Tesco in Asia November 2008

Tesco in Asia November 2008 Tesco in China Ken Towle, CEO

Agenda China a recap How are we doing? Tesco China Strategy A quality, fast-growth business Tesco Operating Model provides the platform Regional approach that leverages scale Freehold Shopping Centres Integrated supply chain and sourcing Shenyang 3 China Economy One of the world s largest and most dynamic economies Urban disposable earnings (and wage costs) seeing ongoing rapid growth Real GDP growth (%) 13 12 11 10 9 10.1 10.4 11.6 11.9 9.8 8.5 8.7 GBP 1200 1000 800 600 8 2004 2005 2006 2007 2008 (F) 2009 (F) 2010 (F) 400 2000 2001 2002 2003 2004 2005 2006 2007 Per Capita Annual Disposable Income China GDP was 24.7 trillion yuan (GBP 2.02 trillion) in 2007 GDP growth has been in excess of 10% This will slow, but is still expected to be healthy China is projected to overtake Japan to become the world s second largest economy by 2015 Disposable incomes have increased by 115% in last 8 years Projected to double again in the next 5 years 4 Source: National Statistics Bureau, EIU

China People A rural society seeing rapid urbanisation The reliance on bicycles is giving way to cars % Urban Pop'n 50 650 45 600 550 40 500 450 35 400 30 350 300 25 250 20 200 1995 1997 1999 2001 2003 2005 2007 % Urban Population (m) Pop'n (m) 80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 Total cars on China's roads (m) Currently 600 million of China s 1.3 billion population lives in cities Recent urban growth equates to 13 million people moving into cities each year By 2020 a further 90 million people will have migrated to cities such as Shenyang Car ownership is low in China with 2 cars per 100 population (cf. 25 in Central Europe) But car ownership levels have doubled in the last 4 years And they continue to grow in excess of 15% per annum 5 Source: SSB / Statistic year book China Retail In the top 15 cities, hypermarkets now account for 1 out of every 3 RMB spent on grocery 7 17 9 13 3 16 20 26 32 28 22 20 28 30 29 2001 2004 2007 Others Supermarket / CVs Hypermarket Grocery / Food St Wholesale Hypermarkets are the most successful modern trade format market share of grocery has increased from 20% to 30% over the last 6 years But traditional wet markets are still part of people s everyday shopping routine about 60% of Tesco customers also use wet markets regularly for fresh products 6 Source: TNS Worldpanel China 15 cities

How are we doing? Customers per week Sales per week (GBP) Hypermarkets Express Regions DCs Team Increased share to 90% (from 50%) in December 2006 Entered South 2006 Re-branded the business to Tesco in 2007 Member Card 2007 2004 2m 7m 25 0 2 1 11,000 Tesco Own Brand 2007 Fresh DC 2007 Entered Beijing 2007 Express Trial 2008 2008 3.7m 15m 58 5 3 3 21,000 7 Tesco China Strategy A quality, fast-growth business Tesco Operating Model provides the platform Regional approach that leverages scale Freehold shopping centres Integrated supply chain and sourcing 8

A quality, fast-growth business Tesco family Your local store that s part of the Tesco Delivering on the customer promises Locations that succeed downtown and in new growing areas 9 Locations that succeed 10

A quality, fast-growth business Tesco Your local store that s part of the Tesco family Delivering on the customer promises Locations that succeed downtown and in new growing areas Hypermarket designed to be easy to shop and give customers what they want Malls that complement the hypermarket Strengthening new store programme focused on organic growth Delivery on the people promises to ensure we have the people ready for faster growth 11 The customer promises The prices are good for me I can get what I want I can trust what I buy Shopping is pleasant and easy I don t queue The staff are great 12

The customer promises 13 Tesco Operating Model the platform Standard suite of operating systems; integrated with standard operating processes Supported by Organisation Design Blueprints Developed and implemented by Group experts but with country accountability China implemented Phase 1 in 2007 same systems and ways of working across all stores and regions centralised Finance and IT developed change model for Phase II Enables significant productivity in people and capital Customers are the real winners 14

Customers are the real winners 15 Regional approach that leverages scale Benefits of a country with the challenges of a continent Regional Vice President with country team accountable for growth and results 16

Regional approach that leverages scale 17 Regional approach that leverages scale Benefits of a country with the challenges of a continent Regional Vice President with country team accountable for growth and results Shared services across China Leveraging scale on a first among equals principle Everyone is connected to the customer In 2009 we will also be present in Shandong and Fujian Shandong 94m people, GDP of RMB 2,589bn, GBP 212bn First store in 2009, will emerge as 4 th region Fujian 34m people, GDP of RMB 755bn, GBP 62bn First store in 2009 18

Regional approach that leverages scale 19 Regional approach that leverages scale 20

Regional approach that leverages scale 21 Freehold Shopping Centres A step-change from the leasehold business: Conforming store Destination mall anchored by the hypermarket with retail and leisure facilities Car parks that will cope with rapid growth in car ownership Mixed-use schemes to secure sites as necessary A sister-company run and resourced by property professionals Pro-active approach with local authorities and city planners Compliments leasehold development and underpins step-change Customers are the real winners Take a tour 22

Integrated supply chain A core requirement of the Operating Model Enables much better control of range, quality, inventory and costs Provides transparency and facilitates proper segregation of duties Enables direct sourcing at country, Asia and global levels Existing grocery DC serves East region replaced with freehold DC in 2009/10 Third party non-food DC serves all regions Fresh DC serves East region, with North East fresh DC opening later this year 23 Integrated supply chain 24

Integrated supply chain A core requirement of the Operating Model Enables much better control of range, quality, inventory and costs Provides transparency and facilitates proper segregation of duties Enables direct sourcing at country, Asia and global levels Existing grocery DC serves East region replaced with freehold DC in 2009/10 Third party non-food DC serves all regions Fresh DC serves East region, with North East fresh DC opening later this year Network of DCs planned and grows with the business Asia joint buying for hardlines and softlines International sourcing for fruit includes Chinese suppliers Developing partners for local growing and sourcing of vegetables 25 Integrated supply chain 26

Shenyang City in Liaoning Province Liaoning province in north-east China has a population of 42 million people The provincial capital is Shenyang with urban population of 4.5 million 10th largest city in China and one of 35 cities in China with population greater than 2 million people Growth in GDP, disposable income & retail sales has outstripped China s urban average in recent years The city s key industries are aircraft & car manufacturing 20 18 16 14 12 10 Shenyang GDP Growth & Retail Sales Growth 8 1999 2000 2001 2002 2003 2004 2005 2006 2007 GDP Growth Retail Sales Growth 27 Source: National Statistics Bureau of China Tesco in Shenyang & Liaoning Province Hymall entered Shenyang in December 2000 Now Tesco trades from 5 hypermarkets in the city Tesco has a total of 11 trading stores in Liaoning province market leader among international operators A strong opening program is planned for 2009 We are targeting expansion in all 14 cities in the Province and have strong support from the Province level government Number of trading stores Shenyang Liaoning Tesco 5 11 Carrefour 6 9 Wal Mart 2 5 RT Mart 2 5 28

Tesco in Asia November 2008