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Good day, everyone, and welcome to the Lenta Fourth Quarter and 2017 Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Albert. Please go ahead.
Thank you, Lisa. Good evening, good afternoon, and good morning, ladies and gentlemen. Thank you for joining us to discuss Lenta's fourth quarter and full year 2017 sales and operating results. As usually, with me to review the results and answer your questions are our CEO, Jan Dunning and CFO, Jago Lemmens. You know that the announcement and respective presentation are available on our website. And after our remarks, we look forward to taking your questions. With that, I will now turn the call to Jan. Jan, please.
Yes. Thank you, Albert, and once again, good to meet you everyone. Thanks for joining us. Now you will have seen from the announcement that the sales growth accelerated significantly in the fourth quarter, and we made our new store opening guidance for the year.I would like to start by taking you through some highlights in 6 key areas before going into more detail in some of them. So the first one is, the fourth quarter sales were stronger across the board. Total sales growth exceeded selling space growth, like-for-like growth exceeded inflation, and like-for-like traffic was positive. As a second point, the sales improvement in the fourth quarter were largely driven by our own efforts, not by the economy. Momentum is building from the initiatives we launched actually earlier in 2017. As a third point, Lenta improved its market position in all key markets. We are becoming a significant player in Moscow. We have cemented our leadership in St. Pete hyper segment. Lenta grew strongly in the last -- larger cities, cities over 1 million population, now actually being the #1 hyper in most of them. We doubled our supermarket footprint and entered 2 new regions. And overall, Lenta became Russia's third retailer, up from a sixth position when we did our IPO.As a fourth point, acquisition's performance was excellent. The ex-Kesko stores doing very well: Sales per square meter above Lenta average. The ex-NASH stores also doing very well. We see an extreme fast ramp up. And the Holiday deal in Siberia gives us immediate scale in our Siberian supermarket business. The fifth point, we see positive signs for 2018. The first 3 weeks sales were promising. Deflation and cannibalization headwinds are abating. Economy is likely to help in 2018. Overall, not seeing much of it yet. Big drop in interest cost, with more big drops to come, we expect.And the sixth, last bullet point is, we're also encouraged from a long-term strategic perspective. The fourth quarter results demonstrate Lenta's ability to succeed in a tough environment, sustainable -- sustaining a rapid growth through a healthy combination of like-for-like sales, organic expansion and accretive bolt-on acquisitions. Our success continues to be underpinned by our low-price, low-cost business model, our attractive customer proposition, and very important in this volatile environment, our ability to adapt to change circumstances. Our rapidly falling cost of debt is especially good for Lenta, given our high property ownership.Now I'll take you through a little more detail on some of these key points. To start with, the fourth quarter sales were strong across the board. Now the fourth quarter sales growth of plus 23%, exceeded the selling space growth of plus 21% for the first time since the fourth quarter 2015, when inflation was significantly higher. A key factor was a healthy maturing of our store base. The proportion of stores over the years were always higher than a year ago. And as you would expect, these more mature stores have higher sales than younger stores. Sales growth improved 4.7 points versus third quarter. The biggest driver was improving like-for-like sales, but also our new stores performed strong. Like-for-like traffic was posted for the first time in the year, despite continuing cannibalization effects. We saw a change in consumer behavior with increasing visit frequency to our hypermarkets, trends which started actually in the latter part of the third quarter.We continue to win new customers, a good trend, but not a new one. Cannibalization effects, which were especially visible in St. Petersburg due to the Kesko acquisition, stabilized in the fourth quarter, and we expect it to fall into 2018. Like-for-like ticket growth improved despite a record shelf price deflation. The biggest factor driving ticket growth was in increasing the number of articles per basket. This trend also started in the third quarter and accelerated significantly in the fourth quarter. Trading up also continued, but the effect remained almost flat quarter-on-quarter.Non-food like-to-like sales growth was positive for the first time in 2017. We believe this was a result of a series of improvements in our non-food offer rather than an increase in underlying demand. Promo share in the fourth quarter was up slightly versus 2016, but the trend has been fairly stable with the same year-on-year increase in promo share in fourth quarter as in the third quarter.Then the second point, sales improvements in the fourth quarter were largely driven by our own efforts, not the economy. We probably benefited slightly from improvements in the economy but did not see any easing of competition. The improvement in sales growth was predominantly driven by a growing momentum from the series of initiatives we launched earlier in the year to increase our attractiveness to customers. As an example, we have increased our focus on unique assortment to give customers additional reasons to come to Lenta.We made quite visible changes in some product categories, introducing new unique SKUs, replacing some assortment and improving the ranges. As part of this, we are implementing a long-term plan to improve our private label offering. The number of private label SKUs has increased by almost 30% since we started this, primarily in the medium and premium part of the assortment. We introduced new high-quality private label products in children goods, cosmetics and alcohol. We also launched our premium private label in confectionery. We recently added a new range from the well-known Finnish private label, Pirkka, which was a private label of Kesko for stores in St. Petersburg and Northwest.Looking forward, our recently announced membership of EMD, a leading European purchasing alliance will improve our access to high-quality European private labels in dry and non-food categories. We're not finished and have not run out of ideas. There is still a lot to do in many areas. So we expect the benefits from these new steps to go -- continue to grow over time.The third point, Lenta improved its market position in all key markets. Now the biggest change was in Moscow. As a reminder, we opened our first stores in the region in 2013, with just 1 hyper and 10 supers. We now, by the end of 2017, have 4 -- 24 hypers and 43 supers having opened a record of 11 hypers and 8 supers during 2017, adding 72% to our selling space in that region. Sales were up 77% in the quarter 4, and even in December, it was 96%. So we have become a series player in this market, but still have a very small share with huge scope for further growth.The Kesko acquisition has given us clearly the shape in the St. Pete hypermarket segment, but we still see potential for more stores in that region. We also improved our position in the 15 cities with population over a million. These cities have been a key focus for our new store expansion since our IPO. For the first time, we became market leader in the hypermarket segment in the majority of those cities. We've doubled our supermarket footprint to 97 stores in 5 regions, but it's still a relatively small business. So we see the potential to double again in the next couple of years to become an important player in that segment as well. We believe that Lenta became Russia's #3 retailer during 2017. If not by full year sales, then certainly by quarter 4 sales. As a reminder, Lenta was a #7 player in 2012 and a #6 when we did our IPO in 2014. So we've moved 4 places up the ranking in just 5 years.Fourth point is acquisition's performance was excellent. Now the ex-Kesko stores continued ramping up very nicely, and the same-store sales growth was 39% in the last 3 weeks of December, compared to the same period in 2016, when the stores were already operating under the Lenta brand. The stores have performed ahead of the acquisition business plan and are now delivering sales per square meter above Lenta average, though still below the average for St Pete. So there is scope to grow further.All 14 ex-NASH hypermarkets in Moscow and the regions were reopened during the first part of November. We spent almost 3 months renovating the stores to ensure successful relaunch. We're very pleased with the initial results, both in Moscow, but also in the regional stores. The stores contributed almost 3% to Lenta's sales growth for the quarter and a 0.9% for the year, from a period of only about 6 weeks of operating in November and December. It was even better than we expected and the sales per square meter is already above the Lenta average.The acquisition of 22 owned supers from Holiday announced in November gives us immediate scale in Siberia. With regards to the supermarkets, this is the first acquisition we've made in this format, 6 of the stores opened in December and all 22 will be opening by the end of March. We finished the year with 15 supers in Siberia and this acquisition alone ensures that we'll have over 30 by the end of the first quarter 2018. A good progress in our opinion in just 13 months, since opening our first super in Novosibirsk.Our track record of successful acquisitions is growing. We've acquired stores every year for the last 5 years and have proven our ability both to execute transactions, and more important, to integrate them effectively and deliver the expected financial results. I've talked about acquisitions but would like to reiterate that our expansion strategy is unchanged. Organic expansion in both formats remains our core growth driver. However, the pressure on smaller retailers is growing, and we will continue to pursue both on acquisitions, opportunities selectively where the targets are a good fit, and we will be able to create value for shareholders.Fifth point, we see positive signs for 2018. January has started well with sales growth in line with the selling space growth for the first 3 full weeks in January. Like-for-like sales growth is in line with the fourth quarter of 2017. We also see some easing promo activity of the customers with promo sharing in January down significantly in comparison to the fourth quarter, albeit slightly higher on a year-to-year basis. Of course, January is not very representative and usually comes with a bit slower sales growth in December. It is too early to make any firm conclusions, but we are satisfied till now with the dynamics.Cannibalization stabilized in the fourth quarter 2017, and it will be significantly lower in 2018, primarily because of the ex-Kesko stores that entered the like-for-like panel in January. We expect deflationary effects will ease in the coming quarters. Deflation, as you know, eased in October, and has since then been easing. The momentum from our improvement initiatives will continue in 2018, and we expect the impact to grow as the year proceeds, potentially adding to growth or offsetting other pressures depending on how the market evolves. We expect some market improvements in 2018, but of course, we're not depending on this and will rely on our own measures foremost.Finally, the average interest rate on our debt is falling quite rapidly and will be close to 9% in the first quarter of 2018. We expect it will continue to fall to around 8% by the end of 2018. And this reduction in our cost of debt and average cost of capital is significant, both strategically and for evaluation. As a hypermarket's operator, our expansion is normally lastly through owned property rather than leasing. Currently, we own 76% of our selling space. So our total interest cost is much higher than lease cost. This makes us more sensitive to the cost of debt than to lease rates, which are currently stable or increasing. Falling interest rates, obviously, also help to offset increase in leased space as well as any increase in lease rates. By the way, if you look at our openings in 2017, then 54% of new selling space opened in 2006 -- 2017 was leased, which was unusually high for Lenta, because we leased the ex-NASH stores in addition to expanding more quickly in the supermarkets, which are mostly rented. As a result, leased selling space growth was 62% year-on-year versus a 24% in 2016. So the interest point is important, and so Jago will provide some more comments on this in a moment.Guidance. We plan to publish guidance on hypermarkets and supermarket openings as well as CapEx for 2018, with the full year 2017 financial results announcements scheduled for the mid of March 2018.So now I will turn the call to Jago, who will talk briefly about profitability trends and cost of debt.
Yes. Thank you very much, Jan, and thank you all for being on the call. As everybody well knows, our full year financials will be published on the 12th of March, and I will restrict my remarks to a few comments. It is too premature to talking detail about the financial results for 2017. We don't see anything material to reflect to the market.Looking at the management account, we see different trends in different lines of the P&L, but combined with the effect for the profitability looks more or less balanced. Jan just emphasized the falling cost of debt, and we are making indeed encouraging progress. Average cost of debt in Q4 '17 was around 9.7%, around 150 basis points reduction year-over-year. Total year average cost of debt was 10.3%. Based on the current Moscow update, we project a big fall actually in the first quarter of 2018 to 9.2%, which is 170 basis points improvement to previous year. And actually, we expect further large reductions during the rest of 2018. We will achieve this through a combination of refinancing at much lower rate, negotiating new rates under existing facilities with our lenders, and we also expect, of course, further falls in the market range. A key goal of our financing strategy is to bring our average lending cost much closer to the 7.5% interest rate at which we can currently borrow new fixed-rate money.As an example, we have 4 [ bolt ] issues totaling RUB 17 billion where coupon resets are due within the next 8 months. The first of this goal, for a total of RUB 5 billion will reset in a few days from a current rate of 12.5% -- 12.4%. So we expect to reduce the cost of this debt with around 500 basis points. This sort of activity will actually continue for rest of the year, and we expect it to be to an average rate of around 8.2% in the fourth quarter of 2018 and below 8% in 2019.And as Jan already expressed, this reduction in our cost of debt and average cost of capital is significant, both strategically and for evaluation. And as a hypermarket operator, that is mainly expanding through own property rather than leasing. And our interest cost is much higher than the lease cost. This makes us more sensitive to the cost of debt, which is currently falling rapidly then to this range, which is either stable or increasing.And then, Jan, I would like to give back to you for the closing remarks.
Yes. Thanks, Jago. Now as you are used from our call, I tend to end always with some closing remarks and that's what we do today as well. So all in all, we're encouraged by these intents and feel a bit more optimistic. The initiatives that we took to improve our offer have been recognized by our customers. Headwinds from deflation and cannibalization start to ease. We met our store opening targets, making good progress in Moscow and in the supermarket format. Our overall position in the sector improved significantly, and we believe we are now #3 food retailer in the country. And all in all, recent results make us confident that we are moving in the right direction with our initiatives, while, of course, we recognize that there is still a lot work to be done.Thank you for listening. And I think, we're ready for questions.
Lisa, thank you. We're ready for the Q&A session.
[Operator Instructions] We'll take our first question from Victoria Petrova with Crédit Suisse.
My first question would be related to the market dynamics. Around a year ago, Jan was talking about the end of the tunnel. Are you seeing any signs that the end of this dark tunnel is starting -- is seen somewhere? And what exactly is happening with promo activities? You obviously now indicate that decrease in promo sort of as a positive factor. Does it mean that you and potentially your competitors as well, it's more of a general market question, but also specifically, I mean, those are specifically in Lenta? Is your promo activity margin dilutive for you? Why it has been so high? What is happening with sort of nominal price from suppliers versus promotional price from suppliers? And is there any way -- as far as I understand it's in everyone's interest to sort of get rid of this massive share of promos. What can be done in the market? Who will be leading this process? And should this incrementally improve gross margin or not?
Yes, thanks, Vica. So the last question is pretty fundamental, and I'll give that, call it, my opinion. But let me first start with the market. What we see is, in certain regions in Russia, a gradual improvement. So if you look at Moscow, St. Pete slightly, some of the million towns in the regions, we get the feeling that, okay, the -- call it, the crisis is bottoming out. But there are also other regions as well where it is still tough. So that is something that we need to deal with, and I think that's part of the success of our last period that we've -- that we have been more flexible in how to deal with these different types of regions. So we believe that -- and like always, the improvements start at the capital, and then most likely that is going to filter into the rest of the country as well, and we believe that that's going to happen in the course of 2018. That's one. Another comment on the market is, the -- of course, the competitiveness of certain regions is currently also growing as part of our colleagues expanding fast, and it is noticeable. But with the experience that we have in the more mature markets, we see that we can deal with this. So also there, I think, we'll see some developments coming up. Then more on your promo activity question. Now by definition, the fourth quarter has always had the highest promotions activity in every year. So as seen in the fourth quarter, it is something actually quite logical. And like I mentioned in my explanation, we haven't seen an accelerated growth. We saw actually that the growth of the advertising share was similar to what we've seen in the previous months. So there is not, in this respect, an increase. If you then look more specific at January, we see a similar development for January year-on-year, with a slight increase, but that's not really coming from our activities, it is more that the consumer is oriented like this. And one of the things what I also think has helped, with the customer data that we have, we have, I think, strongly improved our communication to consumers. We are more able to reach them with all kind of digital techniques than what we did before. And that, of course, also helps to make people more sensitive to the promos. It's not that we have deeper promos or more promos, it's simply a matter of communication. Now more fundamental is the last part of your question. What do I think of this whole mechanics? Now I think none of the colleagues or none of the retailers is actually happy with the current situation. For the simple reason that it is complicated, it requires different accounting and also your reaction can be, it needs a bit of time. So on top, if you see that our share in categories, basically in the cosmetics, detergents, where certain suppliers have actually a promo share of over 80%, which actually means that they maintained a wrong price in the markets. And I think those suppliers could actually start by realizing that it does not make sense to go back to the original price, it may be is a better thing to just come up with a general price reduction and be less favorable to the retailers to give them opportunities to promote. That would make it easier, that would be more effective, and in the end, you get also the -- a more normalized situation. As retailers, it is difficult to dictate this. I think all of us, retailers, have the same discussions with the suppliers, but, yes, the suppliers should give in. He should understand that it doesn't make sense to run around with an advertising share that's beyond 80%, and it's better to cut his normal price by 10%, 15% and maintain that price positioning and be less aggressive in promo. Is that -- Vica, is that answering your questions?
The margin -- yes, and was the margin -- is this promo share margin dilutive for retailers or not? Who is paying for this promo? Where is the retailer?
Yes. I tend to say both. But in principle, the mechanic currently is that you -- if you want to do a promotion, you ask for a discount on invoice. And that discount of invoice is then translated into a different offer price to the consumer. So not all promotions are margin dilutive. But sometimes, the -- you do impulsive actions or -- and then -- but that was always the case, it was the year before as well, then you pay yourself.
So Vica, the last point is that, it's not only about the share of promo, the figure itself, it's also about the quality of promotions.
Our next question comes from Maryia Berasneva with Morgan Stanley.
A couple from me, if I may. Firstly, I would like to ask about -- I would like to ask for some color on the drivers of the like-for-like trends in supermarkets. Now I can say that the basket growth slowdown could be explained by lower inflation. But could you give us a couple of pointers as to why traffic growth decelerated and turned negative? That would be very helpful.
Okay. So there are -- now there are several reasons for that. Some of them are just technicals, just 1 store ended like-for-like panel in the quarter 4, and the same we had in the late third quarter, while this number was much higher in the previous quarter, so there was no support from matured stores. Second point is, actually we've seen some seasonal effect as well when -- in the fourth quarter when customers clearly are focused more on shopping in bigger formats during the previous season. And in general, I would say, the general competitive environment in the smaller formats remains stronger. And we're just reviewing our marketing and promo strategy at the moment in supermarkets as some of the technical changes did not really work out as we had hoped. So we're -- we think we have quite a good view on what should be done there.
Could you give us a couple of examples, if you don't mind sharing?
I think we should -- like we've seen what we've done in the hyper, and I feel that we should put in a bit more private label and dedicated private label to differentiate. I think direct imports, which we have done for the hypers, we should also try to boost a bit more into the supers in order to create a bit more margins as well. And then the assortment range in the supermarkets, what we've seen in the customer data is actually that the supermarkets relatively attract more premium customers, and I think we should fill that gap as well.
Okay, that's helpful. My second question is on private label. On the private label, what was the -- what is your current share of sales that comes from private label for the hypermarkets? For example, on the group overall. And would you characterize your -- overall your private label as margin accretive? And if you could share some targets for the future on where you would like the private label penetration to go? That would be helpful.
Maryia, let me just give you a couple of figures, and then Jan and Jago can add on this. I think based on 2017 results, private label share as a percent of total sales has not increased a lot. It's fluctuating between 12% and 14%, depending on the quarter. And most of it comes from middle of the range or premium private labels and the development we've seen is that increase is coming from these parts. While we mentioned, we are entering -- we are introducing a lot of new private labels in the middle of the range and relaunching some premium private labels, increasing the assortment by almost 30% in private labels and the next step is to do more in non-food by the way, while currently, we're -- where we were focused more on dry food. And as I understand, the margins in the private label have improved significantly on the -- over the course of the last 2 years. But I will pass now to Jago to add something on that.
Now maybe I can explain a bit more then what we're doing in the private label. So the -- as you know, Maryia, we had -- we have 365 private label, we've got a Lenta brand, and we have the Dolce Albero premium. Besides this, we also have direct imports, the European-produced B4, B5 assortment. But we do not consider to be private label, but it's a unique assortment only in Lenta. Now looking at the dynamics, what we have seen and that's partly due to the problem I described earlier in the question of Vica. If as an example, Coca-Cola comes down with its Coca-Cola price with 40%, what is then the difference between your Lenta private label and the price of Coca-Cola? That becomes then very little. And what we even have seen -- that we've seen people that were buying 365 were moving into branded articles on promo. Now what we have seen though is if you create unique assortment, the Dolce Albero as an example, does not have that problem. And there -- I think that's where we've seen growth at the cost of the lower-range private label. And that's also one of the things the A branch should realize that if they do not have a different view to pricing, they get more and more hit by private label development. So we will be stepping into further development of private label. Our plan looking forward is that we actually also want to introduce private label into fruit and veg. As one of the things I've mentioned in an earlier call is, we've established quite a strong network of Russian farmers that grow only for us. And we do quality control, we do seed control, we do the whole growing process control. So we also feel that, that is part of our private label portfolio, so that will -- we will also add. And then our ambition is to grow from a 12%, 14% into a 14%, 16% range. But you will also understand that this is -- this on the total volume that we currently already do, is quite a big growth of the private label in itself.
Yes, and let me add to that. Looking at the margins of private label, I had -- I think the last 7 years always the mantra in Russia, you earn less on private label. But at this moment, I have to change my mantra, because actually since this year, thanks to the efforts of our sourcing team, the margins on private label are higher than for branded goods.
Okay, that's helpful. And just I don't know if you can kind of share any numbers or metrics with us. But when you think about M&A, what kind of EBITDA or EBITDA sales are you thinking when you kind of look at the deal -- at the deals? Or maybe you could share the estimates based on those you've already executed? And how would you think about it going forward? Just to give us some flavor around the multiples and the transactions that you are doing?
Our transactions are only as deals, so no multiples. Now we just look at stores as assets, rent or buy, and then we put our projections on it. That's all.
And then we, in the end, want to earn similar in terms as on organic growth.
Yes.
So you effectively look at it as if you were to build that store and you compare how much it would cost you? And if it's comparable, then you would go for this type of transaction?
Well, correct. Replacement value.
We'll take our next question from Ulyana Lenvalskaya with UBS.
The first question will be on your statement about revenue growth exceeding selling space? Would it be fair to assume that this trend should be sustainable into 2018 as well?
Yes. We -- yes, and that would be fair to assume, yes.
Ulyana, you understand that we've passed the peak of the young store base, and our store network becomes older. You remember in our presentation, as we always show this fleet of our selling space by age, and you can check and understand that the trend has changed.
So the business model matures. That's clear. Secondly, just as a quick follow-up on Vica's question, can you provide the percentage of promo shares in revenue now?
No. Ulyana, unfortunately, we don't provide the precise numbers.
And I mean, I think that's also competitive, sensitive. I don't want to share that number.
Jan, that's fine, that's fine. And maybe a tricky question from me. When you...
Another one?
When you -- I think, yes. When you think about 2018, what food inflation you assume in your forecast internally? And there was a statement by CEDAR recently that food inflation might further slow. Is that a trend you see at the end of stores?
Yes, let me try to deal with that. I think we also have not given any exact details of our on-shelf inflation, so we expect it to ease significantly over the next half year. That is what we expect. For your understanding, what you see as food inflation by Rostov, I think, does not properly reflect food inflation in Russia because it simply does not take into account promo. And I think from our discussion, you understood that this year actually we had no on-shelf price inflation, but a deflation.
So that means actually if it slows down -- and inflation slows down, we still see a small increase of prices in certain categories.
And perhaps, Ulyana, you noted in our comment in the beginning of the call in Jan's remarks that in October deflation on our shelf has peaked and since then it started easing. So this is the trend we see. Quarter-on-quarter, it was almost flat. I mean, fourth quarter versus the third quarter.
Yes. I was more kind of curious about 2018. But, yes, so it's still deflation assumption for now.
Much easier than what we had...
It's easing, but -- yes.
In 2018, yes. And -- yes, yes.
We'll take our next question from Brady Martin with Citi.
First question is, wondering whether you can give a -- some kind of underlying growth numbers without the Kesko stores? I mean, if I recall correctly, you were consolidating Kesko like towards the end of Q4 last year. So there was clearly some kind of timing impact, which helped your -- this dynamic between sales and space growth. So I don't know if you can give a number without Kesko what was the growth rate. And the second question is, I mean, I heard in your initial remarks that in Q1 you were seeing space and sales growth relatively in line and when -- with Ulyana's question, you said you thought this is going to be sustainable. You could see space growth or sales growth higher than space growth throughout the year. I'm just wondering why you would think that? I mean, we're -- if we assume that you're still going to open stores, you'll still have organic expansion, and we'll -- we're still seeing deflation, I would be surprised -- and we're just surprised to hear you think that this will -- the sales growth will exceed the space growth in the -- towards the beginning of the year even. So if you could just comment on that.
Brady, I will give you the -- some remarks, and then Jago and Jan can add on this. Speaking about Kesko, there is actually no need to provide specific sales growth numbers for the full year of 2017 scraping out Kesko, because Kesko stores have entered like-for-like panel on 7th of January. And for the full fourth quarter, they have not been including in the like-for-like panel. So there was no contribution from Kesko stores to the like-for-like sales growth in the fourth quarter. The first contribution, we're getting only in January this year.
Actually, the correction is the 1st of January.
Right. Actually -- but I wasn't actually thinking about the like-for-like, I was thinking that in Q4 as a fact that -- yes, I mean, Q4 total sales growth of 23% versus the 20% space growth, which is -- it's the first time since 2015. But I mean, obviously, part of that was the timing of Kesko what was included in 2017 versus 2016. That's why I'm just wondering is there -- if you strip those out then without the Kesko stores did you also see, for the rest of the chain, higher sales growth than space growth without Kesko?
That is the case. So we made an example with Moscow, where sales growth in the fourth quarter increased more than 70%, including December around 100%.
And then the second part of the question, really I think that was already answered by -- unless we haven't understood the question.
No, the second part of the question was about -- was, yes, why -- what's underlying, Jan, just the maturity, as I said, I mean -- because we are going to continue to open stores and you're talking about deflation. These are two things that normally would lead to -- would pressure this relationship between space and sales. But you think your maturing of the stores is enough to overcome it?
Yes, just as a comparison, the 50 new store openings that we did in 2016 was on a weight of the 37 other stores. So the 40 now is on a weight of 190 store now. So that maturity level is -- the impact of new meters on the total is declining. But on the other -- just to turn it around, the maturity development is increasing.
And speaking about the ticket growth, yes, we had deflation in the third quarter and in the fourth quarter, in both quarters, which was actually flat quarter-on-quarter. But why ticket growth increased in the fourth quarter versus the third one is that because we had much stronger growth of average number of articles in the basket and still extremely stronger product mix, average price per article. So if inflation starts easing -- deflation, sorry, but trading up and the volume growth continues, then the pressure on the ticket growth is -- will be easing as well.
Okay, understood. And just if I may, one follow-up question on another topic. The -- we understand that some of the government wages were increased at the beginning of January. I know it's very early in the month, so I got 3 weeks. I mean, this -- are you seeing any impact on either sales or any -- do you expect some pressure on salaries as a result of this? Or is it just too early to tell?
Now what we've seen in the last year, if you look at the rough start, it's actually the disposable income has all been gone despite some salary increase. But it looks like that tariffs and costs are actually absorbing this increase. And it's too early to give something away on January. But we normally look at the rough start numbers there.
Our next question comes from Elena Jouronova with JPMorgan.
I have 3 small questions. First of all, can you please tell us something on your Lenta Pro project? How much the revenue from Lenta Pro increased in Q4? And is this becoming a noticeable business in your overall sales? That's the first question.
Now we -- what we did last year is we -- so Lenta Pro, just for those that are not aware, is simply a program on the card for certain customers that we see have got individual consumption behavior. So we've provided them with a Lenta Pro card, and there is a progressive scale of discount. And actually just to be quite honest, over the year, which is obvious, as we have rolled it out throughout the country, the Lenta Pro has had a positive dynamic and has absolutely contributed to the development of our like-for-like, but it had already a positive development in the first half year as well. So the improvements that you've seen, as of the third quarter, are actually not coming from the Lenta Pro in itself. The number, I don't know.
It is not material.
Okay.
It's also -- one of the things that I would like to add is that what we actually did in the fourth quarter of this year is that we started introducing a professional private label for especially those customers.
[ Bonvida ]
So now I understand why Metro saw a 9% drop in like-for-like sales in Russia because you guys are doing well in your Lenta Pro. That was not a question. Those were just my comments, sorry. So the second question is coming back to promotion. So Jan, you explained to us that you can have a promo which is financed by supplier and you can have an import promo and also the depths of promo can be very different. So we're all just trying to figure out the dynamics of your gross margin. We haven't seen it for Q3. We have no clue what's it like for Q4, but the market is trying to get as much knowledge as they can. Can you comment at all, if your depths of promo in Q4 had been stronger than Q3 or in general first half? And if you had to do more of the import promos than usually to get the like-for-like best results?
Yes. The -- let me get -- first, let me react on your Metro comment because we have not been out there selecting new customers. You should realize that those customers were already present in our base. We only incentified them more to buy more. So the Metro reason, you should somehow look for somewhere else. The second one is, like I said before, the -- there has been an increase of promo share, third quarter, fourth quarter. But if you look third quarter 2016/2017 and fourth quarter 2016/2017, actually the growth is similar. So the majority of that growth is coming from more tailored approach in customers. I also think that we've been more -- due to more customer insight, more, I would say, demand driven in defining which are that we put on promotion. So I think the selection of promo has also been better and those were to simply a higher share. But their process was already ongoing as of June 2017. Now if you remember that after the second quarter, we were commenting that June was actually the first time that we were plus again. And I think that was related to the way we do the communication and the way we select the ads, with the help of customer insight. So we -- so if you look at how the commercial team plans this, Elena, then they can pretty accurately tell you if we do this price to this group of audience then we expect this amount of sales.
And can you disclose to us what was the gross margin of Lenta or even a year-on-year dynamic in June stand-alone when you started -- when you became more demand-driven in terms of promo?
Elena, we can, but on the 12th of March.
Well, it's June, right? It's already included in the first half.
And we'll be happy to do so.
That's always good than the first half. Okay. And my final question would be on your Slide 8 in the presentation. So interesting slide was the digital initiatives that Lenta is planning. I was just wondering if anything has already been implemented of all the ideas that you listed there? And if it has anyhow contributed to positive Q4? And generally, if you have any comments to make on this online digitalization, how important that will become? I think it could -- it would be interesting to know.
Now like we presented here in -- on Page 8, we strongly believe in this. And the -- some of the initiatives have already been -- are already active in sales -- like sales scanning. The robots are in the promo robots. The Instamart and Igooods we're actually actively working with. But the plan is to pick up all those initiatives and at least by -- the majority by half of the year should start to become active. The pilots are in place, so all the initiatives that you see are currently in operation.
Our next question comes from Pierre Safa with Silver River Capital.
Just a follow-up on a comment you had made in the past. I was hoping to clarify, if possible. You explained the trade law that passed by the Russian government, actually was increasing the promotional environment in Russia. So I was just hoping to, I guess, double-click on that and understand how that goes to -- how that translates into an increased promo environment?
It's a bit too far, maybe I've been a bit lost. But I would not blame the trade law for a higher promo share, there's also competition. But the mechanism of the trade law incentivizes retailers to look for promo in order to attract consumers. But where in the past, there was a different set of compensations. Now we need to go to the supplier, who, after a year of high inflation, has not come back and have exchange rate differences. Not all of them have come back to a normalized situation with regards to dollar-ruble relation. So for us, to get an attractive price, we need to agree upon a promo period, and then the promo discount, and then we can lower our prices. So in a price aggressive environment, they start focusing more and more on promo in itself, which, I think -- that's the first reaction. I think, over time, that will correct itself again. As we believe that also price is not the only instrument that we have to offer. We also now are going on our private label, and so differentiation should also be a way of attracting customers.
Okay. Thank you, operator. And we -- with that, we would like to finish the call and remind everyone that next time we will talk to you on 12th of March, when we disclose full year financial results. Thank you, everyone, for listening.
Thank you.
Yes, bye-bye.
Thank you, bye.
And that concludes today's presentation. Thank you for your participation. And you may now disconnect.