European Trends and

Implications for Portugal By Boris Planer

Planet Retail Ltd | January 2012

3

Contents

1. Economy & Demography

2. Retail Evolution

3. Trends

4

1 Economy & Demography

5

Europe continues to be divided economically.

Positive outlook for countries benefiting from emerging markets growth and featuring stable domestic economy (e.g. Germany).

Difficult outlook for countries struck by public and household debt crises (UK, Ireland, Spain, Greece, Portugal), with most problems coming from the inside.

Portugal unlikely to return to pre-crisis output levels until 2015, Greece to follow in 2016/17 (in real terms, today’s forecasts).

Structural adaptations in retail will be accordingly deep & fast (unlike Germany, where it is largely business as usual).

IMF/ECB/EU bailouts have helped to avoid chaos, but they guarantee that predictably tough times are ahead.

Consumer confidence is key in a country like Portugal.

But not all structural change is economy-led. Further drivers are demographic trends and technological progress.

Key Framework Trends - Overview

6

Consumer Spending: Real Growth, 2000-2015 (%)

Source: IMF, Planet Retail

-6

-4

-2

0

2

4

6

2000 2002 2004 2006 2008 2010 2012 2014

Greece

UK

Portugal

Germany

Portugal is not the worst case in the EU, but it is fairly close to the bottom

7

80,00

90,00

100,00

110,00

2007 2008 2009 2010 2011 2012 2013 2014 2015

Greece

UK

Portugal

Germany

GDP: Real Growth Index, 2007-2015 (2007 = 100)

Source: IMF, Planet Retail

Real growth index shows how deep the crisis really is

8 Source: IMF, Planet Retail

,0

5000,0

10000,0

15000,0

20000,0

25000,0

2000 2002 2004 2006 2008 2010 2012 2014

UK

Germany

Spain

Portugal

Consumer Spending per Capita, 2000-2015 (EUR)

Consumer spending will rise in nominal terms

9 Source: IMF, Planet Retail

-2,000

-1,000

,000

1,000

2,000

3,000

4,000

5,000

2000 2002 2004 2006 2008 2010 2012 2014

Greece

UK

Portugal

Germany

Annual Consumer Price Inflation, 2000-2015 (%)

Healthy inflation rates do not equal absence of problems

10 Source: IMF, Planet Retail

30

35

40

45

50

55

60

65

70

75

2000 2002 2004 2006 2008 2010 2012 2014

USA

Portugal

UK

Germany

China

Consumer spending/GDP ratio (%), 2000-2015

Portugal needs positive vision to restore consumer confidence

11

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Spain

Portugal

EU 27

Unemployment continues to hit confidence – Portugal looking bad but not the worst

Source: Eurostat

Unemployment Rate, 2000 – Q3-2011 (%)

12

1250,0 1300,0 1350,0 1400,0 1450,0 1500,0 1550,0 1600,0

October

September

August

July

June

May

April

2010

2011

-5.3%

-5.7%

-6.1%

- 6.7%

-7.1%

-7.7%

-8.1%

Dropping petrol sales due to unemployment & income pressure - to affect hypermarkets

Source: Planet Retail

Portugal: Gasoline Consumption Year-on-Year Change, 2010-2011 (in 1,000 tons)

13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2000 2002 2004 2006 2008 2010

65+

25-64

15-24

0-14

Source: Eurostat

EU 27

30.4%

27.7%

Portugal vs EU 27: Population Structure, 2000-2010

Demographic change under way fast – will require more income re-distribution

14

0

5

10

15

20

25

30

Birth rates show this trend will last unless eliminated by immigration

Portugal: Birth Rates, 1960-2011 (per 1,000)

Source: World Bank

15

1,00

1,500

2,00

2,500

3,00

3,500

1985 1990 1995 2000 2005 2010

Smaller households also reflect modern lifestyles – more shopping close to home

Portugal: Average Household Size, 1985-2010

Source: Instituto Nacional de Estatística

16

2 Retail Evolution

17

The crisis will continue to cause carnage in vulnerable (non-essential/ deferrable) categories.

With Portugal’s retail sector less concentrated than counterparts of northern Europe – and with the economy doing worse – retail shakeout will be stronger here.

In the more resistant food category, weakest players will exit (mostly small and independent players).

Independent traders most vulnerable due to extra cost in the system.

Their exit will make room for city/town centre chain stores.

Traditional retail in Portugal should settle at below 10% of market in the long term (30 years?)

Concentration process irreversible, but Portugal will emerge with stronger retail sector.

Key Retail Evolution Trends - Overview

18

0

10

20

30

40

50

60

70

80

90

100

2000 2005 2010 2015

Spain

Portugal

UK

Germany

Visible concentration trend, accelerated by crisis - Spain most dynamic

Grocery Market Shares Top 10 Companies, 2000-2015 (%)

Source: Planet Retail

19 Source: IMF, Planet Retail

,0 10,0 20,0 30,0 40,0 50,0 60,0 70,0 80,0 90,0 100,0

Portugal

Spain

Germany

UK

2000

2010

2020

2000

2010

2020

2000

2010

2020

2000

2010

2020

Share of Modern Trade of Grocery Retailing 2000-2020, (%)

Crisis is accelerating shakeout among Portugal’s independents

20

3 Trends

21

Retail shareholders’ interests not necessarily identical with customers’ interests in years ahead (private ownership is what makes German retail strong in hard times).

This is a time to follow demand, rather than creating it – as consumer behaviour has become more “professional”.

Demand is for good-quality essential products at affordable prices from more easily-accessible store locations – sustainability component also coming, but from low level.

Affordability issue reflected through reduced choice, more private label, more targeted ranges and petrol-saving easy access.

Accessibility efforts reflected through shift back towards city centres, as well as spread of multi-channel strategies, including e-commerce.

Internationalisation remains a selective process, partly moves online.

Access to capital to remain difficult.

Key Retail Sector Trends - Overview

22

Hypermarkets have been under pressure in both the US and Europe, nearing saturation point.

Smaller household sizes and ageing populations favour central shopping – which is a slow shift, a long-term development – but already visible.

Non-food at hypermarkets has been hit by economic weakness, new high street specialists / online rivals

High petrol prices have made shoppers avoid out-of-town trips.

US & European retailers already reacting with roll-out of central formats.

Market concentration continues, groups to expand at expense of independents.

Out-of-town retail is under pressure as town centre locations are on the rise

Carrefour Express, Belgium Tesco Express, UK Sainsbury’s Local, UK

23

-04

-03

-02

-01

00

01

02

03

04

05

06

Q12008

Q2 Q3 Q4 Q12009

Q2 Q3 Q4 Q12010

Q2 Q3 Q4 Q12011

Q2 Q3

Walmart US

Metro Group Real

Sonae MC

Portuguese not deserting hypermarkets as fast as US and German consumers

Hypermarket Operators: Like-for-like Growth, Q1-2008 – Q3-2011, (%)

Source: Planet Retail

24

Shopping behaviour is now more “professional” (shopping lists, better fridge management).

Mass market needs good-quality essential products with late date of expiry at affordable prices.

Crisis cannot be waited out, product offer needs to adapt.

Non-essential, deferrable and many added-value lines of less importance, double-digit decreases in some non-food categories.

A more streamlined product offer will help take cost out of distribution (independent sector at disadvantage).

Consumers will remember retailers who offer what they need

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Private label will move more into focus of attention (disadvantage for small and independent grocers).

Nielsen 2010: number of Portuguese consumers buying more PL +74%.

Nielsen 2011: PL share Portugal 25% (Switzerland: 46%, UK 43%, Germany 32%).

Opportunities for upmarket ready meals as foodservice sector suffers.

Interesting projects on private label endorsement (Carrefour France, Walmart/ Asda UK, Migros Switzerland – www.migipedia.ch).

Significant expansion potential for private label lines

26

The area of wild flag-planting is definitely over.

For around 10 years, the ideal has been to operate in a comparatively small number of markets while achieving strong market positions.

Famous market exits: Walmart from Germany and South Korea; Carrefour from South Korea, the Czech Republic and Slovakia; and Ahold from all of Asia and Latin America.

Carrefour and Tengelmann have withdrawn from Portugal...

Main investment stream now to Asia and Latin America, requires strong localisation in store formats and product offer.

Requires strong home market operation to cross-finance start-up-losses.

Internationalisation has gone careful...

27

Internationalisation: Ahold

Active

Reduced (2000-2011)

Inactive

28

Active

Inactive

Internationalisation: Carrefour

29

As a lower-risk route to market, globalisation is going increasingly online/ global shipping services (M&S online now in over 80 markets).

Next step: offering local language sites beyond global top markets, plus local currency options and delivery services.

Even small retailers can go global now, and with product offers far beyond what they sell instore (Schlecker).

Don’t expect any large-scale grocery bricks and mortar market entries for Portugal, but international e-commerce sites could put pressure on domestic non-food sector.

...and globalisation is increasingly moving online

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Grocery online is difficult to do profitably in a mass-market without delivery fees.

Germany is not ready for it, the UK and Switzerland are (traditional priorities in shopping behaviour).

Click & collect emerging as sensible compromise approach, offering convenience to client while saving the retailer delivery charges – danger to pure-play grocery e-commerce.

E- and m-commerce will advance as the crisis passes, a stronger retail sector emerges, broadband grows, smartphones spread and – importantly – a very different generation (post-95) grows up.

Tesco working hard to make model viable in emerging markets.

This is not about eliminating bricks and mortar shopping, which has significant sensual rewards, but about giving customers the options they will increasingly expect.

Online grocery retail is yet to take off...

...as e-commerce largely remains in the non-food domain

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As US and European shoppers get more selective, they expect the comfort of buying in different ways: out-of-town, near the home, near the job, online... increasingly online shopping is also moving mobile...

Most of Europe’s leading grocers already operate mixed portfolios of hypermarkets, superstores, supermarkets, neighbourhood stores, convenience stores, discount stores and online channels – these are often complemented by non-food banners.

Small-format expertise will be key for expansion in emerging markets’ less urbanised areas, as well as in a consolidating market like Portugal.

Go where the customers are: the future will look more multi-channel

Biedronka, Poland

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Outlook of extended economic crisis will lead to continued shakeout in retail sector.

Weakest players in most vulnerable categories to go first.

European retail sector will emerge stronger from the crisis if it adapts to changed demand.

Demand is for good-quality essential products at affordable prices from more easily-accessible store locations.

Consumers will emerge from crisis more careful and selective.

Private label still with significant potential in Portugal, with new opportunities to get customers involved.

Cont...

Summary

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Demographic and technological change to support focus of retail investment on neighbourhood areas and online.

Multi-channel approach as strategy of leading players as they will allow customers to buy how, when and where they want.

Multi-channel also to involve e- and m-commerce opportunities as a very different new generation grows up.

In grocery e-commerce, bricks and mortar players are at an advantage due to their ability to offer click & collect as a more viable approach.

Bricks and mortar retail internationalisation will continue to be prudent and selective – no large grocery market entries expected for Portugal.

Summary

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