Where We Are Now…

1. Where WeAre Now… Presented by: Bryan Gildenberg November 2008

2. A Gathering Storm: We’re Going To Party Like It’s 1992 You Are Here Wall Street Main Street Storm Track

3. So, Let’s Play The Storm Metaphor Some More ;-) • The back eye wall of a hurricane is the worst place to be • All measures would suggest we have just entered this • A 3-9 month period of intense turmoil • Increases in unemployment • Mildly catastrophic business results – profits and cash flows down • The wind-down of the asset selloff • Housing searching for a landing place • Troughed consumer confidence

4. US Consumer Confidence (or Lack of It) September 2008*: 58.8 60.5 59.8 Index Consumers More Optimistic About Tomorrow Than Today Consumers More Optimistic About Today Than Tomorrow 35 Year Low *Preliminary #s Source: Pollingreport.com

5. Consumer Confidence in Pink, 12-Month Rolling comps In blue… September 2000-October 2008 Source: The Conference Board, MVI Research

6. 4 Simple Retail Rules(Or, Why Wal-Mart Trumps Target) • Needs beat wants • Discretionary purchases will disappear for a while • Value beats difference • Some difference is fine, but value has to lead • Trip consolidators dominate “extra trip” retailers • Trip capture obviously important • …but for retailers that are not the highest frequency option in their shoppers portfolio of stores category conversion is the real game • Financial conservatism beats financial adventure • Target’s credit card business

7. The Core Real Estate Problem Is Still RegionalWhich retailers are exposed? Source: RealtyTrac.com

8. Latest Estimates from the Federal Open Market Committee • Real GDP growth FLAT in 2009 • Unemployment rising until early 2010 • Which cripples consumer confidence • Housing market bottoms late 2009 • Until then discretionary purchasing challenged • Disinflation and a risk of deflation in 2009 and 2010 • Though with all due respect we may disagree with them a bit on the fate of the dollar in 2009

9. The Economy Is PersonalThe “Consumer’s” Financial Statements Cash Flow Challenges (reduce, trade down, trade out) Balance Sheet Change in financial strategy (defer, delay, redefine) • Asset values – real estate price decline • Asset values – less opportunistic capital gain • Debt – harder to service, harder to get Income Statement • Cost inflation – declining dollar • Cost inflation – export restrictions • Wage acceleration – slower than inflation • Tax stimulus – short-term bump

10. The Trading Goes Up & Down, But Also In And Out Trade Up • The New Frugality • Bulk purchase for cost/oz value • Replace high ring purchases/services with lower cost solution • DIY vs. DIFM • The New Premium – personal and societal • Transparency • Preservation • Purpose Trade In Trade Out • The New Poverty • Trip Consolidation • Category Rationalization • Back to the non-modern trade • The New Value: • Smaller packs • 2nd tier brands • Private Label • Promotion responsive Trade Down

11. Retailer Uncertainty Is Strangely Predictable • Uncertan retailers have 2 specific behaviors • Profit certainty vs. profit maximization • Asset avoidance vs. asset productivity • Profit certainty • Buy side vs. sell side profits • % margin vs. $ margin • Fees vs. “% of the take” • Asset avoidance • All about inventory minimization – anyone else have a customer that’s stopped ordering in 2008?

12. What’s The Way Out? • Hard to see the consumer leading us out of this recession • Income statement consumers choked by unemployment • Balance sheet shoppers reconfiguring their wealth perception • What can government do? • Somehow help establish a floor for housing values • Direct stimulus/infrastructure spend may only replace what states stop spending • Industrial policy must be aimed at industries that will generate demand and US capital investment • Massive US stimulus plan may be coming (will destroy the dollar, btw)… • It’s up to business…now, how’s that gonna work? • Global sourcing may rebalance markedly if US industrial policy, a weaker dollar and Chinese capacity constraints converge as a “perfect storm”

13. A Crisis Is a Terrible Thing to Waste!What an “Inverted Yield Curve” Means Certainty • Winners in 2010-2012 Building “FITTER” FMCG companies • Flexibility • Information flow • Total economic returns • Tribe leadership/conversational marketing • Enablers (people, tools) • Retailer brand development Traditional An average company with short-term uncertainty Time

14. Key Economic Conclusions Disinflation will be the word for 2009 This means those of us with projected price increases have a tough time ahead Obama’s First 100 Days Are Critical 52% of the USA better have been right about this guy! Unemployment has several knock-on effects Fear Wages Time pressure

15. Key Economic Conclusions, Cont’d Holiday messaging will need to be fine-tuned or overhauled Local economic conditions will drive different regional strategies Tightening credit puts more businesses at risk For highly leveraged retailers your credit teams need to be integrally involved Uncertainty is your reality….

16. Market Evolution Has Many Stages…

17. Market Evolution Has Multiple Phases Exploration Penetration Concentration Maturation Post-Modern MT <20% of mkt T5 MT retailers <30% of MT MT <30% of mkt T5 MT retailers <40% of MT MT <40% of mkt T5 MT retailers <50% of MT OT>50% of mkt T5 MT retailers >60% of MT OT>60% of mkt T5 MT retailers >70% of MT Gradual Transition Regional Variations Rapid Transition Gradual Transition Rapid Transition Multi-Format DominantHigh-capability Drug, Supermarkets & Category Specialists. Regrowth of Specialty Chains, Mom ‘n Pops with Demographic Focus Adjacent Nation, Pioneers, andSecondary Formats Traditional Trade now impacted Adjacent Nation, Primary Formats Discounters & C-Stores = new growth formats; Hypers and C&C largest growth formats Pure Secondary Formats, Multi-formatsDrug, Supermarket, Category Specialists PioneersCategory Specialists,Hypermarkets, Cash & Carry, and Local Food Chains Developing markets move along a predictable evolution continuum Source: MVI research

18. Overarching Trends Across Markets • Very difficult to generalize about markets and their exposure • That being said, many markets in Exploration and Concentration mode have banking systems that are decoupled from the global system • Has been a barrier to economic growth historically • However, in this environment? Blessing in disguise • Uncertain economic times are often good for the informal/traditional trade • Slower economic growth slows modern trade aspirations • Informal credit often required to get through tough times • Modern trade operators need profits and growth when a pure growth story is unconvincing to investors • Modern trade (especially for discretionary purchases) in many cases leverages purchasing power from remittances, which slow in a global slowdown • Declining commodity costs leave many markets exposed to rapid drop in GDP • Particularly acute in “oil based” economies • Some, like Chile, actually prepared for this… • Cash flows more important than profits • Asset avoidance vs. optimization!

19. Exploration Markets: Focus India • Indian economy unique for exploration in that it net benefits from falling commodity prices • 2/3 of India’s economy is still internal, not global • Rising food prices hurt India domestically more than it helps their export revenue • India’s exports more balanced between materials, goods and services • Retailers modernizing India are by and large Indian, well capitalized and patient • In exploration phase, domestic modern operators often lack financial sophistication – not the case here • Some strategies making their way into this market earlier • Future Group in particular more aggressive with private label

20. Concentration Phase – Most of Lat Am and Russia • Recovery from tough economic times accelerates concentration • Most acquisitions come buying troubled retailers • If downturn weren’t global, retailers from sound economies could be more acquisitive • Major global consolidators in Lat AM (WMT, CFR) have their issues at home right now • Real advantage for Lat Am is previous credit woes • Much stricter banking regulations than most of the developed world leaves their banks relatively solvent right now • Price warfare a feature of the concentration phase anyway, so any softening intensifies this • Lat Am concentration drivers largely Chilean outside of the globals, so Chile’s economy is the one to watch

21. Lat Am Penetration Markets • Brazil, Mexico, Argentina, Chile (though Chile is in many ways a post-modern market) • Continued format innovation to expand beyond primary geographies – Dia%, Todo Dia, Bodega • Chile hoping copper prices rebound before their rainy day fund runs out • Brazil, Mexico, Argentina though the global economic crisis is interesting many of their problems are at home • Brazil – weaker peso, government transition • Mexico – crime and linkage to the US economy • Argentina – continued political uncertainty and low consumer confidence • Penetration phase for major retailers all about format development and complexity management – this will continue

22. Other Key Attribute of Penetraton Phase Retailers Is Consumer Credit Global credit crunch Consumers turn to retailer credit Alternative source of revenue Larger basket Big ticket items Retailers try to show they understand the hardships shoppers are going through, and offer rewards to help them get through the tough times Manipulate point rewards to keep people spending Source: MVI research, company websites

23. Conclusions:Around The World in 20 Minutes • US economy is headed for a short, sharp shock • What happens after that is anyone’s guess but recovery before 2010 seems unlikely • SENTIMENT CHANGES FASTER IN A NETWORKED WORLD • Major challenges for retailers in the USA that sell discretionary purchases based on difference • Exploration markets – the revenge of the traditional trade? • India is (like always) almost backward from the conventional wisdom here • Concentration markets – intense price competition and acquisition on the way to recovery • Penetration markets – smaller formats and consumer credit key drivers of growth

24. … A Partner in Your Success Thank You! Bryan Gildenberg Chief Knowledge Officer Global Headquarters: 20 University Road Cambridge, MA 02138 617-588-4124 bryan@mventures.com Management Ventures, Inc.