9.7 45.6 14.0 14.7 12.3 11.3 10.9
Retail
Retail is our favorite segment in the consumer sector and we are not breaking new
ground in our preferences: Russian retail stocks are trading at premium multiples vs. their
international peers. We, however, see their demanding valuations as justified by superior
growth rates and impressive profitability. Between the market’s two plays – Seventh
Continent and Pyaterochka – we prefer the latter and rate it our top pick in the sector. We
believe Pyaterochka is best positioned to capitalize on the rising proliferation of modern
retail formats in Russia and appreciate its superior profitability, impressive growth rates
and well thought-out expansion strategy. Our DCF-based model provides an end-2005
target price of $17.5 per GDR, or 25% upside, and we initiate coverage of
Pyaterochka with a Buy. As for Seventh Continent, although we believe the stock has the
ability to generate stable returns for the long-term investors, its near-term potential is
limited and, with a price target of $14 per share, we start our coverage with a Hold
recommendation.

10 June 27, 2005
Retailers’ premium ratings largely justified by their superior growth rates
Price
(com.)
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Russia
Seventh Continent 14.2 913 835 19.5 12.2 9.6 33.4 21.4 17.3 19.0 14.3 12.2
Pyaterochka 14.0 2,145 2,202 19.7 12.4 8.4 28.8 19.1 12.9 19.9 15.3 10.3
Developed markets: Europe
Delhaize Group 61.0 5,832 10,217 5.9 6.1 5.8 16.1 12.8 11.4 5.5 5.6 5.1
Tesco Plc 5.8 45,220 50,717 9.6 8.8 8.0 18.2 15.9 14.2 11.0 9.8 9.2
Sainsbury (J) Plc 5.3 8,915 13,041 8.6 8.3 7.5 17.0 25.6 19.9 8.9 8.2 6.9
Morrison Supermarkets 3.3 8,785 11,918 8.8 11.5 8.3 19.2 33.8 18.4 7.6 11.2 8.6
Metro AG 51.4 16,815 27,096 7.5 7.0 6.5 16.7 15.1 13.4 6.5 6.0 5.6
Casino Guichard Perrachon 69.4 7,463 13,179 6.7 6.4 5.9 11.6 11.0 10.3 5.6 5.4 4.8
Guyenne ET Gascogne SA 114.5 788 635 7.1 7.6 8.0 14.4 14.2 13.3 10.1 10.7 10.1
Hyparlo SA 40.8 641 368 7.7 6.4 5.7 39.3 43.9 39.0 8.6 15.0 13.2
Developed markets: America
Loblaw Co LTD 57.3 15,710 19,753 11.5 10.3 9.1 19.9 18.2 15.7 13.9 12.1 10.6
Sobeys Inc 32.0 2,090 2,061 5.2 5.1 4.8 14.2 13.8 12.7 6.6 6.5 6.1
Kroger Co 17.4 12,673 20,378 6.4 6.3 6.0 15.2 14.7 13.6 4.7 4.6 4.8
Safeway Inc 23.3 10,457 14,700 6.6 6.3 5.9 17.5 16.0 14.4 6.1 5.9 5.8
Albertson’s Inc 21.5 7,919 14,013 5.9 5.7 5.6 15.3 15.8 15.0 4.5 6.4 5.1
Pathmark Inc 9.1 273 857 6.0 5.4 5.0 N. M. 102.6 21.5 18.9 3.0 N. A.
Emerging markets
Dairy Farm Intl Holdings Ltd 2.8 3,772 3,150 11.7 9.7 8.4 15.2 16.6 13.9 13.0 10.4 9.0
Super-Sol Ltd 2.4 513 636 8.5 8.8 8.2 37.1 35.4 30.8 6.3 N.A. N.A.
Migros Turk TAS 8.1 1,098 1,002 10.1 8.5 7.5 28.2 21.4 17.8 13.8 9.3 5.9
• Apteka 36.6 is the only Sell recommendation in our consumer goods basket.
Although its growth prospects remain solid, in our view the market is running ahead of
itself on 36.6 shares as the risk of slipping into the red outweighs the potential returns.
Poor liquidity also reduces the stock’s attractiveness, while our target price of $16.9
per share suggests 18% downside.
36.6’s high comparative valuation multiples leave little margin for error
Price
(com.)
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Apteka 36.6 20.0 166 239 12.9 10.5 8.5 82.4 33.2 19.8 na 34.6 16.7
Pharma retailers
CVS 29.2 23,654 23,745 12.3 9.3 8.3 26.8 20.5 17.6 9.6 11.7 16.4
Walgreen 45.4 46,417 42,317 14.6 14.2 12.3 30.0 29.2 25.7 24.1 23.4 21.7
Boots 11.1 8,093 9,362 7.4 8.0 8.1 13.1 14.6 15.0 9.1 9.8 9.2
Pharma manufacturers
Gedeon Richter 145.0 2,655 1,863 9.1 8.3 7.4 16.2 14.7 13.1 13.6 12.4 11.0
Egis 87.8 681 338 5.2 4.4 3.9 16.9 13.3 11.7 12.6 14.2 11.3
Teva 31.4 20,177 15,529 11.9 9.8 8.3 22.3 18.6 15.8 15.8 N.A. N.A.
Pliva 59.7 1,113 1,295 4.3 4.7 4.4 7.5 9.3 8.0 4.4 4.8 4.5
Personal care & household products
In the personal care and household products sector we prefer Oriflame to Kalina.
Although both look cheap in the global peer context, elements of uncertainty regarding the
success of Kalina’s recent acquisition should put a brake on the stock’s further
advancement, at least until there is a better indication of Dr. Scheller’s impact on the
company’s financials. We rate Kalina a Hold with a target price of $26. As for Oriflame,
we believe the current share price discounts a fairly pessimistic scenario, assuming a further

Investment case
June 27, 2005 11
deterioration in market position and profitability and does not take into account the
company’s strong cash flow generation ability. We thus initiate coverage of Oriflame
with a target price of SKr 204 (GDR €21.95) and a Buy recommendation.
Russia-related personal care & household goods’ names still look cheap, even on conservative estimates
Price (com.) MCap EV EV/EBITDA P/E P/CF
As of 23/06/05 $ $mn $mn 2004 2005F 2006F 2004 2005F 2006F 2004 2005F 2006F
Russia
Oriflame 22.8 1,086 1,143 9.5 10.1 9.2 13.8 13.9 12.6 12.0 11.4 10.5
Kalina 26.5 275 248 7.4 6.4 5.8 14.5 11.1 10.0 10.6 13.8 11.3
International Direct Selling Companies
Avon 36.8 17,375 20,556 15.1 13.4 12.0 20.5 17.7 16.5 19.0 20.8 15.1
Nu Skin 23.8 1,663 1,591 10.5 9.3 8.7 21.9 19.0 17.1 16.6 13.4 12.9
Developed markets
L'Oreal 72.5 47,858 45,626 14.9 13.8 12.8 23.8 24.8 22.7 18.5 18.8 17.4
Beiersdorf 113.0 9,489 8,636 11.3 10.4 9.8 26.9 24.1 22.1 15.8 14.1 13.3
Colgate Palmolive 51.2 26,787 30,904 12.4 11.7 10.8 19.6 19.2 17.5 17.3 16.8 14.9
Henkel KGaA 84.9 12,716 13,500 8.6 7.5 7.1 18.6 14.1 12.8 8.6 9.3 8.4
Emerging markets
Colgate-Palmolive India 5.3 720 385 9.6 8.0 7.1 28.0 22.1 19.0 21.5 17.5 15.0
Dabur India 3.0 858 783 18.8 12.9 10.9 25.8 19.1 15.4 20.8 15.6 12.5
Eng Kah 0.9 54 47 9.8 7.8 6.3 15.8 12.2 10.1 8.9 10.8 9.1
Sarantis 7.1 275 363 7.2 7.5 7.1 14.6 12.6 11.1 10.2 9.4 7.8
Banking
Finally, in the banking sector, although the scarcity value attached to the only Russian
traded consumer finance story suggests Sberbank is likely to remain well bid and largely
insulated from downside risk, we fail to see further upside potential in the stock even after a
revision of our base cost of equity rate and an upgrade in our target price from $615 to
$667. Our recommendation is Hold for common shares. However, preferred look more
attractively valued and we suggest these offer better exposure to Russia’s only banking blue
chip given 29% upside to our target price of $10.15 per share and rate them as a Buy.

12 June 27, 2005
Sberbank’s valuation gap to international peers has narrowed
Country MCap P/E P/BV
As of 23/06/05 $mn 2004 2005F 2006F 2004
Sberbank Russia 12,616 18.7 13.7 11.2 2.6
Sberbank adjusted* 67.6 18.7 12.6
Emerging markets
Banco Bradesco Brasil 12,848 14.3 9.6 8.6 N. A.
OTP Bank Hungary 8,908 15.0 12.1 10.6 7.3
Komercni Banka Czech rep 5,182 13.6 13.0 14.0 3.0
Pekao Poland 6,987 18.6 16.6 14.6 3.4
Turkiye Garanti Bankasi Turkey 4,728 15.0 12.5 9.5 N. A.
Average 15.3 12.7 11.5 4.6
Multinational banks
Barclays UK 68,305 10.8 9.4 8.7 2.6
Citigroup US 239,977 11.7 11.3 10.5 4.1
Deutsche Bank Germany 45,098 12.8 10.8 9.8 1.9
JP Morgan Chase US 122,539 15.5 12.2 10.7 2.4
Mitsubishi Tokyo Japan 56,145 17.3 17.7 13.0 1.5
Weighted average 13.6 12.3 10.5 2.5
American banks
Bank of America US 178,482 13.3 10.9 10.4 3.7
US Bancorp US 50,405 13.0 12.1 11.4 5.0
Wachovia US 78,091 15.0 11.9 10.9 3.4
Wells Fargo US 98,409 14.8 13.4 12.1 3.9
Developed markets
BBVA Spain 53,604 16.1 12.7 11.2 2.8
BNP Paribas France 60,471 10.9 9.5 9.3 2.2
Commerzbank Germany 13,473 21.1 12.5 11.3 1.3
Nordea Sweden 28,500 12.1 11.5 10.9 2.0
UniCredito Italiano Italy 36,753 13.6 12.3 10.8 2.4
* Adjustments for realized gains on securities revaluation

Macroeconomic backdrop
June 27, 2005 13
MACROECONOMIC BACKDROP
Russia’s consumer sector continues to be a direct beneficiary of the country’s robust
economic growth, boosted by high commodity prices and increasing foreign direct
investment. This backdrop means consumption is becoming a focus theme for many
portfolio and strategic investors.
High oil prices and stronger than expected growth have required us to revise our economic
forecast for Russia upwards several times in the last 12 months, in which we have been
joined by the consensus. At the same time, the main sectors of the economy have continued
to surprise on the upside.
Russia’s macroeconomic fundamentals provide basis for continuing growth
Russia - key economic indicators 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F
Nominal GDP, $bn 345 430 582 712 855 991 1,092 1,198 1,311
Real GDP Growth, % 4.7 7.3 7.1 6.2 5.8 5.5 5.3 5.3 5.3
Industrial production, % change y-o-y 3.7 7.0 7.4 5.9 5.6 5.3 5.1 5.1 5.1
Fixed investments, % change, y-o-y 2.5 12.1 10.9 10.0 9.5 9.2 7.9 7.9 7.9
GDP/capita, $ 2,376 2,984 4,054 4,975 5,990 6,970 7,709 8,484 9,323
GDP per capita, % change y-o-y 11.6 25.6 35.9 22.7 20.4 16.4 10.6 10.1 9.9
Annual disposable income per capita, nominal $ pa 1,419 1,933 2,593 3,216 3,903 4,560 5,052 5,557 6,087
Consumer spending per capita, nominal $ pa 1,198 1,482 1,935 2,377 2,883 3,384 3,770 4,175 4,617
Average wage, nominal $ pa 1,688 2,161 2,849 3,680 4,640 5,560 6,379 7,256 8,251
Year-end exchange rate, R/$ 31.8 29.5 27.7 27.2 26.5 26.7 27.1 27.5 27.6
Average exchange rate, R/$ 31.4 30.7 28.8 27.8 26.9 26.4 26.9 27.3 27.5
CPI year-end, % 15.1 12.0 11.7 11.9 10.2 8.5 7.0 6.0 5.0
CPI, average, % 16.0 13.7 10.9 13.6 11.6 9.7 8.0 6.8 5.7
PPI, average, % 17.5 13.0 28.4 16.0 8.0 7.0 6.0 6.0 5.0
Real Ruble appreciation/(depreciation), % 6.6 18.6 14.8 11.4 10.4 5.1 3.0 2.0 2.1
Ruble devaluation, % -5.2 7.9 6.1 2.0 2.6 -0.7 -1.5 -1.5 -0.4
Russia is one of the fastest growing economies in the world, with improving sovereign
ratings, a large budget surplus and booming consumption, while relative political stability
and the implementation of structural reforms provide the basis for further growth and open
new horizons for investors.
5-year real GDP growth: Russia vs. fastest growing emerging and developed economies
0.0 20.0 40.0 60.0
Hungary
Philippines
Thailand
Bulgaria
Malay sia
India
Korea
Russia
China
0.0 20.0 40.0 60.0
Japan
Germany
Italy
France
UK
USA
Canada
Greece
Russia
Source: IMF; World Economic Outlook Database; Aton estimates
After a difficult period in 1998-1999, when the Russian financial and economic crisis
brought weak consumer spending and rising import costs in its wake, the consumer sector

14 June 27, 2005
has shown remarkable growth. Disposable income per capita bottomed out in 1999 and
started to grow steadily from 2000 onwards, while consumer spending grew in line with
generally applicable income-elasticity trends.
Disposable income and consumer spending dynamics (nominal $ per annum)
0
500
1,000
1,500
2,000
2,500
3,000
1999 2000 2001 2002 2003 2004
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Disposable income per capita (nominal $ pa)
Consumer spending per capita, (nominal $ pa)
Real disposable income per capita (%, ch. y-o-y)
Although inequality of income distribution remains an issue in Russia with the top quintile
incomes exceeding the lowest quintile by more than 14X (vs. a European average of 4.3X,
with the highest in Portugal at 6.5X and the lowest in Denmark at 3X) the share of the
population living below the poverty line is steadily declining.
Inequality of income distribution Income distribution, R per capita
13
13.2
13.4
13.6
13.8
14
14.2
1995
1997
1999
2001
2003
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2000 2001 2002 2003
to 1,000 1,000-1,500 1,500-2,000
2,000-3,000 3,000-4,000 4,000-5,000
5,000-7,000 7,000 and up
Note: Inequality of income distribution is the ratio of total income received by the 20% of the population
with the highest income (top quintile) to that received by the 20% of the population with the lowest
income (lowest quintile).
The population’s increased purchasing power helped the national retail market grow in both
size and scope from 1999-2004, and in the last three years the overall volume of retail sales
has doubled in US dollar terms. Another notable trend is that non-food retail sales have
grown faster than food retail sales and are gaining a higher share of overall retail turnover
as people increase spending on home appliances, cars and luxury items – a pattern also seen
in other emerging markets.

June 27, 2005 15
Retail trade volume of food and non-food sales ($bn)
0.0
50.0
100.0
150.0
200.0
250.0
1999 2000 2001 2002 2003 2004
Food (US$bn) Non-food (US$bn)
Today, with over 144mn consumers, Russia is one of the world’s biggest consumer markets
in terms of size and growth potential. While cheap, mass-market products dominate in both
the food and non-food segments, there is considerable potential for expansion for branded
and other “premium” products as income levels increase.
General consumption patterns and anticipated trends
Since 2000, real disposable incomes have been rising in Russia at a rate exceeding real
GDP growth. Official statistics show that in the last four years each percentage point in
GDP growth has produced, on average, a nearly 1.8% increase in real disposable income.
However, this accelerated rise in disposable incomes, underpinned by higher prices for
assets such as stocks, bonds and real estate, slowed last year to about 1.3% per percentage
point of real GDP growth. Going forward we expect real disposable incomes to continue
rising faster than real GDP before the two growth rates converge in the course of the next
five years. Coupled with ruble appreciation against the dollar, the projected growth rates
translate into Russia’s nominal dollar income per capita more than doubling through 2010
to reach $6,087 by the end of the decade.
Real disposable income growth has far outpaced GDP growth in recent years
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F
0%
2%
4%
6%
8%
10%
12%
14%
16%
Nominal disposable income per capita, $ pa
Real disposable income per capita, %, ch. y-o-y
Real GDPgrow th, %, ch. y-o-y
Where is all this rising income going? Russia is a market of 144mn consumers who prefer
spending to saving due to a fear born of the 1998 financial crisis. Today, more than 75% of
disposable income ends up being spent on goods and services. In recent years private

16 June 27, 2005
consumption has steadily increased as a percentage of GDP, and from the current level of
50% it should continuing moving closer to European levels of 55%-65%.
Share of private consumption in GDP is set to increase
0
100
200
300
400
500
600
700
2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F
40.0
42.0
44.0
46.0
48.0
50.0
52.0
54.0
Total household consumption, $bn Private consumption as % of GDP
Along with growth in household expenditure we expect to see significant shifts in the
consumption structure. Engel’s Law states that the income share of food expenditure falls
as incomes rise, since consumers do not tend to increase their food intake drastically. The
overall food expenditure level is, however, affected by inflation and consumers trading up
to higher quality branded goods. This is in line with trends observed elsewhere in the world
and we see the current consumption structure in Eastern European countries as a good
benchmark for Russia.
Share of food in total consumption falls with rise of per capita GDP, 2003 data
Russia
Lithuania
Estonia Latvia
Poland
Slovakia
Czech Rep
Hungary
Slovenia
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0
Source: Federal Statistics Service; Eurostat; Aton estimates
Russia still has the highest share of food expenditure in total consumption
Food,
beverage &
tobacco
Clothing &
footwear
Housing,
utilities & fuels
Furnishing &
household
equipment
Health &
education
Transport &
communication
Recreation &
culture
Restaurants
& hotels
Others GDP/capita, $
Czech Rep 27.7 5.7 22.8 5.6 1.8 13.6 10.9 5.4 6.6 8,793
Estonia 31.6 5.8 21.0 4.8 4.0 14.1 7.5 5.9 5.3 5,277
Hungary 27.7 4.6 18.4 6.7 4.7 19.7 7.8 5.0 5.4 9,193
Latvia 33.5 9.7 16.1 3.4 7.0 13.0 7.6 5.3 4.6 4,363
Lithuania 38.1 6.3 14.0 5.2 4.2 18.1 7.0 3.3 3.8 5,708
Poland 26.4 4.2 24.6 4.5 6.6 14.6 6.3 3.6 9.3 5,703
Slovakia 27.9 4.1 23.1 5.1 3.1 13.4 9.1 7.9 6.4 6,333
Slovenia 22.0 6.3 20.0 6.3 4.2 17.6 9.5 6.4 7.7 15,214
Average 29.4 5.8 20.0 5.2 4.5 15.5 8.2 5.3 6.1 7,573
Russia 40.1 12.7 10.6 7.4 3.6 11.6 6.0 3.1 4.5 4,054
Russia rel to average 1.37 2.18 0.53 1.43 0.82 0.75 0.74 0.59 0.74 0.54
Source: State Statistics Service; Eurostat; Aton estimates

June 27, 2005 17
In our forecast, Russia’s GDP is expected to reach $9,323 per head by 2010 –
approximately the current level of GDP per capita in the Czech Republic and Hungary,
which also share similar levels of expenditure on food. Our projected consumption
structure of the average Russian household in 2010 allocates 29% of total spending to food
items and comes close to figures currently seen in the Czech Republic and Hungary.
Growth in per capita household consumption should be accompanied by a shift in
consumption structure
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1997
1998
1999
2000
2001
2002
2003
2004F
2005F
2006F
2007F
2008F
2009F
2010F
Food, alcohol & catering, $ Non-food, $ Services, $
Our forecast figures are based on the observation of historic growth rates for consumption
of products and services vs. growth in disposable income. In effect, our projected
consumption figures for the next five years reflect already well-established trends. The
growth in disposable income inevitably affects consumption patterns. Most of the models
of consumer behavior (the most commonly cited is Maslow’s pyramid) imply that the
nature of consumers’ needs changes as average incomes rise and they are better able to
satisfy their more basic needs. This explains, for example, drastic increases in expenditure
on entertainment, catering and travel. Another effect is that consumers are likely to be
willing and able to purchase premium products.
The graph below illustrates how main consumption categories have changed relative to changes
in disposable income, clearly showing that the bulk of the increase in incomes goes into services
and non-food goods consumption. This is a factor of both quantitative and qualitative changes in
consumption patterns as Russians not only consume larger volumes of goods and services but
demand better quality products and are ready to pay higher prices for them.
Change in household consumption vs. growth in disposable income, change, y-o-y, %
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F
Change in nominal disposable income per capita
Food
Non-food
Services
Total household consumption

18 June 27, 2005
Statistical data for the last five years clearly shows that in the food sector only catering
grew at a much faster pace than disposable incomes – at an average rate of 1.7 X above –
and increased almost 6X between 1999 and 2004.
Only catering spending grew faster than disposable incomes, (1999-2004 CAGR, %)
-10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Sugar & confectionery
Vegetable oils
Eggs
Potatoes
Bread
Dairy & dairy products
Fish & seafoods
Vegetables
Meat & meat products
Alcoholic drinks
Tea, coffee, non-alcoholic drinks
Fruits & berries
Disposable income
Catering
In contrast to the food sector, the non-food spending profile shows that all but two
segments outpaced growth in disposable incomes, with total non-food spending more than
tripling in the space of five years.
Bulk of increased disposable income spent on non-food items (1999-2004 CAGR, %)
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Clothing, footwear, textiles
Personal care, cosmetics, medicine
Disposable income
Fuel
Cars
Furniture & household products
Audio & video appliances
Building & renovation materials
The services segment exhibited the highest growth among the major consumption
categories, rising at a CAGR of 37% in the last five years. Most remarkable was an 11-fold
increase in spending on entertainment, highlighting the fact that disposable incomes are
now covering more than the basic needs of the population.

June 27, 2005 19
Entertainment spending rose nearly 3X faster than disposable income (1999-2004
CAGR, %)
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Medical services
Transport services
Disposable income
Education
Services
Housing services
Communications
Repair & renovation services
Entertainment
Our resulting 2010 household expenditure forecast assumes food consumption will cease to
be the largest single area of spending, with non-food outlays taking the lead, followed by
services. We also assume that Russians will continue to spend around 75% of their
disposable incomes, with the remainder divided between savings, investments, mandatory
payments and hard currency purchases.
Change in Russia’s household expenditure profile
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2004F 2010F
Food, $ Non-food, $ Services, $
Source: Federal Statistic Service; Aton estimates
Within this, we expect higher prices for utilities, municipal rent, satellite TV subscriptions
etc. to ensure that housing services are the largest household expenditure item – although at
13% this will still be well below Eastern European levels of 20%. This should be followed
by non-food items such as clothing and footwear, electric appliances and cars.
As we have already noted, consumers should spend a smaller percentage of their incomes
on food as their pay rises; yet they will also demand higher quality and greater variety in
their meals as their spending power increases. Since this usually involves spending more
per calorie, it softens the effect of Engel’s Law. Better-educated and higher income
consumers will also make more conscious choices about the health consequences of their
diets and increase their intake of fruit and vegetables. Similarly, we expect spending on
vegetables, fruits, fish and seafood as well as meat and meat products to grow at a higher

20 June 27, 2005
rate than the average for the food sector and for these goods to be among the largest items
of consumer spending.
Spending on food should be affected by demand for higher quality, healthier foods
$44.7bn, Meat & meat
products
$19.8bn,
Dairy
$11.5bn,
Tea, coffee etc
$9.4bn,
Fish
$10.9bn, Vegetables$10.4bn,
Fruits
$8.3bn,
Alcohol
$20.2bn,
Bread
$7.7bn,
Confectionery
$3.8bn,
Tobacco
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
Share in household expenditure in 2010F, %
2004-10FCAGR,%
Source: Aton estimates
In the non-food sector the fastest growing items are expected to be building and renovation
materials, passenger cars, home appliances and furniture and household products,
highlighting rising demand for better quality living.
Non-food consumption: Russians likely to spend more to improve quality of life
$51bn,
Clothing & footwear
$46.2bn, Furniture &
household products
$19.5bn,
Cosmetics & personal
care
$12bn,
Fuel
$20.1bn, Building &
renovation materials
$34.2bn,
Audio-video
equipment
$33.8bn,
Cars & other vehicles
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
-1.0% 1.0% 3.0% 5.0% 7.0% 9.0%
Share in household spending in 2010F, %
2004-10FCAGR,%
The service sector is by far the biggest beneficiary of rising disposable incomes. Apart from
housing services – which should claim the biggest chunk of disposable incomes in the
future – segments such as communications, repair and renovation services and
entertainment are expected to post the highest growth in the next five years. Demand in the
communications and entertainment industries is also stimulated by the concerted effort of
all major players – from mobile phone companies and software developers to operators and
content providers – to compensate for falling ARPU by offering new products and services.

June 27, 2005 21
Communications, repair and renovation services and entertainment are expected to
post the highest growth
Transport,
$21.7bn
Education,
$14.5bn
Entertainment,
$14.4bn
Medical,
$6.2bn
Housing services,
$82.3bn
Repair & renovation,
$28.6bn
Communications,
$27bn
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
0.0% 5.0% 10.0% 15.0% 20.0%
Share in household spending in 2010F, %
2004-10FCAGR,%
In the table below we present our consumption forecast for all major segments of consumer
spending. It should be noted that the projected size of the markets for goods and services is
based solely on trends in disposable income and consumption structure and may not
correspond to official retail figures for the food and non-food sectors. For example, we
estimate official food retail figures accounted for only 80% of food consumption in 2004,
which we attribute to the still considerable share of non-organized retail such as open-air
markets and street retailers. By contrast, non-food retail accounts for more than 99% of
consumption, pointing to a much higher proliferation of organized retail in the segment.
Nevertheless, figures for individual items of consumption differ significantly from those
reported by the respective retail segments. Thus, expenditure on cars in official statistics is
well above that reported by the industry due to the fact that the former also attribute to this
segment items such as car accessories as well as sales of scooters, motorcycles and
bicycles. Because of these discrepancies, the table is useful for estimating the relative size
of markets for goods and services rather than their absolute sizes, as well as growth rates
and corresponding consumption trends.

22 June 27, 2005
Russian household expenditure profile, $bn: service sector to grow fastest
1997 1998 1999 2000 2001 2002 2003 2004F 2005F 2006F 2007F 2008F 2009F 2010F CAGR
2004-
10F, %
Food, alcohol & catering 104 84 58 61 75 80 92 110 126 140 152 161 171 181 8.7%
Non-food 78 46 32 40 51 63 80 105 131 154 174 192 212 234 14.3%
Services 32 21 13 16 22 30 42 64 89 114 137 158 182 209 21.8%
Total household consumption 214 151 103 117 148 173 214 279 345 409 463 511 565 624 14.4%
Food 91.8 77.4 53.3 55.8 67.9 72.1 80.6 93.9 105.7 115.7 123.5 129.8 136.3 142.9 7.2%
Bread 16.2 12.4 8.8 9.5 12.6 12.3 13.9 15.6 17.0 18.0 18.7 19.2 19.7 20.2 4.3%
Potatoes 1.3 1.4 1.2 1.1 1.2 1.4 1.7 2.1 2.4 2.6 2.7 2.8 2.9 3.1 6.4%
Vegetables 5.3 4.4 3.1 2.9 3.6 4.1 4.9 6.1 7.1 8.1 8.8 9.5 10.2 10.9 10.3%
Fruits & berries 5.1 3.8 2.4 2.8 3.4 4.0 4.7 5.8 6.8 7.7 8.4 9.0 9.7 10.4 10.2%
Meat & meat products 25.6 21.4 14.0 15.3 19.7 21.6 23.3 27.8 31.8 35.2 37.8 40.0 42.3 44.7 8.2%
Fish & seafood 5.1 4.4 2.8 2.9 3.8 4.1 4.5 5.4 6.3 7.1 7.7 8.2 8.8 9.4 9.4%
Dairy & dairy products 13.0 11.0 7.2 7.5 8.9 9.7 10.9 12.8 14.5 15.9 17.1 18.0 18.9 19.8 7.5%
Sugar & confectionery 10.5 9.0 6.8 6.9 6.5 6.0 6.6 6.4 6.6 6.8 7.1 7.3 7.5 7.7 3.1%
Eggs 1.7 1.7 1.4 1.4 1.6 1.6 1.7 1.8 1.9 2.0 2.1 2.1 2.1 2.2 2.7%
Vegetable oils 2.6 3.2 2.4 1.8 1.9 2.2 2.1 2.4 2.6 2.8 2.9 3.0 3.1 3.2 4.8%
Tea, coffee, non-alcoholic drinks 5.3 4.8 3.4 3.6 4.7 5.0 6.2 7.6 8.7 9.6 10.2 10.7 11.1 11.5 7.2%
Alcoholic drinks & catering 12.0 6.9 4.3 5.0 7.3 7.9 11.1 15.8 20.3 24.5 28.0 31.1 34.5 38.1 15.7%
Alcoholic drinks 6.0 3.9 2.6 2.9 3.6 3.8 4.7 5.7 6.4 7.0 7.4 7.7 8.1 8.3 6.5%
Catering (public food services) 6.0 3.0 1.7 2.1 3.7 4.1 6.4 10.1 13.9 17.5 20.6 23.4 26.4 29.7 19.7%
Non-food 77.9 45.5 31.6 40.2 50.9 62.6 79.7 105.4 130.5 154.2 174.4 191.9 212.2 234.5 14.3%
Clothing, footwear, textiles 31.6 19.5 13.9 18.2 19.8 23.0 26.5 31.4 35.6 39.3 42.3 44.8 47.6 51.0 8.4%
Audio & video appliances 8.8 4.2 2.7 3.7 4.7 5.9 9.4 13.6 17.9 21.8 25.1 27.8 30.9 34.2 16.6%
Cars 12.0 3.5 3.2 3.3 5.3 7.9 9.2 12.3 15.7 19.2 22.4 25.5 29.3 33.8 18.3%
Building & renovation materials 1.9 1.7 0.9 1.2 2.1 2.6 4.1 6.2 8.7 11.1 13.3 15.3 17.6 20.1 21.5%
Fuel 2.3 1.5 1.3 1.8 1.9 2.8 3.6 5.1 6.5 7.9 9.0 9.9 10.9 12.0 15.5%
Furniture & household products 10.5 6.3 3.9 5.3 7.7 9.9 13.7 19.1 24.5 29.6 33.8 37.6 41.8 46.2 15.8%
Personal care, cosmetics, medicine 7.3 5.7 3.9 4.6 5.8 6.7 8.6 10.7 12.7 14.4 15.8 16.9 18.2 19.5 10.5%
Tobacco 2.1 2.1 1.3 1.4 1.6 1.7 2.1 2.5 2.9 3.1 3.3 3.5 3.7 3.8 7.2%
Other 1.5 1.1 0.5 0.8 1.9 2.1 2.6 4.4 6.1 7.7 9.2 10.6 12.2 13.9 21.1%
Services 31.8 21.0 13.3 16.2 21.9 30.2 42.3 64.1 88.8 114.3 137.2 157.9 182.0 208.8 21.8%
Housing services 10.9 7.8 4.8 5.4 7.7 10.7 15.4 23.9 33.6 43.7 52.9 61.3 71.2 82.3 22.9%
Repair & renovation services 2.3 1.5 1.0 1.2 1.5 2.6 4.5 8.0 12.3 16.7 20.4 23.2 26.0 28.6 23.7%
Entertainment 1.1 0.8 0.4 0.5 1.5 1.9 3.0 4.6 6.4 8.1 9.7 11.1 12.7 14.4 20.9%
Education 2.1 1.5 1.5 1.4 2.1 2.9 3.4 5.1 7.0 8.9 10.4 11.8 13.1 14.5 18.8%
Medical services 1.5 0.9 0.6 1.2 0.9 1.6 1.5 2.0 2.5 3.0 3.6 4.3 5.1 6.2 21.2%
Transport services 6.8 3.9 2.5 3.0 3.7 4.7 6.0 8.0 10.2 12.4 14.4 16.4 18.8 21.7 18.1%
Communications 2.6 1.8 1.1 1.4 1.8 2.6 4.1 6.3 9.1 12.2 15.2 18.3 22.2 27.0 27.3%
Other 4.5 2.7 1.3 2.1 2.8 3.3 4.5 6.1 7.7 9.3 10.5 11.6 12.9 14.2 15.0%
Source: Federal Statistic Service; Aton estimates
Apart from disposable income growth, factors driving consumption include the increasing
availability of consumer credit, a lower tax burden for consumer goods producers and
retailers and the advent of new technologies enabling producers to expand product range
and quality, thus making them more competitive. At the same time, major risks for our
forecast, apart from a general economic slowdown resulting from a prolonged decline in oil
prices, are: an underdeveloped banking system that poses the threat of a liquidity crisis, and
a faster than expected rise in utilities tariffs, housing rates and other mandatory
expenditures that may hinder the population’s propensity to spend on consumer goods and
services.
The projected growth in consumption should benefit all the consumer related sectors of the
economy. However, not everyone will be affected equally and the major beneficiaries are
less immediately apparent than it appears at first glance.
Positive effects are particularly pronounced for services, retail, wholesale, trade and
catering and telecommunications, which, as non-tradables also suffer almost no import
pressure. Manufacturing and light industry are indirectly negatively affected as export
capital inflow leads to real appreciation of the ruble, which hurts the competitiveness of
manufacturers. Increased costs undermine growth in these sectors, slowing the pace of
expansion and reducing economic diversification.

June 27, 2005 23
Similarly, while strong domestic demand is positive for Russian food producers, real
appreciation of the ruble makes imports cheaper, though volumes of imported food are still
small. The effect of ruble appreciation is, however, softened by dollar depreciation against
the euro (as well as other world currencies) – with only 5.2% of imports originating from
the US (2003 data) and the bulk of imports contracted in euros and other currencies,
Russian producers of import-competing goods gain additional competitiveness.
Furthermore, the effect of an expanding economy on consumer sector industries is often
somewhat ambiguous since rising incomes are accompanied by increasing labor costs. This
can have a fairly pronounced effect on competitiveness if wages rise at a higher rate than
productivity. From 2000-2003, average wages in the industry grew at an average rate of
15.8% while productivity improved by only about 9.2% every year. In the food processing
sector, in particular, wages grew at about double the productivity increase, thus reducing
competitiveness. To the extent that labor productivity fails to keep pace with employment
costs, this could necessitate further restructuring to reduce employment and cut costs.
Conclusion
In both the food and non-food segments, retailers are best positioned to benefit from the
rising tide of disposable income, while the manufacturing segment will face growing
competition from both imports and multinational companies establishing local production.
Most segments of the consumer goods universe should see high growth rates in the next
five years and are also well positioned to withstand competition from imports and
multinational companies entering Russia. These are: telecommunication services,
information and data providers, IT services, advertising and media, retail, car dealers and
maintenance service providers, consumer lenders, insurers, construction companies and
cement producers, personal care and recreational services, including fitness centers, SPA
and beauty salons, restaurants and multiplexes and producers of premium foods and
beverages.
Further in this report we describe the major trends in the consumer sector and identify the
most dynamic sub-sectors and markets, which we expect to be the major focus for portfolio
and strategic investors alike. We focused mainly on the sectors where we could find
publicly traded securities, such as food and beverages, banking, automotive, retail and
personal care and household products.

24 June 27, 2005
FOOD & BEVERAGES: VALUE OVER VOLUME
The food and beverages sector was one of the first to flourish after the 1998 crisis, with the
emergence of strong domestic players benefiting from the switch to Russian goods. While
there are strong dominant players in segments such as beer, confectionary, soft drinks,
tobacco, water, tea and coffee, elsewhere the sector remains highly fragmented – with small
companies vulnerable to competition from multinationals and experiencing increasing
pressure from emerging larger retailers. We suggest investors in the food and beverage
sector concentrate on medium to large-scale operators showing scalability, geographic
diversification, significant brand power, focus on high value-added activities and
innovation. Modern facilities ensuring high quality output are also desirable, as is a well-
developed, preferably proprietary, distribution network. Our top pick in the sector among
available equities – juice and baby food producer Lebedyansky – satisfies most of these
criteria.
The financial meltdown of 1998 saw many importers squeezed out of the market. The
total value of imports to Russia shrank by over 45% between 1997 and 1999, while the
share of foreign brands on the local food market halved through 1998-1999. The ruble
devaluation of 1998 also had a disproportionately significant impact on foreign companies
operating in Russia, as currency devaluation was not matched by internal inflation, making
it impossible for these businesses to raise prices sufficiently to maintain adequate return
levels for parent companies abroad. As a result, a number of foreign operators exited the
market, giving large local food processing companies an opportunity to gain greater market
share. Those foreigners who stayed, however, were rewarded handsomely by becoming
dominant players in some segments of the sector.
Today, multinational companies are either market leaders or significant players in
such segments as beer, confectionary, soft-drinks, tobacco, water, tea and coffee, while
their presence can be felt in many others.

Food & beverages: Value over volume
June 27, 2005 25
Major companies in the Russian food & beverages industry
Segment Companies
Alcoholic drinks Kristall, Tulaspirit, Veda, Ost Alko, Pernod Ricard, Istok, SPI-RVVK, Topaz, Beverages & Trading (Bacardi-
Martini), VINAP, Rosspirtprom
Baby Food Nestle, Heinz, Nutricia, Lebedyansky
Beer Baltika, Sun Interbrew, Heineken, Efes, SABMiller, Ochakovo, Krasny Vostok, Detroit Brewing
Coffee Nestle, Kraft Foods, Tchibo, Cacique, Milagro, Kuppo, Montana Coffee, Russky Produkt, Zolotye Kupola
Cocoa Rossiya (Nestle), Red October (United Confectioners), SladCo
Cereals Bistroff, Myllyn Paras, Russky Produkt, ZolkKupola
Confectionery United Confectioners (Red October, Babayevsky Rot Front), SladCo, Nestle, Dirol Cadbury, Kraft Foods,
Mars, Udarnitsa, Bolshevik (Danone), Dan Cake, Zvezdny, Kolomenskoye, Pekar, Russky Buisquit, Chupa
Chups, Wrigley, United Bakers
Dairy
Yogurts WBD, Danone, Petmol, Ochakovsky, Piskarevsky, Campina, Ehrmann, Ostankinsky, Parmalat
Cheese Lactalis-Istra, Hochland, Valio, WBD
Ice Cream Inmarko, Ice-Fili, Russky Kholod, Petrokholod, Talosto, Nesle-Zhukovsky, Uniliver
Flour Milling Agros, Rusagrocapital, Razgulai-UKRROS, Stoilenskaya Niva
Frozen Foods Talosto, Daria, Kolibri, Zvezdny, Morozko, Hortex, Bonduelle
Fruits & Vegetables Belaya Dacha, Sunway
Juice WBD, Multon, Lebedyansky, Nidan Foods
Margarine & Mayonnaise Samara Fats & Oil Plant, NivoSiberiasrk Fats & Oil Plant, Uniliver, Moscow Fats & Oil Plant
Malt Soufflet, Sun Interbrew, Russian Solod, Baltika, Efes, Ochakovo
Meat Cherkizovsky, Mikoyan, Tsaritsino, Omsky Bacon, Campomos, Ostankinsky, Parnas, Samson
Pasta Makfa, Extra-M, St. Petersburg Pasta Factory No 1, Russky Product, Verola, Vermani, Altan
Snacks Frito-Lay (PepsiCo), Estrella (Kraft Foods), Pringles (Procter & Gamble), Siberiasky Bereg, Russky Product,
United Bakers
Soft drinks Coca-Cola, PepsiCo, Borodino, Ost Acqua, Ochakovo, Chernogolovka
Soups, Ketchup, Condiments Baltimor, Petrosoyuz, Uniliver, Heinz, Gallina Blanca, Nestle, Podravka, Trapeza, Russky Product
Starch & Sweeteners Glukozno-Patochny Kombinat (GPK-Cargill), Roskrakhmalpatoka (RKP), Khobotov, Gulkevich, Beslan
Sugar Prodimex, Rusagro, Sucden, Razgulai-UKRROS, Euroservice, Louis Dreyfus
Tea Orimi Trade, Maiky Tea Company, Uniliver, Ahmad Tea, Grand, Russky Product
Vegetable Oil Yug Rusy, Aston, Krasnodar Fats & Oil Plant, Efko
Water Nestle Waters, PepsiCo, Coca-Cola, Narzan, Borjomi, Shishkin Forest Holding, Kavminvody, Polyustrovo
Source: Ernst & Young; Aton estimates
The increased flow of capital into the consumer sector in the past decade has resulted in an
unprecedented transformation of the food processing and food retail industry. According to
a recent Ernst & Young survey, foreign multinational companies active in the Russian
sector plan to invest $85mn on average over the next three years, while domestic companies
plan to invest an average of $30mn. This should bring a significant increase in the range
and quality of products on offer; competition should also intensify.
With the exception of a few dominant players (in the beer or juice segments, for
example) the food & beverages industry still remains highly fragmented, with many
small- and medium sized companies often present only in their own regional markets. This
is explained by the sheer size of the country, underdeveloped logistics and lack of access to
capital. This makes these companies highly vulnerable to increasing competition and easy
prey for emerging large retailers, putting further pressure on the profit margins of food
processors.
The smaller companies may find themselves squeezed for several reasons. First,
consumers remain highly price sensitive even as they gain a far wider choice, demanding
both a larger range of products and better quality for their money. At the same time,
aggressive foreign competitors looking to gain market share locally are often ready and able
to accept lower margins than Russian producers. International companies also have the

26 June 27, 2005
advantage of highly skilled management and access to capital, which gives them the ability
to rapidly establish themselves by building superior production and distribution systems,
investing in aggressive advertising campaigns and offering a wider range of products.
Russian companies face a tough task defending their market share against well-known
multinational brands, particularly as market potential in all segments is likely to attract
more foreign competition in the near future.
In the face of this competition, domestic companies need to consolidate if they are to
gain the scale needed for investment and to obtain greater bargaining power. Larger
companies should also look at spreading their wings to neighboring countries, as Wimm-
Bill-Dann has done in Ukraine, Kazakhstan, Kyrgyzstan and Uzbekistan.
Meanwhile, the fast growth and increasing power of retailers has mixed implications for
food & beverage companies. On one hand, producers are likely to see price pressure and
slimmer margins amid competition from – and cooperation with – private labels
(supermarkets’ own brands), and as they risk developing excessive dependence on a few
giant retailers. On the other hand, they should benefit from better information on consumer
habits and the supply chain, as well as faster volume growth and economies of scale. The
key will be a combination of size and brand power enabling food & beverages producers to
negotiate better terms with retailers and achieve mutual benefits through cooperation in
such areas as private labels.
Summing up, we advise investors in food & beverages to look for medium- to large
operators offering scalability, geographic diversification, significant brand power, focus on
value-added activities and a history of innovation. Modern facilities ensuring high quality
output are also desirable, as is a well-developed, preferably proprietary, distribution
network.
Most dynamic areas: changing patterns of consumption
A recent Ernst & Young survey of Russia’s food and beverage industry revealed that our
forecast of growth in consumption of major food items is close to survey respondents’
perception of the most dynamic areas in the food and beverage sector in the next five years.
Annual growth in food & beverages industry in next 5 years %, perception of major
foreign and domestic companies in Russia
3.0
4.4
4.4
7.5
9.1
11.0
11.3
12.5
20.0
20.4
0.0 5.0 10.0 15.0 20.0 25.0
Bakery products
Confectionery products & snacks
Cereals
Baby and dietary foods
Juice, w ater & soft drinks
Dairy products
Cocoa, coffee & tea
Seafood
Alcoholic drinks
Soups, seasoning & dressing
Note: According to Ernst & Young’s industry survey of 50 major domestic and foreign companies.
Respondents were asked the expected growth rates in their own segment in the next five years
Source: Ernst & Young
In fact, the survey’s respondents were more optimistic than us regarding growth in the
alcoholic drinks and dairy segments but in line with our estimates on the potential of the

June 27, 2005 27
juice, water and soft drinks segments. The latter sectors together with baby and dietary
foods, confectionery and pet foods are also perceived as being among the most profitable in
the years ahead.
As mentioned earlier in the report, Russia’s food market is likely to grow more in value
than volume. As consumers gain affluence, their concern naturally switches to the quality
of food they consume, while better-educated and higher-income consumers make informed
choices about the health consequences of their diet and opt for an intake comparatively rich
in fruit and vegetables. As this situation develops, food presentation – and thus packaging –
is becoming a major part of positioning and marketing. These changing consumption
patterns are having a profound effect on the food processing industry and on retailers.
Brewing sector: a ‘beerish’ outlook
Consumption of beer per capita in Russia has quadrupled in the last 10 years and nearly
doubled between 1999 and 2004, marking a remarkable shift from hard liquors to drinks
with lower alcohol content. This is still relatively low by international standards (see chart
below), and we see further upside in consumption per capita in coming years.
Per capita beer consumption selected countries, liters
0
20
40
60
80
100
120
140
160
180
R
om
aniaBulgaria
R
ussiaEstoniaLithuaniaH
ungaryH
ungarySlovenia
U
SA
C
roatiaSlovakia
U
K
AustriaG
erm
any
C
zech
R
ep
Source: Canadean; Aton estimates
After growing at an average rate of 22.7% from 1997 through 2002, market expansion
slowed to just over 7% in 2003 before surprising with a 12.5% jump in volumes last year.
In 1Q05 the market grew at a rate of 5.5% and we expect similar levels for the year as a
whole. Further down the road we expect consumption growth to fall to about 3%.

28 June 27, 2005
Beer consumption growth curve set to flatten
0
20
40
60
80
100
120
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005F
2006F
2007F
2008F
2009F
2010F
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Total beer sales, mn hl Change, y-o-y, %, rhs
Disposable income grow th, y-o-y, %, rhs
Source: Federal Statistics Service; industry data; Aton estimates
The expected general slowdown in volume growth, however, still leaves significant upside
in value terms as customers trade up to better quality and trendier brands. This is due to
rising disposable incomes as well as extensive advertising and promotional campaigns that
have been little affected by recent advertising restrictions and threats to ban drinking in
public.
In the last five years, the local premium segment has nearly doubled in volume terms, while
sales of licensed premium beer have increased 6.7X. We believe growth in these two
segments should far outpace expansion of the broader market.
Forecast growth by segment – focus on premium brands
mn hl 2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F CAGR,
2003-
2010F, %
Imports 1 1 1 1 1 1 1 1 2 2 2 9.3%
Licensed Premium 1 1 1 3 5 7 8 9 9 10 11 20.3%
Local Premium 7 9 11 10 12 14 16 18 19 21 22 11.7%
Mid Priced 25 29 33 33 34 36 36 36 36 36 36 1.4%
Low Priced 19 24 26 28 30 31 32 32 33 33 34 3.0%
Total 51.7 63.2 70.6 75.0 85.2 89.5 93.0 96 99 102 105.2 5.0%
Source: Federal Statistics Service; industry data; Aton estimates
Prices are also likely to come under pressure going forward and should rise well below
inflation. But brewers should benefit from an improving sales mix as premium brands’
share of consumption increases; moreover, demand is less elastic in the higher price
segment.
The market is highly consolidated and dominated by large, mainly foreign-owned brewers.
Judging by the growth rates of major brewers such as Baltika – above the underlying
market growth – small brewers’ market share is already being squeezed by the larger
players. Nevertheless, judging by the relative success of Tinkoff premium beer, niche
positions are still available if a brand is well positioned and targeted.

June 27, 2005 29
Market share of main players by volume
SAB Miller
5%
Ochakovo
7%
Baltika
31%
Heineken
9%
SUN Interbrew
17%
EBI
7%
PIT
4%
Carlsberg
3%
Krasny Vostok
4%
Others
11%
St.Razin
2%
Source: AC Nielsen, Dec 2004
Market share of major players by value
Baltika
29%
SAB Miller
8%
Ochakovo
5%
Krasny Vostok
3%
Others
12%
St.Razin
2%
Carlsberg
4%
PIT
4%
EBI
8%
SUN Interbrew
16%
Heineken
9%
Judging by 2004 production volumes and assuming an average 70% utilization rate, total
industry capacity exceeded 120mn hl at the end of last year. Of this capacity, the four
market leaders – Baltika, SUN Interbrew, Heineken and Efes Breweries International (EBI)
– accounted for half. In our view, the balance of power could change with a large
acquisition: e.g. if one of the multinationals bid for a large independent such as Ochakovo
or Krasny Vostok. This, however, would be unlikely to topple Baltika from its leading
position in the sector given the sheer power of the brand, its focused marketing and the size
of market share the company currently controls.
The Russian beer market is still relatively fragmented in terms of brands, with over
600 beers vying for consumers’ attention. While Baltika is far ahead of all the other players,
there is no obvious leader in the number two and three positions. This underscores the
opportunities for newcomers, primarily for Western beer companies wishing to expand
their international brands into Russia.

30 June 27, 2005
Top 10 brands nationwide account for less than half the market
13%
6%
4% 4% 4%
3% 3% 3% 3% 3%
0%
2%
4%
6%
8%
10%
12%
14%
Baltika
(BBH
)
Klinskoe
(InBev)
Arsenalnoye
(BB
H
)
Stary
M
elnik
(E
fes)
O
chakovoYarpivo
(BB
H
)
Sibirskaya
Korona
(InB
ev)
N
evskoe
(BBH
)
Tolstyak
(InBev)
O
khota
(H
eineken)
Interestingly, the Baltika brand is only number two in Moscow, with Efes’s Stary Melnik
taking the lead. This suggests Russia’s brand wars are far from over, while the main area
for competition is likely to be the local premium segment.
Baltika is in close second position in Moscow, overtaken by Efes
11.0%
10.0%
9.0%
7.0%
5.0%
4.0%
3.0% 3.0% 3.0% 3.0%
0%
2%
4%
6%
8%
10%
12%
Stary
Melnik
(Efes)
Baltika
(BBH)
Klinskoe
(InBev)
Ochakovo
Zolotaya
Bochka
(SABMiller)
Nevskoe
(BBH)
Bochkarev
(Heineken)
MillerGD
Sibirskaya
Korona
(InBev)
EfesPilsner
In terms of packaging, although glass bottles continue to dominate sales, cans and PET
(polyethylene terephthalate) bottles are becoming increasingly popular. Sales of beer in
cans and PET bottles have risen considerably in the last three years and we expect them to
overtake glass in the near future.

June 27, 2005 31
PET and cans are becoming more popular. % of total beer sales
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2000 2001 2002 2003 2004
Total bottles PET Cans
Source: Efes Breweries International
Meanwhile, alcohol regulation has continued to tighten, with legislation introduced last
year imposing time limits on TV beer advertising and banning the appearance of people and
animals in those adverts. This caused most major brewers to rework their marketing
strategies and launch advertising campaigns tailored to the new legislation – thus incurring
one-off relaunch costs. Furthermore, after a few months of debate, the government
approved a watered down bill slightly restricting the consumption of alcohol in public
places and raising the legal drinking age from 16 to 18. The law appears to have had little
effect on drinking habits, given the 5.5% q-o-q rise in beer sales volumes in 1Q05 despite
the cold weather.
M&A activity: shrinking assets pool
Consolidation of Russia’s last remaining independent brewing assets is ongoing, with
European companies such as InBev, Heineken and Efes (EBI) at the forefront of the
race. Among the most recent big transactions was EBI’s 2003 acquisition of the Amstar
brewery in Ufa for $62mn, or at about $50/hl-$55/hl of capacity. Of the major brewers,
Heineken was the most aggressive consolidator in the sector last year. The company made
two acquisitions – one in August and another in October that added some 3.4mn hl of
additional capacity to its assets: the Shikhan Brewery in Sterlitamak and Volga Brewery in
Nizhny Novgorod. Heineken spent an estimated $205mn on the assets, which implies a
price of around $60/hl. Earlier this year it also acquired the Patra Brewery for an estimated
$65mn-$75mn, or around $62 per hl of capacity. We expect Heineken’s next target to be
Pivoindustria Primoriya, and given that the brewery is owned by CEBCO (the seller of the
Shikhan and Volga Breweries) we believe Heineken has a greater chance of adding this
asset to its portfolio than its competitors do.
The number of suitable targets is steadily declining and there is a danger that acquisition
multiples will reach value-destroying levels. There are still a few independent regional
brewers that in our view are likely to be taken over in the near future, but the assets pool is
shrinking fast. Heineken has just announced the acquisition of Patra Brewery in the Urals
and it is possible that all Russia’s remaining small brewers will be taken over by the end of
the year.
Several larger companies also have a significant market share, including Stepan Razin,
Ochakovo, PIT and Krasny Vostok. These could shift the balance of power in the brewing
sector as their combined market share of around 18% rivals that of the second-largest
Russian brewer, SUN Interbrew. In calculating the values of potential targets (see table
below), we have used an estimated average multiple of $60 per hl of capacity. In reality,

32 June 27, 2005
however, the effective price for the acquirer would probably be even higher given the likely
need for further investment. Moreover, larger breweries with strong brands could demand
an additional premium; having said this, brewers such as Ochakovo and Krasny Vostok
have started to feel the full impact of rising competition, and with their capacity
underutilized, market share falling and revenue and profit declining, they might be more
flexible over pricing than is generally thought. Moreover, now looks like a good time to sell
as the market is still red hot and potential buyers are willing to pay a premium for quality
capacities and market share.
Potential M&A targets in brewing sector: who will snap up the last remaining quality assets?
Capacity, hl mn Output, hl mn,
2004E
Volume market
share, %
Estimated acquisition
multiple, $/hl of
output
Estimated M&A
value, $mn
Implied price per
% of market
share
Small cap
Pivoindustria Primoria 0.8 0.4 0.5 60 48
Barnaul Brewery 0.8 0.8 0.9 60 48
VINAP 0.7 0.6 0.7 60 42
Irkutsk Brewery 1.2 0.7 0.8 60 72
Total 3.5 2.4 2.8 210 74.2
Large cap
Stepan Razin 2.3 1.5 1.8 60 138
PIT 3.5 3.1 3.6 60 210
Ochakovo 12.0 5.7 6.7 60 720
Krasny Vostok 13.0 5.5 6.5 60 780
Total 30.8 15.8 18.5 1,848 99.7
Source: Company data; Aton estimates
The current price for existing brewing capacity appears to be very high compared with the
average cost of building a new plant of $25/hl (based on EBI’s recent investment of $25mn
to build a brewery in Rostov with capacity of 1mn hl). The lower cost implies a higher
return on investment, while self-building should also allow brewers to ensure their facilities
are high quality and operationally efficient. But while beer producers would obviously be
wise to weigh the greenfield alternative against the advantages of acquisition, they often
cannot afford to lose time on Russia’s fast-developing market given that the average time
span for a greenfield investment is about two years including the planning process and
testing stages. In addition, the average $35/hl-$55/hl premium implied by the most recent
acquisitions reflects the targets’ brand portfolios and market shares.
We thus expect major brewers to continue their expansion in Russia through a mix of
greenfield projects and acquisitions. Deep-pocketed businesses like Heineken and InBev
are likely to opt for acquisition, while EBI and SAB are likely to choose a mixture of the
two approaches and Baltika should continue following a largely organic path to growth.
Dairy sector: significant potential
The dairy segment illustrates perfectly the population’s move towards higher quality,
healthier foods with a high proportion of natural ingredients. Although the sector faces
challenges including raw milk shortages, it remains one of the most promising of Russia’s
consumer sub-sectors. The market is little affected by foreign competition, particularly at
the regional level where a vast number of small local players dominate. This means there is
significant potential for consolidation at a time when the growth rates of the biggest players
are still very attractive.
We estimate the size of the dairy market at about $12.8bn or 13.7% of total household food
expenditure and 14.6% of total food retail revenue. We note, however, that a large chunk of
the dairy products market is not picked up in food retail figures because of goods sold at
local markets or door-to-door in villages. At any rate, in terms of overall annual revenue the
Russian dairy market ranks eighth largest in the world, ahead of the UK and Canada.
Russia’s dairy goods consumption was historically high by global standards but has
declined sharply since 1990, largely as a result of a reduced cattle headcount (see table

June 27, 2005 33
below). Milk consumption per capita is now only about 57% of the 1990 level, which
indicates the market has significant growth potential, with 40% expansion only taking the
dairy sector back to the levels of the beginning of the last decade.
Cattle headcount and raw milk production has fallen significantly since 1990
1990 1995 1998 2000 2001 2002 2003 2004 CAGR, %,
2000-04
Vs 1990,
%
Cattle headcount, mn 20.8 18.4 14.5 12.7 12.2 11.8 11.0 10.6 -4.4% -49.0
Average cow yield, tn 2,781 2,013 2,275 2,520 2,697 2,839 3,036 3,100 5.3% 11.5
Total milk production, mn tn 57.8 37.0 33.0 32.0 32.9 33.5 33.4 32.9 0.7% -43.2
Import, mn tn 8.0 6.3 5.0 4.7 4.9 5.0 5.6 5.7 4.9% -28.9
Export, mn tn -0.3 -0.4 -0.3 -0.5 -0.6 -0.4 -0.5 -0.5 -0.3% 49.3
Livestock feeding, mn tn -7.3 -7.1 -5.8 -5.2 -5.2 -5.3 -5.1 -5.0 -0.9% -31.3
Final consumption, mn tn 58.3 35.9 31.8 31.0 32.0 32.8 33.5 33.1 1.6% -43.2
Consumption per capita, kg 398 247 219 214 222 228 232 230 1.8% -42.0
Source: Prodinvest; Aton estimates
However, we expect changes in dairy consumption to be more qualitative than quantitative,
with a shift to higher value-added products as the country starts to consume more processed
milk. At present, more than half of Russia’s milk production is not processed and is instead
consumed by livestock-owning households or sold raw at outdoor markets. Another 10% is
used to feed livestock, leaving only 30%-35% to be industrially processed and packaged,
compared to more than 70% in 1990. But over the past five years consumption of processed
milk has been growing at a faster pace than overall raw milk production, and this has
resulted in a higher share of the total for value-added products.
It is worth noting that the average share of processed products in total raw milk usage in
Central and Eastern Europe is around 70% – ranging from 50% in Belarus to 92% in the
Czech Republic. Compared to the European average of 100kg per capita per annum of
processed dairy products, Russian consumption is low at only about 67kg.
Dairy consumption forecast – we expect a rising share of processed milk
1999 2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F CAGR,
2004-
10, %
Total dairy consumption, mn tn 31.8 31.0 32.0 32.8 33.5 33.1 33.2 33.4 33.6 33.7 33.9 34.1 0.5%
Per capita consumption, kg 219 214 222 228 232 230 231 233 235 237 239 241 0.9%
Processed dairy products consumption, mn tn 7.6 7.8 8.3 8.7 9.4 9.8 10.1 10.5 10.9 11.3 11.7 12.1 3.6%
as % of total dairy consumption 23.9 25.2 25.8 26.5 28.0 29.5 30.5 31.5 32.5 33.5 34.5 35.5
Per capita processed dairy cons, kg/capita 52.1 53.7 57.1 60.3 65.0 67.6 70.5 73.5 76.4 79.5 82.5 85.7 4.0%
Average retail price, $/kg 0.23 0.24 0.28 0.29 0.32 0.39 0.43 0.47 0.50 0.53 0.55 0.57 6.6%
Dairy market retail turnover, $bn 7,296 7,517 8,906 9,665 10,881 12,817 14,451 15,821 16,881 17,723 18,542 19,359 7.1%
Per capita spending on dairy, $ 49.9 51.6 61.5 67.1 75.6 88.9 100.6 110.5 118.3 124.7 130.9 137.1 7.5%
As % of total food spending, % 13.5 13.4 13.1 13.4 13.5 13.7 13.7 13.8 13.8 13.9 13.8 13.8
Source: Federal Statistics Service; Prodinvest; Wimm-Bill-Dann; Aton estimates
The potential for growth in the Russian dairy market over the next three to five years is
therefore relatively significant. We expect volumes in the processed packaged liquid dairy
segment to grow by about 23% in 2004-2010. By 2010 we expect annual revenue in the
dairy market to exceed $19bn vs. an estimated $12.8bn in 2004.
Within the dairy market segment, we expect a shift towards higher value-added products
with enhanced nutritional and health characteristics. Categories like cheese should expand
noticeably over the next five years, as Russia’s consumption catches up to its European
neighbors.

34 June 27, 2005
Cheese consumption in Russia is among the lowest in Europe, kg/capita
25.5
20.6
17.2
15.0
14.8
12.7
9.9
6.6
2.1
3.7
0 5 10 15 20 25 30
France
Germany
Sw eden
Finland
USA
Poland
UK
Lithuania
Russia
Ukraine
Source: Euromonitor; Wimm-Bill-Dann; Aton estimates
In the cheese segment, however, we expect imported products to gain an increasing share as
Russian cheese makers continue to suffer from a dearth of raw materials. Cheese is among
the most labor- and raw materials-intensive dairy products (roughly 20 liters of fresh milk
is needed to make 1kg of cheese) and the current shortage of raw milk on the market is
hindering the faster development of the cheese industry. Of the major players only Wimm-
Bill-Dann (WBD) has invested in full cheese production, while of the Western
manufacturers only Germany’s Hochland and France’s Lactalis have launched Russian
production, although this is limited to processed cheese products that have less rigid raw
materials requirements.
However, local producers should gain a stronger footing if the Russian authorities go ahead
with plans to put a brake on cheese imports. A proposal is currently being examined to slap
a 15% tariff on imported cheese to combat subsidized European products. This should help
Russian cheese makers in the longer term although it would be unlikely to immediately
affect domestic output levels (or consumption).
Cheese market one of the most dynamic areas of growth in the dairy sector
2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F CAGR, %,
2004-10
Cheese production, '000 tn 260 316 335 350 360 365 391 419 449 480 5.0%
Imports, '000 tn 196 176 175 190 195 229 225 241 259 278 8.5%
Exports, '000 tn -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 0.0%
Final consumption, '000 tn 446 482 500 530 545 584 625 670 718 769 6.4%
Consumption per capita, kg 3.1 3.4 3.5 3.7 3.8 4.1 4.4 4.7 5.1 5.5 6.8%
As % of processed dairy consumption 5.4 5.6 5.3 5.5 5.4 5.6 5.8 6.0 6.2 6.4
Avg. price, $/kg 4.1 4.2 5.0 6.3 7.0 7.4 7.6 7.8 8.2 8.6 5.3%
Cheese market value, $mn 1,817 2,008 2,519 3,322 3,824 4,326 4,757 5,244 5,871 6,582 12.1%
Per capita spending on cheese, $ 12.6 13.9 17.5 23.1 26.7 30.3 33.5 37.0 41.6 46.8 12.5%
As % of total food expenditure 2.7 2.8 3.1 3.6 3.6 3.8 3.9 4.1 4.4 4.7
As % of total dairy expenditure 20.5 20.8 23.1 26.0 26.6 27.4 28.3 29.7 31.8 34.1
Source: USDA; Federal Statistics Service; Aton estimates
The yogurts segment is also ripe for growth, with a paltry 3.8kg per capita consumption
level compared to Europe’s 10kg per capita. Russia is already fast catching up – in the last
three years yogurt consumption has increased more than 1.6X and we expect it to rise
another 1.5X before the end of the decade. Live yogurts with fruit additives such as apricot,
strawberries and peaches are the most consumed items. Within the major yogurt categories,
there is a noticeable shift towards drinkable yogurt with added bifid bacteria and other live
active cultures. This type of product is a relative novelty for the Russian market and is
widely perceived to have enhanced nutritional and health qualities, again highlighting the
shift towards such products in the food sector in general.

June 27, 2005 35
Yogurt market expected to almost double in value in the next five years
2000 2001 2002 2003 2004 2005F 2006F 2007F 2008F 2009F 2010F CAGR, %,
2004-10
Thick yogurt, '000 tons 153 194 247 260 267 286 306 328 351 376 401 7.0%
Drinking yogurt, '000 tons 92 137 181 238 276 302 329 356 384 412 442 8.2%
Total 245 331 428 498 543 588 635 684 735 788 843 7.6%
Thick yogurt per capita consumption, kg 1.1 1.3 1.7 1.8 1.9 2.0 2.1 2.3 2.5 2.7 2.9 7.4%
Drinking yogurt per capita consumption, kg 0.6 1.0 1.3 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 8.6%
Yogurt per capita consumption, kg 1.7 2.3 3.0 3.5 3.8 4.1 4.5 4.8 5.2 5.6 6.0 8.0%
As % of processed dairy consumption 3.1 4.0 4.9 5.3 5.6 5.8 6.1 6.3 6.5 6.8 7.0
Avg. price, $/kg 1.22 1.23 1.21 1.30 1.46 1.62 1.73 1.78 1.79 1.81 1.84 4.0%
Yogurt market value, $mn 298 408 517 647 791 952 1,098 1,215 1,316 1,428 1,552 11.9%
Per capita spending on yogurt, $ 2.1 2.8 3.6 4.5 5.5 6.7 7.7 8.5 9.3 10.1 11.0 12.3%
As % of total food expenditure 0.5 0.6 0.7 0.8 0.8 0.9 1.0 1.0 1.0 1.1 1.1
As % of total dairy expenditure 4.0 4.6 5.4 5.9 6.2 6.6 7.0 7.2 7.5 7.7 8.0
Source: Prodinvest; Federal Statistics Service; Wimm-Bill-Dann; Aton estimates
Although the dairy industry is highly fragmented, WBD remains the clear leader in all the
major dairy segments, followed by Danone, Petmol and Ochakovo.
Market share of major players
WBD
38%
Others
25%
Piskarevsky
3%
Campina
2%
Parmalat
1%
Ehrmann
2%
Danone
16%
Ostankinsky
2%
Ochakovsky
6%
Petmol
5%
Source: AC Nielsen retail audit, 9 cities, 2004; Aton estimates
As we have already noted, one of the factors preventing growth in the dairy segment is the
lack of raw milk due to a shortage of cattle, which has sent raw input prices soaring and
resulted in dairy manufacturers’ margins slimming. The cattle headcount has declined by
about 16.5% in the last four years and the price of dry milk powder, for example, has
soared 70% in the last two years alone. Although raw milk prices have started to stabilize,
2005 is shaping up as another tough year for dairy producers’ margins.
Dry milk prices seriously hampering producers’ margins, $/ton
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
Jul-02
Sep-02
Nov-02
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-04
Sep-04
Nov-04
Jan-05
Source: Prodinvest; Aton estimates

36 June 27, 2005
For all its promise, the dairy market in Russia also holds many challenges. We see those
companies that constantly focus on innovation and higher value-added products as being
best positioned to capitalize on the expected growth in dairy consumption. But the going is
likely to be tough, with large multinationals heavily represented in the premium products
segment; and in all likelihood margins in the dairy sector will remain under pressure for
some time from both high raw materials prices and rising marketing and advertising
expenditure.
Juice & water sector: playing catch-up with Europe
Russia’s juice market is significantly more concentrated than its dairy sector, with the top
four players accounting for nearly 84% of all juice sales. Imports play an insignificant role
and foreign competition has been barely noticeable to date.
Four major domestic juice producers dominate the market, Oct.-Nov. 2004
Lebedyansky
29.8%
Multon
25.9%
WBD
16.5%
Nidan
11.6%
Other
16.2%
Source: AC Nielsen retail audit, Oct-Nov 2004;Company data; Aton estimates
The increase in both juice and bottled drinking water consumption is largely due to rising
health awareness. Between 1998 and 2003, drinking water and juice consumption increased
at a CAGR of 31.7% and 24.6% respectively, according to our estimates.
Juice volumes have nearly quadrupled since 1999, (total consumption, mn liters)
550
740
1,200
1,500
1,800
2,050
0
500
1,000
1,500
2,000
2,500
1999 2000 2001 2002 2003 2004F
Source: Company data; Euromonitor; Aton estimates
Apart from rising disposable incomes, growth is also being encouraged by aggressive
marketing strategies, wider product ranges and the adoption of juice as a substitute for fresh
fruit, especially during the long Russian winter. Juices that are high in vitamin content
enjoy particularly strong demand.

June 27, 2005 37
Per capita consumption and spending on beverages, 2003
68
52
28
20 17 16 14 12
7
15
49
19
59
9 10
5
11
18
0
10
20
30
40
50
60
70
Tea Beer Milk &
milk
drinks
Spirits Coffee CSD Drinking
w ater
Juice Wine
0
10
20
30
40
50
60
70
Per capita consumption, l Per capita expenditure, $, rhs
$l
Source: Euromonitor; Aton estimates
Despite having risen significantly, bottled drinking water consumption in Russia of about
11 liters per capita is half the Central and Eastern European level of 21 liters per capita and
well below Western European levels of 100 liters. Juice consumption also appears to have
significant upside if other countries are used as benchmarks (see chart below).
Russian juice consumption lagging that of most European countries, liters/capita
41
38
28 27
25
23 23 23 22
20
16
12 12
10 9
5 4
2 1 0
0
5
10
15
20
25
30
35
40
45
Germany
USA
Netherlands
Hungary
Czech
Sweden
UK
Switzerland
Poland
France
Spain
Russia
Italy
Mexico
Bulgaria
Ukraine
Romania
China
Argentina
India
Source: Euromonitor, 2003 data; Aton estimates
In short, we see no reason why Russian per-capita juice and bottled water consumption
should not reach similar levels to Central and Eastern Europe in the not-so-distant future,
provided the population’s wealth continues to increase and the country suffers no
significant setback like the 1998 financial crisis. Intensive advertising and improved
distribution will help to further boost demand for high quality dairy and fruit juice products.
For instance, our projections for juice show consumption increasing to the current Polish
level in five years’ time.
For the sake of a reference, we point out that per capita juice consumption in Moscow and
St. Petersburg – at 35 liters and 30 liters respectively – is already above that of some
European countries. This provides a good benchmark for the rest of Russia and highlights
the fact that the only limitation to increased consumption across the country is the current
low level of disposable income per capita. Rising incomes should therefore bring the
nation’s consumption levels closer to those of Russia’s two main cities.

Russian_consumer_sector_Jun05

Recommended

Recommended

More Related Content

What's hot

What's hot (19)

Similar to Russian_consumer_sector_Jun05

Similar to Russian_consumer_sector_Jun05 (20)

Russian_consumer_sector_Jun05