RETAILNETGROUP STRATEGY ALERT RNG's Latest Chain Retail Forecasts for Latin America April 2009

Greetings! We recently completed a major update for our chain retailer database in Latin America and wanted to briefly highlight a few of the themes we came across during our update. For those not familiar with RNG's coverage in Latin America, we closely track, monitor, & forecast over $200 billion dollars in chain retail sales accounting for close to 20% of formal retail sales in a region with a combined GDP of more than $3.5 trillion dollars. Please read on for the five biggest themes coming out of from our update. Subscribers can access these detailed views at the banner & market level at retailnetgroup.com. As always, please reach out with any questions or concerns - we are here to help. Sincerely, Aaron Chio Senior Analyst RetailNet Group

I. Chain retail sales will slow down significantly... ... but continue to grow sales & share. (Figure 1) Despite talks of potential deflation in developed markets, inflation still remains high throughout most of Latin America. In addition, currency depreciations will impact prices of imported goods, further pressuring costs & price points higher. These two things should somewhat offset economic slowdown in the region - at least nominally. Nonetheless, RNG is still forecasting a marked slowdown in sales & store growth across the board down from double digit, 11.9%, to single digit, 6.9%, sales growth for chain retailers. Figure 1: Sales & stores forecasts, Top 25 retailers in Latin America

Source: RNG Database (click image to enlarge)

II. Retailers still opening stores... ... just at a slower pace (Figure 2). Despite credit tightening & tougher market conditions, retailers are still opening stores--albeit at a significantly slower pace. The key difference between what we are seeing in the US (dozens of retailers going bankrupt and closing thousands of stores) and Latin America is that the latter is not nearly as over-developed as the US, particularly around category specialists. The chart below compares 2007 openings vs. 2009E store openings, showing that a higher number of banners opened more stores in 2007 than we expect for 2009E. In other words, while 205 banners opened two or more stores in 2007 only 143 banners will do the same in 2009E - that's a 30% difference from '07 vs '09E. Figure 2: Fewer banners to open fewer stores in 2009E.

Source: RNG Database

III. Share continues to concentrate The Top 10 retailers in Latin America accounted for 45% of RNG's chain retail database in 2006, and their share will continue to grow to as much as 54.6% by 2013E (See Figure 3). Acquisitions & retail consolidation across markets are two key drivers here (click the slide below for summary sample of key developments). In addition, we see more and more retailers going after different shopping trip occasions & socio-economic segments, further consolidating sales in the markets where they operate while expanding into new geographies. Figure 3: Share of RNG's chain retail sales

Source: RNG Database (click images to enlarge)

IV. Consumable-focused retailers will outpace discretionary-focused retailers As consumers' disposable income is pressured during tough economic times, one of the most affected spending areas is discretionary spending. Since the vast majority of the modern trade in Latin America takes place primarily around food related segments (over 50% of RNG's chain retail sales in Latin America are concentrated in the grocery channel), we see need-based segments outgrowing the market and want-based segments growing significantly below average (Figure 4).

Figure 4: Winning and Losing segments

Source: RNG Database (click image to enlarge)

V. Leading retailers have multi-segment & multi-market approaches RNG expects the retail leaders that will outperform the market will have a multi-segment approach, targeting different socio-economic segments & most importantly will focus primarily in the bottom of the ladder - a segment that has been relatively untouched historically by the modern trade. In addition, six out of ten of the top ten retailers in our earlier list (Figure 1) have multi-market operations. The other four operate almost exclusively in their home markets, which coincidentally happen to be some of the largest modern retail markets in Latin America (Mexico with Soriana & Oxxo; Brazil with Lojas Americanas & Casas Bahia; Colombia with Exito).

What does this mean? A few things can be concluded from this, most of which we have talked about in past Strategy Alerts:

● This change appears to be structural, not cyclical. Retailers are evolving their strategies to match the economic cycle and this will change how we go to market over the next 12-36 months.

● Non-discretionary will continue to outperform discretionary segments. When we look at how discretionary is performing in the US, one would expect similar performances in other parts of the world. However, Latin America is much less developed/saturated in the category specialist space which leaves room for growth

● However, not all segments are created equal. Discretionary segments, like department, electronic, furniture stores in Latin America operate under a much more "rent-to-own" model, where credit plays a huge role in facilitating purchases. Unlike some modern markets, this market is still largely unexplored by many retailers and presents a tremendous opportunistic upside for retailers to tap into consumers' pockets.

Still have questions? We are helping both our retailer & CPG clients work through a lot of these issues today. Simply drop us a line to see how we can help.

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