Analysis of external and internal environment

Headlines:

• In 2010 sales of tea grow by 3% in total volume and by 9% in current value terms

• The volume growth in the off-trade is 3% and the on-trade 2% in 2010

• Fruit/Herbal tea registers the strongest performance in off-trade volume terms with growth of 7% in 2010

• The unit price of tea grows by 6% to RUB 621 per kg in the off-trade channel in 2010

• Top four operators within tea remain Orimi Trade OOO, Mai Kompanya OAO, Ahmad Tea Fabrika OOO and Unilever Rus OOO (first two are local producers)

Trends:

Tea market is close to saturation, almost 100% of Russians consume tea. The growth in number of new consumers is not significant, but this leads for the new competition dimension - companies introduce new brands and new solutions in product packaging.

Tea continues its growth in value terms in 2010 – 9% vs last year, mainly due to price increase (inflation) and market premiumization.

Fruit and herbal tea shows huge growth and the tendency is positive for the future sales increase (now account for only 5% of total tea market), while black tea segment is stable, but already is the biggest segment in the Russian market (accounts for almost 80% of the total market). Black tea is mainly present in economy and standard price segment, while other types of tea are more upper mainstream and premium.

Sales growth was similar within the on-trade and off-trade channels. Despite the general slowdown in growth within the on-trade channel, tea sales remained relatively strong, supported by the fact that tea is cheaper than coffee and other hot drinks, thus people felt able to afford a visit to a cafeor restaurant, in order to enjoy a cup of tea with friends, or just relax and spend some time. Moreover this channel gave them the opportunity to try more exotic or expensive types of tea without committing to the purchase of an entire pack.

Competitive landscape:

Top four operators in tea remained Orimi Trade OOO, Mai Kompanya OAO, Ahmad Tea Fabrika OOO and Unilever Rus OOO. The strong leader Orimi Trade OOO had a 25% share in off-trade value terms. This company operates in all the tea subcategories, which helps enable it capture a large share. Its Princess Gita brand is the leader in black tea with a 12% value share. Greenfield is a relatively new brand of Orimi Trade, holding a 25% value share in green tea. The Tess brand was a new product development in the fastest-growing fruit/herbal tea subcategory. The company achieved significant consumer loyalty due to affordable unit price and good-quality products.

The trend of redistribution of sales towards the segment of premium tea started in 2010. Premium and upper-mainstream teas share grows from 7.3% to 15.2% in 5 years (estimated, from 2005 to 2010). Over the past year several industry leaders launched new products in this segment. It is also worth noting that players continued to expand the range of the most successful brands through new flavoured versions. With regard to the most significant innovations in packaging, pyramid tea bags with individual foil packaging for each unit can be seen as belonging to the premium segment.

Competitors for Wyssotzky tea were selected based on the following key criteria:

• Similarity of the product line

• Price level

• Promotion specifics

Based on these features, “strong” market players (with more or less significant market share) are, descending order:

• Greenfield (Orimi trade)

• Ahmad Tea (Ahmad Tea London Ltd)

• Tess (Orimi trade)

• Mlesna (Mlesna England co ltd)

• Riston (Riston teas ltd)

• Twinings (Associated british foods plc)

• Newby (Newby teas of London)

• Messmer (Laurens Spethmann Holding AG & Co)

• Maître de Thé (Technologies Françaises Alimentaires)

Other competitors, which have very little market share, but are widely distributed within premium retail stores, are:

• Quai sud

• Heath & heather

• Clipper

• Ronnefeldt

• Dammann

• Today was fun

• Kowa

• Dr. Stuart's

• Fortnum&mason

• Whittard of chelsea

• Harney&sons

Share dynamics in value for the top premium and upper-mainstream players is the following (total tea market, shares of premium brands, all segments, bars present total market in mln RUR):

Premium teas share grows from 7.3% to 15.2% in 5 years – clear evidence for market premiumization.

Segment-by-segment dynamics is slightly different from the total picture (while Greenfield is strong market leader in all premium tea segments, other competitors account for different positions). Black tea (black tea market, shares of premium brands, bars present total black tea market in mln RUR):

Greenfield shows significant growth on the background of stable competitors.

Fruit/herbal tea (fruit/herbal tea market, shares of premium brands, bars present total fruit/herbal tea market in mln RUR):

Green tea (green tea market, shares of premium brands, bars present total green tea market in mln RUR):

Greenfield and tess (both brands of one company) show sustainable growth while others are stable.

Prospects:

• There is an expected growth of 3% in volume terms for the total tea market in Russia, this growth will not significantly exceed 2010 result, because mainly companies continue to develop qualitatively and not in volume terms due to high level of market saturation

• For the next few years experts forecast active competition, advertising and price wars. There are going to emerge several extensions of the already well-known brands, and private labels could be a significant threat for the already existing competitors, which could force them to decrease prices

• More and more companies are moving to the domestic packaging, because it could be much cheaper due to the difference in import tariffs for both variants.

• There is a tendency to increase export of the Russian tea to the other countries because of the market saturation (mainly CIS countries)