FY11 for JMT is 15,21 €, which implies a potential return of

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THIS DOCUMENT IS NOT AN INVESTMENT RECOMMENDATION AND SHALL BE USED

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Worse Economic Scenario: We have updated our model with the recent rise of EU Sovereign yields and the revised IMF estimates for GDP growth and inflation. This impacted the Portuguese operations much more severely as Biedronka’s weight in JM’s valuation increased to 81% EV from 74%.

JM is safe even in turbulent periods: In Poland, JM is protected against aggravated macroeconomic conditions, as the Polish economy is expected to continue outperforming the EU average. In Portugal, despite the deteriorating macro outlook, JM has a strong leading position in both the supermarket and wholesale segments.  Biedronka will continue to drive JM’s growth: According to our

model, by 2020, JM’s Polish operations will represent 73% of total sales and are expected to grow at a CAGR1 of 12,47%, until 2020.  We address three areas of investor push back: i) Biedronka can accumulate a total of 3.000 stores by 2015, ii) Biedronka is safe against any price-driven competition for market share, iii) Biedronka can sustain a double-digit sales CAGR in the next ten years and an EBITDA margin of (at least) 8%.

JM is expected to unveil its expansion plans to a 3rd market

this year, which we expect to be a new trigger to JM’s share.

 According to our Sum-of-the-Parts Valuation, our new Price Target FY11 for JMT is 15,21€, which implies a potential return of 17,72%. Therefore, our investment recommendation does not change: BUY.

1In this report, all Compound Annual Growth Rates (CAGR) are denominated in Euros and refer to nominal growth rates.

JERÓNIMO MARTINS, SGPS

COMPANY REPORT

F

OOD

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ETAIL

27

M

AY

2011

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UI DA

S

ILVA

Mst16000282@novasbe.pt

The Euro Zone on shaky ground...

...While Poland escapes from turbulence.

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY11: 15,21

Vs Previous Price Target 15,54 €

Price (as of 27-May-11) 12,92

Reuters: JMT.LS, JMT PL

52-week range (€) 6,61-12,92 Market Cap (€mn) 7.173,94 Outstanding Shares (mn) 629,293

Source: Bloomberg

Source: Bloomberg

(Values in € millions) 2010 2011E 2012E Revenues 8.691 9.860 11.070

EBITDA 653 751 848

EBITDA Margin (%) 7,5% 7,6% 7,7%

EBIT 462 539 613

EBIT Margin (%) 5,3% 5,5% 5,5%

Net Profit 281 347 400 Capex (€mn) 434,2 644,6 696,2 Source: Company Data and Nova Research

0 2.000 4.000 6.000 8.000 10.000

0 5 10 15

02-01-2009 02-01-2010 02-01-2011

JMT vs PSI 20 ()

JMT PSI 20

Company description

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Table of Contents

Company overview ... 3

Company description ... 3

Shareholder and ownership structure ... 4

Past figures ... 5

Portugal ... 8

Macroeconomic Environment ... 8

The Portuguese Food Retail Market ... 9

Poland ...10

Macroeconomic Environment ... 10

The Polish Food Retail Market ... 11

Operational Forecasts ...12

Capital Expenditures and Net Working Capital ...25

SOTP Valuation ...27

Comparables ...31

Financial Ratios ...32

Financial Statements ...33

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31%

8%

2% 55%

3% 1%

Exhibit 1: Sales breakdown (2010)

Retail Mainland

Recheio

Madeira

Biedronka

Manufacturing

Services

Source: Company Data

Company overview

Company description

Jerónimo Martins, SGPS, S.A. (JM) is a Portuguese Group with international projection operating in three main business segments: Food Distribution, Manufacturing and Services. In Portugal, JM has a leading position under the Pingo Doce (supermarkets) and Recheio (cash & carry and food service platforms) chains. Moreover, it is the largest industrial Group of Fast Moving Consumer Goods (FMCG) – where it holds leading positions in several markets (e.g. ice tea, ice cream, margarine, olive oil, fabric cleaners) through its association with Unilever2, the Anglo-Dutch multinational, and Gallo Worldwide3. Additionally, the company owns a Services business unit that includes the company Jerónimo Martins Distribuição de Produtos de Consumo (JMD), which is responsible for the representation and distribution of international brands (e.g. Kellogg’s, Nestlé, among others) in Portugal. However, JM’s most valuable asset is in Poland: the hard discount chain Biedronka is the market leader in food distribution and, in 2010, accounted for 55% of the Group’s total sales. In Portugal, JM is the second largest Food Retail Group (right behind Sonae, SGPS, S.A., its main competitor). However, if we consider both national and foreign operations then, according to Deloitte Touche Tohmatsu Limited (DTTL) and STORES Magazine, JM is ranked as the 85th largest retailer around the world while Sonae occupies the 139th

position, based on publicly available data for the fiscal year of 2009. The top of the same overall ranking that elects the world’s 250 largest retailers was shared among: the American corporation Wal-Mart that runs chains of large discount stores, the French hypermarket chain Carrefour and Metro AG, the German retail and wholesale Group (see Exhibit 2).

Exhibit 2: Top 250 global retailers (FY09)

World Rank

Name of Company

Country of Origin

2009 Retail Sales (U.S. $mn)

# Countries of Operation

Dominant Operational Format

2004-2009 Retail Sales CAGR

1 Wal-Mart Stores, Inc. U.S. 405.046 16 Hypermarket/Superstore 7,3%

2 Carrefour S.A. France 119.887 36 Hypermarket/Superstore 3,4%

3 Metro AG Germany 90.850 33 Cash & Carry/Warehouse Club 3,0%

85 Jerónimo Martins, SGPS, S.A. Portugal 9.932 2 Discount Store 17,1%

139 Sonae, SGPS, S.A. Portugal 6.096 2 Hypermarket/Superstore 4,2%

250 Fuji Co. Ltd. Japan 3.075 1 Hypermarket/Superstore -1,5%

Source: Deloitte Touche Tohmatsu Limited and STORES Magazine

2In 1949, a joint venture was set up between JM and Unilever and later, in 2007, with the merger of the companies: Fima VG, Lever Elida and

Olá, a new company was established: Unilever Jerónimo Martins.

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Soc. Francisco

Manuel dos Santos

56% Floating

and Own Shares

31% Asteck,

S.A. 10%

Carmig, Gestion 3%

Exhibit 3: Shareholder Structure

Source: Company Data

Shareholder and ownership structure

Currently, there are three qualified shareholders composing JM’s shareholder structure that hold different stakes: Sociedade Francisco Manuel dos Santos SGPS, S.A. which reinforced its position on February 2009 and now holds 56,1% of the company’s capital, Switzerland’s Heerema Holding Company Inc which operates in the oil and gas industries and acquired 10,01% of the Group’s share capital through its Astek, S.A. investment vehicle4, on late February 2007, and the French asset management company Carmignac Gestion with a 2,7% share – the remaining company’s capital (31,2%) is free-floating. Thus, the Soares dos Santos family is the major shareholder with the highest percentage of voting rights (56,19%) and, thus, with the last word in any matter.

Additionally, there are differences in what concerns the ownership structure of JM’s business units. As we can see below in Exhibit 4, in the Food Distribution segment JM holds 51% of Retail Mainland (which includes Pingo Doce and, until 2010, also included the hypermarket chain Feira Nova) while the remaining 49% is held by the Dutch supermarket operator Ahold. JM also holds 75,5% of Madeira operations (where it performs under the Pingo Doce and Recheio brands), while Recheio and Biedronka are fully owned by the Portuguese retailer. The Manufacturing business unit is operated under a joint venture between JM and Unilever, with stakes of 45% and 55%, respectively. Finally, concerning the Services business unit: JMD is fully owned by JM, the Hussel chocolate chain was the outcome of a joint venture between JM (51%) and the German specialist retailer Douglas AG (49%), Caterplus resulted from a partnership between JM (49%) and the Portuguese family enterprise Sugalidal (51%) and, lastly, JM holds a 27,5% share in PUIG Portugal, which operates in the wholesale of perfumes and cosmetics.

Exhibit 4: JM Ownership Structure

Source: Company Data and Nova Research

4Asteck, S.A. is 100% controlled by the Heerema Holding Company and, thus, all the respective voting rights are attributed to the latter.

Jerónimo Martins, SGPS, S.A.

Food Distribution

Retail Mainland

(51%)

Recheio

(100%)

Madeira

(75,5%)

Biedronka

(100%)

Manufacturing

Unilever JM

(45%)

Gallo Worldwide

(45%)

Services

JMD

(100%)

Hussel

(51%)

Caterplus

(49%)

PUIG Portugal

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27% 27% 40% 47% 6% 29% 13% 23% 35% 37% 30% 20%

2005 2006 2007 2008 2009 2010

Exhibit 6: Biedronka Sales Growth

€ PLN Source: Company Data

Past figures

i. Sales and EBITDA

Jerónimo Martins hasn’t been always a growth and successful story. However, in

the past recent years, it has been able to deliver a strong, solid performance. The results speak for themselves: from 2005 to 2010, total sales grew at a CAGR of approximately 17,8% and, in 2010, amounted to a total of €8.691mn. In the same time period, the Group’s EBITDA also grew at a double digit CAGR of 16,2% and reached €653mn in 2010. Such results were only possible because the management team i) successfully entered in a new and promising market and ii) rebuilt its business model around its Portuguese supermarket chain.

Exhibit 5: JM Sales and EBITDA breakdown

Source: Company Data and Nova Research

The weight of Biedronka within JM has been increasing gradually in the past years. In 2005, the Polish operations represented around 35% of the Group’s total sales, while Retail Mainland had a bigger weight inside JM (approximately, 39%). From 2005 to 2010, however, Biedronka’s sales grew at an impressive CAGR of 29% (far greater than any other business unit) making it now the biggest business unit inside the Group, both in terms of sales (55%) and EBITDA (60%). Consequently, the other four business units progressively lost weight inside the Group and, today, they represent around 14% (13%) of JM’s total sales (EBITDA).

On the other hand, a greater Biedronka weight in the Group’s operations implies a greater exposure to the Polish Zloty. As we can see in Exhibits 6 and 7, between 2005 and 2008, JM did not only benefit from operating in a growing economy, but also through the Zloty-Euro conversion. However, notice that the subsequent devaluation of the Zloty (from 3,3 to 4,8) had a huge negative impact on Biedronka’s growth rate expressed in Euros. From the first quarter of 2009 onwards, the Zloty has progressively appreciated and, consequently, we can see 27% 7% 1% 60% 5% 0,2% EBITDA 2010 Retail Mainland Recheio Madeira Biedronka Manufacturing

Mkt., Repr. and Rest. services 39% 15% 3% 35% 6% 2% Sales 2005 Retail Mainland Recheio Madeira Biedronka Manufacturing

Mkt., Repr. and Rest. services 47% 13% 3% 23% 14% 0,5% EBITDA 2005 Retail Mainland Recheio Madeira Biedronka Manufacturing

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0 100 200 300 400 500 600

2005 2006 2007 2008 2009 2010

Exhibit 8: Capex Breakdown (€mn)

Retail Mainland Biedronka Others

Source: Company Data 3,3

4,8

2005 2006 2007 2008 2009 2010 2011

Exhibit 7: PLN/EUR Exchange Rate

Source: Bloomberg

the reflection in terms of the 2010 growth rates. Since we estimated the cash flows of each business unit according to each local currency, we had to use some sort of forecasts for the exchange rate in our model. Thus, we decided to resort to forward exchange rates which means that our model incorporates current expectations for the future exchange rate. Given its degree of unpredictability (it’s an exogenous factor that the company does not control), however, we view the Euro/Zloty exchange rate as JM’s major source of risk in the future.

ii. Investment and Sales Area

The evolution of Biedronka’s importance within JM reflects not only an extraordinary sales performance of the Polish stores, but also a substantial amount of investment that has been directed to Poland, year after year.

In Exhibit 8, we highlight how JM’s investment policy on its main business units has been evolving since 2005. The Group’s total investment gradually increased at a CAGR of 73% until 2008 and, in that same year, reached its maximum: a total of €874mn. Additionally, 37,4% (€327mn) and 58,2% (€509mn) of this total amount were directed to Retail Mainland and Biedronka, respectively (as one can see, the investments made in the other four business units, even when accounted together, are not so relevant). In 2009, there was a substantial contraction in total investment, which amounted to €312mn (-64% yoy), as a consequence of a stronger prudence due to the tough economic context felt at the time. All business units were obviously impacted, but especially Retail Mainland and Biedronka which saw their Capex amounting to €113mn and €182mn, respectively. However, after this shock, total investment started increasing once again and, in 2010, amounted to € 434mn.

Another striking feature of Exhibit 8 is that, Biedronka has been gaining more and more importance as it gets a higher percentage of total investment. Indeed, while in 2005 the investment made in Poland represented 43% of total investment, in 2010 this percentage increased to 62%. As a consequence of a higher investment, the number of Biedronka stores has been increasing at an average of 169 stores per year, since 2005. More, by the end of 2010 the company had already 1.649 Biedronka stores5, representing approximately 62% of JM’s total sales area (sqm).

5Expansion in Poland has been made both organically as well as through M&A operations. The Portuguese retailer bought 57 Tip stores from

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9,7%

6,6% 8,1%

7,6%

5,1%

8,2%

2005 2006 2007 2008 2009 2010 2011E

Exhibit 10: EBITDA Margins

Retail Mainland JM Biedronka

Source: Company Data and Nova Research

In Portugal, Pingo Doce has been the number one priority in terms of investment and, by the end of 2010 it counted with 349 stores (see Exhibit 9). Moreover, in 2009, the Group concluded that this was the business unit with the best positioning in the Portuguese market and, thus, decided to end the Feira Nova brand and convert the remaining stores into the Pingo Doce format.

Exhibit 9: # Stores and sales area (sqm) by business unit

Source: Company Data and Nova Research

iii. EBITDA Margins

In the past three years, JM’s consolidated EBITDA Margin has inverted its negative tendency and started growing year after year (see Exhibit 10). Notice that this reflects the strategy and performance of the two main business units. While JM decided to bet on low prices and high volumes (lower margins) in Portugal, in Poland the EBITDA margin has been increasing year after year, since 2007. This reflects an ambitious and continuous search for cost efficiency, but it is also evidence that Biedronka is at a development stage where benefits of scale impact at all levels. Indeed, the benefits taken were sufficiently high to compensate the diluting impact of the Plus stores which, in 2009, were still operating at below full maturity. Additionally, as Biedronka grew inside the Group, consolidated margins have become more and more dependent on the Polish operations and less reliant on Retail Mainland.

JM’s current operating profitability (overall EBITDA margin of 7,5% in 2010) compares with 3,98% for Carrefour or 4,96% for Metro AG. On the other hand, operators with major exposure to Emerging markets, such as the Turkish BIM retail chain and the Russians X5 and Magnit retail Groups, exhibit higher levels: 5,5%, 8,44% and 7,89%, respectively. This, in turn, suggests that it is Biedronka that will continue to boost JM’s operational margins in the future.

32 33 33 35 35 38

805 905

1.045

1.359 1.466

1.649 15

15

15

15

15

15

208

227

256

343

343

349

2005 2006 2007 2008 2009 2010

# Stores

107.202 110.005 109.634 115.724 114.410 123.532

394.536 452.952

536.729

753.531 814.493

938.218

13.697 13.697

14.626

14.626 14.300

14.253

279.842

311.468

355.809

433.049

434.744

437.317

2005 2006 2007 2008 2009 2010

Sales Area (sqm)

Retail Mainland

Madeira

Biedronka

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1 0 2 ,1 1 1 1 ,5 1 0 7

,4 109

,4

1

0

6

,7

2007 2008 2009 2010 2011E

Exhibit 14: Consumer Spending (bn)

1,4% -0,5%

1,2% 3,5%

-4,1%

2,1% 2,1%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Exhibit 11: Real GDP Growth Rates

Portugal European Union

7,8% 8,1% 7,7% 9,6% 11,0% 11,9% 12,4% 11,9% 11,3% 10,6% 9,8%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Exhibit 12: Unemployment (Percent of total labor force)

Source: IMF

Source: Bloomberg

Source: Bloomberg

Source: IGD and Nova Research 4,2% 5,8% 9,6% 30 -03 -2007 30 -07 -2007 30 -11 -2007 31 -03 -2008 31 -07 -2008 30 -11 -2008 31 -03 -2009 31 -07 -2009 30 -11 -2009 31 -03 -2010 31 -07 -2010 30 -11 -2010 31 -03 -2011

Exhibit 13: Portuguese 10-year Gov. Yield

Portugal

Macroeconomic Environment

Since the beginning of the 21st century, Portugal has been constantly growing below the EU average (exception to 2009) and, in the future, there is no

evidence suggesting that this tendency will change. Furthermore, according to IMF’s revised growth estimates, Portugal will be under a recession in both 2011 and 2012, while unemployment is expected to continue increasing until 2012. The incapacity to increase the country’s competitiveness, combined with permanent negligible growth rates and a heavy debt repayment burden, increased the likelihood of Portugal not being able to comply with its obligations. As financial markets assimilated this information, global rating agencies started downgrading the Portuguese credit rating (currently at Baa1, according to Moody’s), as they perceived Portugal as a riskier country with a higher probability of incurring in default. Consequently, creditors started demanding higher interest rates (see Exhibit 13) which, ultimately, became unsustainable for

Portugal. Thus, after Greece and Ireland, the Portuguese government, facing a real threat to the financing of the Republic and to its banking system, had no option left but to request an emergency bailout from the EU. In exchange for a €78mn 3-year rescue package, Portugal committed to achieve a reduction of the Government deficit to 5,9 percent of GDP this year and to 3 percent in 2013. After the decisions to cut wages in the public sector and to increase the value added tax (VAT) for 2011, austerity measures are expected to continue after this agreement (e.g. wages in the government sector will be frozen in nominal terms in 2012 and 2013, while VAT will increase substantially, especially concerning electricity and gas).

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8% 7%

24%

6% 5%

11% 14%

20%

9% 10%

2006 2007 2008 2009 2010

Exhibit 16: Sales Growth Rates

Sonae MC Jerónimo Martins

20%

19%

9% 7% 6% 5% 34%

Exhibit 15: Portuguese Food Retail Market Shares (2010)

Sonae MC

Jerónimo Martins

Intermarché

Auchan

Lidl

Minipreço

Others

0 500 1.000 1.500 2.000

2005 2006 2007 2008 2009

Exhibit 17: Sales Area ('000 sqm)

Modelo e Continente Pingo Doce

Lidl Auchan

Minipreço Source: Company Data

Source: Company Data and Nova Research

Source: APED and Nova Research

The Portuguese Food Retail Market

In 2010, the Top 5 retailers represented, approximately, 61% of the Portuguese Food Retail market6 – this level of concentration is in line with other Western European mature markets7. Among these main retailers, Sonae MC and Jerónimo Martins held the biggest market shares (20% and 19%, respectively) while Intermarché, the Auchan Group and Lidl, altogether, held around 22% of market share (see Exhibit 15).

The world’s most recent financial crisis impacted negatively all of these food retailers8 and, in Exhibit 16, we highlight what happened to JM and its main competitor. In both cases, it is visible this effect as sales growth rates fell sharply after 2008. Moreover, according to this graph, JM had not only a stronger response to the tough macroeconomic scenario, but also a higher growth (CAGR of 12,64%) than Sonae MC (CAGR of 9,88%), in the past 5 years. Throughout time, these two main food retailers were able to increase their market shares (though, in different proportions), through M&A operations9 but especially via organic growth – the Modern Grocery Distribution (MGD) segment is thus growing mainly at the expense of traditional retailers which, by 2010,

represented approximately 25% of the Portuguese retail market. In the future, we expect these two largest Portuguese retailers to continue increasing their market share, at the expense of small supermarkets and traditional retail, which are the most penalized by the tough environment in Portugal, according to Nielsen. Furthermore, recently both leaders adopted a similar strategy, which consisted in repositioning their food retail business by having a single and their stronger brand operating10.

As we further discuss, there are not very ambitious plans in terms of new store openings for the near future, something that reflects the negative consequences that the current and future austerity measures are expected to originate, but also, the advanced stage of the Portuguese Food Retail market. Moreover, we argue that Pingo Doce should be able to continue increasing its market share as it developed an adequate strategy that best suits the Portuguese consumers’ needs.

6In our definition we do not include Cash & Carry operations (thus, Recheio is not accounted in JM’s market share).

7In France, for example, the 5-firm concentration ratio is equal to 65% (see the Biedronka chapter for further details).

8According to APED, both Lidl and Minipreço posted negative growth rates from 2008 to 2009 (-2,02% and -0,77%, respectively).

9As we’ve mentioned earlier,JM acquired the Plus operations, while Sonae bought the Carrefour hypermarket operations in 2007.

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6,2%

1,7%

3,6% 3,9%

3,5%

-4,1%

2,1% 2,1%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Exhibit 18: Real GDP Growth Rates

Poland European Union

1

8

7

,2

2

2

1

,9

1

8

8

,2

2

1

0

,4 22

2

,4

2007 2008 2009 2010 2011E

Exhibit 20: Consumer Spending (bn)

Source: IMF

13,8%

9,6% 7,1%

8,2% 9,0%

9,0% 8,7%

8,5% 8,2%

8,0% 8,0%

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

Exhibit 19: Unemployment (Percent of total labor force)

Source: IGD and Nova Research Source: IMF

Poland

Macroeconomic Environment

From the 27 countries that compose the European Union, Poland was the only one that stood out during the most recent global financial crisis, registering a positive growth in 2009 (1,7%). As we can see in Exhibit 18, despite the

considerable drop on its real GDP growth rate, this country was able to remain above the EU average – a tendency that should not change in the next 5 years, according to the International Monetary Fund. To a large extent, Poland’s stout domestic demand11, its flexible currency (the Zloty) and its less fragile banking sector, all together, allowed a better performance. Furthermore, the 2012 UEFA European Football Championship – hosted by Poland and Ukraine – was also important for this behavior of the Polish economy, since some infrastructure investments, backed by an inflow of EU funds, have already begun.

Additionally, throughout time, Poland has been able to substantially decrease its unemployment rate, even though it increased in 2009 as a consequence of the international financial crisis (see Exhibit 19). For instance, in 2004, 18,9 percent of total labor force were unemployed and, by 2008, this number had been reduced by more than half.

Additionally, Poland has been able to escape the turbulence that has impacted the Euro Zone in the past recent months. Contrarily to Portugal,

Poland has not seen its credit rating being downgraded and, according to Moody’s, it preserves its A2 rating which has been constant since 2003.

Conclusion: contrarily to Portugal, Poland’s current macroeconomic context creates good prospects for the future. Even though consumer spending fell sharply in 2009, as a consequence of a slower GDP growth, we can see in Exhibit 20 that it recovered in 2010 and is expected to go beyond the level recorded in 2008 throughout the current year. This will help to boost the food retail market which, in 2011, is expected to grow at 5%, according to PMR Corporate. This, in turn, makes us believe that Poland will be able to sail through the storm that has been affecting Europe. Therefore, we conclude that Biedronka will continue to be JM’s main source of profitability and growth driver, which explains the aggressive expansion plan to be implemented there in the next triennium.

11Contrarily to its neighbors, Poland relies much less on its exports due to its solid internal market, which has seen a middle class rising in the

last 10 years.

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12%

7%

7%

6%

6% 6%

4% 52%

2010

Biedronka

Schwarz Group

Tesco

Carrefour

Auchan

Spolem

9% 5%

6%

5% 4% 5%

4% 62%

2008 Biedronka

Schwarz Group

Tesco

Carrefour

Auchan

Spolem

Real

Other

The Polish Food Retail Market

With a population size over 38 million people, Poland is the 6th most populous member of the EU and, consequently, not only one of the leading economies in Central and Eastern Europe, but also the 9th largest Grocery Retail market across Europe (see Exhibit 21). According to IGD Retail Analysis, the number one spot in the Polish Food Retail industry12 belonged to Biedronka, with a market share of 12% in 2010, clearly above major retailers such as the Schwarz Group (operating under the Kaufland hypermarkets and the Lidl hard discount chain), Tesco or Carrefour (see Exhibit 22). Moreover, notice that the Top 5 retailers accounted for, approximately, 38% of the Polish Food Retail market (against 61% in Portugal). Indeed, this is an evidence that the Polish market is much more fragmented and, thus, subject to a fiercer competition. Another striking feature of Exhibit 22 is that, most of the retailers we highlight have been able to increase their respective market shares since 2008. This growth has essentially been made at the expense of the traditional retail segment which, by 2010, had a 50% share in Poland13

(versus 20-25% in Portugal) – an indicator of a less developed market. However, we also highlight that some of this growth was boosted by M&A operations, since the Polish retail market is moving fast towards consolidation with main players purchasing

small retailers14. In the future, all retail formats have room for further growth. This, in turn, will continue to occur especially at the expense of the traditional retail segment as it share converges to Western European standards (by 2020, it should account for 25-30% market share).

Exhibit 22: Polish Food Retail market shares

Source: IGD and Nova Research

12IGD defines the Food Retail market as: “all food, drink and non-food products sold through all retail outlets selling predominantly food in a

given country”. It includes both modern and traditional formats (and excludes Cash & Carry operations).

13Around 7.000 small grocery stores were closed in 2008.

14 The last deal was made by Mid Europa Partners (UK-based private equity firm), which acquired Zabka Polska SA (Poland’s largest

convenience-store chain), last February.

Exhibit 21:

Europe’s 2009 Top 10 Grocery Retail Markets (€bn)

1. France 208,16

2. Russia 166,70

3. UK 164,23

4. Germany 161,82

5. Italy 129,52

6. Spain 99,63

7. Turkey 54,78

8. Switzerland 35,93

9. Poland 34,58

10. Netherlands 34,48

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Operational Forecasts

The departure point consisted in estimating JM’s number of stores, sales area (sqm) and the evolution of sales per sqm, for each business unit. For this, we relied on the company’s guidelines15

, on the different macroeconomic scenarios (Poland and Portugal) and on our perception of each market’s competitive and saturation levels. Furthermore, in order to estimate the sales area, we relied on the latest available information (2010) concerning the average size of each store. We believe this is reasonable since we do not expect the company to present major changes relative to each store format and size. Finally, even though we fully incorporated the company’s expansion guidelines for Biedronka, we were a bit more cautious with the Retail Mainland business unit.

Retail Mainland

In the last five years, the sales area concerning the Retail Mainland business unit grew at a CAGR of 9,34%, being this growth mainly driven by Pingo Doce (PD) openings16. During the same period, sales grew at a CAGR of 12,64%. In terms of the EBITDA margin, there was a slight decrease in 2010, which reflected several factors that occurred throughout the year: i) the management decision to strengthen the brand’s awareness by increasing the investment in advertising, ii) the deflation in the PD basket, especially, during the first half of the year and iii) the integration of the Plus and Feira Nova stores under the PD brand. Below, in Exhibit 7, we present our operational forecasts for Retail Mainland.

Exhibit 23: Retail Mainland Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 349 352 355 358 360 362 366

Total Sales Area ('000 sqm) 437 440 444 447 449 451 455

Growth (%) 0,59% 0,72% 0,72% 0,71% 0,47% 0,47% 0,00%

Sales (€ mn) 2.695 2.824 2.960 3.140 3.322 3.524 4.126

Growth (%) 10,13% 4,80% 4,80% 6,09% 5,80% 6,06% 3,01%

Sales/sqm (€ tho.) 6,2 6,4 6,7 7,0 7,4 7,8 9,1

Growth (%) 9,49% 4,05% 4,05% 5,33% 5,30% 5,57% 3,01%

Capex (€mn) 115,5 102,5 107,2 97,1 93,1 95,4 98,9

Source: Company Data and Nova Research

According to our forecasts, there will be a decrease in PD new openings. Thus, total sales area is expected to grow at a CAGR of 0,40% until 2020, clearly below past figures, as we don’t see many opportunities for further organic growth in a market that we already deem mature. Meanwhile, sales are expected to

15JM investor’s day, 2010.

16In 2010, JM opened seven PD stores.

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6,2% 6,4% 6,6% 6,8% 7,0% 7,2%

0 1.000 2.000 3.000 4.000 5.000

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Exhibit 24: Retail Mainland

Sales (€mn) EBITDA Margin (%)

grow at a CAGR of 4,35%, until 2020, being the following two years more penalized in terms of growth due to the tough austerity measures that already have and will continue to impact negatively consumption. Despite this dark economic scenario, we remain particularly optimistic on the Retail Mainland’s operations due to four specific reasons:

i. PD has a strong competitive position and is increasing its market share: PD has today, together with Sonae MC, a leading position in the Portuguese Food Retail market. In 2010, while the food retail segment grew 1,6% yoy, PD total sales grew by approximately 10%, meaning that PD is increasing its market share, even under a tough economic environment. Furthermore, according to Nielsen, traditional retail and small supermarkets are the most affected ones in tough economic environments, which should leave room for larger retailers to gain further market share in the future. At the same time, the competitive pressure coming both from Lidl and Minipreço has eased in recent years, even though the latter revealed its intentions to reformulate its business strategy17. ii. Investment on differentiating pillars: Throughout time, JM has not only

maintained its stable and low price policy, but also kept its investment strategy on important differentiating pillars of the PD banner, such as: Private Brand18, Perishables19 and, more recently, Meal Solutions (Take Away and Restaurants)20. At the same time, during last year, there was a strong effort to diffuse the banner’s awareness through an increased investment in advertising to levels in line with the sector’s average. These efforts to build up a differentiating commercial proposition allowed PD to receive increasing customer preference, while strengthening its position with a like-for-like sales growth equal to 8,4% in the supermarkets (7,2% in the whole store network), in 2010. In the future, the company intends to build stronger partnerships with suppliers of both Perishables and Private Brand, while maintaining its competitive price policy with the main objective of growing and reinforcing market share.

iii. Efforts concentrated on a stronger brand: We believe JM made a good move when decided to extinguish Feira Nova as a brand and to convert the respective hypermarkets under the PD banner. In this way, the Group will be able to concentrate its efforts and resources on a stronger brand (recall that Feira Nova was the 3rd hypermarket player in Portugal).

17In 2010, there was some speculation that Carrefour wanted to sell their 524 Minipreço stores and, consequently, leave Portugal. However,

more recently, the Group revealed its intentions to reformulate its strategy and to have 600 operating stores until 2016.

18At the end of 2010, there were 2.011 references in the Private Brand assortment (representing around 38% of the Company’s total sales).

19Perishables represent 34,3% of the Banner’s sales.

20Out of the company’s 349 stores, take away sales are already present in 214 of them and there are 33 restaurants already operating. Source: Company Data and Nova Research

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iv. Improvement of the EBITDA margin: After a small decrease in 2010, we expect the EBITDA margin to gradually recover until it stabilizes at 7%, in 2020. This will be mainly driven by the logistics improvement that the company is expected to undertake, between 2011 and 2013, and a larger scale with the integration of the Plus and Feira Nova stores totally assimilated. Currently there are seven distribution centers (DCs), but the company set the target of having four to five over the next three years. The purpose is to improve cost efficiency through a more rational geographical distribution of its DCs. Furthermore, the costs concerning the integration of the former Plus stores are being diluted and the benefits arising from private brand scale are still to come.

Exhibit 25: Retail Mainland Forecasts

(€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Sales 2.695 2.824 2.960 3.140 3.322 3.524 4.126

EBITDA 174 186 195 210 223 236 289

EBITDA margin (%) 6,5% 6,6% 6,6% 6,7% 6,7% 6,7% 7,0%

Depreciation (90) (91) (93) (94) (94) (94) (102)

EBIT 84 95 102 117 129 142 186

EBIT margin (%) 3,1% 3,4% 3,5% 3,7% 3,9% 4,0% 4,5%

Source: Company Data and Nova Research

Recheio

During the last five years, the Recheio business unit has been able to expand its sales area at a CAGR of 2,88%, while sales grew at a CAGR of 4,52%. At the same time, the EBITDA margin, which had stabilized around 6% in the past few years, increased to 6,2% in 2010, reflecting the success of the overall strategy to increase sales.

In the future, we expect the number of openings to gradually decrease and, by the end of 2020, JM should count with 43 Recheio stores (which, in terms of sales area, corresponds to a CAGR of 1,24% in the following ten years). Despite its leading position, Recheio operates in a highly mature market and, thus, we do not foresee plenty of expansion opportunities. Until 2020, we expect sales to grow at a CAGR of 3,72%, which is below past performance, while the EBITDA margin is expected to evolve according to past figures and stabilize around 6,1%. In 2010, Recheio continued to operate in a difficult environment as its two main target markets posted negative growth - according to Nielsen, the Portuguese Traditional Retail segment posted a contraction of 9,7% yoy, which confirms the negative trajectory of the past few years that is expected to continue. At the same time, Recheio will continue facing a tough environment in the near future, as then the HoReCa channel’s turnover is expected to fall again in 2011.

The Group set the target of reducing its number of DCs to four or five...

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6,0% 6,1% 6,2% 6,3%

0 200 400 600 800 1.000 1.200

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Exhibit 27: Recheio

Sales (€mn) EBITDA Margin (%)

Exhibit 26: Recheio Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 38 39 40 41 41 42 43

Total Sales Area ('000 sqm) 124 127 130 133 133 137 140

Growth (%) 7,97% 2,63% 2,56% 2,50% 0,00% 2,44% 0,00%

Sales (€ mn) 721 746 772 810 830 874 1.039

Growth (%) 4,64% 3,46% 3,52% 4,90% 2,45% 5,37% 3,01%

Sales/sqm (€ tho.) 5,8 5,9 5,9 6,1 6,2 6,4 7,4

Growth (%) (3,08%) 0,80% 0,93% 2,34% 2,45% 2,86% 3,01%

Capex (€mn) 29,1 16,6 17,1 17,6 11,0 18,5 13,2

Source: Company Data and Nova Research

However, we have reasons to believe that Recheio will be able to overcome these adversities, as it did in the past, due to the following three reasons:

i. Market leader and market share growth: Considering the two main players acting in the Portuguese Wholesale Market, Recheio is the one with a clear leading position. According to JM, in 2010, Recheio had a 37,5% market share while Makro held 21,7%. This is even more important if we consider that, in 2005, Recheio (Makro) held 24,5% (22%) market share. Concluding, Recheio is not only the market leader, but has also been able to reinforce its leading position throughout time. Furthermore, even with both the HoReCa channel and the Traditional Retail segments posting negative growth, Recheio has delivered solid and positive sales growth in both target markets (4,5% and 2,1%, respectively). In this way, it strengthened its market share and ended 2010 with a 3,2% like-for-like sales growth.

ii. Adequate strategy: A great percentage of Recheio success in 2010 was, in our view, due to a rigorous planning. Anticipating a year of difficulties and aware that today’s consumers attribute greater value to the Banners’ value proposition, the Group decided to invest in strong promotional campaigns targeted at its customers (consolidating its differentiation in key areas, such as Perishables21) and increased its proximity to clients through a series of events that allowed the above-mentioned sales growth. At the same time, in order to strengthen the Banner’s presence in crucial locations for the HoReCa market, Recheio opened three more stores which reinforced the proximity with its customers. This ability to redefine strategies according to new market circumstances is, in our view, a key element that will allow Recheio to continue strengthening its market leadership.

21In 2010, Perishables represented 14,9% of Recheios sales and posted a growth of 20,5% yoy. Source: Company Data and Nova Research

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iii. Private Brands The Amanhecer project: Private Brands have also seen their importance growing within Recheio22 and, in 2010, priority was given to the

Amanhecer brand which ended the year with a total of 129 products. In 2011, this project is expected to continue and, on February, two Amanhecer stores were opened (Lisbon and North of Portugal). According to JM, the purpose of this recent initiative is to revitalize the Portuguese Traditional Retail segment, which has been subject to a huge pressure in the past years. In essence, this results in a commercial cooperation agreement between two parties, whereby Recheio is responsible for the entire logistical operation. The traditional retailer that owns the space, in turn, commits to purchase 75%-80% of its products to Recheio and to offer a majority of Amanhecer products. JM has received many requests by traditional retailers to convert their stores into this new concept and, until the end of the year, the company expects to have a total of 20-25 Amanhecer stores operating. We believe Recheio will be able to boost sales associated with the Amanhecer brand, thus benefiting from an increasing scale in the wholesale segment.

Exhibit 28: Recheio Forecasts

(€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Sales 721 746 772 810 830 874 1.039

EBITDA 44 46 47 49 51 54 63

EBITDA margin (%) 6,2% 6,1% 6,1% 6,1% 6,2% 6,2% 6,1%

Depreciation (9) (9) (10) (10) (10) (10) (11)

EBIT 35 36 37 39 41 44 52

EBIT margin (%) 4,9% 4,8% 4,8% 4,9% 5,0% 5,0% 5,0%

Source: Company Data and Nova Research

Madeira

In the last five years, operations in Madeira have been pretty stable from a sales area point of view (the number of stores remains constant and equal to 15, at least since 2005). Meanwhile, sales grew at a CAGR of 6,22%, during the same time period. In 2010, as expected, the EBITDA margin fell 10 bps relative to the previous year (4,8%) due to the storm that hit the island and led to the closure of PD two biggest stores in that region, until the 7th of June.

Also worth mentioning is the fact that, despite the temporary closure of the two main stores, PD sales in Madeira grew approximately 9,8% yoy, which was only possible due to its capacity to retain clients.

22 In 2010, the sales referring to the Private Brands with which Recheio works Gourmês, Masterchef and Amanhecer – represented 17,1% of

Recheio’s sales and increased 11,6% yoy.

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4,5% 4,6% 4,7% 4,8% 4,9% 5,0%

0 50 100 150 200

2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Exhibit 30: Madeira

Sales (€mn) EBITDA Margin

Exhibit 29: Madeira Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 15 15 15 15 15 15 15

Total Sales Area ('000 sqm) 14 14 14 14 14 14 14

Growth (%) (0,33%) 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

Sales (€ mn) 142 145 147 149 152 154 170

Growth (%) 7,58% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%

Sales/sqm (€ tho.) 10,0 10,2 10,3 10,5 10,6 10,8 12,0

Growth (%) 7,93% 2,35% 1,42% 1,42% 1,44% 1,64% 1,79%

Capex (€mn) 12,6 2,4 2,5 2,5 2,6 2,6 2,9

Source: Company Data and Nova Research

Similarly, despite all the negative impacts on tourism (with effects being felt through the HoReCa channel), Recheio was still able to post an annual growth of 2,3%, benefiting from a redesigned distribution strategy at the hotel and restaurant levels. For the future, we expect the number of stores to remain constant and, thus, there should be no significant changes in the total sales area. Nevertheless, we believe that both Pingo Doce and Recheio will continue strengthening their market leadership, as long as they keep applying the recipe that has proven successful in Portugal Mainland: investment on differentiating pillars and a very competitive price policy. Sales should, therefore, grow at a CAGR of 1,84% until 2020, while the EBITDA margin, after a slight decrease in 2010, should recover in the following years and stabilize at 4,9%.

Exhibit 31: Madeira Forecasts

(€ mn) 2010 2011E 2012E 2013E 2014E 2015E 2020E

Net Sales & Services 142 145 147 149 152 154 170

EBITDA 6,7 7,0 7,1 7,3 7,4 7,6 8,4

EBITDA margin (%) 4,7% 4,8% 4,8% 4,9% 4,9% 4,9% 4,9%

Depreciation (1,0) (1,0) (1,1) (1,1) (1,1) (1,2) (1,3)

EBIT 5,7 5,9 6,0 6,2 6,3 6,4 7,0

EBIT margin (%) 4,0% 4,1% 4,1% 4,2% 4,2% 4,1% 4,1%

Source: Company Data and Nova Research

Biedronka

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maintain the market price leadership. Below, in Exhibit 32, we present our operational forecasts for JM’s Polish operations.

Exhibit 32: Biedronka Operational Forecasts

2010 2011E 2012E 2013E 2014E 2015E 2020E

Total # Stores 1.649 1.854 2.089 2.300 2.650 3.000 3.375

Total Sales Area ('000 sqm) 938 1.055 1.189 1.309 1.508 1.707 1.920

Growth (%) 15,19% 12,43% 12,68% 10,10% 15,22% 13,21% 1,05%

Sales (€ mn) 4.807 5.813 6.856 7.778 9.185 10.833 15.573

Growth (%) 29,05% 20,94% 17,94% 13,45% 18,08% 17,94% 6,51%

Sales/sqm (€ tho.) 5,1 5,5 5,8 5,9 6,1 6,3 8,1

Growth (%) 12,03% 7,56% 4,67% 3,04% 2,49% 4,18% 5,40%

Sales/sqm (tho. PLN) 20,5 22,1 23,6 25,1 26,7 28,4 38,8

Growth (%) 3,71% 8,04% 6,61% 6,47% 6,25% 6,48% 6,46%

Capex (€mn) 270,9 516,9 563,8 549,2 773,9 823,6 342,5

Source: Company Data and Nova Research

We’ve incorporated JM’s aggressive expansion plans in Poland and, therefore, we expect it to accumulate a total of 3.000 Biedronka stores by 2015, which corresponds to an increase in total sales area from 938.218sqm to 1.706.890sqm (or, a CAGR of 12,71%). After 2015, we expect a substantial slowdown in the networking expansion pace and the total sales area is expected to grow at a CAGR of just 2,38%. In terms of sales, we expect them to grow at a CAGR of 12,47%, from 2010 to 2020, while the EBITDA margin is forecasted to stabilize at 8% from 2017 onwards.

As before, we now present the arguments behind our assumptions and forecasts which are in line with the company’s projections. This is one of the most important aspects of our valuation since Biedronka is JM’s most valuable asset and, consequently, all estimates concerning this business unit have a huge impact in the final price target. We develop our discussion around three topics that are crucial for most investors: i) the likelihood of JM’s medium-term expansion plans in Poland, ii) the Polish competitive environment and iii) Biedronka’s capacity to sustain a double-digit sales CAGR for the next ten years and an EBITDA margin of 8%.

i. A total of 3.000 Biedronka stores by 2015. Just how reasonable is that? As stated before, we’ve assimilated in our model the Group’s medium-term Polish expansion plans, thus incorporating an average of 270 net additions per year until 2015. To support our view, we first argue that a sales area CAGR of 18,92%, in the past five years, is evidence of the Group’s commitment and capacity to execute pretty ambitious expansion plans. Thus, there is a successful and solid track record, which provides us confidence for the future.

We have incorporated JM’s

aggressive expansion plans in Poland...

Biedronka is JM’s most valuable

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28% 30% 50%

65% 70% 72% 74%

92% 93% T u rk ey R u ss ia P o la n d Cz . R ep u b li c N et h erl a n d s S p a in F ra n ce G erm a n y UK

Exhibit 33: Modern Retail Share

15% 20%

38% 50% 51%

63% 65% 65% 83% R u ss ia T u rk ey Po la n d Cz . R ep u b li c N et h erl a n d s G erm a n y F ra n ce S p a in UK

Exhibit 34: Top-5 Retailers Share

Furthermore, the Polish retail market is still far from being considered a mature market. For instance, organized modern retail accounts just for 50% of the Polish market, which is still considerably low once compared to Western European standards (where modern channels account for 70-90% of the Food Retail segment). At the same time, the Top-5 retailers account for a 38% market share which is also evidence of a developing market that has not

reached maturity yet. These contrasts are illustrated in both Exhibits 33 and 34, where we can observe how Poland compares with both mature European retail markets (e.g. Germany or France) and other fragmented and less developed markets such as the Turkish or the Russian ones. Therefore, this scenario represents a major occasion for modern retail chains to strengthen their position in this market, especially for the leader Biedronka which should see its market share increasing up to 15-16% by 2015, according to our estimates. This increase is expected to be mainly driven at the expense of the traditional retail segment, rather than from Biedronka’s direct competitors.

Additionally we’d like to emphasize that, according to our assessment, there is margin for further store density growth within the Polish HD segment. Today, Biedronka accounts for about 72% of the Polish discount stores which amounted to a total of 2.300, in 2010 – substantially less when compared to Germany (16.000), for example. Looking at both markets, this means that there is one discount Polish (German) store per 16.500 (5.100) citizens.

Assuming that Biedronka will indeed achieve its medium term goal and, moreover, that the other HD competitors will maintain their expansion plans according to the average of the last two years, we estimated a total of 4.069 Polish HD stores by the end of 2015. This, in turn, would represent about one discount Polish store per 9.360, which is still above Europe’s major discount markets (e.g. Germany, Austria or Denmark), with store densities of one per 2.500-7.000. Moreover, notice that we’ve assumed that Aldi will be opening an average of 17 new stores each year, when it actually seems that they have taken a step back in what concerns expansion plans in Poland.

Exhibit 35: # Stores in Polish HD Segment (Actual & Forecasts)

2008 2009 2010 2015E

Stores % Stores % Stores % Stores %

Biedronka 1.359 74% 1.466 72% 1.649 72% 3.000 74%

Lidl 308 17% 335 17% 400 17% 630 15%

Netto 157 9% 184 9% 200 9% 308 8%

Aldi 12 1% 40 2% 46 2% 131 3%

Total 1.836 100% 2.025 100% 2.295 100% 4.069 100%

Source: Company Data and Nova Research

There is margin for further store density growth in the Polish HD segment...

The Polish retail market is still far from being considered a mature market...

Source: Planet Retail and Nova Research

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1.649 530

400 385 336 210 83 48

JM Schwarz Group Lidl Tesco Carrefour Netto Metro Group Auchan

Exhibit 36: # Stores (Poland, 2011)

Thus, our analysis suggests that Biedronka faces a major opportunity to consolidate its position in the Polish retail market. When put in the right context, it turns out that JM’s expansion plans in Poland are far from being utopian. Indeed, there is a solid track record, while Polish discount saturation levels indicate that there is margin for further growth in terms of the number of stores and we expect a convergence to modern store density standards only after 2015. This process should be mainly driven by Biedronka, which was not only the HD chain with the most ambitious expansion policy in the past recent years, but also the one with the most clear and ambitious plans for the future. ii. Assessing the competitive environment in Poland.

Biedronka’s profitable business and solid performance (ROIC estimated at 15%, while the EBITDA margin at 8% and gradually increasing) often raises the following question: how long will Biedronka be able to sustain its leading position in the Polish Food Retail?

While this remains a valid point, first recall that the Polish Food Retail market is already a very competitive and fragmented market. As previously shown,

Biedronka is the current leader in the Polish food-retail market (12%), above some of the world’s retail giants such as: the Schwarz Group (7%), Tesco (7%) or Carrefour (6%). Thus, there are major competitors already in Poland and, in fact, they have been operating there for a long time, just like Biedronka23.

As we’ve argued before, all retail formats have considerable margin for further growth in the Polish market. Thus, it’s not easy to argue what is Biedronka’s main threat. If we take into account size and geographical spread, then Tesco and Carrefour are clearly the main perils. Since its first entrance in the Polish market, Tesco started developing a leading position in the hypermarket format (with both organic growth and M&A operations). Currently, it operates over 380 stores (including different formats: discount, hypermarket and supermarket) and intends to boost its pace of growth by opening about 100 new supermarkets between this year and the following24

. Similarly, Carrefour also started operating in Poland through its hypermarket chain, even though its operations also comprise supermarkets and convenience stores (together, they sum over 300 stores). Currently, its number one priority is to focus on its smaller formats: the 5 Minut convenience stores and the Carrefour Express outlets. In

23The Portuguese retailer decided to bet on the expansion of the Polish market in 1997, with the acquisition of 243 Biedronka stores; the

Schwarz Group decided to enter the Polish market under the Kaufland chain (2001) and then with Lidl (2002); Tesco entered Poland in 1995 through the acquisition of the Savisa SA chain; Carrefour in 1997; Auchan in 1996 via organic growth and the Metro Group also entered the Polish market first via organic growth under the Makro cash & carry chain (1994) and, later, under the Real hypermarket chain (1997).

24 A total investment of more than PLN0,5bn which should add to around PLN10bn that the company has already invested in Poland. Source: Company Data and Nova Research

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40% 36% 24% 17% 8% 7% 5% 5% 4% 3%

7%

Biedronka Real Tesco Carrefour Auchan Spolem Lidl Kaufland Netto Makro Other

Exhibit 37: What is the name of the shop you visit more frequently?

(September, 2009)

fact this strategy is already under way and, in 2010, Carrefour opened 50 new outlets, while it also unveiled its intentions to open 200 new Carrefour Express outlets each year, from 2011 onwards.

On the other hand, if we consider similar business strategies then, looking at the discount chains established in Poland, we argue that Lidl is Biedronka’s main competitor since it has been increasing its pace of growth accumulating 400

stores in 2010 (+19% yoy), while Aldi ended last year with just 48 stores, when it seems that its strategy failed in Poland, and Netto has been decelerating its pace of growth in terms of new store openings (210 stores by the end of 2010). Concerning the last deal that was made in Poland, we regard it as a positive development since the Zabka stores now belong to a UK-based PE firm, rather than a direct trade competitor. Even though Zabka operates more than 2.000 stores in Poland, we don’t perceive as a threat to Biedronka (recall that this is Poland’s largest convenience chain with smaller average size stores than Biedronka: 60sqm vs 550sqm).

From this first analysis, we conclude that Poland’s competitive environment is one of the most demanding in Europe, especially when we consider the myriad of international players that have been and will continue struggling to consolidate their position in the (yet to be mature) Polish retail market.

It is often argued that Biedronka might have benefited from the fact that both Lidl and Aldi postponed expansion to Poland as they wanted a supermarket culture to set up itself first. According to this view, it would be a matter of time before these giants, with enormous economies of scale, decided to crush Biedronka profit margins. However, we argue the “party” has been open for the past 15 years and if Biedronka has had a huge success in the past recent years is not because they allowed, but rather because they couldn’t prevent it. Moreover, if we recall how large Casino, Tengelmann, Ahold and others once were in Poland, we realize that scale is not everything. Indeed, this tells us that, throughout time, Biedronka was the one that not only grew in size, but also, better understood the needs of the Polish consumers and aligned its strategy in the Polish retail

market accordingly.

Polish consumers enjoy proximity/convenience as they prefer to go shopping, mostly on foot, four-to-five times per week day and, even though they do value quality, they are known to be extremely price conscious – recall that the Polish per capita GDP is still well below the EU average. Thus, Biedronka’s high quality products combined with its “every day low prices” policy – selling at a discount in relation to Lidl (3-4%), supermarkets (8%), hypermarkets (15%) and traditional Source: PMR Research

In the HD segment, Lidl is

Biedronka’s main competitor

and...

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