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Omni-Channel Model Development

M.video is the largest consumer electronics and home appliance retailer in the Russian Federation by revenue. We opened our first retail store in the downtown Moscow in 1993 and as of the end of 2013 our business has grown into a nationwide retail network of 333 stores in 144 cities all over Russia.

In 2013 M.video stores were visited by more than 160 million people: in our estimate 20% out of them made a purchase. Average transaction amount (average basket or average ticket) came up to 5,400 Russian rubles, RUB (including VAT) as compared to 5,300 RUB the year before.

Revenue and LFL sales dynamics in 1Q-4Q 2013

The total growth in sales of almost 11% was achieved due to the average basket increase by 1.5% and growth in the overall number of transactions by 9,5% thanks to the opening of the new stores and expanding of online operations. Our like-for-like sales (LFL, same stores sales) increased by 1% in 2013. Overall LFL sales results were impacted by a softening of the Consumer Electronics market towards the end of the 4th quarter, particularly in the regions where we saw consumer confidence weakening while Moscow and St. Petersburg continued to perform strongly.

Total sales efficiency (sales per Full Time Equivalent employee, FTE) increased by 4.2% in 2013.

Transactions, average ticket and LFL sales dynamics in 2013 (as % to 2012)

In 2013 the Company achieved significant increases in certain categories of goods sold, primarily in Telecoms, mostly due to the growth of Smartphones sales, and in Small Home Appliances because of a massive growth in multi cookers (+290% of sales increase year-on-year) which had been introduced as a novel category to the market. Telecom replaced some of the Photo categories as we were selling more Smartphones versus Compact Cameras and some Navigators. We were also seeing ongoing decrease in Entertainment due to a market tendency as many of these products are now purchased online.

Overall white goods (Large and Small Home Appliances) topped our sales mix with more than 35% of revenue in 2013. Entertainment and TV’s each decreased by 1% while other categories had minor movements. Revenue from services to customers (installation of home appliances, Quick Service certificates, additional warranties etc.) increased twofold mainly because of the growth of Digital Assistant services due to Computers sales increase.

Revenue by major categories in 2013

Our Omni-Channel concept again was very successful in 2013. Omni is the combination of online and physical stores under one brand that lets customers shop anytime, anyway, anywhere at their convenience knowing that pricing and services are the same throughout the channels.

We benchmark ourselves versus the online stores with the similar product mix as well as versus the major Russian search engine which provides products’ price and availability comparison in the Russian Internet. We see our competitive advantage in promoting our recognized brand and keeping the customers informed about our promo activities, special prices and exclusive models.

In 2013 we significantly expand the online shopping capabilities in those cities where we operate in Russia. Our 2013 online based sales more than doubled versus 2012. By June 30, 2013 we were already in 37 cities and at the end of 2013 the company opened new internet cities bringing the total to 52. An internet city is the ability to buy online in that city with the delivery calculated from that city.

Online based sales in 2012-2013, RUB million

Internet sales nowadays can be divided into two types: online sales, pick up in store and online sales, delivery to home. Traditional pure play online companies carry out home delivery as their core business. This channel is quite expensive in Russia since home delivery and scheduling costs are quite high. It also does not allow the retailer to show the full range of products and easily sell attachments and services to the customer. The Company’s goal is to bring these online buyers back into store traffic to increase conversion and get additional sales including impulse purchases.

The benefits to the Company are also benefits to the customer thus creating a win-win scenario. To promote this way of shopping the pickup customer is incentivized to go through the store to buy something at the moment of pickup. While the customer walks through the store we have a chance to remind him or her of the products we sell and thus to create conditions for an impulse buy. The impulse buys tend to be higher margin accessories, entertainment items, services or small home appliances.

In 2013 pickup in store moved from a single digit % of internet sales to over 40% of all online revenue in the end of the year. This growth helps us to control delivery costs, increase traffic and conversion in the stores and support our gross margins through the additional sales.

Moscow and St Petersburg are leading the way for our Omni-Channel strategy. We continue to refine our concept and will strive to lead the market in meeting the demands of the customers.

We worked constantly throughout 2013 on improving a usability of our web system including PC, tablet and mobile applications to attain better conversion rates while shifting toward personalized offers and superior customer communication via e-mails, SMS and social media. The growth of our internet traffic and number of transactions was well supported by the existing Supply Chain capabilities to handle growing number of orders and accurate home delivery.

In 2013 we also launched online credit facility together with one of the Russian banks. It provides for the fast and easy loan application processing and is available in 16 cities of coverage. We continued to refine our web engine search and choice capabilities while upgrading ordering system to “one click” level for the better shopping experience of our online buyers.