Riedel Research Group - Outlook on Brazil Retail IndustryThemes, Opportunities, Challenges and Investment Ideas

David Riedel President and Founder Riedel Research Group LLC

Outlook on Brazil Retail IndustryBrazil’s Retail Competitive Outlook

Main Players

Regional Challenge

New Entrants

Attractive Segments

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Outlook on Brazil Retail IndustryBrazil’s Retail Recent Success - Total Revenues in R$ Billions

Retail Sector Total Revenues (2000-2006)

Outlook on Brazil Retail IndustryBrazil’s Retail Recent Success Factors

• Increase of Salaries (C and D Classes)

• Decrease in Interest Rates and Increase in Consumer Credit Volume

• Increase in Credit Terms (Days)

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Outlook on Brazil Retail IndustryBrazil’s Retail Success Factors - Increase in Salary Wages (base 2002=100)

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Outlook on Brazil Retail IndustryBrazil’s Retail Recent Success Factors - Interest Rates and Credit Volume

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Outlook on Brazil Retail IndustryBrazil’s Retail Recent Success Factors - Increased Terms for Personal Credit

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Average Terms of Personal Credit (Days)

Outlook on Brazil Retail IndustryKey to Retail Success is Attracting the Growing Spending from C and D Segments

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Outlook on Brazil Retail IndustryBrazil’s Retail Consumer: Shopping Preferences vs. BRIC Countries

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Source:How Half the World Shops (2006)

Outlook on Brazil Retail IndustryRetail Electronics and Home Appliances present highest growth and potential Annual Average Growth (2002-

2006)

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Retail Sales for Electronics

and Home Appliances

GDP

Retail Sales for Clothes and Food

• Retail Electronics outpaced the Market Growth in recent years

• Many Retailers are specialized in the segment

• More national consolidation is expected

Outlook on Brazil Retail IndustryBrazil’s Retail Main Challenges

• GDP growth and Interest Rate decrease play a great part of the

recent growth in the sector. Aggressive Expansion Plans can greatly

suffer from changes in this parameters

• Heavy Regionalization of the Retail sector remains an obstacle for

increased economies of scale

• Local consumer habits can be a hurdle for new entrants in the North

East region (where the biggest growth is expected)

• Increased competition in the Sao Paulo area can cut margins for all

players (where the biggest volume is concentrated).

• New entrants with differentiated formats and value propositions to

the client can obtain significant market share from current players

(particularly in the areas of highest expected growth)

Outlook on Brazil Retail IndustryConclusions: Attractive Market with Potential Challenges in the Mid-term

• Expected GDP growth will continue benefiting the whole sector, as many more potential customers (segments C and D) are likely to increase their consumption significantly (especial if credit terms continue to improve).

• Increased Investments of Major Players will tighten competition (both in the North East and South East regions)

• More consolidation on the industry is expected (through acquisition of smaller players with good brand recognition in their regions)

• Some product segments (as electronics and home appliances) are expected to outgrow the sector, triggered by the increased consumption of the massive C and D classes

• New Entrants (like Chilean Cencosud or Falabella) will likely incorporate new formats to the industry

• The main challenge will be the pressure margins on the more mature markets of South East region (mainly Sao Paulo)