Pick n Pay Group Strategic Focus Areas Report

1. Strategic Focus Areas Report

2. Pick n Pay Group Strategic Focus Areas | FY2019 In FY2013, following four years of declining profit, escalating costs and difficulties with the transition to centralised distribution and SAP, the Group articulated a three-stage plan aimed to restore PnP to a position of long-term sustainable growth. Ultimately, PnP wants to be deemed ‘South Africa’s most trusted retailer.’ The overall business strategy has remained consistent since the implementation of the turnaround strategy in FY2013, with detailed focus of each area becoming more honed as the years progress. Stage 1 has been achieved and Stage 2 is underway and guiding PnP’s current behaviour: Stage 1: 2013 – 2016: Focused on stabilising the operations and financial position of the business, while developing a solid foundation for future growth. Stage 2: 2016 – current: Stage 2 is organised around the seven ‘business acceleration pillars’ which focus on delivering a better business for customers (shoppers), further improvement of operating efficiencies, strengthening of financial performance and the balance sheet, and material growth opportunities that can substantively affect the Group’s ability to create value over the short, medium and long term. Stage 2 of its long-term recovery plan is focused around the seven ‘business acceleration’ pillars (strategic focus areas) outlined below. These business pillars provide the senior management team with clear priorities, objectives and lines of accountability. Each business pillar presents an opportunity to create value and the value creation is tracked against measurable goals.

3. Pick n Pay Group Strategic Focus Areas | FY2019 cont. • Stage 3: Stage 3 will emerge from the successful completion of Stages 1 and 2 of the recovery plan, with the intention of putting PnP in a position to deliver long-term sustainable growth. The following are indicators that will be used to signal the start of stage 3: • A track record of consistent sales and profit growth over a number of years • A resource-efficient business that is a positive force for good in the countries in which it trades • Strong customer loyalty and advocacy • Continued innovation in store and in the customer offer • An operating model that benchmarks internationally • A continuing growth strategy • An employer of choice that delivers opportunity for all • Collaborative and enduring relations with a strong and diverse supplier base • Looking forward, overall long-term focus remains centred on: • Growing sales in line with, or ahead of the market, by providing great value, service and innovation for customers • Achieving high levels of operating efficiency and lower costs to enable maximum reinvestment in the customer offer • Restoring the underlying profit margin to a sustainable level • In 2018, the Group accelerated its efficiency efforts in response to the increasingly challenging trading environment in South Africa, supporting a more competitive offer for customers through lower prices, better stores and growing range of own-brand products.

4. Pick n Pay Group Strategic Focus Areas | FY2019 Table Table continues on next slide

5. Pick n Pay Group Strategic Focus Areas | FY2019 Table cont.

6. The Shopper: Better for Customers • Pick n Pay Group is committed to a ‘customer-focused, sales-led’ strategy, centred around driving customer loyalty, innovating on value-added services and improving the in-store shopping experience. The intention is to better serve the needs of the customer through: • Lower prices, supported by a strong promotional calendar • The focus is on continued innovation on everyday price and promotions mechanics such as combo deals, to improve the quality, value and relevance of the customer offer. In March 2017, PnP announced its intention to invest R500m to lower prices across 1,300 grocery lines in-store for Smart Shopper customers, with particular focus on fresh meat, fruit and vegetables. In FY2018, the Group extended this to 2,000 everyday grocery items, with particular focus on fresh fruit and vegetable combo deals, as well as price focus on key butchery lines. Success of this can be seen in the following areas: • Internalinflation – thishas remained below food inflation (measured through CPI Food by StatsSA) with FY2018 internal product inflation at 2.2% (FY2018: 6.1%), relative to average food CPI for the period of 5.9% • Note: For further depth on PnP Shopper Marketing at Retail campaigns and mechanics, refer to the Ti Pick n Pay Shopper Marketing Trade Profile. • Private label – The intention is to utilise private label to bring customers exceptional value through a stronger three-tiered ‘good, better, best’ offer, increased quality and choice, as well as to provide small suppliers and entrepreneurs with access to a national market • There is growing customer support for own-brand products, with a number of PnP own-brand products reportedly growing at more than double the rate of independent, national brands in the same category • Pick n Pay introduced 730 new or refreshed own-brand products in FY2018, including 25 products from its “Pick Local” supplier development programme • A big focus for own-brand includes a stronger ready-meal convenience range for time-pressed consumers

7. The Shopper: Better for Customers cont. • Innovation in loyalty, value-added services and a focus on frontline customer service • Key drivers to achieve an improved in-store customer experience by better serving the needs of customers include: • Loyalty • Smart Shopper (launched in March 2011) is considered South Africa’s biggest loyalty programme with over 7 million active customers, and is regarded by PnP as a valuable source of shopper insight • In FY2017, a more modern and cost-effective Smart Shopper was implemented with the introduction of personalised/relevant discounts based on each shopper’s actual shopping habits – seemingly positive responses with +30% growth in overall redemption and +100% growth in number of personalised vouchers redeemed since the change over • Frontline Customer Service • Frontline customer service has been an area in which PnP has experienced some challenges in the past, hence the ongoing focus on trainingstaff members to offer customers a quick, courteous and consistent customer service experience. • Pick n Pay launched the Fan Score programme in July 2017 whereby stores are measured and ranked monthly, based on customer feedback received. Incentives are provided to those stores that deliver exceptional service

8. The Shopper: Better for Customers cont. • Value-added Services • Value-added services, such as third-party bill payments, financial transactions at the till point, ticketing services, air time sales and the sale of gift cards continue to grow for PnP. Next Generation stores have brought with them new PnP money counters, which aim to reduce queue times and frustration of shoppers waiting at till points and enable the expansion of value-added services. Areas with noteworthy enhancements in FY2018 include: • A new low-cost money transfer service: launched in FY2017 in partnership with the Commonwealth Bank of Australia, now has over 400,000 registered customers. This service is fully digitised, integrated with Smart Shopper, and can be used from any PnP till point • Store account: Pick n Pay is determined to grow into South Africa’s most affordable and inclusive banking partner – it launched its first store account in September 2017, in partnership with RCS, a local subsidiary of BNP Paribas Bank. The PnP account offers a 55-day free credit payment option and no joining fee – 56,000 customers were approved in the first six months • Credit spend was reported below R200m with the credit facility apparently used predominantly as an alternative to other forms of more expensive credit. Pick n Pay claims that most customers elected to pay off their credit before interest was incurred • Initially this facility received a lot of press with a concern expressed around the notion of offering credit on food in a country where most consumers are still poor. Time will if PnP is being prudent enough with approval of applications

9. The Shopper: Better for Customers cont. • Enhanced fresh produce offering, with a focus on longer-lasting quality and combination deals • The intention is to continue to invest in improving the quality of fresh and perishables as a means to attract shoppers, with the aim to grow fresh at double the rate of overall PnP growth – focusing particularly on improving shelf life and freshness through the cold-chain and improving the range to meet increasing demand for fresh foods. In addition to quality, pricing remains critical in fresh, with PnP focusing on fruit and veg combo deals, as well as pricing on key butchery lines. One area of focus includes: • Regular and stringent food safety audits and third-party audits of all suppliers

10. 2. Store Footprint: A flexible and winning estate • Pick n Pay continues its focus on opening stores in communities which offer long-term sustainable returns thereby extending its reach in response to changing customer demographics, with the intention of minimising impact on existing stores. The leveraging of its improved operating flexibility and efficiency has enabled PnP to accelerate smaller convenience store openings, enhance the overall estate (including hypermarkets) by refurbishing stores and grow the online offering. • This will be achieved through: • Sustainable growth in new space • Pick n Pay has not released its planned new store openings for FY2019, however the intention is to accelerate new store openings, with the focus on franchise, smaller formats and Next Generation stores. • New stores increased turnover growth by +3.1% in FY2018 (down from +3.6% in FY2017), adding 3.3% to total space. 153 new PnP stores were opened (29 closed) in FY2018 across multiple formats, expanding reach to 15 new communities by increasing the estate to over 1,650 stores (50% of the supermarket estate is new or has been revamped in the past three years). • Pick n Pay’s intention is to offer the most successful, mutually beneficial franchise model in the retail industry. Pick n Pay positions its franchise model as an effective way for emerging entrepreneurs to build a business while leveraging the scale and distribution capacity of the greater PnP Group. Pick n Pay’s intention is to continue to grow its franchise business (59 new franchise stores opened in the year). One noteworthy area of focus was: • Spaza-to-Storeconversion. 14 convenience spaza shops have been brought under the PnP brand in townships in Gauteng and Western Cape. This is a transformative partnership between PnP and Government in order ‘to bring a wider range of safe and affordable food to neighbourhood communities’.. The next 12 to 18 months will provide better insight into whether this remains a sustainable community development programme, and/or whether it is an important means of introducing entrepreneurs to the PnP model, with the intention of growing them into full PnP Family store franchisees

11. 2. Store Footprint: A flexible and winning estate cont. • Targeted refurbishment programme • The storerefurb programme, which focuses on improving the overall quality of stores through improving the shopping experience and delivering improved turnover and ROI, continues to accelerate. Next Generation stores, and specifically smaller convenience formats, are reported to deliver higher like-for-like growth, and the ability to operate a more efficient store on a leaner cost base. • 80 stores were refurbished in FY2018 including 61 company-owned and 19 franchise stores, well ahead of the 62 in FY2017 and the 40 in FY2016 • Major refurbs worth noting (as part of the Next Generation store format) included the flagship Constantia supermarket in the Western Cape, the Durban North Hypermarkets in KwaZulu-Natal and the Northgate Hypermarkets in Gauteng • The first Next Generation supermarket stores were launched during FY2016, offering customers: • An improved shopping environment with lower operating costs • Improved store design • A more compact range • A strong fresh and convenience offer

12. 2. Store Footprint: A flexible and winning estate cont. • Greater convenience • Convenience is increasingly gaining importance in an ever-demanding society. In the case of PnP offering greater convenience as a means of increasing operating flexibility and efficiency, it takes on the form of: • Convenience Focus • The increasing demand for convenience, more flexible opening hours and the ability to move around a smaller store quicker by time-pressed shoppers, has seen PnP respond by increasing the number of small stores. The success of these smaller convenience stores will depend on the flexibility and efficiency with which PnP can leverage within its operating model, allowing for these stores to run on a leaner cost base. In the quest to open more stores closer to its customers, PnP has responded in FY2018 with opening stores in the following formats: • 9 new PnP Local stores (floor space ranging from 500m2 – 3,900m2) • 9 new PnP Express formats (retail forecourts in partnership with BP with floor space of 300m2) • Convenience Range • Convenience meals are a driving feature in Next Generation stores as time-pressed consumers demand for pre-prepared convenience increases. Pick n Pay was particularly proud of the recognition received for its range of convenience meals, which earned 20 first places in the Sunday Times Food Awards in 2018. A new convenience range of meals for children was launched in H2 of FY2018.

13. 2. Store Footprint: A flexible and winning estate cont. • Enhanced Online Offer • Pick n Pay boasts the title of ‘leading online grocery retailer on the African continent’ with continued investment into its digital platform, focussing on convenience and ongoing innovation. This has been reflected in the following ways: • A new mobile-enhanced website was introduced in September 2017, making online shopping easier for shoppers – online visits from mobile devices reportedly increased +70%, and online customer registrations by +150% • Delivery service hours have been extended in high-demand areas, and geographic reach has been extended to an additional 68 suburbs (now 2,900 in total) • ‘Click n Collect’ showed +23% growth • Dedicated online DCs have been established in Cape Town and Gauteng in order to extend reach, increase availability and range and improve standards of delivery • In order to address some of the challenges presented by online shopping and home delivery, the management of onlinedelivery fleets has been insourced. The intention is to provide more reliable and on-time delivery in one-hour time slots.

14. 3. Operational Efficiency: Efficient and effective operations • An efficient, well-run and cost-effective store operation is key to delivering an excellent shopping trip for customers. The long-term strategy remains customer-led and cost-driven, and PnP continues to focus on improving the quality and underlying profitability of its operations, reducing costs and improving efficiencies. • Greater efficiency unlocks value for further investment in the customer offer, with focus on: • Sustainable improvement in trading expense margin • Pick n Pay has restricted like-for-like trading expense growth to +1.6% (3.0% in FY2017), below like-for-like turnover growth of +2.2%. • Like-for-like employee costs reduced to 7.9% of turnover (FY2017: 8.3%), if the once-off cost of the VSP is excluded • Like-for-like operations costs increased +2.4% • Stronger working capital management, including range rationalisation • Focus remains on inventory management and range rationalisation (in particular the stock holding of slow-moving lines) in order to reduce the number of stock holding days and so free up working capital. Areas of improvement include: • Inventory levels: +4.9% in FY2018 with like-for-like inventory levels -5.0%, an achievement worth commending • Supplier finance system: Pick n Pay has implemented a ‘Fast Pay’ supplier finance system allowing early settlement at competitive funding rates • Trading space ratio improvements: The Next Generation stores aim at an 80:20 ratio of trading space to back-up area allocation – an improvement from the traditional store formula of 70:30

15. 3. Operational Efficiency: Efficient and effective operations • Lower finance costs • The level of interest rate affects the cost of debt, and ultimately the profit. In FY2018, PnP Group reported an increase in finance costs due to its investment in capital programmes. The intention is for Pick n Pay to lower finance costs and interest costs in the FY2019 period where possible. • Cost-effective support offices and centralised support • The intention is to provide more cost-effective and productive support offices, aimed at centralising support services to eliminate any inefficiencies, bringing costs in-house where feasible. Areas of Group focus include: • Support office cost • Removing duplication of effort • In-store operating procedures, procurement and administration • The effective use of systems • The simplification of processes

16. 4. Supply Chain: Every product, every day • Pick n Pay intends to further optimise distribution capability within the objective of ‘every product, every day’ distributed out of DCs on a short lead time, and centralisation increasing YoY. This will be achieved through:  • Greater centralisation and efficiency of supply and distribution • The Group articulates progress in its goal of achieving an efficient and fully centralised procurement and distribution channel, with: • Improved on-shelf availability • Improved waste management and strike rate • Cost savings • Centralisation • 98 suppliers were added in FY2018 (including 6 new suppliers from PnP’s supplier development initiatives), with 68% of volume centrally distributed (up from 60% in FY2017): • Grocery at 70% • Fresh and perishable produce at 80% • General Merchandise at 40% • The DC breakdown is as follows: • Western Cape Philippi DC: 78% total centralisation and 90% grocery centralisation • Inland Gauteng Longmeadow DC: 70% total centralisation and 75% grocery centralisation (up from 53% in FY2013) • KwaZulu-Natal DC: Fully operational, and began delivering to stores in March 2018 Additional distribution capacity in Gauteng The Group sees the Gauteng region as an area of opportunity in terms of increasing capacity. The Group operates 12 DCs across the country catering for groceries, fresh and perishable produce, and clothing. The two largest DCs distributing fresh produce, perishables and groceries, are Longmeadow (Gauteng) and Philippi (Western Cape)

17. 4. Supply Chain: Every product, every day • Improved efficiency and cost per case reduction remains a focus, through: • A single warehouse management system across all DCs (SAP EWM) • An enterprise-wide automatic forecast and replenishment system • An online, real-time supplier portal • A dedicated team of procurement and distribution experts • Ongoing cost and efficiency savings from the ‘Buy-better’ programme, launched in June 2017, is intended to: • Strengthen relationships with suppliers • Improve inventory management • Increase value for customers by improving efficiencies • Lower costs across the supply chain • Suppliers have access to an information portal which provides engagement facilitating real-time data to better inform decision making and transparency. Collaboration with suppliers is critical to the success of the programme, with over 3,000 suppliers involved in the programme thus far. The intention is for collaborative suppliers to achieve the following benefits: • Shared weekly forecasts • Promotional volume collaboration of T – 12 weeks • A dedicated vendor coordinator in PnP supply chain teams • Daily in-store availability and strike rate reports per item per store • Stock level reports per item and location • Vendor management inventory opportunities • Full pallet, truck ordering and Greenlight receiving • Cross docking groceries • Fixed slot and fast lanes

18. 5. People: A winning team • The PnP Group has an ambition to build the most skilled and talented retail business in South Africa, and in all the African countries in which it operates. Pick n Pay attracts staff by ‘providing competitive pay and benefits, access to skills training and development, as well as career advancement and recognition.’ • The Group aims to become leaner, fitter and better for customers through ongoing streamlining of employees and operational structures. • The intention is to attract and retain the right skills and the right team through the organisation, with particular focus on: • Creating jobs through more stores • Pick n Pay hopes to create another 15,000 new jobs over the next three years, with the ultimate goal to target young unemployed job seekers. •  Improved labour cost as a percentage of turnover • The intention is to reduce the cost and improve the productivity and efficiency of labour (and all support services), providing a stronger base for stores and customers. An example of how the Group is supporting this focus area: • Conclusion of voluntary severance programme (VSP) that was implemented in April 2017 whereby 10% of workforce was reduced, aimed at removing roles and functions that were no longer required, thereby improving the productivity and efficiency of the team • Excluding the cost of the VSP, like-for-like employee costs reduced to 7.9% of turnover (FY2017: 8.3%)

19. 5. People: A winning team contd. • A more cost-effective and efficient HR function • Training has been focused on keeping the customer at the centre of every action, encouraging staff members to ‘do better for customers every day’. Thus: • The Group delivered 31,595 training interventions in FY2018, reaching almost 11,000 staff • More than 5,000 employees completed customer services training • Pick n Pay implemented the PnP Fan Score to measure customer service against customer feedback • Learnership programmes focused on scarce skills, such as bakery and butchery • Performance management and reward programmes aimed at building a “strong, tenacious and ambitious team that is recognised for delivery of strategy”

20. 6. Boxer: A national brand • Boxer delivered strong growth over the past year, notwithstanding the difficult economic conditions facing the middle and lower-income communities it serves. The Group’s ambition is to continue to build the Boxer business to become the leading limited-range discounter in Southern Africa, through: • Increased capital investment across new stores and refurbishments • Enhanced fresh offer • Greater levels of centralised supply • For more information on Boxer, please refer to the Trade Intelligence Boxer Trade Profile and Executive Report.

21. 7. Africa: A second engine of growth • Pick n Pay has an established presence in six countries outside of South Africa, trading from 144 stores in Botswana, Lesotho, Namibia, Swaziland and Zambia and has a minority (49%) investment in TM Supermarkets in Zimbabwe. Pick n Pay sees the ongoing formalisation of food and grocery retail across Africa as a driver to provide the Group with a second engine of growth in coming years. • Operations outside of South Africa remain an important contributor to Group performance, contributing R4.6bn in segmental revenue during FY2018, +7.7% YoY segmental revenue growth (+9% constant currency terms), and +27.7% YoY growth in profit before tax, underpinned by strong performance from TM Supermarkets in Zimbabwe. • Signalling its commitment to growing into new markets in Africa, PnP has a dedicated ‘Rest-of-Africa’ team. It continues to look for profitable opportunities to grow its store footprint in the rest of Africa, in countries offering a calculated level of political stability, economic growth, ease of doing business and a prospect of strategic scale, without too much complexity, with particular focus on: • Investing in new stores in Zambia and ongoing refurbishments in Zimbabwe • Maintain progress in Zimbabwe • Strong performance in partnership with TM Supermarkets, delivering double-digit growth and +45% earnings growth, driven by positive contribution from PnP branded stores and increasing demand for PnP own-brand products • Opened new store in Gweru • Three refurbishments during the period, including flagship store in Borrowdale • The Group will continue to invest in improving the quality of its stores and its customer offer

22. 7. Africa: A second engine of growth contd. • Improvement in Zambia • Trading conditions, impacted by prolonged drought and a low copper price, remained challenging • Stronger operational efficiency and cost control tempered the impact of the trading environment • Alignment of system infrastructure with South African operations, through a new point-of-sale system • The Group remains confident about its long-term prospects and will continue to build scale in the region and drive growth through competitive customer offerings • Improving operating model • Pick n Pay continues to look for ways to deliver further cost savings while dealing with difficult and varying trading environments, high exposure to political instability, economic instability including currency fluctuations and devaluations. • Developing business in West Africa • The intention is a measured, planned and unhurried approach in order to manage the associated risks and plans to open stores across varying formats to meet consumer needs. • Following extensive market and consumer research, PnP has identified long-term growth opportunities in Nigeria, and intends to open stores in Nigeria in 2020 through a joint venture with the experienced local AG Leventis. The Group is working closely with AG Leventis to secure suitable trading sites in Lagos. AG Leventis is a family-owned leading manufacturing and distribution corporation operating in Nigeria and West Africa with principle activities in the FMCG, motor vehicle, logistics and real estate sectors. Pick n Pay will hold a 51% share of the joint venture.

23. Maryla Masojada | Lead AnalystAdrienne Osberg | Retail Analyst