Topics for discussion

Ibiza, September 11th 2014

Beragua Retail Break: introduction

2

Food retailers

Defending Cash Flow at the expense of LFLs

Questioning end of growth cycle

Looking for new business models

Questioning the new retail sectors (H&B…)

Looking for operational and commercial improvements

Looking for new growth

Private Equities

Looking for winning business models

Looking for growth avenues

Defining the right entry and exit moments

Looking for the most interesting retail subsectors

We believe that the main concerns of the retailers and PEs attending this event are the following:

Beragua Retail Break: topics for discussion

3

Key Topics for Retailers

Back to fresh

The unexplored world of franchise

Loyalty programs: a tool many retailers do not take full advantage from

Rise of ‘discount hypermarkets’

General Merchandise Discounters: a growing trend

Value proposal refreshing and best-in-class experiences in the food retail industry

1

2

3

4

5

6

Key Topics for Private Equities

What do PEs look for when investing in retail?

Approach to CAPEX and scale

8

9

Leading retailers: best approach to market saturation? 7

Key topics for Retailers

1. Back to fresh

Why are both leading supermarket and discounter chains increasingly focusing on fresh produce?

How are these changes likely to impact competitors?

1. Back to fresh

6

Leading supermarket and discounter chains are concentrating on

fresh products in order to drive higher

traffic

Last decade, Mercadona closed its assisted sections and started offering all its fresh produce as dry products. Even though service improved as lines were significantly reduced, its CEO admitted last October that quality fell sharply as well.

As a result, the leading food retailer in Spain is currently starting to implement a new model to get back to its origins: it has already developed an assisted section for fish and is working to improve its remaining fresh produce sections.

Similarly, Lidl has recently substantially improved its bakery section, and Dia keeps developing formats based on fresh produce such as Dia Fresh, in an attempt to considerably drive traffic and increase the average basket.

Can discounters such as Lidl and Dia become fresh specialists despite their industrial dynamics?

How can fresh produce move from traffic driver to margin builder?

2. The unexplored world of franchise

2. The unexplored world of franchise (i)

8

Franchisee

Security Know-how

Operating a franchise model implies for the franchisee giving up part of the profitability (margin) and the control over the

operation of the business. In return, the franchise should provide certain benefits to the franchisee:

Competitiveness

Companies have different reasons for franchising depending on their strategies, business model and financial constraints:

Company

Growth without CAPEX

Explore market niches

Higher results Improvements in

execution Lack of know-how

Why are there retailers who do not franchise?

Is it possible to become a franchise specialist while exploiting own stores?

2. The unexplored world of franchise (ii)

9

The unexplored world of franchise

Model still vastly unexplored

(particularly by discounters) despite

its significant advantages

Franchises are often used as a tool to pursue growth without investments in CAPEX and to explore market niches (international expansion and different formats), among other reasons.

Despite the significant advantages this operating model offers, it is still vastly unexplored by food retailers, particularly by discounters.

Are hard discounters likely to further explore this operating model in the near future?

3. Loyalty Programmes

3. Loyalty programmes (i) – our views

11

Loyalty schemes in food retail are a controversial issue: their costs and potential benefits need to be carefully assessed

Our view on loyalty schemes

Loyalty schemes cannot substitute a good value proposal

Consumer’s loyalty has to be earned and cannot be bought by granting a few points on a card.

Retailers earn loyalty fundamentally through the excellence of their value proposition: assortment, price, quality and service.

Main goal of the loyalty card is to

gather information

The primary role of a loyalty scheme is to gather information about customer’s behavior and preferences.

Rewarding systems are necessary to encourage the use of the card and ensure a high penetration on total sales.

The use of the information is the

key

The ultimate goal of a loyalty scheme is to extract value from the customer’s information which can be used in a variety of actions:

Direct marketing to differentiated customer’s segments.

Tailor-made promotions, cross-selling campaigns.

Life-cycle management: desertion prevention and recovery.

Collaboration and information-sharing with manufacturers and other third parties.

Cost-benefit trade-off: the key issue

While loyalty systems are costly (rewards, IT systems, CRM departments, communication with customers, etc.), the benefits are difficult to calculate, especially when comparing to the ‘traditional’ marketing and promotional tools.

2,73

2

4

15

33

34

12

3,04

3

5

21

37

29

5

3,16

2

10

22

36

21

7

Average

6 retailers

5 retailers

4 retailers

3 retailers

2 retailers

1 retailer

2014 2013 2012

3. Loyalty programmes (ii) – our views

12

The food retail segment presents some characteristics which difficult and condition the adoption of successful loyalty systems

Our view on loyalty schemes in food retail

Loyalty is low in the food retail market

The food retail market is a sector with an overall very low loyalty due to:

High competitiveness

‘Commoditization’ of a good part of the value proposals

Proximity as the main reason for shopping

Increasing price sensitiveness of customers

Limited differentiation drivers in the sector

The examples of Russia and Spain

Source: Nielsen Shopper Trends and Kantar World Panel

Number of food retailers visited – Russia – evolution 2012-2014 Number of food retailers visited – Spain – evolution 2010-2012

4,4

4,5 4,5

2010 2011 2012

3. Loyalty programmes (iii) – our views

13

Commoditization of the loyalty programs

When most players adopt loyalty programs, the impact and the differentiation value of these systems considerably diminish (it is not unusual that a good number of customers have cards from several retailers).

Entry barrier for new customers

‘Aggressive’ loyalty systems (with too much emphasis in rewarding loyal customers and penalizing occasional buyers) discourage new clients.

Since the loyalty in food retail is ‘weak’, penalizing occasional buyers can undermine the future customer base of the Company.

Low potential rewards Given the low margins in food retail, the potential rewards for customers are mandatorily low.

Costs (…and benefits?) Loyalty systems have high operational costs (especially those based on points accumulation and

redemption), while the benefits compared to traditional promotional systems are unclear.

The KEY: information

Most retailers fail to find a real use for the information obtained through loyalty systems:

The complexity of customer’s behavior is a barrier to achieve practical conclusions to be effectively and successfully implemented.

An in-depth customer’s segmentation is radically opposed to the standardization of systems and operations that is the base of the productivity.

The information sharing with suppliers is limited (privacy, confidentiality, negotiation tactics, etc).

Our conclusions

Loyalty systems can be a good promotional tool and source of information but not the pillar of the value proposal.

Simple, direct and almost zero cost systems can work and provide useful information about consumers. The rest

only adds unnecessary complications and does not increase loyalty.

What are the advantages of loyalty programmes?

Why do these schemes usually fail?

Is it possible to create an innovative programme bringing a competitive advantage? Under what assumptions?

3. Loyalty programmes (iv)

14

Loyalty programmes: a tool many retailers do not take full advantage from

Retailers develop loyalty programmes in an effort to attract

and retain customers but they usually do not take full advantage from

them

Retailers are increasingly developing loyalty programmes in an effort to attract and retain customers. Nevertheless, due to the overall very low loyalty level in the food retail segment and the little differentiation between programmes, loyalty schemes usually fail as a stand-alone element to retain customers.

4. Rise of ‘discount’ hypermarkets

4. Rise of ‘discount hypermarkets’ (i)

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Market share evolution of the hypermarket segment 2007-2013 by country

Source: Euromonitor and Companies info

35%

52%

23% 25%

26%

23%

9%

54%

35%

28%

51%

22% 24% 24%

21%

9%

51%

34%

22%

51%

21% 22% 22%

19%

9%

49%

32%

Poland France Germany Italy Portugal Spain Turkey United Kingdom Average

2007 2010 2013

4. Rise of ‘discount hypermarkets’ (ii)

17

Lenta – Revenues and Number of stores evolution 2009-2013 – USD mn

Revenues CAGR 09-13 +27.9%

Source: Companies info, VTB and Beragua

1.689

2.367

3.054

3.537

4.521

36 39 42

56

87

2009 2010 2011 2012 2013

Revenues Number of stores

7,0% 8,0%

4,0% 5,4% 4,6%

12,3% 13,5%

10,0%

13,8%

-1,3% -0,2%

0,5%

-9,9%

3,1%

5,6%

2012 2013 2014

OKEY

Magnit Hyper

Lenta

X5 Super

X5 Hyper

Yearly sales LFLs for top Russian food retail players (excl. Proximity players)

Which are the key ingredients of this successful model?

Would this model be successful in countries where hypermarkets are losing market share?

What is going to be the impact of these ‘discount hypermarkets’ on discounters and supermarkets?

4. Rise of ‘discount hypermarkets’ (iii)

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Despite the intrinsic problems

hypermarkets are experiencing in

most countries, some formats are being

extremely successful

While the hypermarket segment is being challenged in most developed countries, some formats seem to be working very well. Indeed, Lenta, Atacadão and Auchan are revolutionizing the segment by offering a wide assortment of products at very low prices.

In 2013 Carrefour opened in Spain its first Supeco store: a new hypermarket format which aims at offering more competitive prices and discounts by approaching the ‘cash & carry’ format (similar lay-out, volume discounts, etc.). Currently the Company operates 9 stores in Andalucía, Madrid and Galicia regions.

If the format proves to be successful, the French retailer is planning to expand it to other Southern and Eastern European countries.

5. General Merchandise Discounters

2.505 2.916

3.456

3.962

4.515 5.163

5.763

14%

16%

19% 15% 14%

14%

12%

2007 2008 2009 2010 2011 2012 2013

Sales of top 8 UK GM discounters YoY Growth

5. General Merchandise Discounters (i)

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Sales of top 7 UK GM discounters evolution 2007-2013 – GBP mn

CAGR 07-13 +14.9%

Sales of top 3 US GM discounters evolution 2007-2013 – USD mn

20.538 22.070

24.369

26.760

29.871

32.845

35.683

5% 7%

10% 10%

12%

10%

9%

2007 2008 2009 2010 2011 2012 2013

Sales of top 3 US GM discounters YoY Growth

CAGR 07-13 +9.6%

Source: Euromonitor and Companies info

5. General Merchandise Discounters (ii)

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Number of stores and sales per store (GBP mn) of top 7 UK GM discounters evolution 2006-2013

1.016

1.087 1.234

1.415

1.646 1.909 2.196

2.427

2,2

2,3

2,4

2,4

2,4

2,4 2,4

2,4

2006 2007 2008 2009 2010 2011 2012 2013

Number of stores Sales per store

Number of stores and sales per store (USD mn) of top 3 US GM discounters evolution 2006-2013

17.632 18.094 18.524 19.298

20.239 21.312

22.618 23.898

1,1 1,1 1,2

1,3 1,3

1,4 1,5

1,5

2006 2007 2008 2009 2010 2011 2012 2013

Number of stores Sales per store

Source: Euromonitor and Companies info

5. General Merchandise Discounters (iii)

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GBP mn except otherwise stated Total Multiprice

(w/o PStr) BM Home Bargains Poundstretcher

Total Single Price

Pounland Poundworld 99p

#Stores 311 270 402 389 166 174

Avg. Sqm per store 778 1,195 516 624 481 418 560 464

#SKUS 4,375 5,750 3,000 - 3,333 3,000 4,000 3000

#SKUS/sqm 5.1 4.81 5.81 - 6.9 7.18 7.15 6.47

Turnover 819 830 333 765 187 270

Sales per store 2.3 2.8 3.3 0.9 1.7 2.1 1.3 1.7

Sales densities GBP 3,447 2,352 6,494 1,495 3,640 5,070 2,374 3,475

Sales densities EUR 5,219 2,776 7,663 1,765 4,295 5,983 2,801 4,100

GM% 32.6% 33.7% 29.0% 35.2% 37.3% 36.9% 39.7% 35.4%

Staff costs% -12.3% -12.0% -11.3% -13.6% -14.5% -14.4% -15.0% -13.9%

Leases % -6.2% -4.4% -2.8% -11.4% -8.5% -7.5% -9.9% -8.1%

EBITDA margin 7.3% 8.4% 10.4% 3.2% 5.0% 5.1% 5.9% 4.0%

CAPEX/store GBP th 229.2 250.0 - 208.3 268.3 262.1 259.3 283.4

CAPEX/sqm GBP 272 209 - 334 567 627 463 611

WC % sales -1.4% -1.4% -1.4% -1.5% 0.1% 1.3% 0.0% -0.8%

ROCE (EBIT pretax/CE) 51.4% 99.8% 48.9% 5.3% 22.7% 30.3% 20.3% 17.6%

C.employed/store 328 210 579 195 273 289 259 269

Sales/CE X 7.78 13.4 5.7 4.5 6.4 7.4 5.2 6.5

KPIs of leading GM Discounters in UK – 2012

Source: Companies info, BCG, Shore Capital and Beragua

5. General Merchandise Discounters (iv)

23 Source: Companies info

Moreover, some General Merchandise Discounters have

started their international expansion. For instance, Poundland recently introduced its format Dealz

(already operating in Ireland) in Torremolinos, Spain.

In the United States, Dollar Tree (#2 in the segment) has recently agreed to acquire

Family Dollar (#3) in an USD8.5 bn cash and stock deal that will marry two of the US’s largest discount stores in an attempt to

become more competitive vs. Dollar General and Wal-Mart. Once the sale goes through, Dollar

Tree and Family Dollar, players for which the penetration of food items in the assortment is

significantly higher than for European retailers, will have more than 13,000 stores and annual

sales of USD18 bn.

How is this growing trend going to impact food retailers in the medium-term?

What actions can food retailers take to reduce the impact?

5. General Merchandise Discounters (v)

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General Merchandise Discounters : a growing trend

General Merchandise Discounters, which are experiencing a substantial growth,

are starting to expand

internationally

General Merchandise Discounters such as Poundland, Poundstretcher and Dollar General have experienced very meaningful growth in the past years both in the United Kingdom and in the United States (c.15% CAGR over the period 2007-2013 in United Kingdom and 9.6% in the United States).

Moreover, they are expecting to continue growing either through mergers and acquisitions (as the one that will marry Dollar Tree and Family Dollar, #2 and #3 in the United States) or organically, by expanding to new markets (as the penetration of Poundland in Spain).

How are General Merchandise Discounters going to be accepted outside UK and US?

6. Value proposal refreshing and best-in-class experiences

What are the factors triggering in-depth strategic repositioning processes?

What are the main learning outcomes from successful repositioning cases?

6. Value proposal refreshing

26

Value proposal refreshing and best-in-class experiences in the food retail industry

Repositioning: successful

experiences

At a certain moment, most retailers need to reinvent / refresh their commercial models and value proposals undertaking in-depth transformation processes. In many cases they have ended in successful (both from the commercial and the financial point of view) stories: Mercadona, Pingo Doce, Biedronka… are paradigmatic cases in the industry.

However, other Companies have faced strong problems to undertake such transformations (including strategic, leadership, financial and organizational barriers) which have prevented them from achieving substantial improvements in their competitive positioning.

What are the main difficulties to succeed in these processes?

What is the role of the owners, BoD and CEO in the different stages of the strategic repositioning projects? – Leadership need

7. Leading retailers: best approach to market saturation?

7. Best approach to market saturation?

28

Leading retailers: best approach to market saturation?

Coping with a broader audience

On July 7th, an article of Vox Populi read: “It is one of the keys to the recent acquisition of the supermarket chain Grupo El Árbol by Grupo Dia: apart from allowing the Company fulfill the goal of becoming the Spanish #2 player […], is the Company will be able to reinforce itself in the fresh segment”.

Indeed, once a retailer dominates its segment of operation and reaches its ‘limit penetration’, which changes should be introduced in the model to become attractive to new customers?

New subsectors or new markets?

Once Lidl reaches its maximum penetration rate in a particular country, it expands to other countries adapting, only very slightly, its already successful format.

Other retailers, however, prefer exploring new subsectors rather than penetrating other markets (i.e. discounters in H&B segment).

Is it preferable to saturate a particular market in different sectors or to export already successful formats to other markets?

What are the key elements to take into account to succeed in such an adaptation process?

Is this process worth the risk or is it better to expand to new sectors or markets?

Key topics for Private Equities

8. What do PEs look for when investing in retail?

8. What do PEs look for in retail?

31

What do PEs look for when investing in retail?

Is it preferable to focus on growth or to focus on margins?

Experiences of investing in retail of PEs participating in the event

a) What are the key criteria you take into account when deciding whether or not to invest in a retailer?

b) What do you consider adequate valuation levels?

c) What is the added-value brought-in by PEs?

How PEs can add value to the good and ‘clean’ Companies?

How should be approached cheap deals with high execution risks?

9. Approach to CAPEX and scale

9. Approach to CAPEX and scale

33

Approach to CAPEX and scale

Growth is key to increase valuation of

a retailer

Increasing ‘profitable’ growth is a key issue to improve the valuation of a retailer by enlarging its asset base in its current markets, expanding LFLs through commercial initiatives or entering new markets.

When approaching the investment case by a PE firm, it is also important the additional future growth of the Company that can be sold to the potential buyers, thus the business plan must lay the foundations of further expansion after the investment period of the PE.

Growth must be carefully planned

and monitored

However, growth implies the need for financial and organic resources which should be taken into account in the business plan:

The right CAPEX and its funding are key issues in PE investments.

Entering new areas requires a proper assessment of the maturity period of the operations as during a good number of years they will bring negative cash-flows.

M&A operations (at the right valuation) can help to speed up the learning curve in new areas.

At the end, growth must be self-sustainable and generate value for the Company to be well valued by buyers at exit.

Thank you for taking part in our event!

Beragua Capital Advisory S.L.

Calle Triana 31

28016 Madrid

Telephone: +34 91 535 75 18

Fax: +34 91 536 28 95

info@beragua.com

www.beragua.com