Crisis Hastens X5 Exit But Not Responsible For It


X5, Russia's second biggest food retailer by sales after Magnit, is leaving Ukraine after agreeing to sell its stores (around 12) to the domestic retailer Varus for around US$5-10mn, according to the Ukrainian newspaper Capital. While the ongoing political crisis between Russia and Ukraine clearly poses enormous challenges for Russian firms operating in Ukraine, particularly outside of the Crimea region, this exit was on the cards before the crisis broke out. Our view is that the effect of the crisis has been to hasten X5's departure rather than causing it directly.

We have published a number of articles over the past year comparing the conflicting fortunes of X5 and Magnit and more recently published an article looking at the key implications for the food retail sector on the back of the crisis ( see 'Weak Rouble A Major Concern For Key Retailers Magnit And X5,' March 14 2014). Whereas Magnit has gone from strength to strength since mid- to late 2011 in particular, X5 has faced one challenge after another. X5 has only recently shown signs of finally turning the corner after posting its first quarter of same-store sales growth in more than a year in Q413, following average growth of -1.2% year-on-year in the preceding eight quarters.

X5 Same-Store Drop-Off
Same Store Sales Growth Excluding Fuel (LHS) And EBIT Per Retail Square Foot (RHS)

Turning around Russia is clearly X5's main priority as it needs to put together a sustained run of sequential growth in same-store sales and ultimately restore confidence in its business, which has been blighted by its inability to execute a planned strategic shift in 2011 away from acquisition-led growth and towards organic growth. With fewer than 20 stores in Ukraine (compared with more than 4,500 in Russia), it is not losing much by leaving and in our view this is a predictable and sensible move.

The fact that X5's presence was still negligible in 2014, despite entering back in 2005 in an industry that relies on economies of scale, suggests that the company never really believed in its Ukraine business. This is particularly evident after the global financial crisis battered consumer spending, destroying the the business case for growth as any potential expansionary steps would have involved investment capital that would be put to better use in Russia. In US$ terms, BMI expects Russia's organised food retail market to grow from an estimated US$101.8bn in 2013 to a forecast US$196.6bn in 2018, representing compound annual growth of 14.1%.

Divergence Between Magnit And X5
Price/Book Ratio
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Related sectors of this article: Food & Drink, Mass Grocery Retail
Geography: Ukraine