grupo pão de açúcar annual report...

Grupo Pão de AçúcarAnnual Report 2006

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Credits

GENERAL COORDINATIONInvestor Relations Instituto Pão de Açúcar

TEXTSSilvia Martinelli (Mtb 39.545/SP)

GRAPHIC PROJECT AND DESKTOP PUBLISHING TheMediaGroup

PHOTOSGrupo Pão de Açúcar’s Assets: page 06, 41, 43 and 44Daniel Renault: page 13, 16, 19, 23, 25, 26, 31, 33 and 50Daniel Rosa: page 10 (Cássio Casseb Lima),page 11 (Maria Aparecida Fonseca) 12, 15, 20, 22, 37,39, 46, 47, 53, 54, 57, 58, 60, 61 and 68Maurício Simonetti: page 10 and 11 (executive directors)

PRINTINGRWA Gráfi ca

PRESENTATIONCorporate profi le 01Mission, Vision, Pillars 02Operating, Financial and Sustainability Highlights 04

COMMITMENTMessage from Management 06Board of Executive Offi cers 10

STRATEGYStrategic focus 2006 14Investments 18Goals 2007 19Strategic planning 2010 21

RESULTSSales Performance 24Operating Performance 28Financial Performance (MD&A) 34Social Performance 38Environmental Performance 42

DIFFERENTIALSOperating 48Socioenvironmental 54Acknowledgement 56People Management 57

TRANSPARENCY Corporate Governance 62Our shares as an investment 64Risk Management 67

General Remissive Index – GRI 69Corporate Information 71

Financial Statements 2006 attachment

ANNUAL REPORT 2006

The information in this Report is presented in an objective and direct manner, to provide a thorough view of the main results and projects developed by Grupo Pão de Açúcar during the fi scal year of 2006. For further details please refer to online annual report 2006, available in the website (www.cbd-ri.com.br/relatorioanual2006).


With a 13.3% market share and R$16.5 billion total sales, Grupo Pão de Açúcar is one of Brazil’s largest food retailers. Due to the characteristics of the business and its capillarity – there are 549 stores spread around 14 states from the Southern, Southeastern, Midwestern and Northeastern Regions and Distrito Federal, which add up to 1.2 million square meters of sales area –, the Group is present in the lives of many communities.

PRESENTATIONProfi le

To ensure the supply at the stores, the Company banks on a diversifi ed logistic infrastructure, with 85% centralization and 19 distribution centers located strategically in seven states. Another noteworthy feature is the positioning and segmentation of the brand, composed of a multiformat structure (balance of share between supermarkets and hypermarkets), with stores in the main markets of the country. In 2006, this share was diversifi ed with penetration in the convenience retail segment, by means of the Extra Perto brand.

The strategy of Grupo Pão de Açúcar is geared toward the pursuit of gains of effi ciency, which allow it to operate with lower expenses and greater competitiveness. Listed on the São Paulo Stock Exchange (Bovespa) since 1995, and on the New York Stock Exchange since 1997 (ADR level III), the Company became part of the group of listed companies that adhered to the new IGC – Special Corporate Governance Share Index – level 1, which includes companies with special Corporate Governance actions; and was also included in the IBX-50 index, which includes the 50 companies with the highest liquidity on Bovespa; in 2006, the Company was added on Ibovespa, Brazil’s most important average pricing performance indicator.

Support to public policies of a social nature, incentive to sports and cultural practices, encouragement of ethical and solidary commerce and of conscientious consumption are also initiatives present in the Group’s DNA and shared with the 63.6 thousand collaborators, which make the Company the largest private employer from the Brazilian retail segment.

02 Grupo Pão de Açúcar

Mission To ensure the best shopping experience for all our

customers, at each one of our stores.

VisionGrupo Pão de Açúcar desires to expand its market

share in the Brazilian retail market and to become the most admired company due to its profi tability, innovation, effi ciency, social responsibility and contribution toward the nation’s development.

PillarsCustomer: our reason for being

Grupo Pão de Açúcar is geared toward its customers, making sure that each contact with its brands corresponds to a best experience and serves to build a long-term relationship of loyalty.

Our PeoplePeople provided with better technical skills relative

to the market average, well trained and motivated to face challenges, take risks and show innovating attitudes. People who are fond of serving, who value respect in their relationship with customers, suppliers and partners, with an enthusiastic approach, regardless of the circumstances.

Command of technology Attention to everything that goes on in the world,

assessing its usefulness and its return for our business, to take full advantage of these available technologies.

Solid capital structureA capital structure that allows investments in our

Company, in our people and in our country, operating effi ciently to bring return to shareholders and long-term sustainable growth.

Concept Share in turnover

Neighborhood supermarket with a focus on consumers from the A and B income groups, offering the best food service, product quality and variety.

22.1%

CompreBem/Sendas is targeted at the working woman, helping her facing a big challenge: buying everything her family needs on a tighter budget.

16.4%

8.1%

Hypermarket of the Brazilian family, which offers differentiated customer care and services, a modern and pleasant environment, a broad range of food and non-food products at competitive prices.

51.2%

Specialized in electroelectronic products, the Extra/Eletro stores also sell furniture and homeware items, focusing especially on the excellence of services delivered to consumers.

2.2%

Proximity store that offers a pleasant and convenient shopping experience, with essential products and services and a very clear price-quality perception for consumers.

—

03Annual Report 2006

December 2006 Pão de Açúcar Extra Extra Eletro CompreBem Sendas Extra Perto CBDSão Paulo 97 44 50 172 4 367Rio de Janeiro 9 17 14 62 102Ceará 19 2 21Brasília 15 5 20Pernambuco 10 2 12Paraná 4 2 6Paraíba 4 4Piauí 4 4Bahia 3 3Minas Gerais 3 3Goiás 2 1 3Mato Grosso do Sul 1 1Rio Grande do Norte 1 1Sergipe 1 1Alagoas 1 1Total Stores 164 83 50 186 62 4 549Sales Area (m2) 221,383 629,091 33,713 225,829 107,355 613 1,217,984

4

4

3

1

11

97 45044 172

9 14 6217

10 2

42

515

2 1

13

São PauloRio de Janeiro

Minas Gerais

BahiaSergipe

AlagoasPernambuco

ParaíbaRio Grande do Norte

Piau

í

Paraná

Mato Grosso do Sul

Goiás

Brasília

19 2 Ceará

Operating and Financial Highlights Income (millions of R$) 2002 2003 2004 2005 2006*Gross sales 11,154 12,788 15,297 16,121 16,460Net sales 9,455 10,806 12,565 13,413 13,880Cost of Sales (6,809) (7,764) (8,891) (9,438) (9,908)Gross Income 2,645 3,042 3,673 3,975 3,972Ebitda (1) 781 902 1,044 1,170 1,083Net Income 245 226 370 257 220Margins (%)Gross Margin 28.0 28.2 29.2 29.6 28.6Ebitda Margin 8.3 8.3 8.3 8.7 7.8Net Margin 2.6 2.1 2.9 1.9 1.6Productivity Ratios Gross sales per m2/month (R$) 1,007 1,105 1,143 1,142 1,147Gross sales per employee/month (R$) 16,907 22,874 25,057 25,379 26,587Gross sales per check-out/month (R$) 125,677 138,013 146,801 150,532 151,186Average Ticket (R$) 29.4 29.0 30.5 31.1 32.1Financial indicators (thousands of R$)Total assets 9,188 8,940 10,423 10,923 11,672Shareholders’ equity 3,592 3,768 4,050 4,252 4,842Capital Expenditures 1,096 571 561 889 857Gross Debt 2,925 2,480 2,721 2,056 1,978Net Debt (2) 702 894 926 (26) 318Net Debt /Shareholders' Equity (%) 49.8 39.8 35.0 8.7 14.4Number of Employees 57,898 55,557 63,484 62,803 63,607Market indicatorsNumber of shares (thousand) 113,186,139 113,442,239 113,522,239 113,667,915 113,771,378Net income per share (R$/thousand shares) 2.17 1.99 3.26 2.26 1.93Market cap (thousand of R$) (3) 6,168,645 7,986,334 7,798,978 8,741,063 8,529,440Dividends (thousand of R$) 59,441 54,792 84,059 62,053 20,312* Pro forma results (for further details, please refer to page 34).(1) Earnings before Interests, Taxes, Depreciation and Amortization.(2) Gross Debt – Cash – Receivables.(3) Preferred shares’ price in the end of period multiplied by total shares.

Gross Sales per Business Unit (%)ExtraPão de AçúcarCompreBemSendasExtra Eletro 51.2%

22.1%

16.4%

8.1% 2.2%


Ebitda (R$ million) andEbitda Margin (%)

781

1,0831,1

70

1,044

902

_03 _04 _05 _06*_02

8.3% 8.3% 8.3% 8.7% 7.8%

Net Sales (R$ million)

9,45

5

_02

13,8

80

_06

13,4

13

_05

12,56

5

_04

10,8

06

_03

Gross Sales (R$ million)11,

154

_02

16,4

60

_06

16,12

1

_05

15,29

7

_04

12,78

8

_03

Gross Sales per Employee (R$)

16,9

07

26,58

7

25,37

9

_05

25,0

57

22,8

74

_03 _04 _06_02

Number of Employees

57,8

98

63,6

07

62,8

03

_05

63,4

84

55,55

7

_03 _04 _06_02

Net Income (R$ million)and Net Margin (%)

245

22025

7

370

226

_03 _04 _05 _06*_02

2.6% 2.1% 2.9% 1.9% 1.6%

Added Value (R$ million)

2,535 3,0

653,286

_05

3,068

3,209

_03 _04 _06_02

Market Capitalization (R$ million)

6.2

8.58.7

_05

7.88.0

_03 _04 _06_02

Gross Sales per m2/month

1,007 1,1

47

1,142

_05

1,143

1,105

_03 _04 _06_02

05

* Pro forma

Annual Report 2006

06

One of the period’s highlights was the Group’s restructuring, which included the creation and consolidation of a professional structure that will support and lead to the higher growth we plan to achieve over the next years. We have made important changes in our Executive Board, which will be essential to the achievement of our goals, thus resulting in higher profi tability and return”.

COMMITMENTMessage from Management

2006 was a year of important adjustments for Grupo Pão de Açúcar. Despite strong defl ation in some food products categories, we maintained our strategy to achieve increased competitiveness and reduction of expenses. These two features are crucial to support our market share recovery and to trigger a virtuous cycle.

One of the highlights for the period was the Company’s restructuring process, shaping and consolidating a professional base to support and drive the accelerated growth expected for coming years. We have promoted important changes in our executive board, which will be essential to reach our goals, and, consequently, greater profi tability and returns. We now have a marketing executive offi cer, who consistently guides and directs the actions in all our banners. Additionally, the Commercial area was divided into

Abilio Diniz Chairman of the Board

Grupo Pão de Açúcar

07

two different departments – Food products and Non-food products – to promote specifi c strategies according to the profi le and demand of each of these segments, and, as a result, boost our sales.

We also changed our stock option program to a more aggressive one, to ensure the alignment with the goals of strategic planning, resulting in a stronger commitment of the management to the Company’s results and to the value of shares in the market. Now, the performance of 110 executives awarded with the plan will be closely linked to performance indexes, and to the Return on Invested Capital (ROIC). In practice, we reshaped both the executive’s bonus and stock options related to that bonus, pursuant to the accomplishment of the established targets, turning the compensation package a more aggressive one when compared to the market. Now, the possibility of stock option gains is 100% of the annual bonus. Prior to the review, the amount of stock options an executive received was, on average, only 6% of the annual bonus.

At the year-end, the Group opened 21 new stores – including 4 Extra Perto units (8 stores in the beginning of 2007), which represented our entry in the convenience retail segment, the fastest-growing store format in the country according to the Nielsen research institute. This will give us a greater fl exibility to expand our reach to a public diverse from the ones we have already reached through the conventional formats. The expansion of stores based on this new format will be defi ned as we reach positive results, confi rming the underlined plan. On the top of that, we expect to open 10 new hypermarkets and 20 supermarkets for 2007.

Annual Report 2006

Even facing a sales scenario which gave little room to expenses dilution, we took some important steps forward to increase the investment in price competitiveness, a fundamental move to gain market share. We achieved important reductions in operating expenses, which totaled approximately R$120 million in the year. That reduction was essential to improve the competitiveness of the Company as it became better suited for each micro-market in which the stores are located, and led to an improvement in our image, an increase in customer traffi c and a recovery in food products sales in the ‘same store’ concept.

Another focus in 2006 was the development of a long-term strategic planning, allowing us to match the short-term strategies to in-depth planning for the next four years, up to 2010. One of the established targets is to reach a signifi cant sales growth for the coming years, reaching a gross sales level, in real terms, of R$25 billion by 2010, considering the opening of 150 new stores from 2006 to 2010. Cost reduction, a main focus in 2006, will continue. For 2007, our goal for expenses over net sales is 20%.

Our expectation is that the foundation laid now will continue to yield even better results in the coming years. We also expect a signifi cant increase in non-food product sales as a percentage of total sales, due to several ongoing initiatives in that area. One of them is the consolidation of category management process, with the development of “Soluções” (Solutions) concept, which tries to understand the consumer’s shopping behavior by displaying together products from different categories related to each other by a common theme (‘Home World’, ‘Digital World’, ‘Entertainment World’, ‘Baby World’ etc). Additionally, we are strengthening sales through e-commerce, and expanding global sourcing and imports, which should increase the assortment of products.

Throughout the year, we worked as well in other important fronts of our business. We strengthened the relationship with our main partner, the French group Casino, aiming at sharing best practices that may be adapted to our reality, such as convenience stores, which led to the Extra Perto project. We also shared experiences and explored synergies in international trading and non-food areas.


Aiming at ensuring transparency to all our stakeholders, we have been working intensely to meet the requirements of the Sarbanes-Oxley Act (SOX), by creating new controls and adapting our processes. In light of all initiatives we have developed – the creation of the SOX committee, the SOX Agent in the stores, Group 404 (comprised of specialists), and the communication process that will be intensifi ed in 2007 – we are confi dent to say that this issue is no longer just a project, but a sustainable theme for the Group.

Another important initiative related to the Group’s strategic goals is the new level we have established for ROIC (Return on Invested Capital), which should increase from 10% to 15% by 2010. In 2006, our ROIC was 10% and our goal in 2007 is to reach, at least, 11%.

We can say that 2006 was a year of expenses adjustments and strengthened competitiveness, whereas 2007 will be the year of sales. To achieve our main goal – increase sales – we will promote a campaign based on awards and incentives, primarily in the stores, aiming at involving and motivating employees to reach their sales targets, with the participation of the entire Company. At the same time, in order to support the technical and consistent decision making, we will

also invest in the modernization of our management systems, adopting tools that will allow us to deepen our knowledge about consumers (Database Mining), measure media return, and analyze price elasticity, which will strengthen our competitiveness.

All these initiatives lead us to believe even more in our mission: ensure the best shopping experience for all of our clients in each of our stores. We intend to be the best shopping alternative for consumers and the best investment for our shareholders, reinforcing our commitment to social responsibility and the importance of our contribution to the country’s development.

09

Market

share Throughout the year, important advances allowed the Group to strengthen price competitiveness, which in turn is critical to market share gains.

Annual Report 2006

Executive Offi cers

In 2006, we reconciled the short andlong-term. We developed profound and serious strategic planning for future years and the cost cutting, which was the focal point of the period, will continue.”


Cássio Casseb Lima Chief Executive Offi cer

Caio MattarInvestments and Construction

“We are working to reduce store construction costs and to attain more productivity, to thus ensure that the Group’s expansion plan is fulfi lled.”

José Roberto TambascoPão de Açúcar“The redefi nition process of discrepancies in prices, which were adapted to the micro markets, brought more competitiveness to the Pão de Açúcar stores. We will be consolidating a policy of more constant, regular and competitive prices.”

11

Claudia PagnanoMarketing“The integrated marketing concept will reinforce brand positioning, and will be oriented by the client’s needs, which must be refl ected in our store’s operation model.”

Enéas PestanaChief Financial Offi cer “The expense reduction process was implemented and consolidated during the year by means of the deployment of several initiatives and, particularly, the strengthening of a culture of lower expenses among the collaborators of the Group, in pursuit of greater effi ciency and competitiveness.”

Hugo BethlemExtra and CompreBem/Sendas“With the consolidation of CompreBem, the Company has a growth outlook for the next years. For Sendas, we expect to reach higher productivity levels, and for Extra, we will focus on the development of non-food items and on the increase in productivity.”

Maria Aparecida FonsecaHuman Resource “To promote the full development of our collaborators within every scope, we seek to create a working environment that supports individual and collective development, in a synergy with the business demands.”

Ramatis RodriguesFood Commercial “In our search for greater competitiveness, we have made price adjustments and started recovering our sales and client traffi c in our stores.”

Pedro JanotNon-Food Commercial“In 2007, we will seek to consolidate the category management process, strengthening e-commerce and expanding supply, with an emphasis on global sourcing.”

Annual Report 2006

“I think Pão de Açúcar’s great differential is customer service, since employees are very helpful. In addition, the quality of services and

products has won my preference.”

The strategic work and activity of Grupo Pão de Açúcar during the year was driven at the achievement of two essential aspects that will enable the Group to recover market share and to initiate a virtuous cycle: effi ciency and competitiveness.

STRATEGYStrategic focus 2006

The search for higher effi ciency through the implementation of a cost-cutting program, aimed at keeping in 2006 the same expense level in nominal terms posted in the previous year, excluding non-recurring expenses resulting from the restructuring, led to the adoption of some projects that already presented expressive results in the year.

Zero Based Budget (OBZ) – R$46 million Shared Services Center (CSC) and Purchase of non

saleable – R$45 million Maximum Effi ciency at Stores – R$16 million Other initiatives – R$15 million


15

With the development of these fi rst initiatives, the reductions of operating expenses came to a total R$120 million in the year, which allowed the Group to attain competitiveness that is satisfactory in relation to competitors and more appropriate in terms of the market. But the quest for effi ciency – which involves a very strong expense reduction process and better negotiations with suppliers

– will continue in the years to come, especially in the corporate area, where the expense reduction potential is still signifi cant. The Group expects to expound on the organizational structure analysis – commenced in 2006 and that resulted in the reduction of three to two hierarchical levels – to achieve a structure that is more appropriate for the Company’s processes.

The Balanced ScoreCard, or BSC, will be introduced in 2007 to ensure management monitoring and the tracking of strategic planning. This will permit the continuous evaluation of the performance indicators. These indicators will be important tools for keeping track of targets established in the strategic planning.

Annual Report 2006

An important step was the creation of a new position for a Marketing Executive Offi cer, which the objective of creating synergies between and among the banners and of capitalizing on these synergies in a more effective manner for the entire Organization. Based on this concept, the area assisted in the performance of actions developed during the year to increase competitiveness in all the banners, respecting the specifi c strategies of each business and enabling the Group to reach a new threshold of growth, established in the strategic planning.


COMPETITIVENESSThe results attained with the

expense reduction process allowed the Group to also start a series of initiatives geared toward the increase of competitiveness.

The reduction of price discrepancies in all the formats was one of the principal initiatives executed. To this end the Group created a pricing area, specialized in the analysis and monitoring of competitiveness which, besides affording a higher level of assertiveness in the strategy implementation, also permitted a better positioning of the banners before competitors.

A comprehensive assortment review was also organized for the elimination of slow-moving products that have a low level of relevance in sales. To attract and consolidate the image of prices among consumers, the Group adopted another strategic action, with a differentiated price policy in products that are more important to the formation of image to consumers, and positioning them below the market average. During the year, the promotional calendar was also reinforced with the performance of three major marketing actions in the Pão de Açúcar, Comprebem/Sendas and Extra banners, with the purpose of

increasing the fl ow of customers at the stores. Finally, perishable products were an important tool in pursuit of an increase in the fl ow of people at the stores.

The major differential of this strategy is that all the initiatives were adapted to the micro markets of the stores, which indisputably improved the Company’s competitiveness and made it possible to achieve gains of image, an increase of customer traffi c and the recovery of food sales in the ‘same stores’ concept, in spite of the defl ation experienced by the sector during the year.

Sales BreakdownCashCredit cardsFood vouchers Post-dated checksInstallment

_03 _04 _05 _06_02

2.0%8.0%

38.6%

49.5%

1.9%3.0%7.5%

37.1%

50.4%

2.0%3.2%7.1%

36.5%

52.0%

1.2%4.1%6.9%

33.8%

53.2%

2.0%4.8%6.5%

31.9%

53.7%

3.1%

Sales per SegmentGroceryPerishablesBazarElectronicsTextiles

43.9%

29.6%

10.1%

13.9%

2.5%

Sales per RegionSão PauloRio de JaneiroBrasíliaCearáBahiaMinas GeraisParanáPernambucoGoiásOutros

17

2.9%

19.5%

3.8%

1.9%

2.1%

1.3%

6.1%

0.9%

1.4%

60.1%

Annual Report 2006

In 2006, the Group invested R$857.2 million, a lower capex compared to R$888.5 million invested in 2005.

Capital ExpendituresInvestments were divided as follows:

R$261.4 million in the opening of new stores; R$182.6 million in the acquisition of strategic lands; R$292.4 million in the remodeling and

upgrading of its stores, in every banner; R$120.8 million in infrastructure

(technology, logistics and others).

The openings were more concentrated in the fourth quarter. The Group inaugurated a total 21 stores, with three Pão de Açúcar, nine Compre/Bem, fi ve Extra and Extra Perto units (convenience retail).

One of the highlights of the year were the partnerships developed with companies from other segments (real estate, construction retail) for joint use of the land of the stores, which permitted the dilution of land acquisition and construction costs, besides generating more traffi c to the store.

The quantity of gas stations at the stores was also bolstered with the opening of eight units, which raises the total number of stations distributed at all the banners of the Group to 55. At the same pace, 19 drugstores were opened in 2006.

Investments planned for 2007 add up to aroundR$1.0 billion and will be targeted as follows:

28% for the renovation and modernization of stores; 55% for opening stores and for the purchase of

strategic land to ensure the growth established in the Group’s growth strategy;

17% earmarked for infrastructure(technology, logistics and others).

R$857.2 million Of the total amount invested by Grupo Pão de Açúcar in 2006, a large portion was destined to stores’ remodeling and upgrading.


Capex in 2006Opening of new stores and land acquisitionsStore remodelingTechnology, logistics and others

51.8%

34.1%

14.1%

Goals 2007LEVERAGING OF SALES AND GREATER PROFITABILITY

Sales growth will be the major challenge for 2007. Maintenance of the levels of competitiveness attained, by banner, in 2006.

Consolidation of the reduction of expenses: rationalization and dilution of corporate expenses, increases of scale with advertising and logistics,and productivity gains with CSC – Central deServiços Compartilhados (Shared Services Unit), Purchase of Non Saleable Products, Maximum Effi ciency at Stores.

19

REINFORCEMENT IN NON-FOOD AND GLOBAL SOURCING Consolidation of the category management

process, with the creation of the Solutions concept (Home World, Offi ce World etc), which seeks to understand the form of shopping of consumers.

Enlargement of the assortment bolsteredby Global Sourcing.

Strengthening of ties with suppliers by meansof business development plans with mutualgrowth goals.

Annual Report 2006

PRIVATE LABEL AND GLOBAL SOURCING Consolidation of private label

as a tool to obtain the loyalty of customers and to build up business profi tability, respecting the positioning of the banners.

Private label should be act as a tool for strengthening the main assets of the Group, i.e., the banners.

ELECTRONIC COMMERCE Adoption of new systems, to

support the growth estimated for future years.

Expansion of the assortment and of the payment methods.

Strengthening of integrated services with the physical stores.

New communication strategy, with reinforcement in promotional actions in specifi c media of the sector.

VIRA RIO PROJECT Recovery of the Group’s results

in the State of Rio de Janeiro. Adoption of a decentralized

structure: operation will be focused on the region and not by banner.

More agility and autonomy for local decisions, with the consequent increase of negotiation power geared toward the maximization of profi tability.


ORGANIC GROWTH In line with the Group’s

organic growth strategy, 30 inaugurations are planned for 2007, comprised of fi ve Pão de Açúcar, fi fteen CompreBem and ten Extra stores.

To support this strategy and to pave the way for the inaugurations planned for the next four years, and subsequently, to ensure that the milestone of 150 store openings is reached, the Group structured a master plan of expansion, which defi ned, standardized and documented the processes involved in the opening of a store – from the search for and acquisition of land through to the inauguration.

One of the Group’s strategic challenges in 2006 was to make the immediatism of the retail segment compatible with a structured plan for future years, which resulted in the defi nition of Strategic Planning up to 2010. One of the most prominent targets set was signifi cant sales growth, with gross sales of R$25 billion (deducting infl ationary effects) at the end of the period and the increase of return on invested capital (ROIC), from 10% to 15%.

Strategicplanning 2010

Seven major guidelines were defi ned to attain these macro goals:

1 Strengthen the banners competitiveness.2 Increase electronic commerce sales to

4.5% of total sales in 2010.3 Expand the Non-Food share to 34% of gross sales.4 Double the share of private label from 5% to 10%. 5 Intensify organic growth with the opening of 150

stores from 2006-2010 (average growth of 7% per year of the sales area).

6 Intensify the pursuit of enhanced operating effi ciency.

7 Invest in the attraction and retention oftalents at the Group, in line with theHuman Resource guidelines.

21

R$25.0 billion By 2010, the Company expects to reach an impressive increase in gross sales, with a 10.0% to 15.0% ROIC.

Annual Report 2006

“Extra has everything I need: cold cuts, fruits, vegetables, fi sh and a good butchery. Apart from shopping, I get to fi nd many things in a

single place, and even enjoy a family ride.”

The gross sales of Grupo Pão de Açúcar exhibited growth of 2.1% in 2006, totaling R$16.5 billion. Net sales recorded an increase of 3.5% in relation to the prior year, attaining R$13.9 billion.

RESULTSSales Performance


Consolidated Gross Sales (R$ million)20052006Change (%)

3,864

3Q

3,915

1.3%

4,52

2

4Q

2.7%

4,64

4

16,12

1

2.1%

year

16,4

60

3,791

4.9%

2Q

3,977

3,943

-0.5%

1Q

3,925

In 2006, gross sales in the ‘same stores’ concept exhibited a slight decrease of 0.1%, while net sales recorded growth of 1.1%. This performance is the result of the impact of price defl ation on certain food product categories (particularly perishables and commodities) and also of the lower prices practiced by the Group for certain items.

25

Non-food products corresponded to 26.5% of the Group’s sales and the growth of this category in the ‘same stores’ concept was 12.6% in the year, out perfoming the negative performance of 3.9% of food products. The expressive performance exhibited by non-food is mainly a result of the performance of the electroelectronics category (with an emphasis on IT products), which continued to present signifi cant growth in the second half of the year, and of a more suitable product mix (improvements in the assortment) offered at the stores.

Annual Report 2006

Although the food defl ation had a negative impact on the sales performance in 2006, the Group expects sales in the ‘same stores’ concept in 2007 to attain growth above infl ation, on account of a more favorable scenario for food, supported by the competitiveness strategy and by the continuity of expressive growth in sales of non-food products.


26.5%Non-food products accounted for 26.5% of CBD’s total sales, due to the consumer electronics’ performance.

Pão de Açúcar 2002 2003 2004 2005 2006 Gross Sales (R$ million) 3,729 4,045 4,044 3,930 3,645 Net Sales (R$ million) 3,037 3,435 3,315 3,245 3,092 Number of Stores 211 208 196 185 164 Sales Area (m2) 267,419 273,016 261,262 247,164 221,383 CompreBem 2002 2003 2004 2005 2006 Gross Sales (R$ million) 1,767 2,248 2,426 2,614 2,692 Net Sales (R$ million) 1,658 1,921 2,015 2,194 2,279 Number of Stores 175 172 165 176 186 Sales Area (m2) 219,026 211,517 197,111 214,500 225,829 Sendas 2002 2003 2004 2005 2006 Gross Sales (R$ million) - - 1,155 1,387 1,339 Net Sales (R$ million) - - 998 1,209 1,174 Number of Stores - - 63 66 62 Sales Area (m2) - - 113,165 119,987 107,355 Extra 2002 2003 2004 2005 2006 Gross Sales (R$ million) 5,249 6,174 7,354 7,885 8,419 Net Sales (R$ million) 4,432 5,195 5,997 6,532 7,050 Number of Stores 60 62 72 79 83 Sales Area (m2) 456,569 462,195 537,319 590,890 629,091 Extra Eletro 2002 2003 2004 2005 2006 Gross Sales (R$ million) 409 321 318 305 365 Net Sales (R$ million) 327 255 240 233 286 Number of Stores 54 55 55 50 50 Sales Area (m2) 36,709 35,973 35,892 33,713 33,713 Extra Perto * 2002 2003 2004 2005 2006 Number of Stores - - - - 4 Sales Area (m2) - - - - 613 CBD 2002 2003 2004 2005 2006 Gross Sales (R$ million) 11,154 12,788 15,297 16,121 16,460 Net Sales (consolidated – R$ million) 9,454 10,806 12,565 13,413 13,880 Same-store sales growth (%) 4.0% 6.3% 5.1% 2.6% -0.1% Number of Stores 500 497 551 556 549 Sales Area (m2) 979,723 982,701 1,144,749 1,206,254 1,217,984 Number of Employees 57,898 55,557 63,484 62,803 63,607 Number of Transactions (thousand) 405,375 439,108 517,401 522,734 511,947 *Sales is included in Extra Hypermarket.



The Group closed 2006 with 21 new stores – including 4 new Extra Perto units, marking its entrance in the convenience retail sector.

Operating performance

PÃO DE AÇÚCAR In view of the defl ation observed in food – mainly

in the categories of agricultural commodities – the strong competition in certain region and the closings and conversions that occurred in 2006, the Pão de Açúcar banner closed the year 2006 with R$3.6 billion of gross sales, down 7.3% in relation to 2005. Even with this scenario, as from the 2nd half of 2006, the banner exhibited a reversal of this downward trend in sales.

One of the factors that contributed to this performance was the review process of discrepancies of prices, which were adapted to the micro markets of the stores. Moreover, the price reduction strategy (focused on items of high notability) and the price and assortment adaptations promoted in products from high-value added categories (such as wines, coffees, cheeses etc) also contributed to improve the consumer’s price perception. These initiatives, in line with the Group’s strategy, brought a little more increased competitiveness for the banner.

Another important action was the continuity of the expense reduction process, initiated in 2005 with the project for Maximum Effi ciency in Stores. In this case, the major challenge was to accomplish signifi cant reductions without forsaking quality in customer service, which is the banner’s differential.

Portfolio adaptation was organized in order to standardize the positioning of Pão de Açúcar stores, with 3 store openings, 42 renovations and 3 convertions to another banner. Two of the new stores – Alphaville and Náutico – were opened following a development of the 3rd generation concept with a differential for the new form of presentation of products to consumers: complete shopping solutions, gourmet area, sushi bar etc.

R$3.6 billion Pão de Açúcar’s gross sales started to recover in the second half of 2006.

Gross Sales – Pão de Açúcar (R$ million)

3,729

3,6453,9

30

4,04

4

4,04

5

_03 _04 _05 _06_02

29

Another initiative developed was the pilot, at six stores, of the new Programa Mais (More Program), a program designed to be self-sustainable, consolidating its position as the main instrument of brand loyalty and differentiation. The program was developed going from three basic assumptions: simplicity and fl exibility of operation, relevance to consumer and profi tability for the banner.

In 2007, the group expects to maintain a policy of more regular prices, with fewer oscillations to avoid substantial deviations, including in offerings; to extend the new Programa Mais (More Program) to the other stores; and to consolidate the ‘Jeito de Ser e Atender Pão de Açúcar’ (Style of Working and Serving) concept based on team formation work with an emphasis on differentiated customer service at the stores.

COMPREBEM For the CompreBem banner,

2006 was a year of growth and store openings. Gross sales amounted to R$2.7 billion, up 3.0% over 2005. A total of nine stores were opened, the highest number of inaugurations performed in a single year, since the brand was created.

It was also the year of consolidation of the Supermercado da Cidade (City Supermarket) model of store, which acts as a small hypermarket in regions that do not have this kind of establishment. In this format, the aim is to pursue the development of non-food sales, as a supplement to existing food sales. The new format has already been reinforced as an important operating model for the banner, with reduced costs and higher yields, due to the increase in sales of non-food products.

The slump in food sales recorded by the sector during the year was offset by the banner with investments in perishables (technical education and multiplication of training sessions for collaborators) and in non-food products (to leverage ‘same stores’ sales). Another initiative to this effect was the continuity of in&out actions

(non-food products of considerable consumption appeal, which are sold at very aggressive prices and with payment in installments), to boost the low price image and to encourage the sale of non-food items that are not part of the store’s mix.

The forecast for 2007 is for maintenance of the pace of growth of the banner, with organic expansion: the Group is planning to open 15 new stores, besides some renovations and adaptations. The work of expense reduction and control will also be continued to ensure more competitiveness and profi tability for the operation.

Gross Sales – CompreBem (R$ million)1,7

67

2,692

2,614

2,426

2,248

_03 _04 _05 _06_02

Annual Report 2006

SENDASTo resume the pace of growth

recorded in the previous year, the banner experienced a phase of considerable adjustment of expenses, the Group’s most signifi cant, and of pursuit of greater competitiveness. Sendas’ gross sales reached the end of the year totaling R$1.3 billion, down 3.5% in comparison with 2005. Although sales exhibited a negative result, performance in the ‘same stores’ concept have been recovering from the downtrend observed in the fi rst months of 2006.

The challenge of the period was to attain better productivity ratios in several aspects to offset and balance investments made in 2005 with the store relaunching.

In line with the Group’s strategy, the banner also felt the positive effects of price repositioning, both in sales and in brand image. This initiative, added to the work of economists – which reinforce the image of price to consumers – had a repercussion at Sendas with the start of important sales recovery.

At the end of 2006, to recover results in the State of Rio de Janeiro, Grupo Pão de Açúcar commenced the deployment of Vira Rio Project, created to guarantee the strength of CBD in an increasingly competitive district with very peculiar characteristics, by means of a new proposal of action, focused on the autonomy of the operation and nimbleness for decision making.

EXTRA HYPERMARKETS Pushed by expressive sales of

electroelectronic goods presented during the year, the banner recorded growth of 6.8% in relation to 2005, with gross sales of R$8.4 billion.

One of the highlights of 2006 was the consolidation of regions process and the opening of stores in new markets. Units were inaugurated in Jundiaí (São Paulo), with two stores in Recife (Pernambuco), Ceilândia (Distrito Federal) and São José dos Campos (São Paulo).


R$8.4 billion Extra Hipermercado’s gross sales were pushed by consumer electronics’ impressive performance.

Gross Sales – Sendas (R$ million)

1,155 1,3

391,387

_05 _06_04

In line with strategic planning, a new organization was promoted in non-food, based on the concept of shopping solutions for customers (Home World, Digital World, Entertainment World, Baby World etc), which assembles products from different categories that are related to the topic in the same space inside the store. The Group expects to understand the way consumers shop to meet up their expectations, facilitating the acquisition of certain products, which will be gathered in a single place. Three stores were opened with this new layout and another three stores already in place were adapted in 2006.

Extra also benefi ted from another strategy of the Group, which seeks the development of the homeware and textile categories, based on adaptations in the assortment, with an emphasis on international trade (global sourcing). The Group expects to promote the sustainable development of non-food, by combining various actions: logistics, which will perfect the supply response; IT, with the adoption of specifi c programs for the non-food categories; and international trade, with innovative products in relation to the national market as top priority.

31

Gross Sales – Extra (R$ million)

5,249

_02

8,41

9

7,885

_05

7,354

6,17

4

_03 _04 _06

Annual Report 2006

EXTRA ELETROThe Extra-Eletro banner

exhibited expressive growth in the year 2006, due to the strong performance recorded by the electro category at the Group. Gross sales amounted to R$365.4 million, up 19.7% over the prior year. The banner’s growth was above the sector’s 8.5% average growth, according to Eletros (National Association of Electronics Manufacturers).

This performance is a result of some decisive factors. During the year the Group started to work on improving the relationship with customers, focusing on winning over the public from classes C/D. Furthermore, improvements were made in the assortment, with an emphasis on IT products adapted to the needs of this consumer. The success of this strategy was supplemented by the participation of FIC – Financeira Itaú CBD, which contributed to improve the fi nancing image, based on the offering of better credit rates and on the development capacity of different forms of payment.

EXTRA PERTOTo be part of the retail segment

that has grown the most in the country in recent years – that of stores with up to four check-outs –, Grupo Pão de Açúcar created Extra Perto – a new model of store, inspired by the European convenience retail model. At these stores, which have between 150 and 250 square meters of sales area and two check-outs on average, the idea is to work with the supplier supermarket concept, to satisfy essential needs for food products, perishables and non-perishables, with a fair price/quality ratio.

Three models of store were defi ned – neighborhood, pass-through and work – the facilities of which vary according to the profi le of the audience from the region. Four units were opened in 2006, and by the end of the fi rst quarter of 2007, another six stores will be inaugurated. If the performance of these units meet up with the Company’s expectations, an expansion plan will be designed for this new format.

The model presented positive results until the end of 2006, particularly as regards positioning and the average purchase of customers, ratifying the planning developed by the Group.

19.7 % Extra Eletro’s gross sales grew signifi cantly compared to the previous year, with R$365.4 million gross sales.


Gross Sales – Extra Eletro (R$ million)

409

365

305

_05

318312

_03 _04 _06_02

EXTRA.COM.BRIn line with one of the goals

proposed in 2005 – to restructure the electronic commerce operation, with an emphasis on non-food –, the Group advanced in the consolidation of Extra.com.br. As part of this process, the Group started to form a team of specialists and professionals from various areas of the Company: marketing, commercial, logistics, customer care and technology.

From that point on, operating changes and improvements were organized that afforded more agility, speed and simplicity, and thus ensured more commercial aggressiveness. One example was the unifi cation and the expansion

of the customer service center (pre and after sales), which has over 50 people responding to inquiries from consumers. Another change with positive impacts on the result was the expansion and adaptation of the assortment: the quantity of products offered practically tripled. Dedicated logistics, which banks on a specifi c distribution center for electronic commerce sales, with an area of three thousand meters of storage capacity, was also inaugurated.

With these initial initiatives, Extra.com.br ended the year among the top fi ve players of this market in the country, with growth of 170% in sales in relation to 2005.

One of the goals proposed for 2007 is to double the revenues in relation to 2006. Accordingly, several initiatives will be organized that will enable Extra.com.br to earn recognition as an important channel for sales of electroelectronic products and also of homeware and textile goods. To support this growth the Company is planning the adoption of new systems; expansion of payment methods; strengthening of services integrated with the physical stores; new communication strategy, with reinforcement in promotional actions in specifi c media of the sector (online media, e-mail, search engines etc) and in the catalogues of the Extra banner.


In 2006, the Company focused on achieving higher effi ciency levels and increased competitiveness, two important features that have allowed CBD to gain market share and trigger a virtuous cycle. The Company promoted a broad internal restructuring aiming at expenses reduction, which, in turn, allows the transfer of effi ciency gains converted into lower prices to end consumers.

FinancialPerformance (MD&A)

OPERATING PERFORMANCEOperating results in 2006 were affected by the

following non-recurrent items: The provision and payment for contingency,

accounted in 3Q, related to value-added (ICMS) tax assessments for transactions of purchase, industrialization and sales of soybeans exclusively for exports, in the amount of R$96.8 million, of which R$54.4 million affected Cost of Goods Sold (COGS), and R$42.4 million affected fi nancial expenses (related to fi nes and interest). Thus, the total impact, net of income tax, on the net income was R$74.9 million;

Nonrecurring expenses related to organizational restructuring totaling R$56.9 million, of which R$29.1 million impacted selling expenses, andR$27.8 million impacted the general and administrative expenses.

GROSS MARGINIn 2006, the pro forma gross income remained

practically stable in relation to the fi gure recorded in the previous year, totaling R$3,971.8 million as opposed to R$3,975.3 million in 2005. The pro forma gross margin slid from 29.6% in 2005 to 28.6% in 2006, as a consequence of the strategy adopted by the Group during the year, which was focused on the reduction of discrepancies and the adoption of more aggressive prices in traffi c-generating products.


R$1,082.7 million Pro forma Ebitda totaled R$1,082.7 million, with an Ebitda Margin of 7.8%.

35

OPERATING EXPENSES Pro forma operating expenses

amounted to R$2,889.2 million in 2006, equivalent to 20.8% of net sales, practically the same sum reported in the prior year. During most of the year, expenses were negatively affected by the sales scenario, which was not at all favorable to dilution.

In addition, for comparative purposes, the total leases expenditure was not refl lected in the prior year either. Therefore, if we were to deduct the R$83.4 million (referring to the 60 stores sold to Fundo Imobiliário Península – Real Estate Fund) the percentage of selling expenses would be 20.2% (versus 20.9% in 2005). In this manner, results of the actions in pursuit of effi ciency and productivity gains, which will continue to be pursued in 2007, can already be observed (in the year).

EBITDA MARGIN The pro forma Ebitda totaled

R$1,082.7 million in 2006, with a margin of 7.8%, registering a downslide of 7.4% in relation to 2005. The year was marked by important adjustments for Grupo Pão de Açúcar, which implemented and consolidated various initiatives, which have been essential for the sales growth trend that has been reported since the end of 2006. If we deduct the leases that were not refl ected in the year 2005, the pro forma Ebitda would have registered a margin of 8.4% during the year (versus 8.7% in 2005).

Consolidated EbitdaEbitda (R$ million)Ebitda Margin (%)

87

423

272

_98

159

104

_96 _97 _99_95

781

_02

634

604

_00 _01

1,0831,1

70

_05

1,044

902

_03 _04 _06*

3.6% 3.6%5.1% 6.2% 7.3% 7.9% 7.9% 8.3% 8.3% 8.3% 8.7% 7.8%

Annual Report 2006

*Pro Forma

Consolidated Gross Profi tGross Profi t (R$ million)Gross Margin (%)

598

1,567

1,189

_98

830

739

_96 _97 _99_95

2,645

_02

2,247

2,101

_00 _013,9

72

3,975

_05

3,674

3,042

_03 _04 _06*

25.1% 25.2% 26.7% 27.1% 27% 27.5% 27.9% 28% 28.2% 29.2% 29.6% 28.6%

*Pro Forma

FINANCIAL RESULT Financial revenues reached

R$382.8 million in 2006, versus R$438.6 million in 2005, down 12.7% on account of lower revenues with fi nancial investments, resulting mainly from lower interest rates and from a highly promotional environment for credit sales. During the year, the Group recorded an even greater downslide of 17%, in pro forma fi nancial expenses, which came to R$561 million, in comparison with the R$675.5 million reported in 2005. The lower interest rates of the period, which slid from 19% to 15% in 2006, were the main reasons for this result.

The pro forma net fi nancial result in the year was negative by R$178.2 million, an improvement of 24.8% in relation to the same period of 2005. The net bank debt exhibited growth of R$344.3 million from one year to the next, growth that was caused mainly by the reduction of R$429.3 million in cash. The net bank debt corresponded to 0.67 x Ebitda of the year.

NON-OPERATING INCOMEThe Group reviewed the

economical and fi nancial assumptions that sustain the future realization of goodwill of its affi liated company Sendas Distribuidora. With a basis on this review, it was concluded that provision would be necessary for partial reduction of goodwill, which had a net impact of R$268.9 million on the consolidated balance sheet, recorded in non-operating income. The net non-operating income in the year also includes write-offs of assets relating to the closing of stores.

MINORITY INTEREST: SENDAS DISTRIBUIDORA

During 2006, Sendas Distribuidora felt the positive impacts of the price repositioning and of the signifi cant adjustment of expenses adopted by the Group. Gross sales ended the year at R$3,203.7 million, down 3.8% in comparison with 2005, representing 19.5% of the Group’s sales. Net sales attained R$2,776.7 million in 2006.

Although sales in the ‘same stores’ concept accumulated a downslide of 1.4% in 2006, the stores of Rio de Janeiro already started to shown signs of recovery from this tendency in the fi rst months of 2007.

Aiming to recover the performance in Rio de Janeiro, Grupo Pão de Açúcar deployed Vira Rio Project. The initiative was created


R$219.7 million Pro forma net income accounted for 1.6% of the Company’s net revenue.

to guarantee the force of CBD in a district that is becoming more and more competitive and with very peculiar characteristics, by means of a new proposal of action, focused on the autonomy of operation and on agility for decision making.

The gross margin of Sendas Distribuidora attained 26.7% in 2006, down by 230 basis points in comparison with the year 2005, due to the lower prices practiced by the Company since 2Q06.

Although operating expenses were 6.5% lower in comparison with the same prior-year period, the sales scenario has not yet shown a reaction in order to permit greater

dilution of expenses in the year. Hence the Ebitda margin of the period was 3.9%, lower than the 5.4% of 2005, mainly due to the lower gross margin of the period.

NET INCOME

The pro forma net income of 2006 amounted to R$219.7 million (1.6% of the net revenue) as opposed to R$257 million (1.9% of the net revenue) reported in 2005. This downward trend was caused mainly by the price reduction strategy, which directly affected the gross margin, and by the leases expenses that become recurrent as from 4Q05.


Grupo Pão de Açúcar mobilizes efforts to contribute toward the strengthening of community life as it believes that the encouragement of participation of individualsas agents that transform their own reality,making use of the media available at the sites where they are located, is an effi cient mechanism for minimizing social defi ciencies and the needs that have not yet been completely fulfi lled by public policies.

Social Performance

Therefore it utilizes its ample capilarity as a tool for diffusion and mobilization of the practice of citizenship, taking a stand as a partner of the community from the vicinity of its stores for local development, always valuing and respecting the specifi cities of each region.

INSTITUTO PÃO DE AÇÚCARCreated in 1998 to orient the Company’s social

investment, the track record of the Institute is often confused with the history of evolution of social responsibility in Brazil. Initially restricted to work driven at the education of children and adolescents, the Institute began to coordinate all the social investments of the Group, forming a structure of more integrated and articulated actions that, built up over the years, contributed toward the social and environmental development of communities where the Company is active and directly benefi ted over 60 thousand children and youths in the educational program.

Under the motto of Education for Ethics, Protagonism and Autonomy, the educational program continued making room in 2006 for the cooperation of partner entities, potentializing the range of actions developed at Casas do Instituto – educational centers maintained inside stores of the Group, comprised of classrooms, computer laboratories and recreational areas.

PARTNERSHIPS Another important contribution of Grupo Pão de

Açúcar to local communities is its willingness to transfer knowledge to multiplier agents, which broaden and potentialize the radius of coverage of actions.


R$8.7 millionThrough the program “Parcerias contra o Desperdício” – “Partnerships against Waste”, the donation of products good for consumption but improper for sale rose by 36.3%.

An example of this is the partnership with the Municipal Government of São Paulo for the execution of Project Acordes at the CEUs (Unifi ed Education Center), a musical education program that included musical knowledge in the daily lives of 2 thousand youths between 7 and 17 years of age in the period from 2003 to 2006. Furthermore, 40 classes and four orchestras were formed and over 50 performances were held.

INCENTIVE TO CULTURE The careful look that Grupo

Pão de Açúcar takes at local communities, preserving the cultural manifestations of each region, is expressed in symbolic actions such as the sponsorship since 2000 of one of the most important Afro groups in Brazil, Ilê Aiyê, known internationally for its social project, which caters to over 2 thousand children in the neighborhood of Liberdade, in Salvador (Bahia).

39

INCLUSION THROUGH SPORTS The focus on the development

of actions that improve the quality of life in communities in which Grupo Pão de Açúcar is established appears in initiatives such as Super Copa, a soccer championship targeted at young boys between 13 and 16 years of age, living in regions that contain CompreBem (in São Paulo) and Sendas stores (in Rio de Janeiro). Created in 2003, Super Copa serves as a measure of socio-recreational inclusion.

Annual Report 2006

In 2006, 8 thousand youths signed up to take part in Super Copa. Of these entrants, 1.2 thousand were selected to compete in the championship, which has become an important attraction in local communities.

After competing in the championship, the boys with the most outstanding performance are chosen to attend the Pão de Açúcar Training Centers (São Paulo) and Sendas (RJ) Soccer Club, by means of which they have the chance to develop as athletes and to take part in games that are already an integral part of the offi cial calendars of Soccer Federations.

CAMPAIGNSAware that the construction

of a fairer society is everyone’s responsibility, Grupo Pão de Açúcar maintains a series of social mobilization actions in force that involve the community and the collaborators of the Company, and encourages volunteer work, reaffi rming its belief that it is necessary to join forces to attain common goals.

In 2006, this standpoint is present mainly in the organization of partnerships for the performance of campaigns for canvassing warm clothing at the Group’s stores. All told, the actions collected a volume of 157 thousand warm garments.

QUALITY OF LIFEIn Grupo Pão de Açúcar, the

concern with the health and the quality of life of customers starts with the stringency of the Company’s criteria of selection of products sold at its stores, seeking excellence in the fulfi llment of recommendations, such as shelf life, hygiene in food handling, adequate storage of products and freshness of theitems sold.

Healthy eatingThe Company believes that

its contribution to this goal lies in the dissemination of values and information about healthy and pleasurable everyday practices, and in the creation of opportunities so that people can have experiences that foster well-being and self-development.

With this intention, in 2006 Grupo Pão de Açúcar launched the Healthy Eating Program, an itinerant kitchen that offers cookery courses at the CompreBem stores. Created in partnership with the Municipal Secretariat of Supply, of the Municipal Government of São Paulo, the program is composed of courses given by nutritionists that transmit to the audience notions of healthy eating based on the food pyramid, information about the importance of hygiene in the preparation of food,

cooking techniques and recipes, besides the tasting of dishes. In 2006, 10.8 thousand participants took the course.

Practice of physical activitiesAware that physical wellness

depends to a large extent on the everyday practice of physical activities, the Group strives to disseminate this value that is part of the Company’s DNA.

An example of this spirit is the Pão de Açúcar National Racing Circuit, which contemplates 10-kilometer races, besides the trials of the Marathon Relay of São Paulo, already in its 14th edition, and of the Marathon Relay of Fortaleza, in its 5th year of existence.


25.7% In 2006, the use of reforested wood to build stores increased by 25.7%.

A similar effect of dissemination and taking up of sports by people can be observed at the Extra Bike Brasil circuit, created in 2003. Divided into 10 legs, assembling around 3 thousand participants per leg, the trial has already become one of the most important events in Brazil in this category. In 2006, the circuit was held simultaneously in 10 Brazilian cities on the same day.

As it considers the professional athlete an icon that can serve as an example especially to children and youths, disseminating values associated with sports, such as team spirit, discipline and excelling, the Group annually renews its commitments of providing sponsorship to professional athletes.

In 2006, 36 athletes from categories such as the triathlon, athletics and cycling, received support from the Company.

Aware that sports can and should be included in the lives of people in any age bracket, the Group encourages the practice of sports among children and senior citizens as well. In 2006 the Group organized two Pão de Açúcar Kids Races in Parque Vila Lobos and in Ginásio do Ibirapuera (both in São Paulo) for children. The 2 thousand vacancies were fi lled in record time. Caminhada Viva Bem da Feliz Idade, (Live Well Walk for Senior Citizens) was organized in Peruíbe and Jacareí, and assembled more than one thousand participants per event.

Contact with cultureEndeavoring to promote

quality of life as refers to the mental dimension as well, Grupo Pão de Açúcar organizes and supports initiatives involving democratization of access to culture. In recent years, the main focal point of these actions has been the promotion and performance of musical shows all over Brazil.

In 2006, Pão Music, which takes leisure and culture to populations from various parts of Brazil, held shows in the cities of Fortaleza, Brasília, João Pessoa and Campinas, with an average audience of 70 thousand people per show. Pão Music has already attracted over 600 thousand spectators in its 14 years of existence.


This was the growth registered in the quantity of disposable waste collected originating from clients, which totaled 3.8 tonnes in the year.

Environmental Performance

This concern already appears in the process of choice of the site of its stores. The Group adopts the practice of conducting environmental liability tests in the property acquisition process, ensuring that stores are built on land that is safe from the environmental point of view, practically eliminating the possibility of any problem in the future. Whenever possible, the Company grants preference to the employment of recyclable material in items such as doors, partitions, wiring and PVC pipes.The roofs of the new stores opened in 2006, for example, have zenithal lighting in 6% of the total roof area,which permits a signifi cant reduction in the electric energy consumption.

The same responsibility in the installation of the stores was transferred to the gas stations, with the adoption of environmental impact monitoring in their implementation. Continuing with the procedure adopted in 2005, all the stations installed in 2006 received the electronic fuel leakage monitoring system. Additionally, stations opened in 2006 exhibit ecological tanks built of steel, with double walls, covered inside and outside with a fi berglass layer.

We present below some highlights in 2006: Installation of a high output rainwater collection

and infi ltration system, which contributestoward the reduction of fl ooding and damage provoked by rain, in the region of the ExtraJundiaí store (São Paulo).

Renovation and revitalization of the public square close to the Extra Ceilândia store (Distrito Federal), including the planting of trees and adaptation of the local street system and of the underground rainwater network.


26.6% This was the growth registered in the quantity of disposable waste collected originating from clients, which totaled 3.8 tonnes in the year.

Preservation of 5 thousand square meters more than provided in the legislation, of the wooded land of the Extra Benfi ca store, in Recife (Pernambuco), besides the restoration of the mansion that exists at the site.

Tree planting with the native species Algodão do Pará all along the perimeter of the parking lot of the Pão de Açúcar Dom Severino store, in Teresina (Piauí).

Deployment of a rainwater catchment for the Pão de Açúcar store in São José do Rio Preto (São Paulo).

Preservation and maintenance of a permeable stretch of 30 meters of the extension of the stream located next to the parking lot of the CompreBem store of São Bernardo do Campo (Sao Paulo), including the planting of 300 trees.


ENVIRONMENTAL AWARENESSThe Group permanently

invests in environmental awareness programs targeted at all the audiences with which it establishesa relationship.

Among the most comprehensive measures adopted to this effect are the Recycling Stations, a pioneer project in the Brazilian retail market. Established in Pão de Açúcar stores since 2001, in 2006 they attained the milestone of 98 voluntary delivery posts, at which over 14.8 tons of waste have already been collected over these years. Anchored to the broad concept of

shared responsibility, the project is not limited to the collection of material but goes much further, functioning as a mechanism that generates the involvement of the entire chain – ranging from the industry, and the local governments of the cities where the stores are present, to consumers and cooperatives of recyclablematerial collectors –,producing income and work.

Besides the Recycling Stations, the internal and operating areas of the Group are also involved in the processes of awareness and involvement.


EDUCATION FOR CONSCIOUS CONSUMPTION

Contributing toward the awareness of responsibility of individual actions in the quality of life of the planet has served as a basis also for the initiatives of education for conscious consumption, geared mainly toward children and youths.

A program that follows along these lines is Pão de Açúcar Kids, a ludic space installed in two stores from São Paulo, where children learn about the operation of a supermarket and obtain some idea of conscious consumption.

Another program is Cidadão Kids em Ação, targeted at schools and other teaching institutions, whereby children and youths pay monitored visits to the stores, on which occasion they receive information about the manufacture and sale of products, besides orientations about the importance of recycling for the maintenance of quality of life on the planet,and others.

Along the same lines, the Company maintains Escola Vai ao Extra, geared toward children between 5 and 12 years of age, who receive information about the operation of the consumption chain, which allows them to develop their fi rst notions of the role that each party plays in the consolidation of the concept of conscious consumption.

45

14.8 tonnes This was the total amount of waste collected by the Recycling Stations since 2001.

Annual Report 2006

“I like to shop at CompreBem, because apart from being nearhome, I can get to buy everything my family needs, for the

money I can pay. Stores are nice, the staff is helpful, and thereare always good offers”.

To fulfi ll its strategy of sustainable growth with competitiveness, effi ciency and profi tability, Grupo Pão de Açúcar is mindful of the specifi c characteristics of the business and dedicates special attention to certain areas, capable of a transformation into important differentials in a segment characterized by strong competition, like the food retail segment in Brazil.

DIFFERENTIALSOperating

PRIVATE LABEL Private label products are one of the topics that

include the strategic planning of the Group, which intends to double the share of these items from 5% to 10% of sales by 2010. Besides boosting the image and bringing profi tability and competitiveness to the banners, private label function as an important tool for obtaining consumer loyalty. The highlights in 2006 were:

Structural changeA far reaching structural change was organized

that integrated all around the company the products that comprise the private label portfolio, which amount to over 3.5 thousand. This means, in practice, that private labels are no longer treated as a separate area – all commercial processes are managed by the Group’s Commercial Area and all Marketing processes are managed by the


49

Marketing Area along with Private Labels Development Area. This movement will permit sharing on a larger scale of expertise and of strategy between and among areas, which can contribute and better understand the characteristics of these products. Furthermore, the involvement of the marketing area will help to disseminate the concept and the use of the private label in the actions and in the marketing strategies of the Group.

Taeq RolloutThe new brand Taeq was

launched with the mission of disseminating the healthy life concept, and received investments of R$20 million in research, marketing and development of products. Taeq is more than a transversal brand of the Group, i.e. present at all the banners, it is a concept of healthy life with the goal of becoming a Business Unit. A total 100 items were launched in 2006, distributed in fi ve different lines: nutrition, organics, sports, beauty and home. The Group expects to end 2007 with 350 items.

Reduction of shrinkageIn partnership with the Supply

Chain, logistic adaptations – such as the centralization of the supply of private label from São Paulo, where the majority of suppliers are concentrated – were developed that produced

positive results like the reduction of 10% in the ratio of shrinkage of these products on the supermarket shelves, in several categories.

InnovationDuring the year, in line with the

strategy of reinforcing the perception of product quality, the Group developed innovative packaging and fl avors in various items.

The third private label movement is expected to start in 2007, with the intensifi cation of premium products of differentiated quality, to reinforce and disseminate among consumers the perception of attributes like quality, innovation and accessible price. Actions with products from Casino will also be organized to expand and consolidate this category, working with an exclusive line of products from the French Group in Brazil.

In pursuit of more adequate costs and profi tability, the search for new suppliers will continue with special attention to those of regional scope, which can supply the Group in different parts of the country. Another challenge will be the intensifi cation of endomarketing, with the development of product communication and tasting actions, in order to create an internal culture of consumption and quality perception for the private labels of the Group.

10.0 % By 2010, CBD intends to double the participation of proprietary products, which accounted for 5.0% of total sales in 2006.

Annual Report 2006

INFORMATION TECHNOLOGYOne of the linchpins of the

Group, technology is more than just a supporting area, as it acts as a partner of the other areas, helping in the consolidation of the various strategic actions organized through the year, such as:

Creation of CSCThe performance of the

technology, with the development of specifi c systems, proved crucial for the establishment of the Shared Service Center (CSC) in 2006.

Adaptation to SOXAlterations and adaptations in

practically all the internal systems of the Group to the Sarbanes-Oxley Act.

Non-foodDevelopment of new

functionalities and work tools for non-food systems (homeware, electro, textile) with the objective of increasing productivity and facilitating the managementof this category.

Electronic commerceCreation of a new system for

extra.com.br (modernizations at the website, introduction of new func-tionalities, development of a new supply system etc).

Pão de Açúcar MaisFormation of a new system

for the Pão de Açúcar Mais relationship program (site, kiosks, card, call center).

Project GCDevelopment of tools

to support the category management project that is part of the Group’s strategy and includes better monitoring and review of assortment, pricing and nationalization of purchases.

Technological updateExchange of 40% of the point

of sale equipment and specialized printers (fi scal and of shelf label).


In 2007, the actions of the area will be concentrated in six large projects:

Loja do Futuro Pão de Açúcar(Store of the Future)

Several innovative technologies such as the use of electronic labels on supermarket shelves, wi-fi technology all around the store, smart labels in the wine section, scales that interact with consumers, boxes with widescreen screens etc., will be applied and tested at this pilot store. This will be the fi rst experience with the use of smart labels with consumers.

Non-FoodDevelopment of specifi c

management systems for these businesses, to reach effi ciency and effectiveness.

BI (Business Intelligence)Large investments to

improve managerial decision tools, implementing controls of indicators based on BSC methodology.

PricingImplementation of a new

pricing tool, focused on price elasticity.

InternetImplementation of several

new functionalities, potentializing the multichannel retail concept.

FinancialImplementation of Financial ERP.

SUPPLY CHAINDue to its capacity to add value

to the Business Units, by means of the reduction of shrinkage, of costs and of inventory investments, the Supply Chain is an important differential for the Group. In line with initiatives developed organization-wide, in 2006 the area continued to focus on the pursuit of lower expenses and the improvement of the service level. The principal activities developed with these objectives were:

RegionalizationTo reduce the shrinkage, the

transportation cost and the lead time of products at the stores, CBD increased the centralization of products at the RegionalDistribution Centers.

New forms of transportationIntensifi cation of alternative

means of transport like coastal navigation and railroad, with a reduction of up to 40% in the transportation cost.

51

Optimization of fl eet useBased on integration with

suppliers, the Group implemented the back-haul system, which ensures greater productivity of the fl eet that renders service to the Company, as instead of returning empty to the distribution center after the delivery of products at the store, the truck returns loaded with products of a given supplier.

Reduction of shrinkageIn 2007, the Group will invest

heavily in actions that enable it to understand the causes of shrinkage in the fi nal link of the retail supply chain, the supermarket shelf. Two streams were created for this purpose that will be responsible for measuring and combating this shrinkage. The fi rst stream will measure the shrinkage on the shelves, with the view of the customer.

1.5 % With the optimization of fl eet usage, carbon dioxide emissions in goods’ transportation dropped by 1.5%.

Annual Report 2006

whole. With a share of 13% in the Group’s sales, FIC ended the year with a total 5.1 million customers, growth of 27.5% in relation to 2005 (4 million customers), and climbed from 308 units installed in the Group’s stores in 2005 to 340 in 2006.

During the year, FIC continued with the implementation and consolidation of its product portfolio. Private label cards ended the year with a portfolio of 3.5 million customers. New products and services, such as sales in installments with interest and personal loans, with excellent performance in the year 2006, were also launched.

The receivables portfolio at the end of the period attained R$893 million, due to the products traded at the Group’s stores. In 2006, the performance of FIC was in line with planning, which forecasts the breakeven of the operation at the end of 2007.

Number of Clients (thousand) 2006Private-label cards 3,493 Co-branded cards 91 CDC (Consumer Loan) 519 Extended Guarantees 863 Personal Loan 127 Total 5,093


MANAGEMENT TOOLSThe adoption of management

tools in Grupo Pão de Açúcar is associated with the search for sustained growth, reduction of expenses and return on investments. Some examples:

The Zero-Base Budget methodology is utilized to assist in the building of budgets going from rational bases and real needs. The tracking of results will be evaluated by a matricial management model, in which the directors-executives are also henceforth accountable for a specifi c package of expenses with policies, processes, rules and defi nitions.

Balanced ScoreCard is being introduced to ensure the monitoring of management and the tracking of strategic planning. This scorecard will permit the continuous evaluation of performance indicators in the fi nancial, market, internal process and learning and knowledge perspectives.

As is the case of the exchange of information with suppliers, other actions with suppliers are the product of Top Log, the relationship program of Grupo Pão de Açúcar with its main suppliers that pursues maximum logistic effi ciency in the Supply Chain. The program reached the end of 2006 with 108 participant companies, accounting for 50% of the Group’s sales.

A new grocery Distribution Center was also opened during the year in Brasília, reducing the cost with freight to deliver to stores that were supplied by São Paulo. Moreover, a new Center started operating in São Paulo, dedicated to the electronic commerce operation.

The forecast for 2007 and for the years to come is that investments will be concentrated in two areas: expansion of storage capacity and technology, to cut costs and to ensure increased productivity and accuracy in processes.

FINANCEIRA ITAÚ-CBDIn 2006, the result of Financeira

Itaú-CBD was affected by the high default rate observed in the sector and by the strong competition that proved detrimental to the credit environment for the market as a

53

KNOWLEDGE OF THE CONSUMERTo Grupo Pão de Açúcar,

understanding the yearnings of consumers is an important asset for being able to gain an edge over competitors. Accordingly, consumer knowledge surveys are conducted periodically to fulfi ll the requirements and deal with the peculiarities of customers, at different levels. A total of 507,933 interviews were held in 2006 at the point of sale, with 13,463 door-to-door personal interviews and 1,013 discussion groups. Over 42.7 million purchase tickets are also analyzed per month, permitting the evaluation of customer shopping habits.

CERTIFICATIONS In 2006, the grocery

Distribution Center – the largest of the Group, with an area of 110 thousand square meters – was certifi ed by ISO 9001. And for the third year running, the chilled and frozen product distribution center maintained ISO 9001: 2000 certifi cation.

Annual Report 2006

Aware of the social transformation potential of the retail market, Grupo Pão de Açúcar adopts principles of equity and inclusion in its business relations. This standpoint is materialized through the constant search for sustainability of consumption based on the encouragement of awareness, mobilization and involvement of the entire productive chain: suppliers, internal audience, consumers and the community.

SocioenvironmentalCARAS DO BRASIL

Following its principle of contributing to the development of solidary and sustainable trade, since 2003, Grupo Pão de Açúcar has made room on its shelves for textile, decoration and personal hygiene items, cosmetics and toys, produced by small producers from several regions of the country. Currently present in 37 stores, Caras do Brasil (Faces of Brazil) products originate from 71 suppliers in 19 Brazilian states and are all the result of the sustainable management of raw materials employed in manufacturing. In 2006, the sales of these items were up 45.2% over 2005, with an increase of 89.6% in average sales per store.


Presented at a meeting of the United Nations (UN), in Geneva, the project was considered an example of good practices. Moreover, it also received the international guarantee of the Inter-American Development Bank (IDB), which presented a study conducted by American researchers about Caras do Brazil in Washington (USA).

IDB PARTNERSHIPThe commitment of Grupo

Pão de Açúcar with the development of small and mid-sized suppliers was reaffi rmed with the Company’s participation in a project that unites Instituto Ethos de Responsabilidade Social and IDB (Inter-American Development Bank), the aim of which is to implement social responsibility measures at small and medium Brazilian companies from the value chain of strategic companies.

With this initiative, the Group assumes the commitment of identifying best practices, evaluating and equipping 15 small and medium members of its productive chain. At the end of the process, once all the determinations and methodologies suggested by Instituto Ethos and IDB have been fulfi lled, these suppliers will receive the Da Melhor Natureza (Of the Best Nature) seal, which will henceforth identify their products.

55

ESTAÇÃO DA CIDADANIAEstação da Cidadania

(Citizenship Station) was created in 2006 in a historical patrimony that is very dear to the population of Santos, the old Estação de Trem Sorocabana train station. The result of a partnership with the Secretariat of Social Development of Santos and the NGO Concidadania, Estação da Cidadania de Santos has been operating since the month of August 2006, and has already performed a series of events with an emphasis on the furtherance of citizenship in all its dimensions, mobilizing around 5 thousand people in this period.

45.2 % Caras do Brasil products’sales recorded a 45.2%increase in 2006.

Annual Report 2006

We present below the awards received by Grupo Pão de Açúcar in 2006, in recognition of the excellence of its operation and of its socioenvironmental work and activity.

Acknowledgement As Empresas Mais Admiradas no Brasil (The Most

Admired Companies in Brazil) – Edition 2006/ Magazine Carta Capital – Supermarket Retail

Melhores do Agronegócio 2006 (Best of Agribusiness) – Magazine Globo Rural – Category: Wholesale and Retail

Guia Brasil 2006 – Magazine Guia Quatro Rodas (Automobile Guide Magazine) – Contribution to arts and crafts – Caras do Brasil Program

Prêmio DCI Empresas Mais Admiradas (Most Admired Companies Award) – Category: Retail

ll Prêmio Integración Latino Americano (Latin American Integration Award) – International Chamber of Research and Social Integration

Prêmio RH Cidadão 2006 (HR Citizen Award) – Magazine Gestão & RH – Pão de Açúcar Group, for the case entitled: Gente de Futuro (People of the Future)

Von Martius Environmental Award – Third Place – Category: Humanity – Caras do Brasil Project

Prêmio Popai Brasil 2006 Award Gold Medal – Category: Permanent Trade Project, for the play: Setting of Coffee – Pão de Açúcar

Prêmio Popai Brasil 2006 Award Gold Medal – Category: Interactive – Sistema Multimídia Interativo Adega Pão de Açúcar (Interactive Multimedia System) – Pão de Açúcar

Prêmio Popai Brasil 2006 Award Bronze Medal – Category: Permanent Trade Project, for the play: Setting of Wine – Pão de Açúcar

Marcas de Sucesso 2006 (Brands of Success) – Correio Popular – Category: Supermarket – Pão de Açúcar

Top of Mind – Jornal Mogi News – Extra Hypermarkets

Top of Mind – Jornal Tribuna de Santos – Extra Hypermarkets

Top of Brands 2006 UMSP – 1st place – Category: Supermarket – Extra Hypermarkets

56

19.7 % In 2006, 5,365 employeeswere promoted, representinga 19.7% growth.


57

The commitment of Grupo Pão de Açúcar to the quality of life of people, in the broad sense of the term, has initiatives geared toward the internal public as one of its main cornerstones. Promoting the full development of collaborators is one of the assumptions that guides the Company’s people management policy, characterized by constant effort in the creation of a work environment that favors individual and collective development, in synergy with the business demands.

People ManagementThe Group ended the year with a total staff of 63,607

collaborators. Of these, 53,495 work at the stores, 3,800 at the Distribution Centers and 2,510 occupy corporate roles. Throughout the year, 26,606 people were relocated while 5,365 were promoted. The Company also hired 24,033 new employees.

Annual Report 2006

EDUCATIONGrupo Pão de Açúcar places

priority on efforts to further the education and the professional development of its collaborators. In 2006, the group held 392,946 hours of training, forming 285 new leaders and distributing over 1,600 scholarships for graduation course studies, offered to a variety of

employees ranging from operators to directors, which required investments of R$14 million. The Group was able to maximize investments throughout the year, increasing considerably the participation in training sessions, from 57,352 in 2005 to 61,457 in 2006, although investments in 2006 were smaller compared to those in 2005.


With approximately 5 thousand people occupying leading roles, Grupo Pão de Açúcar invests permanently in the preparation of its current and future leaders. In 2006, the Jeito CDB de Liderar (CDB Style of Leading) program, created with the objective of developing the leaders necessary for the expansion of the Company, had 15 new classes, with

59

300 participants. The sum of leaders trained in 2005, when the program was created, and in 2006, already represents just over 50% of the estimated total.

DIVERSITYA pioneer in the promotion

of diversity as a factor that adds social value to the business, Grupo Pão de Açúcar has deployed and strengthened over the years its policy of focusing attention on specifi c audiences. In 2006, refl ecting the attention that the Group pays to this matter, a new area – Diversity – was

created within the area of Human Resource management, especially to cope with the development and expansion of the range of actions in this area.

QUALITY OF LIFEGuaranteeing opportunities

for its collaborators to include healthy practices in everyday life that promote physical and mental health is another commitment of Grupo Pão de Açúcar. For nine years the Company has been holding the Infl uenza Vaccination Campaign.In 2006, around 52,440 people,were immunized.

For those that wish to include physical activity in their daily routine, the Company maintains a fi tness center installed in the main offi ce building, visited by over 200 people on a daily basis. And since 2005, 99 Pão de Açúcar stores, 136 CompreBem stores and 7 Distribution Centers feature Espaço Viva Melhor, theme areas designed to allow collaborators to take time off for rest, leisureand relaxation.

R$14.0 million The Group invested R$14.0 million in employee capacity development and training programs.

Annual Report 2006

Grupo Pão de Açúcar seeks to promote its employees’ full development, maintaining its commitment to people’s quality of life. Therefore, the Company is engaged in creating a work

atmosphere that promotes individual and group development, aligned with the business demands.

Grupo Pão de Açúcar has always strived to perfect its Corporate Governance practices, pursuing transparency, an increase in share liquidity, shareholder value creation and the stringent compliance with all the rules intended for public companies:

TRANSPARENCYCorporate Governance

adopts accounting standards and rules for maintenance of registration of public companies at CVM (Brazilian Securities Commission);

fulfi lls all the determinations of SEC (Security and Exchange Commission) for foreign companies listed in the United States;

has participated since 2003, at Level I of Corporate Governance of Bovespa (São Paulo Stock Exchange);

is on the IGC index, which groups companies with differentiated corporate government actions of Bovespa;

has a Code of Ethics that regulates the conduct of its collaborators with the Company, customers, suppliers, competitors and other stakeholders;

adopts a Policy of Disclosure and Use of Relevant Information and Preservation of Secrecy;


63

has an Advisory Board formed by nine members, who are all independent;

the Board of Directors is formed by 15 members, with four external directors;

the Board of Executive Offi cers is composed of 11 professionals from the market, with one chief executive offi cer;

maintains four different committees: Audit, Finance, Human Resources and Remuneration and Innovation and Development.

Responses to inquiries from investors are coordinated by the Investor Relations area, which also organizes national and international meetings, conferences and appointments with investors.

SARBANES-OXLEYTo fi nalize the process of

adaptation to Sarbanes-Oxley (SOX), the major challenge faced by the Group was to reconcile the requirements of the act with the agility required by the retail market. Furthermore, the work – concluded at the end of 2006 – focused on performing a quick and continuous transition, transforming the controls demanded by the act into a sustainable project. The surveys

carried out also permitted the review of all the Group’s processes, with the identifi cation of opportunities for improvement. We present below the main initiatives adopted:

creation of the SOX Committee, of a permanent nature and formed by directors of the Business Units and of the corporate areas;

establishment of the fi gure of SOX Agent in the administrative area and at all the stores;

defi nition of Group 404 (in an allusion to the number of the law), formed by people with a more technical profi le;

training at all the stores, inclusion of the topic in operating meetings and in the plenary meeting;

strong communication work with all the collaborators, aiming to disseminate the concept throughout the Group.

Sarbanes-Oxley The Company’s great challenge was to align legal requirements with the speed required in the retail segment.

Annual Report 2006

In 2006, the shares of Grupo Pão de Açúcar were included on Ibovespa, the most important indicator of the average performance of quotations of the Brazilian stock market. The theoretical portfolio of the index is comprised of the stocks that, all together, represented 80% of the volume transacted on the São Paulo Stock Exchange (Bovespa) in 2006. Moreover, since 2003, the Group has formed an integral part of IBX-50, an index that groups the 50 companies that exhibit the highest liquidity ratios of Bovespa.

Our shares asan investment

Since 1995, the shares of the Company, which strictly complies with the USGAAP international standards of accounting records, have been listed on Bovespa. In 1997 the Level-III ADR (American Depositary Receipts) Program was started at the New York Exchange (NYSE).

CAPITAL MARKETIn a scenario with appreciation of 32.9% registered

by Ibovespa in 2006, preference shares (PCAR4) exhibited a slight recession of 2.5% in relation to the performance of 2005, ending the year quoted at R$75.0/thousand shares. The total volume traded was R$2.8 billion.

Level-III ADRs (CBD) ended the year with an increase in value of 3.9% in view of the 16.3% growth recorded by the Dow Jones index in 2006. The shares presented a total transacted volume of US$2.4 billion, ending the year quoted at US$34.2/thousand shares.

The shares were transacted at 100% of the fl oors of Bovespa and NYSE and the daily average presented was R$11.2 million and US$9.5 million, respectively. At the end of the year, the market value of Grupo Pão de Açúcar was R$8.5 billion.

In the fi rst nine months of the year, with accumulated devaluation of 27.0%, the share performance was infl uenced by the negative sales performance, which suffered the impact of two factors: (i) defl ation of food product prices; (ii) and the restructuring process implemented by the Company.

In the following quarter (4Q06), the recovery of sales combined with the heavy investment in competitiveness, supported by important reductions of expenses organized in the restructuring process that started to produce results, contributed toward the share performance, with valuation of 33.2% in the period.

64

R$8.5 billion This fi gure represents CBD’s market value. The Company’s shares were traded in 100.0% of the trading sessions on Bovespa and NYSE.


65

STOCK OPTIONIn 2006, the Group created

a new stock options plan, named “Ações com Açúcar” (Stocks with Sugar), more competitive than the previous plan, to assure total alignment with the goals of strategic planning. This plan aims CBD x Dow Jones base 100

CBDDow Jones

0

50

100

150

200

2002 2003 2004 2005 2006

CBD x Ibovespa base 100PCAR4Ibovespa

0

50

100

150

200

250

300

2002 2003 2004 2005 2006

at attracting and keeping highly qualifi ed professionals within the Group, in addition to aligning those executives’ interests to shareholders’ interests, encouraging performance and assuring the continuity of the management. Initially, the plans include 110 directors who, according to their performance, will receive bonus and call options of Group’s shares, associated to performance indicators, accomplishment of targets and ROIC. The gains can reach 100% of annual bonus. In the previous plan, gains were on average only 6% of annual bonus.

DISTRIBUTION OF DIVIDENDS With a basis on the net income

recorded in 2006, which amounted to R$88.5 million, the Board of Directors approved the payment to stockholders of dividends in the total amount of R$20.3 million. This sumis equivalent to R$0.16903 per batch of one thousand ON shares andR$0.18594 per batch of onethousand PN shares.

Annual Report 2006

Shareholding positions in December 2006 (billions of shares)Main Shareholders ON % PN % Total %Wilkes* 47.0 94.3% - 0.0% 47.0 41.3%Casino Group 0.0 0.0% 2.1 3.2% 2.1 1.8%Abilio Diniz 1.4 2.8% 16.0 25.0% 17.4 15.3%Diniz Family 1.4 2.8% 13.6 21.3% 15.0 13.2%Others 0.0 0.1% 32.3 50.5% 32.3 28.4%Total 49.8 100.0% 63.9 100.0% 113.8 100.0%* 50% Abilio Diniz and 50% Casino Group.

Average daily traded volume CBD (US$ thousand) PCAR4 (R$ thousand)2002 1,832 1,789 2003 2,375 2,563 2004 3,287 3,349 2005 5,426 5,841 2006 9,457 11,196


Share Performance 2002 2003 2004 2005 2006

Price % per annum Price % per

annum Price % per annum Price % per

annum Price % per annum

PCAR4 (R$) 54.5 10.1 70.4 29.2 68.7 (2.4) 76.9 11.9 74.97 (2.5)CBD (US$) 15.3 (30.5) 25.15 64.4 25.6 1.8 32.9 28.5 34.17 3.9Ibovespa 11,268 (17.0) 22,236 97.3 26,196 17.8 33,455 27.7 44,473 32.9Dow Jones 8,342 (16.8) 10,454 25.3 10,783 3.2 10,718 (0.6) 12,463 16.3US$ (R$) 3.5333 52.3 2.8892 (18.2) 2.6544 (8.1) 2.3407 (11.8) 2,138 (8.7)

OWNERSHIP STRUCTURE The capital stock of CBD, amounting to R$3,955 million, is represented by

113.8 billion shares: 49.8 billion ON (ordinary) and 63.9 billion PN (preference). Control is shared between two principal stockholders, Abilio Diniz (50%) and the French Casino Group (50%), by means of the holding company Wilkes, created in May 2005. Free-fl oating shares represent 28.4%.

Grupo Pão de Açúcar supports its work and activity with a series of analyses and procedures aimed at minimizing the vulnerability of its operations and the impact of variables on the business performance. The risks to which the Company is subject can be divided into Operating (market, product, structural, technological)and Financial (credit and default, liquidityand foreign exchange).

Risk Management OPERATING RISKS

MarketGrupo Pão de Açúcar faces the heated

competition of the retail market with some differentials: nationalization of purchase and category management processes; multiformat structure; services and products adapted to the needs of each audience; private label, with an emphasis on higher value-added items; quality of services; economy of scale; and broad distribution network.

Structural Besidse keeping its facilities and equipment covered

by insurance policies, Grupo Pão de Açúcar permanently monitors the situation of each unit, with stringent control over all operations. The physical integrity of customers and collaborators that circulate around the stores is guaranteed by the Risk Engineering department, responsible for identifying possible situations of risk and for managing the execution priority of mitigation actions.

TechnologyThe domain of technology is one of the linchpins

of the Group, which continuously invests in upgrades and modernization, pursuing maximum return and control of the various operations involved in the business.

67

R$845.7millionReceivables in FIDC(Receivables Fund)were R$845.7 million onDecember 31, 2006.

Annual Report 2006

FINANCIAL

Credit and defaultThe credit risk of the Group,

which sells directly to consumers, is minimized on account of the large customer portfolio and of control procedures that monitor the payment capacity of consumers. Furthermore, with the creation of FIC – Financeira Itaú CBD, credit risks are now being managed by the new company, which has developed a specifi c model of analysis and concession. The risks of accepting sight drafts and future-dated (post-dated) checks are minimized with the

adoption of safety procedures such as: prior registration of customers and online inquiries to information services.

Liquidity To recompose working capital

that sustains installment sales to consumers, the Group assigns part of these receivables to Pão de Açúcar Fundo de Investimentos em Direitos Creditórios (FIDC - Credit Receivables Fund). The balance of FIDC on December 31, 2006 was R$854,7 million in credit receivables.


Foreign ExchangeTo protect the obtainment

of funds in dollars, the Group utilizes swap contracts for reais/CDI (Interbank Deposit Certifi cate) in 100% of these transactions, which are executed in the same timeframes as the transaction fl ows.

69

General Remissive Index – GRIEconomic Performance Indicators Annual ResultsAspects: Economic Performance

EC1Direct economic value generated and distributed, including revenues, operating costs, employee remuneration, donations and other investments in the community, accrued profi t and payments to capital providers and governments

1;2;4;5;8;9;14;18;24;25;26;29;30;32;34;35;36;37;38;39;40;

41;42;43;44;45;49;54;55;64;65;66;67;68

Aspect: Market Presence

EC7 Procedures for local hiring and proportion of top management members recruited in the local community in relevant operating units 57;59

Aspect: Indirect Economic Impacts EC9 Identifi cation and description of signifi cant indirect economic impacts, including the impacts’ scope 16;17;28

Environmental Performance IndicatorsAspect: MaterialEN1 Utilization of materials per weight or per volume 44EN2 Percentage of utilized materials resulting from recycling 44Aspects: EnergyEN5 Energy saved thanks to improvements, without conservation and effi ciency 42Aspects: Emissions, effl uents and wasteEN22 Total waste weight, per type and disposal method 44Aspects: Products and servicesEN26 Initiatives to mitigate the environmental impacts of products and services and the scope of these impacts 1Aspect: GeneralEN30 Total environmental protection investment and expenditures, per type 42;43;45

Performance Indicators Relative to Labor Practices and Proper WorkAspect: JobLA1 Headcount, per job type, labor contract and region 4;57;58;59Aspect: Labor Health and Security

LA8 Education program, training, counseling, prevention and risk control in progress,to assist employees, their families or community members in case of serious diseases 58;59

Aspect: Training and EducationLA10 Training hours average per year and per employee, discriminated by functional category 29;58;59

LA11 Programs aimed at competence management and continuous learning,supporting the continuity of workers’ employability and retirement 58;59

LA12 Percentage of employees receiving performance and career evolution analyses on a regular basis 7;58;59

Annual Report 2006


Performance Indicators Relative to Human RightsAspects: Investment Practices and Purchase Processes

HR1 Percentage and total number of signifi cant investment contracts includinghuman right clauses or clauses that were submitted to human rights evaluations 55;51;52

HR2 Percentage of outsourced companies and critical suppliers that weresubmitted to evaluations relating to human rights and adopted measures 1;51;52;55

HR3 Total quantity of hours of employee training on policies and procedures relative to human rights aspects that are relevant to the operations, including the percentage of employees receiving training 51;52;55

Aspect: Child Labor

HR6 Operations presenting a child labor potential risk, and the measuresadopted to contribute to the abolition of child labor 51;52;55

Aspect: Hard Work or Slave-Like Work

HR7 Operations presenting a signifi cant hard work or slave-like work risk, and the measures adopted to contribute to the eradication of hard work or slave-like work 51;52;55

HR8 Percentage of security personnel submitted to training on the policies or procedures adopted by the organization relating to human rights aspects that are relevant to the operations 51;52;55

Social Performance Indicators Relating to the SocietyAspect: Community

SO1 Nature, scope and effi ciency of any programs and practices, aimed at evaluating and generating the impact of the operations on the communities, including the coming in line, operation and close down of operations

38;39;40;41;42;43;44;45;54;55;56

Aspect: CorruptionSO3 Percentage of employees who received training on the organization’s anticorruption policies and procedures 1Aspect: Conformity

SO8 Monetary value of signifi cant fi nes and total number of non-monetary sanctions resulting from nonconformities with laws and regulations 34

Performance Indicators Relative to Product ResponsibilityAspect: Client Health and SafetyAspect: Product and Service LabelingPR5 Client-satisfaction related practices, including results from client satisfaction surveys 28;29;33;53Aspect: Marketing Communication

PR6 Adhesion Programs relative to marketing communication laws, norms and voluntary codes, including publicity, promotion and sponsorship 50;53

BOARD MEMBERS

Honorary ChairmanValentim dos Santos Diniz

ChairmanAbilio Diniz

Board MembersAna Maria Falleiros dos Santos Diniz D’AvilaCandido Botelho BracherFrancis André MaugerGerald Dinu ReissGeyze Marchesi DinizHakim Laurent AouaniHenri Philippe ReichstulJean-Charles Henri NaouriJoão Paulo Falleiros dos Santos DinizMaria Silvia Bastos MarquesMichel Alain Maurice FavrePedro Paulo Falleiros dos Santos DinizXavier Michel Marie Jacques Desjobert

Corporate Information

EXECUTIVE BOARD

Chief Executive Offi cerCássio Casseb Lima

Chief Financial Offi cer Enéas César Pestana Neto

Food Commercial Ramatis Rodrigues

Non-Food Commercial Pedro Janot

Extra and CompreBem/SendasHugo A. Jordão Bethlem

Investments and Construction Caio Racy Mattar

MarketingClaudia Pagnano

Pão de AçúcarJosé Roberto Coimbra Tambasco

Human ResourceMaria Aparecida Fonseca


INVESTOR RELATIONS

Managing BoardDaniela Sabbag

Analysts Marcel Rodrigues da SilvaFrederico Lorenzo MonteiroAndré Amorim

Support Samantha Conde

AddressAv. Brigadeiro Luís Antônio, 3.172Jardim Paulista – CEP: 01402-901São Paulo – SP – BrazilTel.: 55 11 3886-0421Fax: 55 11 3884-2677E-mail: [email protected]

The publications about quarterly results, monthly sales performance, annual reports and 20F Form may be requested from the Investor Relations department or at the IR website of Grupo Pão de Açúcar (www.cbdri.com.br).

Investor Relations Consulting MZ Consult Avenida das Nações Unidas, 12.995 – 20º andar Brooklin – CEP: 04578-000 São Paulo – SP – BrazilTel.: 55 11 3186-3777/3799 Fax: 55 11 3186-3776 E-mail: [email protected]

TickersBovespa: PCAR4NYSE (level III ADR): CBD

Independent auditorsErnest & Young

Depositary banksIn BrazilBanco ItaúRua Boa Vista, 176 – 4° andarCEP: 01014-913 – São Paulo – SP

In the U.S.The Bank of New York101 Barclay Street – 22 WestNew York, NY 10286 USA


Credits

GENERAL COORDINATIONInvestor Relations Instituto Pão de Açúcar

TEXTSSilvia Martinelli (Mtb 39.545/SP)

GRAPHIC PROJECT AND DESKTOP PUBLISHING TheMediaGroup

PHOTOSGrupo Pão de Açúcar’s Assets: page 06, 41, 43 and 44Daniel Renault: page 13, 16, 19, 23, 25, 26, 31, 33 and 50Daniel Rosa: page 10 (Cássio Casseb Lima),page 11 (Maria Aparecida Fonseca) 12, 15, 20, 22, 37,39, 46, 47, 53, 54, 57, 58, 60, 61 and 68Maurício Simonetti: page 10 and 11 (executive directors)

PRINTINGRWA Gráfi ca

PRESENTATIONCorporate profi le 01Mission, Vision, Pillars 02Operating, Financial and Sustainability Highlights 04

COMMITMENTMessage from Management 06Board of Executive Offi cers 10

STRATEGYStrategic focus 2006 14Investments 18Goals 2007 19Strategic planning 2010 21

RESULTSSales Performance 24Operating Performance 28Financial Performance (MD&A) 34Social Performance 38Environmental Performance 42

DIFFERENTIALSOperating 48Socioenvironmental 54Acknowledgement 56People Management 57

TRANSPARENCY Corporate Governance 62Our shares as an investment 64Risk Management 67

General Remissive Index – GRI 69Corporate Information 71

Financial Statements 2006 attachment

ANNUAL REPORT 2006

The information in this Report is presented in an objective and direct manner, to provide a thorough view of the main results and projects developed by Grupo Pão de Açúcar during the fi scal year of 2006. For further details please refer to online annual report 2006, available in the website (www.cbd-ri.com.br/relatorioanual2006).


Grupo Pão de AçúcarAnnual Report 2006

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