Europe Retail Industry Overview by Sutherland Global Services

Europe Retail Industry Overview January, 2012

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Europe Retail Industry Study Client • The client is a leading global retailer based out of Europe with a need for market assessment of the European retail industry to help formulate market expansion strategy

Project Scope • Key objectives of the study were to size the European retail market, identify key trends and challenges of the industry, identify key players of the retail industry in Europe, identify key macroeconomic indicators for the retail industry, and compare select players on the basis of financial performance

Sutherland’s Solution • SGS conducted extensive secondary research to size the retail industry, identified key trends and major challenges of the industry and also identified macroeconomic indicators impacting the retail environment. Key performance parameters were also identified • SGS then developed a proprietary framework incorporating select financial and operating parameters. The financial data of the chosen retail players was put through this framework in order to arrive at the comparative assessment of the player vis-à-vis the industry as well as vis-à-vis other players • All financial and qualitative databases to which SGS holds subscription, were extensively used to identify key players in the retail industry across Europe as well as to collate the financial information for them

• Benefits to the Client • The project provided significant and exclusive intelligence to the client with regards to the overall market and competitive landscape therein • Identification of key challenges and trends helped client assess its strategy and take corrective course of action where required

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Global Retail Industry Overview 1

Global Retail Sales

$13.9 Tr (2010)

North America Retail Sales

$3.8 Tr (2010)

U.S. Retail Sales

$3.1 Tr (2010)

4 Major Retail Markets

5 Comment about the future

Region

Market Size ($ Tr) 2010

CAGR (%) – 2010-14

Key Contributing Countries

Asia and Australasia

5.4

12.2%

China, Indonesia, India, Malaysia

Latin America

1.4

7.7%

Brazil, Uruguay, Chile

North America

3.8

4.3%

Western Europe

2.5

2.1%

U.S, Canada, Mexico

UK, France, Germany

“Consumer confidence has been returning, yet people have been fundamentally changed by the recession, with markets opening up and rapid advances in technology that influence how and where people shop. For retailers, this means having to create new, exciting opportunities to truly connect with more skeptical and e-savvier customers,” - Jez Frampton, Global Chief Executive of Interbrand about the US Retail Market “It’s time to stop differentiating between the online and the offline world- your customers don’t see it that wayeverything is integrated” - Phillip Schindler, Vice president of Northern and Central Europe, Google on role of ECommerce in Retail

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European Retail Industry Overview Europe Retail Sales (In $B) CAGR Europe Retail Sales

4,000

3,500

3,800

1,000

4,100

1,200 800

3,000

2008

900

1,100

2,700

2,600

2,700

2,900

2009

2010

2011

2012

Western Europe

0.6%

4.6%

- 0.8%

Over the past 3 year period retail sales in Europe have declined and growth is likely to remain subdued in the following years Slow growth of European retail sales can be attributed to the declining sales in Western Europe despite Central and Eastern Europe witnessing relatively stronger growth

Central and Eastern Europe (CEE)

The European retail market is not homogenous and various countries within Europe are at different stages of retail development For example some European markets like France, U.K., Germany are very mature while markets like Russia and Turkey are considered to be emerging

Fiscal austerity measures, low wage growth and high unemployment across Europe has resulted in erosion of consumer confidence due to which consumer spending has declined, particularly in the case of discretionary products

Consumer confidence index for Europe has declined from -14.3 in 2009 to -21.9 in 2011 Also, unemployment has remained above 9% over the last 3 years (9.6% in 2011)

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Western Europe Retail Landscape Western Europe Retail Sales by Country (%) -2010

Year-On-Year Retail Sales Growth (%)

Retail Sales - $2,600B

0.3% 0.3%

France Others 18%

France 20%

-0.9%

Germany

United Kingdom

Netherlands 5%

0.3% -1.3% -1.3% 0.2% 0.5%

Italy

Turkey 7% Germany 20% Italy 13%

0.5%

Turkey

2.1% -0.9%

Netherlands United Kingdom 17%

-0.2% -2%

-1% 2010

More than half of the Western European retail sales is dominated by the “Big three” countries France, Germany and UK

In 2011, unemployment rate in France (9.6%) and U.K. (9.6%) remained a key concern

Austerity measures by governments and high unemployment rates have dented consumer confidence resulting in lower consumer spending

Consumer confidence in France, U.K. and Italy in 2011 dropped to levels much below that of 2009

2011

The retail industry in Western Europe is fragmented to a great extent, with the 5 largest players accounting for less than ~15% of the overall sales Carrefour, Metro Group, the Schwarz Group,Tesco, and the Edeka Group are the main players in Western Europe

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Central and Eastern European Retail Landscape CEE Retail Sales by Country (%) - 2010

Year-On-Year Retail Sales Growth (%)

Retail Sales - $900 Bn

4.3% 3.4%

Russia Others 27%

2.4%

Poland

3.6% -2.2%

Czech Republic

Slovakia 2% Hungary 3% Romania 4% Czech Republic 4%

Russia 48%

Romania

Hungary

1.8% -5.1% 1.6%

-4.9% 0.0% -0.4%

Slovakia Poland 12%

1.9% -6%

-4%

-2% 2010

Except Russia other CEE markets are relatively much smaller when compared to Western European markets Russia, Poland and Czech Republic have attracted many new retailers over the last decade and will continue to remain attractive due to their growth potential

2011

Both Russian and Poland are expected to grow at about ~4-5% year-on-year for the next three year period In the first half of 2011, Russia attracted foreign investments $3.5Bn. Due to the slump in Western Europe many retailers are targeting CEE region. Recently Tesco announced to double its space in CEE

Metro Group, SchwarzGroup, Carrefour, Tesco and X5 are the biggest retailers in the Central and Eastern Europe

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Macroeconomic Indicators of Key European Retail Markets

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

Western Europe

Eastern and Central Europe

France

Russia

2008 2,865.2 -0.1 7.8 -34.7

2009 2,656.4 -2.7 9.5 -17.6

2010 2,582.5 1.5 9.8 -17.5

2011 2,750.7 F 1.6 9.6 -30.1

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

Germany GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2009 3,338.6

2010 3,315.6

2011 3,518.5 F

1.1

-5.1

3.7

7.5 -23.4

7.8 -15.7

7.1 9.6

5.9 -2.2

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

United Kingdom GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2009 1,281 -9 8.4 -20

2010 1,548 3.6 7.6 -10

2011 1,894.5 F NA 6.7 NA

2009 430.6 1.6 8.2 -23.5

2010 468.5 3.9 9.7 -23

2011 497.9 F 4 9.6 -33

2010 192.1 2.7 7.3 -11.1

2011 218.3 F 1.8 6.8 -31.2

Poland

2008 3,651.6

2008 2,679.0 -1.1 5.6 -29.2

2008 1,604 5.6 6.2 -20

2008 529.4 5.1 7.2 -18.2

Czech Republic

2009 2,182.43 -4.4 8.2 -9.7

2010 2,247.46 2.1 9.7 -18

2011 2,471.9 F 0.7 9.6 -25.6

2009 2,116.6 -5.1 7.8 -15.9

2010 2,055.1 1.5 7.1 -22.9

2011 2,181.3F 0.5 5.9 -34

GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2008 216.1 3.1 4.4 -22.7

2009 190.2 -4.7 6.7 -7.3

Italy GDP (USD Bn) GDP Growth Rate (%) Unemployment Rate (%) Consumer Confidence

2008 2,307.3 -1.2 6.8 -30.6

Source: Eurostat, Trading Economics and Economy Watch

2011 GDP growth rates are forecasted * Unemployment Rate is average of 12 months

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Key Challenges faced by Retailers (1/2) Decentralized Operations • A key in-store challenge faced by several retailers is the decentralized operations resulting into non-standard processes and lack of proper control. Non-standardized processes may result in a high degree of decision fragmentation, inefficient labor management, stock outs, and shrinkage • For instance, many a times, one of the stores of a departmental chain may have additional inventory, while there is stock outage of the same in another store of the chain - and these two stores may be in the same city / district

Customer Acquisition & Retention • Changing consumer demands, short product life cycles and higher customer expectations are making customer acquisition and retention increasingly difficult. This is also because of the additional fact that today’s customer is a lot more informed about what he / she wants to buy – this could be through social networks, reviews read, checks done with earlier consumers of the same product and comparison with competitors’ products • As against this, the retailers also find themselves in the midst of a lot of customer data : gathered from historical purchases, predictions by consumer insight groups etc. Matching the past behavior with future prediction in order to launch interesting loyalty and rewards programs is a constant challenge

Efficient Inventory Management • Increasingly sophisticated demands from customers has made the ability to forecast demand accurately a key factor for retailers. Many times, there might be shortage of one item that was otherwise overstocked by the shop! • There is a reason to believe that efficient inventory rotation and management is a key business expertise that is generally lacked

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Key Trends in the Retail Industry (2/2)

Growing m-Commerce in retail

• M-commerce is the fastest growing channel in retail and grew by about 25% in the first six months of 2011 • According to Forrester Research, revenues from m-commerce is expected to hit $10B by the end of 2012 growing at CAGR of 39% over the next five years. M-commerce currently contributes for only 2% of e-commerce sales • Mobile shopping apps are also gaining popularity; For example, “Catalog Spree” – a catalog app that brings catalogs from 25 different retailers into once application has already received over one million page views per week • The impact of m-commerce on sales and margin will come from the way mobile devices will influence consumers shop at the physical store. For example, a mobile application used to find the nearest store that has a desired item in stock may influence a customer to go to that store and purchase the item, or a review checked on a mobile site while a customer is in a physical store may push the consumer to purchase the item.

Use of social CRM for customer support and service

• A 2011 Gartner survey found that social media ranked in the top four action points for retailers in the next 18 months, with midsize retailers## • 81% of Fortune 500's 100 largest companies in retail are conducting customer service and support on social media. Of the 81%, 75% are using Twitter to provide customer service, 56% are on Facebook, 25% have communities, 25% have blogs and 6% use video • However, customer interactions through social media are on mass scale rather than on a one-one basis • Strengthening customer relationship and enhancing brand awareness are the key objectives of retailers through their presence on social media

Source: Forrester, Gartner, Retail Touch Points, Jones Lang LaSalle.

## Retailers with revenue between $250M and $1B

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Distribution of Top 50 Retailers across various operational formats

Total Retail Industry $3.5tr

Top 50 Retail Companies $1.28tr

No. of Companies

Collective Revenue ($ M)

Collective Revenue as % of Top 50 Retailers Revenue

Apparel/Footwear

$13,874

1.1%

Cash & Carry/Warehouse Club

$86,057

6.7%

Department Store

$47,590

3.7%

Discount Store

$152,576

11.9%

Drug Store

$11,959

0.9%

Electronics & Entertainment

$52,726

4.1%

Home Improvement

$74,772

5.8%

Hypermarket/Supercenter

$338,121

26.4%

Non-Stores

$29,637

2.3%

Specialty

$24,776

1.9%

Supermarket

$448,184

35.0%

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Europe Retail – Top 50 Companies (1/6) Apparel/Footwear Sr. No.

European Retail Rank

Company H & M Hennes & Mauritz AB

Type of Company

Country of Origin

Public

Sweden

2010 European Retail Sales ($ M)

2010 European Retail Stores

$13,874

1,777

2010 European Retail Sales ($ M)

2010 European Retail Stores

$86,057

2,076

2010 European Retail Sales ($ M)

2010 European Retail Stores

$17,831 $17,068 $12,691

626 951 250

Sales CAGR (‘05-’10) 10%

Sales CAGR (‘10-’15E) 6%

Europe Sales as % of Total 86%

Cash & Carry/Warehouse Club Sr. No.

European Retail Rank

Company Metro AG

Type of Company

Country of Origin

Public

Germany

Sales CAGR (‘05-’10) 2%

Sales CAGR (‘10-’15E) 4%

Europe Sales as % of Total 96%

Department Store Sr. No.

European Retail Rank

1 2 3

22 25 37

Company El Corte Inglés, S.A. Marks & Spencer Group Plc Karstadt

Type of Company

Country of Origin

Private Public Private

Spain United Kingdom Germany

Sales CAGR (‘05-’10) -1% 3% N/A

Sales CAGR (‘10-’15E) 2% 8% -1%

Europe Sales as % of Total 100% 99% 100%

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Europe Retail – Top 50 Companies (4/6) Hypermarket/Supercenter Sr. No.

European Retail Rank

2010 European Retail Sales ($ M)

2010 European Retail Stores

Sales CAGR (‘05-’10)

Sales CAGR (‘10-’15E)

Type of Company

Country of Origin

Carrefour S.A.

Public

France

$94,369

11,796

74%

Tesco plc

Public

United Kingdom

$78,922

3,797

83%

Groupe Auchan SA

Private

France

$56,327

2,584

96%

Centres Distributeurs E. Leclerc

Private

France

$40,672

754

100%

Walmart

Public

USA

$31,231

383

Casino Guichard-Perrachon S.A.

Public

France

$22,987

6,080

70%

Louis Delhaize S.A.

Private

Belgium

$13,613

1,049

94%

2010 European Retail Sales ($ M)

2010 European Retail Stores

$17,444 $12,193

168 N/A

Company

Europe Sales as % of Total

Non-Stores Sr. No.

European Retail Rank

1 2

24 38

Company Otto Group Amazon.com

Type of Company

Country of Origin

Private Public

Germany USA

Sales CAGR (‘05-’10) 7% 31%

Sales CAGR (‘10-’15E) 4% 23%

Europe Sales as % of Total 87% 35%

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End of Presentation