1 planetretail.net Strategic Preview: Q2 May 2013 – August September 2013 DAVID GRAY Retail Analyst

1.Expectations for the Quarter 2.UK: Q2 Strategic Changes 3.Global: Q2 Strategic Changes 4.Outlook 5.What’s new at Planet Retail Strategic Preview: Tesco Q2

3 UK like-for-like sales (inc. VAT) will remain broadly flat in Q2, with the possibility of a slight decline. Actual Like-for-Like Sales Projected Like-for-Like Sales

4 Tesco is testing sub-letting space to third parties in some of its largest stores.  TESCO is in talks with sporting goods retailer Sports Direct and gym operator Xercise4Less on space sharing. Sports Direct could take over mezzanines at three of Tesco’s stores. Xercise4Less will take space at Tesco’s Stockton-on-Tees outlet.  Downsizing or sub-letting space to other retailers is one of a number of measures being considered by Tesco to utilise excess out-of-town space. Tesco has already implemented a space sharing scheme in the Czech Republic in partnership with Sports Direct.  We see the out-of-town space issue as having been exaggerated in the UK, with Tesco facing far lesser problems compared to European rivals such as Carrefour, where hypermarkets can be over 10,000 square metres. However, letting space will generate rental income for Tesco. It will also increase destination appeal and floor space productivity. That said, Tesco will need to choose the parties to which its rents space with care.  Tesco opens tyre-fitting service in partnership with Black Circles at a store in Bletchley, near Milton Keynes.  We are encouraged by Tesco’s willingness to trial the provision of new services at large stores. The introduction of a tyre-fitting service in partnership with Black Circles – a well-established online tyre specialist – also has potential to drive additional footfall to the store. If successful, it could be rolled out to other outlets. © thesundaytimes.co.uk © Retail Week

5 Global Update  US: Tesco announced the sale of its Fresh & Easy arm to investment firm Yucaipa, which will acquire 150 stores along with the Riverside distribution centre. The remaining 50 outlets will close.  We take a positive view on the sale of Fresh & Easy. It will remove an unwelcome distraction for Tesco both in terms of funds and man hours. This is a good outcome as it will offload the majority of stores (circa 150) to one buyer, leaving only 50 where Tesco will have to manage the closure. A far better outcome than selling piecemeal to a variety of buyers – which we must remember had been more widely anticipated.  The cost of approximately GBP150 million (USD232 million), which includes a GBP80 million loan against the Riverside DC alongside costs associated with the closure of the 50 stores, is also lower than some investors had feared.  Now comes the question what will Yucaipa, the investment fund set up by Ron Burkle, former owner of the Wild Oats brand, do with the stores? It has been speculated the outlets may re-open under a new identity similar to Wild Oats – a chain of organic food stores which were sold to Whole Foods Market in  Even so, the sale of Fresh & Easy in itself will do little to change the issues facing the chain, particularly poor site selections and product offerings that were not geared to the interests of shoppers in the specific location. While the new owner will be able to adjust their strategy to rectify the latter, the former (site selection) will be difficult, if not impossible, to fix. © Storebrandsdecisions.com