Boston, MA -- (SBWIRE) -- 05/27/2013 -- We reiterate our bullish outlook on the Russian retail sector, as rising incomes combined with expansion into the east of the country will benefit companies operating in the sector. We also expect an increasing focus on convenience for shoppers in Russia's bigger cities. We highlight our favourable view on Londonlisted O'Key, whose upscale business model fits well with our view on developments in the market, as a potential alternative to discounter Magnit.

Headline Industry Data (local currency):

- 2013 per capita food consumption = +10.8%; forecast compound annual growth rate (CAGR) to 2017 = +10.4%
- 2013 beer volume sales = +0.5%; forecast CAGR to 2017 = +1.6%
- 2013 fruit juice volume sales = +4.5%; forecast CAGR to 2017 = +5%
- 2013 mass grocery retail sales = +26.8%; forecast CAGR to 2017 = +30%

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Key Company Trends

Weak Q4 A Setback For Carlsberg: Denmark-based multinational brewer Carlsberg's results for the fourth quarter to December 2012 have seen a reversal from the positive momentum that had built up in Q3, with the firm reporting operating income of DKK2.15bn, below consensus expectations for DKK2.3bn.

More importantly, from our point of view, is that Carlsberg has decided to scrap its operating profit margin guidance for the Eastern Europe region to 2015, citing greater uncertainty brought about by rising costs and greater volatility in its key markets. Carlsberg relies heavily on Russia for growth and arguably does not have enough non-European exposure. At the time of writing, Carlsberg's Copenhagen-listed shares were down by about 7%. This reflects the poor response to the Q4 results as well as the lack of visibility given the company's decision to no longer provide medium-term guidance for Eastern Europe.

Retailer Dixy Growing Nicely: The year-end 2012 results reported by Russian food retailer Dixy re-affirm the strength of the country's discount retailing sector in particular. In our opinion, Russia's retail sector is among the world's most exciting, particularly the discount space. In the 12-month period to December 2012, Dixy recorded same-store growth of 7% year-on-year. Dixy is much smaller than domestic retailers Magnit and X5, and most of its stores are based in the central region (including Moscow). However, a promising 20% of its sales are believed to come from the Urals. In the long term, we see a lot of growth coming from discount stores in Russia's less developed regions.

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