Distribuidora Internacional de Alimentación, S.A (the company). and subsidiaries (the Group or DIA Group), have prepared this consolidated Directors’ Report, following the recommendations of the preparation of the Directors’ Report Guide for listed companies issued by the CNMV on 29th July 2013.
2.1.1. Organizational Structure
Distribuidora Internacional de Alimentación, S.A. and subsidiaries form the DIA Group.
Distribuidora Internacional de Alimentación, S.A. owns 100% of all its subsidiaries except Bladis S.A. in France, that is owned by 33,3% through DIA France and it is integrated by the Equity Method. The societies that compose the DIA Group can be seen in the following chart.
The principal activity of the DIA Group is the retail sale of food products and any other consumer products, through owned or franchised self-service stores. DIA World Trade, S.A. is located in Geneva, Switzerland, and its principal activity is the provision of services to suppliers of DIA Group companies, while Finandia E.F.C., S.A.U., is an Spanish credit company that finances the commercial transactions of the customers in DIA stores in Spain through the “ClubDIA” card.
Board of Directors
Distribuidora Internacional de Alimentación, S.A. is managed and governed by a Board of Directors which is made up of 10 members, of which six are independent, two are proprietary, one is executive and one is classified as “other external directors”.
The composition of the Board of Directors is as follows:
- Ana María Llopis Rivas: Non-executive chairwoman qualified as “other external directors”.
- Mariano Martín Mampaso: Vice-chairman qualified as independent.
- Ricardo Currás de Don Pablos: CEO qualified as executive.
- Julián Díaz González: Director qualified as independent.
- Richard Golding: Director qualified as independent.
- Pierre Cuilleret: Director qualified as independent.
- Rosalía Portela de Pablo: Director qualified as independent.
- Antonio Urcelay Alonso: Director qualified as independent.
- Nadra Moussalem: Director qualified as proprietary.
- Nicolas Brunel: Director qualified as proprietary.
The Board of Directors concentrates its actions on the general function of supervision and on consideration of those matters that are of particular importance to the Group. As a general rule it entrusts ordinary management of the Company to the CEO and to the Senior Management (see 1.1.3).
The main responsibilities of the Board of Directors include the followings:
call of the general meeting of shareholders;
appointment of directors by way of co-option and referring proposals to the general meeting regarding appointment, ratification, re-election and removal of directors, as well as acceptance of director resignations;
appointment and renewal of those in the internal positions within the Board of Directors, and the members of and positions on committees;
preparation of the financial statements, management report and proposal for application of profits of the Company, as well as the consolidated financial statements and director’s report;
preparation of the annual corporate governance report to be presented to the general meeting and the other reports and documents that must be submitted to it;
setting and implementing the treasury share policies, within the framework of the authorisations of the general meeting;
delegation of authority to any of its members, on the terms established by law and the articles, and revocation thereof;
approval of amendment of the Board of Directors regulation;
approval of the general policies and strategies of the Company and the organisation necessary to implement them, monitoring and controlling that the CEOs and directors meet the objectives and respect the purpose and interests of the Society;
approval of the compensation policy of directors.
The Board of Directors has appointed an audit and compliance Committee and a nominating and compensation Committee..
The main functions of the audit and compliance Committee are the followings:
reporting to the general shareholders meeting in answer to questions raised by shareholders that fall within the scope of its responsibilities;
supervising and reviewing the process of preparation and presentation of the regulated financial information;
supervising the effectiveness of the Company´s internal control procedures, internal audit and risk management systems, and discussing with the Company´s auditors such significant weaknesses in the internal control system as may be discovered in the conduct of the audit;
proposing to the Board of Directors, for submission to the general shareholders meeting, the appointment of the outside auditors, as well as the conditions for hiring them, the scope of their professional assignment and, if applicable, revocation or non-renewal of the appointment;
establishing the appropriate relationships with auditors or audit companies to receive information regarding such questions as may compromise their independence, for examination by the committee, and those of anyone else involved in the process of auditing accounts, and such other communications as may be contemplated in the legislation regarding auditing and audit standards.
In any event, annually they must receive from the auditors or audit companies written confirmation of their independence as regards the entity or directly or indirectly related entities, and information on additional services of any kind provided to these entities by the aforesaid auditors or companies, or by the persons or entities related thereto, in accordance with the provisions of the Audit Law.
annually, prior to the issue of the audit report, issuing a report stating an opinion regarding the independence of the auditors or audit companies. This report in any event must opine on the provision of additional services referred in paragraph (e) above.
supervising compliance with the rules regarding related party transactions with directors or major shareholders or shareholders represented on the board; in particular, it will report to the board regarding such related party transactions and, in general, regarding transactions that imply or may imply conflicts of interest, for purposes of their approval, and will see to it that information in respect thereof is communicated to the market as required by law;
supervising compliance with internal codes of conduct, in particular the code of conduct for the securities market;
any such others as may be attributed to it by law and other regulations applicable to the Company.
The members of the audit and compliance Committee are Julián Díaz González, chairman, and Richard Golding and Nadra Moussalem as members.
The main functions of the nominating and compensation Committee are the followings:
evaluating the competence, knowledge, experience and level of dedication required of members of the Board of Directors;
making proposals to the Board of Directors of independent directors to be appointed by co-option or, if applicable, for submission to decision by the general meeting, and proposals for re-election and dismissal of those directors by the Company;
reporting on proposals of the Board of Directors for appointment of other directors to be appointed by co-option or, if applicable, for submission to decission by the general shareholders meeting, and proposals for re-election and dismissal of those directors by the general meeting;
reporting on the senior management appointments and removals that the chief executive of the Company proposes to the board;
reporting to the board on matters of gender diversity and, in particular, seeing to it that procedures for selection of directors and senior managers do not suffer from implicit bias preventing selection of women;
proposing to the Board of Directors (i) the system for and amount of anual compensation of directors, (ii) the individual compensation of inside directors and senior managers and the other terms of their contracts and (iii) the basic terms of contracts of senior managers;
overseeing compliance with the compensation policy set by the Company;
generally supervising compliance with the Company´s applicable corporate governance rules.
The members of the nominating and compensation Committee are Pierre Cuilleret, chairman, and Mariano Martín Mampaso and Nicolas Brunel as members.
As has been mentioned in 1.1.2., the Board of Directors of DIA entrusts on his CEO, Ricardo Currás de Don Pablos, as well as on the Management Committee, the ordinary management of the Company, whose members, apart from Ricardo Currás de Don Pablos, are the followings:
- Diego Cavestany de Dalmases: Senior Manager for Operations of DIA España.
- Antonio Coto Gutiérrez: Senior Manager for Latin America and responsable for Partners and Franchises.
- Juan Cubillo Jordán de Urríes: Business and Merchandise Manager.
- Javier La Calle Villalón: Senior Manager Portugal and China.
- Bruno Pertriaux: Senior Manager France.
- Amando Sánchez Falcón: Chief Corporate Officer.
DIA is managed by a team with extensive experience in the retail sector and with an average tenure in the DIA company of more than 20 years.
For management purposes the Group is organised into business units, based on the countries in which it operates, and has three reporting segments:
Segment 1, Iberia, comprises Spain, Portugal and Switzerland (DWT). Spain and Portugal are the oldest countries of the Group and they serve as a model for the others countries. They have a very high profitability and similarly between them. In Switzerland is located DWT, whose principal activity is the provision of services to suppliers of DIA Group companies.
Segment 2 comprises the French companies. France is a outstanding country for the DIA Group.
Segment 3, Emerging Countries, omprises Brazil, Argentina and China (Turkey is not part of this segment, after its sale on July 2013). These countries are characterized by a lower profitability but with a strong potential for expansión.
Management monitors the operating results of its business units separately in order to make decisions on resource allocation and performance assessment.
The DIA Group is the leading distributor of food worldwide specializing in the proximity discount segment, located in 6 countries: Spain, Portugal, France, Brazil, Argentina and China in which it operates in 2013 and having 7,328 stores across different formats as DIA Market, DIA Maxi, Schlecker, Clarel, DIA Fresh, Cada DIA, Minipreço or Mais Perto being own stores or franchises.
DIA Group wants to be the leading distributor in the 2P segment, namely Price and Proximity, that are, acording to several surveys, the 2 most valuable factors for customers when choosing the store to make their feeding purchase.
Therefore, the DIA Group’s strategy is based on the following lines:
) Leadership in the neighbourhood segment: The DIA Group boasts a unique business model that has translated into unrivalled specialisation in the neighbourhood segment. This model implies the ability to cater to each shopper’s everyday grocery requirements without having to travel far, saving money and time for our shoppers in the process. Underpinned by the tenets of sustainable mobility and integration in city-scaping, the sales model makes life easier and is more environmentally-friendly, while helping to preserve existing urban cohesion and the dynamism of the broader parallel retail trade.
Almost 78% of the stores where DIA Group is operating are located in urban and rural areas through formats DIA Market, DIA Fresh, Schlecker, Clarel, Cada DIA, Minipreço or Mais Perto offering the best prices of the area of influence.
To encourage the daily shopping, DIA Market and DIA Fresh stores offer more perishable products as produce quality is of increasing importance to consumers. The DIA Group responds swiftly to its customers’ demands, which is why its stores are devoting more shelf space and prominence to produce. The use of light and colour in our stores facilitates selection of these products infused with energy and life. The goal, to be the player to beat in perishables: fruit, vegetables and hot spot, offering bread and pastries, are the strengths that the DIA Group is actively developing.
Leadership on price: Boosting shoppers’ purchasing power by offering the best quality at the best price in the market make the DIA Group work with a goal of continuous improvement in efficiency in overall business management resulting in its undisputed leadership in prices. Quality food that everyone can afford is a priority for the company. The DIA Group has the best price image in its most important markets: Spain, Portugal, Brazil and Argentina.
) A quality own brand: The own brand is essential to achieve a good price image and represent a single link with consumers, stimulating their fidelity to our stores. The own brand in DIA constantly evolve in order to a better adaptation to the customers’ needs, providing them more information and innovating, with the objective of achieving the same or even a better quality as the leader product of the market, with a unbeatable price.
On average, more than 50% of sales are own brand products, although in emerging countries this percentage is lower. Even so, in all our markets, the percentage of sales of own brand is well above the average of its own market.
A single loyalty program: through the “ClubDIA” card, customers achieve immediate discounts in the cash desk in more than 300 products. Furthermore, monthly coupons are issued offering additional discounts in a product family, a brand of products or a new product that has recently gone to market. The use of these coupons represents an additional discount of 6% of the ticket purchase value.
This tool is critical for the price image and allows the jointly elaboration with the suppliers of more efficient and profitable for all sale plans.
This program was developed entirely by DIA and is one of the most developed and efficient programs in the sector, being implemented in all countries except Brazil.
Low cost operator: The improvement of the processes, the continuous reviews, and the constant search of excellence, are part of the DNA of the DIA Group. This efficiency is the best warranty for the sustainability and what allows the offering of the best prices.
In order to achieve the efficiency and the reduction of costs, the DIA Group develop all its strategic software internally, as the cash desk software, the management of warehouses program or the fidelity program described above. These programs are designed in order to a better adaptation to the proximity trade characteristics.
Efficiency couldn’t be achieved without an integrated and optimized logistic system. Thereby, all merchandise for the stores prepared in our warehouses, is delivered in one multi-temperature truck where all perishable, frozen, dry or +0 temperature products fit. Warehouses are managed using the last technology as the “voice-picking” (voice-transmitted orders) or the radio frequency, that have allowed removing all paper.
Furthermore, in the stores, everything is designed to optimize the tasks of employees, starting with the products allocation facilitated by the packaging and the conditioning. In the cash desk, price reading is faster and easier because of the bioptic scanner, as the bar-code is allocated in several places of the products and the keyboard is optimized by the removal of the unnecesary keys and the enlargement of the most used keys.
Definitely, the management is aimed to efficiency, what allows achieving a lower cost and offer the best prices for the customers.
The franchise: The DIA Group’s track record in the design of an unrivalled business blueprint is transferable to a network of franchises giving the franchisee the opportunity to be part of a large commercial network belonging to the leader in proximity. The flexibility of the franchise model and the proximity of the franchisee to the end customer facilitate the provision of personal service and reinforce the supply of quality products at the lowest prices, nourishing the best neighbourhood model in the marketplace.
DIA transfers to its franchisees all its internally generated know how, covering all aspects of business, giving to its franchisees the possibility of the development of a profitable and competitive business.
This is way the franchise model is suitable for the proximity store management and it is the key to improve the company’s profitability.
Profitable growth: Since its beginning in 1979, the DIA Group has grown steadily. Its international vocation, its capacity for innovation and its high versatility make it a distance runner who needs to take on new challenges after achieving the goal.
However, the DIA Group is not searching for the growth at any cost, but it assesses the profitable growth. This sometimes implies closing unprofitable and little prospect of improvement business as has happened in Beijing (China) or in the latest sale of Turkey. On the contrary, the purchase of the Plus stores in Spain at the end of 2007 or the latest acquisition of Schlecker in the early 2013 demonstrate the growth will of the DIA Group even with trading operations of companies as long as they are made in a reasonable price and fit in the company´s strategy.
Regarding to the organic growth, it is not searched an uncontrolled growth that could affect the profitability of the emerging countries as it has happened in Brazil, where a profitable growth is ensured by the opening of a new region each year and a half or searching alternatives with masterfranchise contracts.
The DIA Group operates proximity stores. Management of stores is carried out by own way (COCO Stores – Company Owned Company Operated), or through franchises (FOFO stores – Franchised Owned Franchised Operated or COFO stores – Company Owned Franchised Operated).
Proximity stores: The DIA Group wants to have the leadership on proximity stores and from its beginnings has developed store models adapted to proximity in urban and rural areas. These stores represent about the 78% (62% DIA and 16% Schlecker/Clarel) of the total number of stores worldwide.
The main formats of proximity stores used by the DIA Group in their markets are the followings:
DIA Market: DIA Market stores have a floor area between 400 to 700 square meters and are readily adaptable to local requirements. Its attempt to get as close as possible to shoppers, bringing them a wide range of products and an unbeatable quality-price trade-off. These stores’ attention to perishables is particularly noteworthy. They are the ideal stores for your everyday shopping.
These stores sell about 2,800 products.
Schlecker: The DIA Group acquired the Spanish and Potuguese business of German company Schlecker in 2013. With this acquisition, DIA acquired more than 1,080 stores in Spain and 40 in Portugal, adding to its product offering in the health and beauty segment, as Schlecker stores, with an average floor space of 200 square meters, are stores specialized on household, beauty and health products, located in urban and rural areas.
These stores sell about 5,500 products.
Clarel: Clarel is a new store concept. The goal is to become the benchmark neighbourhood store for shoppers looking to buy health, beauty, household and personal care items. Clarel stores will retail around 6,000 products.
Clarel is the fruit of the acquisition of the Schlecker stores in Spain and Portugal. These stores are in the process of being refurbished and rebranded. The Clarel store image is more modern and more neighbourhood in feel.
DIA Fresh: This commercial model works as a store where the management of fresh products is developed. Falling under the umbrella of the neighbourhood shopping concept, DIA Fresh is a smaller format, with an average floor space of 150 square meters and a product offering based on fresh products such as fruit, vegetables and hot spot (bread and pastries). Another feature of the DIA Fresh store concept is its ample opening hours, which allows shoppers to stop by at any time from 9.30 am to 9.30 pm.
Cada DIA: is the franchise commercial format for little towns, mainly rural areas, in which the franchisee can offer his products without the need of transform the store into a DIa store. Is the “lifelong” store managed by the little trader.
Minipreço: Minipreço is the brand that DIA operates in Portugal. There are convenience stores that are located in urban centers and larger stores are in the suburbs of cities. In these stores the DIA brand products are offered.
Mais Perto: is the most rural concept of DIA store in Portugal, the same as Cada DIA stores in Spain. The stores are located in little towns and are managed by franchisees of the area. This allows a greater proximity to customers.
Attraction Stores: in order to complement the retail offering of the neighbourhood segment, the DIA Group operates too with attraction stores located around urban centers and offering parking to customers. These stores represent about the 22% of the total number of stores worldwide.
DIA Maxi: DIA Maxi store allows a better adaptation of the supply and the level of service offered to customers characterized by making larger and less frequent purchases, even going to the store by car, compared to the neighbourhood segment. This is the DIA Group’s largest store format, with a floor area of up to 1,000 square meters. At DIA Maxi stores consumers can shop for a huge variety around 3,500 SKUs with the best market price.
Management models: management of stores is carried out by own way (COCO Stores – Company Owned Company Operated), or through franchises (FOFO Stores – Franchised Owned Franchised Operated or COFO Stores – Company Owned Franchised Operated).
COCO Stores (Company Owned Company Operated): This is the historic management model for the DIA Group and, therefore, the most used, although over recent years it has become less prevalent by comparison with the franchise scheme management model. The principal advantages of this management model are the greater ease of adapting the business model, making changes and managing the personnel that work in the retail stores. In particular, the "DIA Maxi" retail stores for the most part operate under this model, due to their greater size, high sales potential and greater management complexity. New business concepts are tested first in COCO stores before being replicated in franchise stores.
COCO stores represent at the year-end 2013, about 59% of the total DIA Group stores.
FOFO Stores (Franchised Owned Franchised Operated): For the DIA Group franchising is a management model and not a different retail model, for which reason this model is treated from the point of view of the end customer in the same manner as a COCO or company owned store. It is a model that has become much stronger over recent years, and is of special significance to the DIA Group. This change in the strategy is based, principally, on the proximity between franchisees and customers that provides a nearby service fitted to their needs. The franchisee makes an optimal and efficient management of the store, is an entrepreneur who manages his business with the support of DIA generating wealth in the environment in which it operates.
FOFO stores represent at the year-end 2013, about 20% of the total DIA Group stores.
COFO Stores (Company Owned Franchised Operated): Implementation of this management model began in Spain in 2006 by way of isolated tests. Since 2009 it has been implemented in a significant manner. The principal advantage of this system is that the DIA group fits out premises meeting all investment requirements and having all necessary equipment and, thereafter, they are transferred to a third party for management and operation, which allows generation of profitability for both parties thanks to the franchisee´s involvement in the operation of the point of sale.
COFO stores represent at the year-end 2013, more than 21% of the total DIA Group stores.
The current franchised banners are: DIA Market, DIa Maxi, Schlecker, Cada DIA, Minipreço and Mais Perto.