Management Ventures, Inc. Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.com © 2008 MVI Where We Are Now… Presented by: Bryan Gildenberg November

Management Ventures, Inc.Management Ventures, Inc.

Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.com © 2008 MVI

Where We Are Now…

•Presented by: Bryan Gildenberg•November 2008

2-2 Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.com © 2008 MVI

A Gathering Storm: A Gathering Storm: We’re Going To Party Like It’s 1992We’re Going To Party Like It’s 1992

You Are Here

Wall Street

Main Street

Storm Track


So, Let’s Play The Storm Metaphor So, Let’s Play The Storm Metaphor Some More ;-)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


US Consumer Confidence (or Lack of It)US Consumer Confidence (or Lack of It)

50

60

70

80

90

100

110

120

130

140

Consumer Confidence Index Present Situation Index Expectations Index

Ind

ex

Source: Pollingreport.com

Benchmark for Consumer Confidence (1985) = 100

59.8 58.8 60.5

September 2008*:

*Preliminary #s

Consumers More Optimistic About Tomorrow Than Today Consumers More Optimistic

About Today Than Tomorrow

35 Year Low


Consumer Confidence in Pink, Consumer Confidence in Pink, 12-Month Rolling comps In blue…12-Month Rolling comps In blue…

0

20

40

60

80

100

120

140

160

1234567891011121314151617181920212223242526272829303132333435363738394041424344454647484950515253545556575859606162636465666768697071727374757677787980818283848586878889909192939495969798

0%

1%

2%

3%

4%

5%

6%

7%

September 2000-October 2008

Source: The Conference Board, MVI Research


4 Simple Retail Rules4 Simple Retail Rules(Or, Why Wal-Mart Trumps Target)(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


The Core Real Estate Problem Is Still RegionalThe Core Real Estate Problem Is Still RegionalWhich retailers are exposed?Which retailers are exposed?

Source: RealtyTrac.com


Latest Estimates from the Federal Open Latest Estimates from the Federal Open Market CommitteeMarket 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


The Economy Is PersonalThe Economy Is Personal The “Consumer’s” Financial StatementsThe “Consumer’s” Financial Statements

Income Statement• Cost inflation – declining dollar

• Cost inflation – export restrictions

• Wage acceleration – slower than inflation

• Tax stimulus – short-term bump

Balance Sheet• Asset values – real estate price decline

• Asset values – less opportunistic capital gain

• Debt – harder to service, harder to get

Change in financial strategy (defer, delay, redefine)

Cash Flow Challenges (reduce, trade down, trade out)


The Trading Goes Up & Down, The Trading Goes Up & Down, But Also In And OutBut Also In And Out

Trade Up

Trade Down

Trade InTrade Out

The New Premium – personal and societal

• Transparency

• Preservation

• Purpose

The New Frugality

• Bulk purchase for cost/oz value

• Replace high ring purchases/services with lower cost solution

• DIY vs. DIFM

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


Retailer Uncertainty Is Retailer Uncertainty Is Strangely PredictableStrangely 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?


What’s The Way Out?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”


A Crisis Is a Terrible Thing to Waste!A Crisis Is a Terrible Thing to Waste!What an “Inverted Yield Curve” MeansWhat an “Inverted Yield Curve” Means

Certainty

Time

Traditional

An average company with short-term uncertainty

Winners in 2010-2012 Building “FITTER” FMCG companies

• Flexibility

• Information flow

• Total economic returns

• Tribe leadership/conversational marketing

• Enablers (people, tools)

• Retailer brand development


Key Economic ConclusionsKey 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


Key Economic Conclusions, Cont’dKey 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 riskFor highly leveraged retailers your credit teams

need to be integrally involved

Uncertainty is your reality….


Market Evolution Has Many Stages…


Gradual Transition

Rapid Transition

Gradual Transition

Rapid Transition

MT <20% of mkt

T5 MT retailers <30% of MT

OT>50% of mkt

T5 MT retailers >60% of MT

MT <40% of mkt


MT <30% of mkt


PioneersCategory Specialists, Hypermarkets, Cash & Carry, and Local Food Chains

Adjacent Nation, Primary FormatsDiscounters & C-Stores = new growth formats; Hypers and C&C largest growth formats

Adjacent Nation, Pioneers, andSecondary FormatsTraditional Trade now impacted

Pure Secondary Formats, Multi-formatsDrug, Supermarket, Category Specialists

ExplorationExploration ConcentrationConcentration PenetrationPenetration MaturationMaturation

Regional Variations

OT>60% of mkt

T5 MT retailers >70% of MT

Multi-Format DominantHigh-capability Drug, Supermarkets & Category Specialists.Regrowth of Specialty Chains, Mom ‘n Pops with Demographic Focus

Post-ModernPost-Modern

Market Evolution Has Multiple Phases

Developing markets move along a predictable evolution continuum

Source: MVI research


Overarching Trends Across MarketsOverarching 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!


Exploration Markets: Focus IndiaExploration 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


Concentration Phase – Most of Lat Am Concentration Phase – Most of Lat Am and Russiaand 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


Lat Am Penetration MarketsLat 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


Other Key Attribute of Penetraton Phase Other Key Attribute of Penetraton Phase Retailers Is Consumer CreditRetailers 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


Conclusions:Conclusions:Around The World in 20 MinutesAround 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


Bryan GildenbergChief Knowledge Officer

Global Headquarters:20 University RoadCambridge, MA [email protected]

Management Ventures, Inc.

… A Partner in Your Success

Thank You!

Documents

Management Ventures, Inc. Corp. Site: MVI-Worldwide.com, Licensed site: MVI-Insights.com © 2008 MVI Where We Are Now… Presented by: Bryan Gildenberg November