Understanding Loblaws June 2005 Loblaws PRESENTATION STRUCTURE This presentation is structured into three sections: a brief overview of the Canadian market, an overview of Loblaws and an analysis of Loblaws’strategy Canadian Loblaws Loblaws Market Overview Strategy Overview Understanding Loblaws 2 Loblaws PRESENTATION STRUCTURE First, a brief overview of the Canadian market Canadian Market Overview Understanding Loblaws 3 Loblaws CANADA IS VERY SIMILAR TO AUSTRALASIA In numerous ways –population distribution, demographics, socially, culturally -Canada is very similar to Australasia (Australia + New Zealand) Population distribution: Canada vs. Australasian (people, millions, 2003) Canada Australasia % of % of Population Population Population Population Ontario 12.3m 39% New South Wales 6.7m 28% Quebec 7.5m 24% Victoria 4.9m 21% 85% 78% British Columbia 4.2m 12% Queensland 3.8m 16% Alberta 3.2m 10% North Island 3.0m 13% Manitoba 1.2m 4% Western Australia 1.9m 8% Saskatchewan 1.0m 3% South Australia 1.5m 6% Nova Scotia 0.9m 3% South Island 1.0m 4% New Brunswick 0.8m 2% Tasmania 0.5m 2% Newfoundland/Labrador 0.5m 2% ACT 0.3m 1% Northern Territories/ 0.2m 1% Northern Territory 0.2m 1% Nunavut/Yukon/PEI 31.7m 100% 23.8m 100% Source: ABS; SNZ; SC; Coriolis analysis Understanding Loblaws 4 Loblaws POLITICAL STRUCTURE Canada is composed of 14 provinces and territories, which are generally clumped into four meta- regions: Western Canada, Ontario, Quebec and Atlantic Canada Political map of Canada (2004) Western Atlantic Canada Canada Understanding Loblaws 5 Loblaws THE GREAT WHITE NORTH The vast majority of the Canadian population is clustered in thesouth close to the U.S. border Canadian population distribution by geographic location (people, millions, 1975-2005e) Population less than 1,000 Population greater than 1,000 Understanding Loblaws 6 Loblaws SLOW POPULATION GROWTH Canada is experiencing very low population growth of 1.1% per year Canadian population growth (people, millions, 1975-2005e) CAGR 75-05e 32.3 1.1% 30.8 29.4 27.7 25.8 24.5 23.1 1975 1980 1985 1990 1995 2000 2005 Source: SC; Coriolis analysis Understanding Loblaws 7 Loblaws STRONG GROWTH IN FOOD AWAY Canadian households are spending more money on food away, at theexpense of supermarkets Share of Food Spending: Food at Home vs. Food Away (% of household food spending, 1985-2004) Absolute Change 85-04 Food Away 28% 33% 38% +10% Food at Home 72% 67% 62% -10% …or effectively 0.5%/year 1985 1995 2004 Source: SC; Coriolis analysis Understanding Loblaws 8 Loblaws TWO LARGE RETAILERS Canada has two main supermarket groups (Loblaws and Sobeys) and a number of other smaller groups Canadian retail grocery market share by group (% of sales, 2004) Other 17.5% Co-op Atlantic 0.9% Loblaws 32.2% Federated Co-op 1.8% Wal-Mart 3.6% Costco 4.4% Top 2 47.3% Overwaitea Next 8 35.2% 4.4% A&P 5.9% Sobeys Safeway 15.1% 7.1% Metro 7.1% Understanding Loblaws 9 Loblaws STRONG REGIONAL GROUPS Many of the smaller Canadian retail groups are strong regionally Canadian retail grocery market share by group by region (% of sales, 2003) 100% 100% 100% 100% 16% 15% 14% Other 22% 4% 3% 6% 4% 2% Wal-Mart 3% 5% Costco 5% 10% Atlantic Co-op 5% Federated Co-op 18% A&P 27% Metro Overwaitea 13% 1%2% 30% 15% Safeway 20% 18% Sobeys 9% 39% 38% 33% Loblaws 23% West Ontario Quebec Atlantic Source: company reports; Canadian Grocer; NBF; xariouspublished sources; Coriolis analysis Understanding Loblaws 10 Loblaws MAJOR CANADIAN SUPERMARKET GROUPS There are a large number of strong participants in the Canadian market, including four US based retailers (Safeway, A&P, Costco and Wal-Mart) Key attributes of major Canadian supermarket groups (various, 2003/4) Grocery Group Sales Sales1 # of Geographic Group Ownership (in Canada) (2002) stores Spread Key Formats Notes Public (L) & C$26.2b C$24.9b 1,641+ National Loblaws Acquired Provigoand Agora Weston Family Others+ in 1998 Public (SBY) & C$11.0b C$11.7b 1,300+ National Sobeys Acquired OshwaGroup 1998 SobeyFamily IGA Price Chopper Public US$3.5b C$5.5b 215 West Safeway Subsidaryof Safeway US (SWY) Public C$5.1b C$5.5b 1,018 Quebec Metro Ontario Super C Loeb Public (GAP) US$2.7b C$4.5b 176 Ontario A&P Subsidaryof A&P US Dominion Food Basics Private C$3.4b C$3.4b 177 West Overwaitea (Jim Pattison) Save-On Public (COST) US$5.2b C$3.4b 62 National Costco Subsidaryof Costco US Public (WMT) C$9.0b C$2.8b 213 National Wal-Mart Subsidaryof Wal-Mart Federated Co-op N/A C$1.4b ~300 West Co-op 1. Grocery sales includes sales of wholesale franchise and independent stores supplied by the group; excludes GM sales of Wal-Mart and Costco Understanding Loblaws 11 Source: company reports; Canadian Grocer; NBF; xariouspublished sources; Coriolis analysis Loblaws PRESENTATION STRUCTURE This section gives an overview of Loblaws to put the company into context Canadian Loblaws Market Overview Overview Understanding Loblaws 12 Loblaws MARKET SHARE GROWTH Loblaw has more than doubled its Canadian market share in the past decade Loblaw’s Canadian market share growth (% of supermarket/retail food, 1990 vs. 2004) 1990 2003 Loblaw 16.8% Loblaw 32.2% Other 67.8% Other 83.2% Source: company reports; Canadian Grocer; NBF; xariouspublished sources; Coriolis analysis Understanding Loblaws 13 Loblaws SALES GROWTH Loblaw’s had a period of slow sales growth in the mid-80’s and 90’s, however, since Loblaw acquired Provigo, growth has returned Loblaw’s group sales by year (C$, billions, 1976-2004) CAGR CAGR 99-04 76-04 6.9% $26.2 7.4% $25.2 $23.1 $21.5 $20.1 $18.8 CAGR 86-97 3.1% $12.5 $11.0 $10.0 $9.9 $9.8 $9.3 $9.4 $8.6 $8.3 $8.4 $8.5 $7.8 $7.9 $6.4 $3.5 1976 198419851986198719881989199019911992199319941995199619971998199920002001200220032004 Source: company reports; Coriolis analysis Understanding Loblaws 14 Loblaws PROFIT GROWTH However, during the period of slow sales growth, Loblaw was dramatically increasing its profitability Loblaw’s group net profit by year (C$, millions, 1976-2004) CAGR 84-04 $968 14.5% CAGR 99-04 $845 20.8% $728 $563 $473 $376 CAGR 86-97 $261 11.1% $213 $174 $147 $126 $99 $89 $76 $90 $64 $67 $64 $59 $16 1976 198419851986198719881989199019911992199319941995199619971998199920002001200220032004 -$50 Source: company reports; Coriolis analysis Understanding Loblaws 15 Loblaws CONSISTENT PROFIT GROWTH Loblaw has delivered on steady, consistent profit margin growth over the past fifteen years Loblaw’s components of sales Absolute (% of sales, 1990-2004) Change 85-04 3.8% 3.8% 3.4% 3.5% 4.1% 4.6% 4.9% 5.2% 5.7% 5.8% 6.3% 6.8% 7.2% 7.4% 8.1% EBITDA +4.3% 96.2% 96.2% 96.6% 96.5% 95.9% 95.4% 95.1% 94.8% 94.3% 94.2% 93.7% 93.2% 92.8% 92.6% 91.9% COS/SG&A -4.3% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Source: company reports; Coriolis analysis Understanding Loblaws 16 Loblaws ACQUISITIONS AND DIVESTITURES Loblaw’s acquisitions strengthened it’s position in Canada; divestitures got it out of the U.S. market Loblaw’s major acquisitions and divestitures since 1975 (various) Year Action Company # of Stores 1976 Divestiture Stores in Chicago, Syracuse and California markets 250 1986 Acquisition Stores in St. Louis (from Kroger) 26 1987 Acquisition MrGrocer franchise independent group 40 1988 Divestiture P.J. Schmitt Co. wholesale business - 1988 Acquisition Fortino’ssupermarket chain (Ontario) ? 1992 Acquisition Former Steinberg stores (Ottawa) 10 1992 Acquisition Dominion Stores (Newfoundland) 18 1995 Divestiture Remaining U.S. operations (St. Louis & New Orleans) ? 1998 Acquisition Agora Foods / Oshawa Foods Atlantic Canada ? 1998 Acquisition Provigo 239/109/655+ “The Company is prepared to enter new markets through the openingof new stores, as in its stated plan, to enter the Quebec market, or from focused acquisitions when opportunities arise. The Company is also prepared to exit particular markets and redeploy assets elsewhere when it is strategically advantageous to do so, as demonstrated by the disposal of the United States retail business in 1995.” Loblaw Annual Report 1996 Source: company reports; Coriolis analysis Understanding Loblaws 17 Loblaws SHARE PRICE Loblaw’s shares have been a good investment Loblaw’s share price (C$, actual, Jan 1973-Feb 2005) 15X Source: BigCharts Understanding Loblaws 18 Loblaws LOBLAWS OWNERSHIP STRUCTURE Loblaw, owned 62% by George Weston Foods Limited, which is in turn owned 60% by Galen Weston and family Ownership structure of Loblaws (various, 2004) Galen Weston & Family 60% 54% 100% George Associated Fortnum Weston Ltd. British Foods & Mason Sales: C$29.2b Sales: £5.2b 62% Weston Loblaws George Weston Foods Company Foods (AU/NZ) C$4.5b Sales: C$b Source: company reports; Coriolis analysis Understanding Loblaws 19 Loblaws LOBLAWS COMPANY STRUCTURE Loblaw’s functions as both a retailer and a wholesaler Company structure of Loblaws (various, 2003) Loblaw Company Sales: $25.2b Corporate Wholesale Stores Stores Sales: $18.8b Sales: $6.5b Units: 646 Units: 7,671 Franchised Associated Independent Stores Stores Accounts Units: 397 Units: 598 Units: 6,676 Source: company reports; Coriolis analysis Understanding Loblaws 20 Loblaws NUMEROUS BANNERS As a result of wholesale activity and acquisitions, Loblaws has a large number of both retail and wholesale store formats and banners Loblaw store formats and banners (2004) Retail Wholesale West East Quebec Source: company reports; Coriolis analysis Understanding Loblaws 21 Loblaws CORPORATE VS WHOLESALE SALES While corporate sales are three times the size of wholesale sales, both