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Opportunities in Eastern Europe & Beyond Slide No. 1

Globalise the Outsourced Supply Chain

Opportunities in Eastern Europe & Beyond

Jeremy Davidson

25th November 2010

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Opportunities in Eastern Europe & Beyond Slide No. 2

Key Themes

Black Sea region is recovering from recession

o Consumer-led growth in demand critical

Black Sea has considerable potential as a key Gateway for C & E Europe as

well as Central Asia

o Shipping FE Imports via N Europe no longer makes sense; direct

shipment a viable and better alternative

W Europe retailers already dominant and changing logistics practices

Controlling logistics cost as important as in W Europe

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Opportunities in Eastern Europe & Beyond Slide No. 3

GDP per capita

Pop (m) Per Capital GDP

2009 in 2009

Russia 142 $15,176

Turkey 75 $13,952

Ukraine 46 $6,873

Romania 22 $12,214

Bulgaria 8 $12,296

Average EU-27 $30,651

Average OECD $33,732

Black Sea Region Overview

Per capital GDP & Consumption half of EU-27 average

Growth potential in consumption greater than EU

Large populations looking to improve standard of living

Increase in demand for FMCG & Consumer Durables

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Opportunities in Eastern Europe & Beyond Slide No. 4

Recovery from Recession

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Russia Turkey Ukraine Romania Bulgaria 2008

2009

2010F

2011F

Effect of 2008-09 RecessionMajor Economies

% change GDP Exports Imports

Canada -3.1 -19.2 -19.0

France -3.2 -15.0 -12.5

Germany -6.3 -18.2 -12.9

I taly -6.5 -23.9 -19.0

Japan -8.0 -32.1 -20.5

United Kingdom -5.9 -13.3 -16.7

United States -3.5 -12.6 -19.5

Euro area -5.1 -17.8 -15.3

OECD total -4.7 -15.7 -17.4

Russian Federation -9.7 -12.9 -35.1

GDP Change in Black Sea Economies 2008 - 2011

Decline in region similar to that seen in leading economies

RU & TU expected to recover strongly

RO & BG slower recovery forecast

Projected growth rates expected to be higher than in W Europe

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Opportunities in Eastern Europe & Beyond Slide No. 5

Investment in BS Region

Sharp decline in GDP

Fall off in foreign direct investment

Reduction in relative County Risk Scores vs EU-15

Fundamentals still sound

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Opportunities in Eastern Europe & Beyond Slide No. 6

Retail Logistics: Key Sector

Retail logistics spend >50% of total market in W Europe; probably even

higher in BS Region

BS countries increasing imports from China & SE Asia

o Growth of own label & cheaper brands

Most leading retailers are W European and often supply the BS Region

through N European ports and ship down (road/rail)

o Critical mass/economic quantities

Often freight costs can represent up to 50% of value of goods. Hence

reducing logistics costs critical

o More centralisation

o Direct shipment from countries of origin

o For cheap footwear at €15/pai5, logistics can represent 15%

On-carriage from ports to RDC’s still problematic; poor road infrastructure

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Opportunities in Eastern Europe & Beyond Slide No. 7

The Black Sea as a Gateway

Black Sea (BS) strategically placed as

Gateway to both West & East

Imports from Far East can be landed in BS

Ports and shipped inland

Infrastructure improving with rail an

increasing option

Turkey a critical gateway to Iran, Iraq and

Central Asia

Russia to develop BS ports as alternative

to Baltics

Istanbul terminals effective for

transshipment

UKRAINE

ROMANIA

RUSSIA

GEORGIA

BULGARIA

CONTAINER SHIPMENTS IN BLACK SEA - 2009

1.9 M TEU forecast for 2010 vs 1.5 M TEU in 2009

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Opportunities in Eastern Europe & Beyond Slide No. 8

Romania Ukraine Turkey Bulgaria

1 Metro Fozzy Migros Kaufland

2 Carrefour Metro Bim Rewe

3 Selgros Fursnet Carrefour CBA

4 Kaufland ASB Metro Picadilly

5 Billa Kishenya Tesco Familia

6 Rewe Auchan BTT Carrefour

7 Plus Anastor Teknosa Metro

8 Mega Tayriya Kiler Fantastico

9 Auchan Eko Tespo c/c Billa

10 Dederman Rewe Carsi Europa

Region targetted by retail multiples from W Europe

Displacing traditional retailers and stimulating demand

Transferring retailing practices and approach to logistics

W European 3PL’s have followed – not always successfully

Leading Retailers in Region

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Opportunities in Eastern Europe & Beyond Slide No. 9

Black Sea Retailers & FE Imports

Regional retail multiples source from the same FE vendors as

in W Europe

Purchasing often remains centralised at Retailers’ HQ’s

Opportunities for local solutions esp logistics

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Opportunities in Eastern Europe & Beyond Slide No. 10

Centralisation & Outsourcing

Outsourced Logistics in CEE

Country 2008 2012

Poland 23% 35%

Hungary 22% 30%

Czech Republic 23% 35%

Slovakia 13% 25%

Romania 28% 35%

Bulgaria 18% 30%

CEE Total 21% 32%

W. Europe 50% + little change

Source: Analytica & NYK

Outsourced

Centralisation of Logistics by leading retail

multiples vary, on average 20%

Problems with ‘critical mass’, supplier

compliance, vehicle utilisation etc

Centralisation depends on efficient inbound

collection & consolidation

Direct store deliveries common

Local produce and products still

important

Shortage of suitable 3PL’s

Level of outsourcing set to increase & 3PL

market will grow

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Opportunities in Eastern Europe & Beyond Slide No. 11

• A retailer importing 2,000 containers/year through Constanta

can save €1.8 million & reduce CO2 footprint by 7,000 t

Nautical

Miles

Shanghai to Rotterdam 10,409

Shanghai to Constanta, RO 7,980

via Rotterdam via Constanta

Sea 327.7 251.2

Road 167 0.3

Rail 0 6.1

Total 494.7 257.6

48%

Kg CO2/ton

Reduction via Constanta

Rotterdam

Constanta

Direct Shipment to Romania

Road/rail

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Opportunities in Eastern Europe & Beyond Slide No. 12

© via donau 2006

Using the Danube

Rail from Hamburg to Krems in Austria

Shipped by barge to Central Europe and

Black Sea regions

Can be used in reverse for imports via Constanta

Significant cost & CO2 savings

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Opportunities in Eastern Europe & Beyond Slide No. 13

END-TO-END LOGISTICS COSTS

Delivered to store

ex-China Qtr 1 08 Qtr 2 09 Qtr 2 10

Sea Freight € 78 € 51 € 81Warehousing € 37 € 36 € 37Delivery to store € 54 € 55 € 58Total € 168 € 142 € 176

Cost per pair of shoes € 1 .40 € 1 .18 € 1 .47

What if…. Savings

Cost/pair

Increase stock-turns by 30% € 0.03Increase drop size by 50% € 0.15Increase container loading by 20% € 0.06Shipped direct from FE € 0.16Did all this … € 0 .40

Savings of 27%

Cost per cbm

Supply Chain Efficiencies

Average selling price of a pair of

shoes lower in BS Region but

logistics cost the same

Even more critical to make supply

chain more efficient

Shipping direct from FE easy to do

and implement

DELIVERY TO STORE

& RETURNS

33% OCEAN FREIGHT

& ON-CARRIAGE

46%

WAREHOUSING

21%

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Opportunities in Eastern Europe & Beyond Slide No. 14

Streamline the Supply Chain

Retail RDC Origin CFS

Origin RDC

Mfr DC

R

E

T

A

I

L

V

E

N

D

O

R

S

DC Bypass

Challenges faced by retailers in BS region no different to those in W Europe.

Opportunities to streamline & save money by:

o Shipping direct to RDC in region (€20-30/cbm)

o Performing more operations in origin countries (eg Origin DC’s)

W Europe wages for warehouse worker € 25,000 pa vs €6,000 in RO

and € 3,000 pa in China

o Consolidating across product ranges & co-loading with competitors:

better container fill & lower cost per cbm.

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Opportunities in Eastern Europe & Beyond Slide No. 15

Shipping can be risky !

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Opportunities in Eastern Europe & Beyond Slide No. 16

Piracy still a major threat

Reported incidents each month during past 12 months

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Opportunities in Eastern Europe & Beyond Slide No. 17

THE WORLD IS FOUR-

FIFTHS WATER

THE REST IS THERE FOR

MOORING PURPOSES !