REVIEW OF THE BUSINESS

Who we are and what we do —— We are the UK’s leading home and general merchandise retailer. Through investing in multi-channel initiatives, expanding choice and developing both product ranges and services, the Group continues to shape the future of shopping for our customers, ensuring that we continue to build successful businesses that bring unrivalled convenience and value to customers’ every day lives, whether shopping at home or on the move.

53,000 1,092 60,000 195 million colleagues are the foundation stores in the UK and Republic products available across customer transactions of our success of Ireland (ROI) across the Argos and Homebase last year Argos and Homebase formats

Argos, the UK’s largest general merchandise Homebase is the UK’s leading home enhancement retailer, has an unrivalled offer of choice, value retailer and offers a growing range of home and convenience to meet customer needs. improvement products and services in a differentiated store environment.

751 400m 341 7m stores in UK and ROI website visits during the year stores in UK and ROI active Nectar customers 35,000 46% 38,000 51% catalogue and of sales are multi-channel branded, own-brand and growth in sales via internet-only products exclusive products Reserve & Collect

4 Home Retail Group Annual Report 2011 RREEVVIIEEWW OOFF TTHHE BE BUUSSIINNEESSSS

We have maintained our market share and leadership We have an effi cient and integrated approach position throughout these challenging times Our clear scale advantage comes from our well-invested infrastructure Despite the reduction of around 4% in the home and general merchandise market which has been built up over a period of many years. in 2010, Home Retail Group remains the market leader with approximately 10% of the £56bn market. We therefore have signifi cant opportunity for growth. Naturally, there has been some movement within individual product categories and you can read more about this on pages 10 to 13. Multi-channel shopping Our highly-successful £56bn 10 % internet and mobile UK home and general Home Retail Group’s channels help us meet merchandise market share of this market consumer demand and make us the market leader in multi-channel retailing.

We have leadership in our main product categories Home Retail Group holds leading positions in each of our ten main product categories, holding fi rst position in four of these (homewares, small domestic UK-wide coverage appliances, toys and jewellery) and second in another fi ve. We use the Our store network and strength of our retail brands to drive leadership in these markets and grow extensive home delivery market share through expanding our product ranges. operation bring our multi­ channel convenience within easy reach of our customers. Our consumers know our brands With over 60 years of market heritage, Argos and Homebase are two of the UK’s leading retail brands. Our own-brand and exclusive brand products have resonance with customers and provide them with confi dence when they shop with us. Our own-brands include Bush and Alba in consumer electronics and, Integrated in toys, Chad Valley, which has become one of the largest toy brands in the infrastructure UK as well as being the top toy brand within Argos. Our recently acquired Our scale and infrastructure Schreiber and Hygena brands, which offer quality and stylish furniture at enables us to leverage affordable prices, are also proving very popular with customers in both Argos financial benefits and and Homebase. synergies to give a competitive advantage which is diffi cult to replicate.

Financial Services Our Financial Services business works in conjunction with Argos and Homebase to provide our customers with the most appropriate credit offers to drive product sales.

International sourcing Our Group sourcing operations import products which account for more than a third of our sales. This provides benefi ts to both businesses and across all major product groups.

Home Retail Group Annual Report 2011 5 REVIEW OF THE BUSINESS

Our product markets —— Home Retail Group operates in the home and general merchandise market, worth approximately £56 billion in terms of UK retail sales.

We are the leader in this market, with an The total furniture market was estimated to approximate 10% market share. The overall have experienced a mid single-digit decline market, which declined by around 4% in calendar in total retail sales, with several major year 2010, can be analysed into various product sub-categories continuing to decline by categories. A summary of these, including where double-digit rates. products are sold at Argos or Homebase, the Group’s overall share position, and the market Home improvement size of each product category during the 2010 The largest part of the home improvement calendar year, is as follows: market is the DIY category (excluding furniture and homewares). During the year, there were Homewares four national retailers (B&Q, Homebase, Wickes The homewares market is relatively fragmented, and Focus) accounting for over 40% of the according to analysis by Verdict Research, with market according to Verdict Research, with other the ten largest retailers accounting for over 40% national operators selling products in this of the market. Home Retail Group is the market category being Argos, Wilkinson, Robert Dyas, leader in this category, with Argos holding the The Garden Centre Group, Topps Tiles and overall third position and Homebase adding Dobbies. Approximately 50% of the DIY market further Group scale. The competition base is very is estimated to be accounted for by specialist broad across the department stores (John Lewis, independents. Home Retail Group is the second Marks & Spencer, Debenhams, Bhs and House in this market, with Homebase holding overall of Fraser) as well as fashion and home retailer second position and Argos adding further Group Next, some national specialists (IKEA, Dunelm), scale. The home improvement market also the supermarkets (Tesco, Asda, Sainsbury’s) and includes the kitchens, bathrooms and some broader generalists (Wilkinson, Matalan, fl oorcoverings (excluding carpets) categories, TK Maxx). Specialist independents are estimated with additional national competitors in these to account for around one-third of the market. areas including Magnet, Howden, IKEA and The homewares market was estimated Homeform. to have experienced a mid single-digit decline The home improvement market was in total retail sales according to Verdict Research. estimated to have experienced a mid single- digit decline in total retail sales according to Furniture Verdict Research. The structure of the furniture market shows a fairly close resemblance to the homewares market according to analysis by Verdict Research, with the ten largest retailers accounting for approaching 40% of the market. Home Retail Group is second in this market, with Argos holding the overall third position and Homebase adding further Group scale. The competition base has a number of national specialists (DFS, IKEA, Homestyle Group, Magnet, Furniture Village, Dreams), with other signifi cant players being B&Q, Marks & Spencer, John Lewis and Next.

10 Home Retail Group Annual Report 2011 REVIEW OF THE BUSINESS

Horticulture, garden furniture and outdoor living PRODUCT MARKETS This market, according to Verdict Research, Group Market Argos Homebase position size (£bn) was mainly dominated by the four national DIY specialists, with Argos, Wilkinson and the two Homewares ✓ ✓ 1 8.7 garden centre retailers, The Garden Centre Furniture ✓ ✓ 2 7.4 Group and Dobbies, also being signifi cant Home improvement (DIY/fi tted kitchens/bathrooms) ✓ ✓ 2 10.5 retailers of products in this category. Horticulture, garden furniture and outdoor living ✓ ✓ 2 3.4 Home Retail Group is second in this market, Small domestic appliances ✓ ✓ 1 1.3 with Homebase holding the overall second Consumer electronics ✓ ✓ 2 14.2 position and Argos adding further Group Large domestic appliances ✓ ✓ 3 3.3 scale. Approximately one-third of this Toys ✓ 1 1.8 market is estimated to be accounted for Jewellery ✓ 1 4.0 by specialist independents. Sports and leisure equipment ✓ 2 1.8 The horticulture, garden furniture and outdoor living market was estimated to have Total 56.4 experienced a low single-digit decline in total retail sales according to Verdict Research. Note: All market positions are for calendar year 2010 and by retail sales except for jewellery, which is measured by volume. The market sizes and positions quoted above are taken from reports provided by Verdict, Mintel, GFK, and internal management assumptions. These reports are subject to prior year restatements upon more current data becoming available. Small domestic appliances This market is relatively concentrated according to GfK. Home Retail Group is the clear market leader in this market, with Argos holding the number one position with a substantial market The consumer electronics market was estimated share and Homebase adding further Group to have experienced a mid single-digit decline in scale. Competition is mainly in the form of the total retail sales, according to Verdict Research. electrical specialists (Currys and Comet), Boots This was largely driven by the video gaming in terms of personal care appliances, the category and photography, as well as the offi ce supermarkets, and department stores such as and telecoms categories, with a marginal increase John Lewis. A relatively small proportion of the in the other major areas of consumer electronics. market would be accounted for by specialist independents. The small domestic appliances market was estimated to have experienced a low single-digit decline in total retail sales, according to Verdict Research.

Consumer electronics This market is also relatively concentrated according to GfK. Home Retail Group is second in this market, with Argos holding overall second position and Homebase adding further Group scale. Currys and Comet are the main competitors, with other competition in the form of John Lewis and other department stores, Tesco and other supermarkets, and national specialists in certain sub-categories such as Game in video gaming, Apple in smartphone and tablet technology and Jessops in photography. Around one-fi fth of the consumer electronics market would be accounted for by specialist independents, while other online retailers represent a small but growing share of this market.

Home Retail Group Annual Report 2011 11 REVIEW OF THE BUSINESS

Our product markets continued

Large domestic appliances Jewellery This market is again relatively concentrated Market competitor analysis on the jewellery according to GfK, with the two major electrical market is based on volume sold rather than total specialists Currys and Comet leading in fi rst and retail sales value. According to Mintel Retail second position followed by Home Retail Group Intelligence, this is a highly concentrated market. in third, with Argos in overall third position and Home Retail Group, through Argos, is the clear Homebase adding further Group scale. market leader in terms of volume sold, Department stores such as John Lewis, DIY and followed by H. Samuel. Other major retailers Find out more about our kitchen retailers and, to a lesser extent the of jewellery volumes include fashion jewellery business, with video and other supermarkets and home shopping businesses, shops, department stores, and specialist information on our new are other signifi cant retailers in this category. jewellers selling a greater proportion of precious reporting centre, available online Approximately one-third of the large domestic metal jewellery such as Ernest Jones/Leslie Davis from our corporate website or at appliances market would be accounted for by and Goldsmiths. www.homeretailgroup.com/ specialist independents. The jewellery market was estimated to have reports/ The large domestic appliances market experienced a low single-digit decline according was estimated to have experienced a mid to Mintel Retail Intelligence. single-digit decline in total retail sales, according to Verdict Research. Sports and leisure equipment This market is relatively fragmented according Toys to analysis by Mintel Retail Intelligence. Home The toy market is relatively concentrated Retail Group, in particular Argos, is number two according to analysis by Mintel Retail in the market, after Halfords (by virtue of Intelligence, with the four largest retailers Halford’s cycles position). Other sellers of accounting for over 50% of the market. equipment include the predominantly sports Home Retail Group is the market leader with clothing retailers (Sports Direct, JJB Sports, Argos being the clear number one, followed JD Sports), the department stores, and Blacks in by Toys ‘R’ Us and The Early Learning Centre. sub-categories such as camping. The majority Supermarkets such as Tesco and Asda are now of the market is estimated to be made up of prominent toy retailers along with The specialist independents. Entertainer and the Disney Store. The sports and leisure equipment market The toy market was estimated to have was estimated to have experienced a low experienced a low single-digit increase in total single-digit decline in total retail sales according retail sales according to Mintel Retail Intelligence. to Mintel Retail Intelligence.

12 Home Retail Group Annual Report 2011 REVIEW OF THE BUSINESS

Expected future development Our businesses are well established but of the competitive landscape continue to evolve to meet changing customer We expect our product markets to remain highly preferences. Our product range is constantly competitive in the future. Supermarkets have expanding. Our supply chain is highly effi cient been growing share in certain parts of the and cost effective. With all the key determinants non-food,non-clothing market, building on for success in place, we expect to emerge in the their regular footfall and the increased space long run as a stronger competitor in a more given to these ranges. Online retailers, such as consolidated market. amazon.co.uk, currently represent a small but growing share of certain product categories. In most categories, the independent specialists will face even greater pressures on their ability to weather the challenging economic environment. Although retail conditions are likely to remain tough in the near term, the longer-term outlook for market growth remains positive. A return to long-term growth in the general merchandise and home enhancement markets would be expected on account of population growth and an increasing number of households, a reversion back to the general trend of rising overall household disposable income, technology changes and other new product developments, as well as the need to replace many existing household items. Home Retail Group’s key strengths mean we are well equipped for the future. Our strong retail brands, multi-channel offering, extensive product choice and competitive pricing, together with a strong fi nancial position, mean we are relatively well placed to trade through the downturn and benefi t from renewed consumer confi dence later in the cycle. While we have leading positions in multiple product markets, there remains substantial headroom for growth in many categories. The more fragmented markets provide growth opportunities, and Our businesses are well established we expect to take market share from weaker competitors and to benefi t from any capacity but continue to evolve to meet withdrawal that ensues. changing customer preferences. Our product range is constantly expanding. Our supply chain is highly effi cient and cost eff ective. With all the key determinants for success in place, we expect to emerge in the long run as a stronger competitor in a more consolidated market.

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