1. Planet Retail Ltd | 13 August 2012 Walmart Q2 Global Round-Up By Natalie Berg Global Research Director May - August

2. 2 Analyst Comment “We’re expecting another solid quarter with further signs of a domestic recovery bolstered by strong growth from overseas. Despite setbacks in Mexico and South Africa, Walmart International remains the company’s growth engine and we are anticipating strong numbers coming from the UK and Latin America in particular. A continuation of the positive comp trend in the US is also to be expected, which would mark four consecutive quarters of comparable sales growth and indicate stability in Walmart’s domestic strategy. That said, we remain doubtful over the longevity of Walmart’s back-to-basics approach. Low prices are no longer a USP, but an expectation from shoppers. The recent closure of an Express store indicates that the format, despite being profitable, is a long way from perfection. Walmart needs to accelerate its multi-channel initiatives in order to sustain the current positive momentum.” Natalie Berg, Global Research Director

3. 3 Agenda  What’s new at Planet Retail  Expectations for the Quarter  US: Q2 Strategic Changes  Global: Q2 Strategic Changes  Outlook

4. 4  All Walmart global figures (2012 and forecasts) have been refreshed.  2012 Strategy fields have been overhauled.  Top 20 Regional Rankings published.  New photos from store visits in the US and Japan.  Competitor Analysis: CityTarget Store Tour and Insight Decks: Tesco, Carrefour, Target, KrogerCityTarget Store TourTescoCarrefour TargetKroger  Coming up:  Q2 Results: We’ll be at the Asda Briefing with Andy Clarke. Insight article to follow.  Refreshed Walmart SWOTs  New profile fields: Key Initiatives and Planet Retail View  Walmart Insight Deck Walmart updates on planetretail.net X What’s new at Planet Retail1

5. 5  What’s new at Planet Retail  Expectations for the Quarter  US: Q2 Strategic Changes  Global: Q2 Strategic Changes  Outlook Agenda

6. 6 We are expecting a continuation of the positive comp trend Walmart US: Comparable Store Sales by Quarter (including Sam’s Club, ex fuel) Comps (%) X Expectations for the Quarter2

7. 7 Another solid quarter expected but doubts over long-term strategy  Expecting more signs of improvement in the US – a fourth consecutive quarter of positive comps will indicate stability in domestic strategy.  Will be looking out for any signs of small-box failing as well as any progress with online initiatives.  Internationally, we foresee another solid quarter, with strong growth expected from Latam and UK.  We will be looking for an update on South Africa integration, success (?) of global EDLP implementation, signs of small-box halting in emerging markets.  Overall, we remain confident in Walmart’s ability to continue its short-term US turnaround but fear that they are losing their USP for long-term, sustainable growth. X Expectations for the Quarter2

8. 8  What’s new at Planet Retail  Expectations for the Quarter  US: Q2 Strategic Changes  Global: Q2 Strategic Changes  Outlook Agenda

9. 9  Chatham store in Illinois closed in July due to cannibalization with nearby Supercenter.  First sign of urban failure, but let’s not forget this is just one location. That said, Washington, DC stores have also been delayed to end-2013.  Highlights the challenges of running small-box profitably (Walmart Express is currently profitable on the whole, but co-locating the stores with a Supercenter is unsustainable).  Catch 22 – proximity to Supercenter needed for cost efficiencies, but not if driving traffic away from small-box.  Indicates that the weekly fill-in trip that Express is designed to target becomes invalidated when larger format is nearby.  Online not yet compelling enough to make Express a true destination pick-up point.  Urban battleground only to heat up with CityTarget launch. Walmart Express store shuts down Check out our Virtual Tour of CityTarget here.here Check out our Virtual Tour of Walmart Express here.here X US: Q2 Strategic Changes3

10. 10  We see Amazon overtaking Walmart by 2020… so does Andy Bond.  Pay With Cash scheme launched in Q2:  Astonishingly complicated – order online, pay instore, wait in for delivery (or pick up again instore)  But there is demand for it!  25% of US households either unbanked or underbanked, yet majority have internet access.  85% of transactions instore paid in cash/cash equivalent.  Has been a success: PWC online order is 50% larger than average.  Would make sense to roll this out internationally. Planet Retail sees the UK, Brazil, China and South Africa as obvious next markets.  We’re still not convinced in current process; a pay-on-delivery scheme could be more appropriate, particularly in emerging markets. Pay With Cash Online launched to appease core shoppers X US: Q2 Strategic Changes3

11. 11  @PGMobile – month-long initiative to promote online and mobile shopping in NYC and Chicago.  Company truck plastered with QR codes for P&G products, which shoppers scan and have added to Walmart.com basket.  P&G-led campaign. Walmart messaging very subtle but good way to raise awareness of multi-channel capabilities.  This isn’t about generating sales but creating a buzz about Walmart’s increased efforts to ramp up its multi- channel capabilities to an urban audience. With P&G, Walmart jumps on the QR code bandwagon “We truly believe [buying consumer packaged goods products online is] the future. But people have yet to really adopt buying consumables online. We think having free delivery, and getting this message out to urban shoppers who don’t have access to Walmart stores, is a great first start.” X US: Q2 Strategic Changes3

12. 12  Walmart fast tracks Timothy Flynn to board of directors to oversee internal probe in Mexican bribery allegations.  Walmart will be looking to Flynn’s expertise as ex-KPMG chairman as he serves as a member of the retailer’s audit committee.  Venky Harinarayan and Anand Rajaraman, co-founders of Kosmix (now @walmartlabs), leave the company.  We never expected Harinarayan and Rajaraman to stay on, given their entrepreneurial spirit. They have however massively helped Walmart to get off the ground with a (belated) start in the world of social and mobile. Jeremy King, CTO of Walmart Global eCommerce, will now lead @WalmartLabs.  Announce plans to test online Goodies service in Chicago and San Francisco and continues price comping instore and online.  Walmart To Go still very much in test phase, although it has been extended to the San Francisco Bay Area and Chicago. Price guarantees, inspired by Asda’s success in the UK, are powerful and quite easy to implement online. However, the challenge online is not about convincing shoppers of low prices, but about the benefits and capabilities of Walmart.com which has so far been sluggish at best. Other key strategic shifts in Q2 X US: Q2 Strategic Changes3

13. 13  What’s new at Planet Retail  Expectations for the Quarter  US: Q2 Strategic Changes  Global: Q2 Strategic Changes  Outlook Agenda

14. 14  Plans to enter Kenya with the Game format confirmed – expected new market for 2014.  Logical extension for Walmart. Currently, 40+ stores outside of South Africa, with Game accounting for the majority.  Kenyan market extremely fragmented. Our figures show that 90% of national grocery sales continue to be generated in the traditional and informal sectors, with modern outlets limited to Kenya’s largest cities such as the capital Nairobi.  Although entering with a variety store, we believe there is a substantial opportunity to launch food formats (i.e. Cambridge Food or FoodCo) in the future.  South Africa: confirmed integration will take another 18-36 months.  No surprise here. Now that Walmart has the green light, we expect immediate changes to include private label development (with potential synergies with the UK), sharing of best practice in formats (Cambridge already gets much inspiration from Latin American bodegas), and global sourcing initiatives (although will be held back by local sourcing deal with government)  We expect EDLP implementation to take place within the next 2-3 years. Walmart will spend the next 12 months looking to reduce its cost base and finalizing its grocery strategy before attempting EDLP. Global expansion update X Global: Q2 Strategic Changes4

15. 15  Opened 47 staff hiring centers in Canada to support growth strategy – 73 projects scheduled for 2012 (new stores, remodels, relos).  Walmart has rightfully gone on the offensive in Canada. Target’s entry will see the opening of up to 135 stores in 2013/14, with an ultimate goal of some 200 stores over time. Given the overlap in shopper demographics, this will inevitably lead to some share loss for Walmart.  Walmart cannot compete with the strong equity and novelty of the Target brand, and will have no choice but to: 1.Become even fiercer on price. In Q2, Walmart Canada slashed prices on more than 10,000 items in July (including 3,000 grocery SKUs). 2.Ramp up its store expansion plans. We see an opportunity for Walmart to convert ~150 stores to Supercenters (which we predict will happen by 2018). After that, they will either need to look to acquire or ramp up organic expansion. However, we see Walmart rolling out a smaller format in Canada before they hit the 2018 saturation mark. Global expansion update X Global: Q2 Strategic Changes4

16. 16  Confirmed plans to invest USD20 mn in India – still only 17 cash & carries, with just two having opened in past six months.  India has been a slow burner due to current FDI regulations. Walmart’s expansion with cash & carries has been sluggish, not unlike competitor Metro (and more recently Tesco and Carrefour, both of which have recently delayed expansion plans.) While the investment announcement is promising, we believe the reality will be more challenging when it comes to securing sites.  Massively scales back Mexico/Central America expansion plans from original (up to 436) to a revised 325-335 stores.  Quite a significant downgrade. Revision primarily due to “additional steps the company is adding to its real estate process that extends the average time required to open a store”. As expected, bribery allegations in Mexico have clearly taken some toll on expansion.  Opening an e-commerce DC in Brazil this month to increase capacity for online business by 50%.  A no brainer given the rapidly growing demand in Brazil. Walmart’s Brazilian e-commerce operations offer 10 times the assortment instore and have been growing at double the market rate.  Walmart is clearly prioritizing international markets for e-commerce investment with the UK, China and Brazil high up the list. Global expansion update X Global: Q2 Strategic Changes4

17. 17  Asda aims to double mobile sales and launch iPad app.  Makes sense given rapid increased usage of mobile devices for grocery orders. Currently, more than 6% of Asda’s grocery orders placed on a mobile device. The UK is without a doubt Walmart’s top market for multi-channel retailing: nearly half of online orders are collected instore with the average click and collect customer spending an extra GBP9.30. The rebranding of Netto to Asda Supermarket has enabled Asda to broaden its geographic reach with click & collect pick-up points (pictured below right).  QR codes to launch on products instore.  Not enough retailers are engaging with the shopper instore. QR codes, albeit somewhat of a fad at the moment, are a fantastic way to interact with, educate and build trust with shoppers. QR codes on private label items, in particular, will help retailers to differentiate form national brands following on from Asda’s successful Chosen By You relaunch.  Virtual store assistants may be rolled out and hybrid checkouts rolling out to four more stores.  This follows a January trial in Milton Keynes where a female virtual assistant greeted shoppers and communicated Asda’s Price Guarantee. Again, shows Asda’s commitment to using technology to generate excitement instore. UK leading the way in the race for digital X Global: Q2 Strategic Changes4

18. 18  What’s new at Planet Retail  Expectations for the Quarter  US: Q2 Strategic Changes  Global: Q2 Strategic Changes  Outlook Agenda

19. 19 Although the US remains the bedrock of Walmart’s business, its international operations will account for more than one-third of group sales by 2017. Source: Planet Retail Outlook5

20. 20 Outside of North America, growth will come primarily from Latin America where we expect Walmart to add USD34 billion in sales by 2017. Note: CAGR calculated in USD Source: Planet Retail Walmart: Sales by Region, 2007-2017f 3.4% ‘12-’17 CAGR 9.8% 9.6% 9.8% 4.3% Outlook5

21. 21  Short-term US turnaround on track.  International growth may be stunted initially by Mexican bribery scandal, but long-term impact will be minimal.  Next six months to see entry into a new region (ME) and first signs of integration in South Africa.  No additional market entries expected – although backfill opportunities in China and Brazil would be taken. Also opportunity for CEE entry... But would they dare? We see Auchan as the most likely buyer if Metro decides to sell its Real business in the region.  Still doubtful over viability of Walmart’s back-to-basics approach. Price/assortment no longer a USP, but an expectation. Walmart must go beyond this by investing in multi-channel, but without neglecting the store environment – as this is the one thing its largest competitor doesn’t have. X Outlook5

22. 22 Author All images ©Planet Retail Ltd unless otherwise stated. Natalie Berg Global Research Director Natalie.Berg@4C.planetretail.net Natalie Berg has been analysing global trends in the food sector since 2003 and specialises in Walmart, Tesco and Carrefour. She is a sought- after speaker at industry events throughout Europe and the US and frequently features in print and broadcast media. In 2012, Natalie published her first book, Walmart: Key Insights and Practical Lessons from the World’s Largest Retailer. She holds a BS in international business from the University of Connecticut and studied at Ecole Supérieure de Commerce in Grenoble, France.

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