David Roth CEO The Store WPP, EMEA and Asia

This Presentation Is Dedicated To The Memory Of Michael Rosen

From The Inside Looking Out

May You Live In Interesting Times

If Anyone Tells You They Know Whats Going To Happen Next…

They Are Wrong

A Macro View

Living In A Minsky Moment

… Success Breeds Excess… … Excess Breads Collapse

From…invest in anything even with the most minimum yield To…investing in nothing but the safest government paper

Result Of Three Factors Low interest rates Quarter of a century of low inflation and stability… Belief business cycle had gone and risk disappeared

Globalisation And Convergence Catch Up Emerging markets growing 3x the developed world c 2001 Resource intensive industrialising period The first fridges, tvs cars, air conditioning Rapid growth will continue pressure on commodity prices

What does it mean? Low interest rates Long term dollar bear market Structurally rising inflation Unwinding of excesses Paying down debt, higher savings, weaker demand Slower growth emerging markets as decoupling impossible Accepted and welcomed

End Of US Consumer Being The Borrower And Spender Of Last Resort Of The Global Economic System

…And Now…The Perfect Storm Energy prices have quadrupled in past 4 years Oil prices highest level in real terms post war Commodity prices spiralling Turmoil and dislocation of the capital markets

Times successful business show their metal

The Credit Crunch Loan to value ratio step changes Cautious lending Requires capital of banks building up Viability of institutions business plan Can households service mortgages? Upside: In the 80s interest rates doubled, unemployment increased significantly Downside: 00 Loans X7 income

Dont Look To The Bank Of England To Stimulate The Economy The NICE decade has ended The Bank of England Is focused on one measure only - Inflation Bank action to brings inflation on target (2%). Currently 3.8%. Bank rate at 5% Squeeze on take home pay and real incomes Upside risk for inflation and downside risk to growth More on the upside

Dont Look To The Bank Of England To Stimulate The Economy Inflation high and output flat - not a sever downturn Negative quarters highly likely Cost shock from world economy impossible to absorb Government planning fiscal stimulus not a Central Bank initiative but a political one Predicting inflation will come out on target

And If That Wasnt Enough… Devaluation of sterling Impact the receipts of government Home owners reducing equity cushion CBI survey worst month in 25 years, firs half of August 2008 Consumer confidence 32 points lower than August 2007 (gfk) Summer that retailer would like to forget

A Macro View From Inside The Retailer

Market Punishing Retail Stocks Retail stocks down 50% since August 2007 Market nervous and looking for any signals Slight rumours send stocks sky high or crashing Quarterly reporting signposts

Not As Protected In VC Held Businesses Either… Many retailers financed by VC Depends on the strength of fund Generally saddled with large debt funding Require cash to repay debt VC will continue to back retailers who generate cash sales Exit timescales being pushed back Sovereign Wealth Fund opportunities China, Singapore, Middle East

Falling Sterling Value Will Increase Costs Previous upside of Pound:Dollar rate ending Export markets pegged to US dollar Downside of Pound:Euro Cost increases Particularly hit non food retailers

Volume To Mass Market Retailers Is Critical Economics built on volume and growing volume Building Fixed Costs Into Business…increases productivity with increasing volumes…puts pressure on costs when volume falls Slight reductions in volume puts strain on balance sheet Fixed cost creep, depreciation of historic capital spending

Cost Side Inflation Situation changed considerably Yesterday: Service inflation offset by commodity price deflation Today: Service inflation and commodity price inflation

Reduction in Time Horizons If there is no short term, there is no long term Long term...next week Trading patterns difficult to read Decisions will be made late… Once made : implementation immediate… Look at activity in relation to quarterly reporting timelines

Back to Basics Natural instincts going back to doing what they do best..

Doing Fewer Things… But Doing Them Better Only do things that grow sales and are core Do it with less resource Cancelling projects

Aggressively Drive Costs Out Of The Business

Reduce Borrowings Sale and lease back Dispose of non core assets Exit marginal and non strategic business

Reduce Capital Spending Capital spending impact on balance sheet and depreciation In capital constrained environment delay: New store openings Buying new sites Store re-fits Marginal range reviews Infrastructure and IT projects

Improve Cash Flow Change supplier payment terms Rent payments Consignment stock Reduce number of suppliers Decrease stock holdings Cancellation of orders at short notice

Pass The Hurt On…The Suppliers Better buying terms Re-negotiations Global re negotiations, consolidating volumes Volume rebate New store opening contributions Promotional support Delisting Squeezing every last drop out of the supply base

Cant Ride The Market, Need To Steal Market Share Riding market growth has ended Growth strategies need to focus on taking market share Aggressive competitive activity

Value Is King Flight to value Must own the value proposition Discounters in all sectors seen as threat Sub value lines to compete with discounters Tesco launching 1,000 new range of products below their value lines to take Aldi and Neto head on Price comparisons more common Promotional activity on KVI and value lines Brands for less…

Three In One Success = Building Customer Proposition + The Brand + Generating immediate Sales In 2008 Its Not Either Or

Increasing ATV Turning shoppers in buyers Using the footfall to buy an extra item

Sales Are Vanity - Profits Are Sanity

Managing Sales V Margin Balance-Simple Yet Complex Strategic decisions resulting in different tactics Generate sales through cutting prices and reducing margins Profit implications if not matched by increasing sales and cost reductions Maintain margin and reduce sales Sales and LFL, market share implications Reduction in profits Share price, ROCE,cost of capital implications Need to do both on different occasions

Innovation More Important Than Ever Why customers should buy Ranges Promotions Displays Shopper marketing

Need Better Consumer Insight Getting closer to customers increases competitive advantage But needs to be: Quicker, more decision orientated for better buying decisions and margin management What others are doing, worldwide that is working

Christmas Planning Make or break for the year for many Buy is made and committed....its now about execution…turn into cash Cash v margin Not if… but when will discounting begin A game of russian roulette Whoever goes early will bring the others with them The consumer will win

Looking For Growth In Other Markets Developing markets looking more attractive for some Requires significant investment… Growing interest in franchising and partnerships to reduce the risk

Consolidate or Be Consolidated Survival of the fittest Mergers and consolidations in all sectors Grocery sector Sainsbury's most likely to get squeezed Discounters, Resurgent Morrisons, Price fighting Tecso, Deep pocketed Asda (Wal*Mart) Well know high street names will disappear

Growth Challenging times provide opportunities This is cyclical so there will be an upside Will be winners who will come out stronger

Prying Open Tight Wallets Woo reluctant shoppers Innovate, innovate, innovate Innovative partnerships Play up strengths Video catalogues Service Multi channel Demonstrate exceptional value Loving customers Become part of your customers lives

Opportunities To Come Out Stronger And Fitter The Winners Strong Brands Play to strengths Innovate Keep a dialogue going Offer exceptional value Aggressive promotions in targeted areas Sales + build brand Move fast Relentless focus on costs Customer focused proposition Superior business model Multiformat strategy Manage/margin volume mix The Loosers Play dead Not well capitalised Cut customer service Tired propositions Generic promotions Formats that have ridden the upside hard Burn margin

This Presentation Is Dedicated To The Memory Of Michael Rosen