David Roth

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• David Roth
• CEO The Store WPP, EMEA and Asia
• david.roth_at_wpp.com

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This Presentation Is Dedicated To The Memory Of
Michael Rosen
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From The Inside Looking Out
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May You Live In Interesting Times
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If Anyone Tells You They Know Whats Going To
Happen Next
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They Are Wrong
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A Macro View
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Living In A Minsky Moment
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Success Breeds Excess Excess Breads Collapse
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Frominvest in anything even with the most
minimum yieldToinvesting in nothing but the
safest government paper
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Result Of Three Factors

• Low interest rates
• Quarter of a century of low inflation and
  stability
• Belief business cycle had gone and risk
  disappeared

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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

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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

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

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Times successful business show their metal
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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

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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

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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
• http//www.bankofengland.co.uk/publications/inflat
  ionreport/2008.htm

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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

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A Macro View From Inside The Retailer
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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

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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

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Falling Sterling Value Will Increase Costs

• Previous upside of PoundDollar rate ending
• Export markets pegged to US dollar
• Downside of PoundEuro
• Cost increases
• Particularly hit non food retailers

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Volume To Mass Market Retailers Is Critical

• Economics built on volume and growing volume
• Building Fixed Costs Into Businessincreases
  productivity with increasing volumesputs
  pressure on costs when volume falls
• Slight reductions in volume puts strain on
  balance sheet
• Fixed cost creep, depreciation of historic
  capital spending

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Cost Side Inflation

• Situation changed considerably
• Yesterday Service inflation offset by commodity
  price deflation
• Today Service inflation and commodity price
  inflation

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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

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Back to Basics

• Natural instincts going back to doing what they
  do best..

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Doing Fewer Things But Doing Them Better

• Only do things that grow sales and are core
• Do it with less resource
• Cancelling projects

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Aggressively Drive Costs Out Of The Business
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Reduce Borrowings

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

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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

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Improve Cash Flow

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

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Pass The Hurt OnThe 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

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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

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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

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

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

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Sales Are Vanity - Profits Are Sanity
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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

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Innovation More Important Than Ever

• Why customers should buy
• Ranges
• Promotions
• Displays
• Shopper marketing

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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

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Christmas Planning

• Make or break for the year for many
• Buy is made and committed..
• ..its now about executionturn 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

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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

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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 (WalMart)
• Well know high street names will disappear

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Growth

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

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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

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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

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This Presentation Is Dedicated To The Memory Of
Michael Rosen