Dear RNG Subscriber,

Over the last 12-18 months the retail industry witnessed thousands of store closings & an unprecedented number
of bankruptcies as the world weathered one of the largest global economic slowdowns in history.

As we look across the industry and this major restructuring around the number of stores and types of formats
that have been most affected by these macro changes, one key question arises:

Is the retail industry over capacity?

Read on for our views as we take a look at North and Latin America and come to some revealing conclusions. As
always, please feel free to reach out at any time to discuss.

Regards,
Aaron Chio
Senior Analyst
RetailNet Group

Assessing Capacity
One way to broadly assess & conceptualize store capacity is to take gross population and divide it by the number
of chain retail stores in the market. When we do this across a variety of markets & zones in North and Latin
America we get to the next base scenario:

Figure 1: Gross population per store

(click image to enlarge)

Source: RetailNet Group

The math behind this is relatively straight forward - there are roughly 300 million people in the US and about
300,000 stores in RNG's database, getting us to slightly over 1,000 people per store (2009E).

There are several broad assumptions behind this calculation (please see list of counter arguments at the bottom
of this email), but for the purpose of benchmarking a highly developed market (like the US) against a set of
developing markets (like many in Latin America), we will use this as a starting point to evaluate & understand
current & future capacity.

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

Understanding the Model: Reachable & Relevant
To assume that 100% of the population in a given market is fully addressable by the modern trade would be
faulty. Things like urbanization, income distribution, education, transportation & mobility, among many others, all
play a crucial role in whether shoppers are immediately addressable by the modern trade.

For this reason, RNG developed a framework to assess the number of addressable shoppers that can be served
by the modern trade today (Figure 2). RNG refers to this number as the reachable and relevant shopper
base.

Figure 2: RNG's Reachable & Relevant Framework

(click image to enlarge)

Source: RNG research
RNG's model implies that:

• Not all shoppers are reachable in an efficient, scalable way. The majority of the rural population
across Latin America cannot be reached efficiently and effectively through modern supply chain
standards. We consider these shoppers aren't immediately addressable.

• Urban population will follow a standard distribution according to each market's socio-
economic segmentation (SES), which is typically derived by local government organizations by
bracketing the population depending on their incomes from the highest (A segments) to the lowest (E
segments). Figure 1 shows the average distribution for Latin America, but keep in mind that each
market looks significantly different and RNG uses individual market data to obtain this high-level view.

• Only the A, B, and C segments are immediately addressable by the modern trade given their
income distributions, education levels, the accessibility and overall relevancy of the modern trade to
their lives.

• However, a large portion of the C socio economic segment is still not relevant to the modern
trade. Despite the fact that this segment is largely urbanized in our dataset, a large portion of this
population does not have appropriate water & sanitation supplies or access to good infrastructure
(electricity, paved roads). For this reason we deem a portion of this segment not immediately
addressable to the modern trade today.

To obtain a more accurate picture of the real capacity in the marketplace, RNG uses this reachable & relevant
model to assess the size of the addressable market (Figure 3). Inevitably, this is a much smaller portion of the
total gross population, yielding a completely different story when assessing capacity.

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

 Figure 3: Breakout of Reachable & Relevant Shopper Base in Latin America

(click image to enlarge)

Source: RNG analysis

Gross vs. Reachable and Relevant Population per Store

When we take this new addressable population on a per store basis we get to a very different reality in terms of
capacity, particularly for Latin America (Figure 4).

Figure 4: Gross vs. Reachable & Relevant population per store

(click image to enlarge)

Source: RNG analysis

What this chart tells us is that:

• A market like the US has both a gross and reachable & relevant population of about 1,000
people per store. These two numbers are very close to each other given that almost 100% of the US
population is addressable by the modern trade.

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

 • A market like Mexico has close to 4,000 people per store in gross terms, but fewer than 1,000 reachable
& relevant per store, meaning that Mexico is at a very similar capacity level as the US today.

• A market like Brazil has almost 5x the number of reachable & relevant population per store vs. the US,
Central America is at 6x while South America is at 7.5x - meaning there is an indication of potential
room for store expansion.

So what does it mean for a market to have a similar capacity as the US, and when can we expect as regions in
Latin America approach a similar threshold?

Channel Development Implications

Our two examples so far have approached capacity at a very high level, taking total number of stores in the
market and dividing it first by gross population, then the addressable market. However, since individual channels
have fewer stores than the aggregate for each market, the size of the addressable shopper base will be higher at
the channel level vs. at the market level. (Figure 5)

Figure 5: Channels Over/Under Capacity

(click image to enlarge)

Source: RNG analysis

What is most interesting about the above chart is that we can clearly see which channels are most & least
developed on a market by market basis when benchmarked against a developed market like the US. In
other words, this chart is telling us the number of immediately addressable shoppers by the modern
trade on a per store basis by channel. Without going line by line, market by market, there are a couple of
important callouts:

• Channel under-development translates into room for growth. This is particularly true for players
in the category specialist world (i.e., apparel,mass merchandiser, home specialists, other category
specialists, etc). However, much of this development depends on the growth of the addressable market.

• Channel over-development means big opportunity for smaller, more targeted stores. RNG
believes the discounters & smaller, in-fill oriented and more targeted boxes will thrive in an environment
where markets are reaching capacity.

• The role of consolidation. A few players are typically the culprits for some of the channel's capacity
issues. In the case of Mexico, for example, health & beauty saturation is driven by players like
Farmacias Similares, or in convenience stores, primarily by Oxxo.

• Format development hybrids. A big portion of the capacity across Latin America today comes in the

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

 form of stores focusing on the lower-end of the SES spectrum vs. the mid to high range parallels of the
advanced markets. This is especially true for small boxes but the opposite for larger boxes.

Given that we now have a base understanding of the number of addressable shoppers available by market and
channel and how that compares to a developed economy, the next logical question is: how much more capacity
can Latin America add, and how fast will these channels reach capacity?

How many more stores could Latin America hold?

The following chart shows how many more stores each individual channel would have to build to reach the same
level of capacity as the US today. (2009E, Figure 6)

Figure 6: How many more stores to reach same level of US capacity?

(click image to enlarge)

Source: RNG analysis

For example, the number of reachable & relevant (R&R) per store for apparel specialists in the US in 2009 is
6,435 people. For Mexico to reach this same number of R&R/store it would have to add 3,225 more stores. On
the other hand, to reach the same number of R&R/store for health & beauty stores, Mexico would have to close
4,195 stores.

The bottom line is that there are clearly some channels where there is a lot of room for growth, and others where
we see excess capacity. If we assume that each of these channels would grow their store base 5% year-over-
year, here is how long it would take for each individual channel to reach the US level of capacity (i.e., reachable
& relevant / store):

SEE NEXT PAGE FOR IMAGE

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

 Figure 7: How many years to reach capacity?

(click image to enlarge)

Source: RNG analysis

Without a doubt, Latin America is rapidly evolving to become a much more modernized retail market and retailers
are reacting quickly to the changing consumer demands & the evolving macro landscape. The speed & impact of
this changing dynamic will be seen both across developed channels and the less developed channels. Retailers
who are able to assess & plan past the 6-18 month horizon will be able to better position themselves for long
term growth.

Preparing for the Future

So what can we learn from this exercise? When looking across markets there are several factors at play today
that the industry needs to be aware of:

1. Which channels are reaching - or already reached - capacity. The closer each of these channels
get to the US number (which we are using as a benchmark) the more saturated the channel is. This has
tremendous implications for what kind of stores will be built in the future and the kind of players we can
expect to see enter new markets.
2. When channels approach capacity, retailers will open new store formats. RNG has talked about
how retailers are re-generating their stores in developed markets as they continue to face legacy
challenges. Assortment, merchandising, marketing & pricing strategies will be impacted as markets
develop. Different buildings target different portions of the reachable and relevant, and retailers will
increasingly continue to develop new formats as markets reach capacity. For example, markets like
Argentina, where some express & smaller stores are beginning to show up, or Walmart's ongoing
development of a three tier Bodega strategy in Mexico (Bodega Aurrera, Express, and Mi Bodega) are
just two examples on how retailers are really embracing this point.
3. Store formats develop very differently and vary market by market. In our earlier example for
Mexico, health & beauty care is driven primarily by the low end, very small (<500 sq.ft), generic
pharmacies like Farmacias Similares. It is hard to make a real parallel against their larger counterparts
of a developed market like the US (such as Walgreens or CVS). For that reason, it is important to
understand local dynamics that may appear subtle to the eye but have a big influence on the market.
4. Different skills are needed as markets develop. RNG has identified the capabilities that leading
retailers are beginning to show in the most developed markets around the world (subscribers click here
for presentation, or see RNG's report on Carrefour). For example, as markets reach capacity, retailers
will have very different capital expenditure plans (small vs. large box), think about store layouts &
department/category relevance very differently, and approach their branding & marketing architecture
from a top down vs. bottom up approach.

Appendix: Assumptions & Counter Arguments

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)

RNG's model is not intended to be a definitive answer but rather to highlight and spark the conversation around
the broader implications as markets reach capacity and how we should be re-thinking things like store & format
development, marketing & merchandising as markets develop & modernize. Here are some of the big
assumptions and potential counter arguments to consider.

• Size of the addressable market. There are assumptions about the size of the reachable & relevant
markets, from the A through E socio economic segmentation to the collecting, manipulation, and
forecasting of the data. If the size of the market is larger/smaller than estimated, this capacity analysis
would look different, both in terms of how many more stores each market could build and the number of
years it would take to reach this capacity. Our model allows us to see different scenarios based on
the addressable market and the impact this would have on store & format development for
any given market. Please contact us if you would like to see learn more or plan for a specific
scenario.
• Consumers shop multiple outlets. Shoppers will visit & shop several stores, channels & formats
throughout the year. Therefore, there is a normal flow in the number of shoppers available from
channel to channel depending on this behavior.
• Population density. Our model cannot account for population and/or store density variations at a city
level, which we know are critical to how economies & retailers develop their store base around the
world.
• Expanding the market: reaching the belly of the market. Our model assumes that only some
percentage of the population is truly relevant today to the modern trade based. As we all know, retailers
are increasingly focusing on reaching the lower end consumers - the belly of the market - as a way of
gaining share of the market & particularly of the traditional trade. This means the size of the market
could be bigger if retailers are able to efficiently and effectively reach the lower rungs of the SES
pyramid.
• We can't talk in absolutes. When we say that the reachable & relevant market is 157 million in Latin
America, the reality is there is a big portion of that that ebbs and flows in/out of the modern and the
traditional trade. At any given point in time this number could swing by as much as +/- 30% depending
on macro economic conditions and other exogenous variables. We have not included such scenarios in
here, but please contact us if you would like to see them in more detail.

Connect with An Analyst

RNG Clients are reminded of our Analyst Support and Access. If you have questions, challenges, or would like
help making the RNG tools and data work for you please contact us by email, phone or through the chat function
on our site. We look forward to hearing from you.

Questions? Visit us at www.retailnetgroup.com or contact Aaron Chio (aaron@retailnetgroup.com)