Sonae SR

International Expansion

Signal Consulting

Kate Boland | Nick Lane | Greg Piercey | Stephanie Daley

Memorial University

Agenda

Problem Statement Kate

Key Issues

Objectives

Recommendation

Analysis Nick

Alternatives Greg

Implementation Stephanie

Risks and Mitigations Kate

Questions

Problem Statement

What approach should Sonae SR

take to international expansion to

fuel profitable growth?

Key Issues

Mixed results of franchising model

Variable profitability across store concepts

International IT system lacking

Brand building challenges

Objectives

Rapid Growth

New Market Penetration

Balance Risk and Return

Overall International Profitability

Recommendation

Procced with an

aggressive franchising

plan to expand Zippy to

new markets.

Analysis

Sonae financial performance

Relatively stagnant

growth across

entities

Sonae SR accounts

for 24% of turnover

International

expansion to fuel

this growth

€ 1,626

€ 579

€ 63 € 119

€ 1,633

€ 582

€ 64 € 124

Sonae MC Sonae SR Sonae RP Sonae IM

Sonae turnover breakdown by entity

Revenue (1H 2014) Revenue (1H 2015)

2014 - 2015 growth

Sonae MC 0.4%

Sonae SR 0.5%

Sonae RP 1.6%

Sonae IM 4.2%

Sonae SR

Diversified:

590 locations

Four store

concepts

EBITDA margin

negative YoY

Strengths in:

Own brand development –

28% of turnover

Operations and management

Talent / management

Areas for improvement:

IT / technology

Establishment of more

partnerships

Same store sales trend – Sonae SR

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Same store sales - growth rates by quarter

Portugal International

“Stores outside Spain are

profitable”

The four store concepts

185

81

113

38 44

36

11

82

Worten Sport Zone MO Zippy

Store locations by concept

Portugal International

29% of Sonae SR’s

locations are

international

Zippy is the most

international store –

68%

Largely due to single

franchise contract

The four store concepts

Worten

• Electronics and home appliances

• High market share required

• Accounts for 68% of revenue and

profit

• Struggles with international

expansion

• Brands not its own

• Requires large investment

• Online retail competition

• Spain stores 3x the size

The four store concepts

Sport Zone

• Sporting goods retailer

• Already achieved profitability in Spain

• Utilizing modified store concept in India

• Has begun launching franchised stores

• Desirable locations and wide selection

The four store concepts

Zippy

• Children’s merchandise

• All products sold are own brands

• High-quality offerings – profitability

• First store concept to franchise internationally

• Proven to succeed as a franchise model with Alhokair

• Failed franchises due to lack of local talent

The four store concepts

MO

• Fashion clothing store

• International expansion began in 2013

• Problems differentiating products

• Aimed at smaller towns and suburbs

• Generally low-priced offerings

Alternatives

Expansion Strategy Alternatives

Organic growth

Acquisition

Franchise / Joint Venture

Expansion Strategy Comparison

Organic Acquisition Franchise / JV

Rapid Growth - + + New Markets + + +

Balance Risk /

Return - - + International

Profitability + = +

Store Concept Alternatives

MO

Worton

Sport Zone

Zippy

Store Concept Comparison

Mo Worton Sport Zone Zippy

Owned Brands + - = + Proven Success = - + + Differentiation - - + +

Recommendation

Procced with an

aggressive franchising

plan to expand Zippy to

new markets.

Implementation

A Zippy

Growth Strategy

Implementation

Short (6 Months)

Improve IT, Branding & Sales

Acquire Zippy Partners & Franchisees

Medium (7 Months +)

International Zippy Store Roll Out

Long (24 Months+)

Focus on Growth of Sport Zone

Key Success Factors

Leverage operations strength

IT to fuel profit

Sales force

capability

Build a global brand

Talent Plan

Zippy Expansion Team (25):

Logistics, IT, Marketing, Sales

13 New hires for Sonae SR International

IT (5)

Sales (5)

Marketing (3)

IT Improvements Consolidate

& mine international

sales data

Leverage store

management capacities

Improve inventory

management & pricing

Powerful Partnerships

Dedicated sales force

Contacts in the target business communities

Ease of access online

Building a Global Brand

Experienced International Brand Manager

Experience with Carters

Refine brand & materials

Maintain consistency

Do not amend name

Advertising that reinforces quality

Put Some Zip in Your Portfolio

Be the first to bring the next global brand to your

market with Zippy Children’s Clothing and

Merchandise.

Fastest growing children's brand in Europe

Fueled by global management expertise of

Sonae

Country and partner selection process

Country selection

Partner selection

Executive and Board

decision

Population, birth rate,

economic growth, income

and income growth

Financial health, available

capital, proven history,

assets / network

Final decision made by

Executive and Board

Initial analysis points to China, India, and Mexico as country options

International Operations

Growth through Zippy Franchisee & Partnership

Focus on profitability of problem stores using

new IT systems

Stop expansion of Worton in Spain

Opportunity to leverage floor space for other brands

Budget

2016 2017 2018

Talent

Zippy $1.3 $1.3 $1.3

Sport Zone $1.3

Technology $2 $1

Sales & Marketing $1 $0.5 $1.0

TOTAL $4.3 $2.8 $3.6

Budget in Millions (EU)

Funded by debt.

What Success Looks Like

-5

0

5

10

15

20

2016 2017 2018

EBIT

DA (

Million E

uro

)

EBITDA from New Zippy Franchises

Low Profit

Expected Profit

High Profit

0

20

40

60

80

100

2016 2017 2018

New Zippy Store Franchises

India

China

Risks and Mitigations

Risks and Mitigations

Risks

Zippy Brand

Regulations

Talent

Probability

Med

Med

Low

Mitigation

Sportszone earlier

Further diversification

Further recruitment

Conclusion

•90 stores in 3 years Rapid Growth

•China, India New Market Penetration

•Capital-light model Balance Risk and Return

•IT enhancements Overall International Profitability

Questions