UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

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FORM 20-F

 

Commission File Number 1-14626

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COMPANHIA BRASILEIRA DE DISTRIBUIÇÃO
(Exact Name of Registrant as Specified in its Charter)

BRAZILIAN DISTRIBUTION COMPANY
(Translation of Registrant’s name into English)

THE FEDERATIVE REPUBLIC OF BRAZIL
(Jurisdiction of incorporation or organization)

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Christophe Hidalgo, Chief Financial Officer
Phone:  +55 11 3886-0421
gpa.ri@gpabr.com
Avenida Brigadeiro Luiz Antonio, 3142
01402-901 São Paulo, SP, Brazil
(Address of principal executive offices)

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Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

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*The Preferred Shares are non-voting, except under limited circumstances.

**Not for trading purposes, but only in connection with the listing on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

 

 

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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the period covered by the annual report:

As of December 31, 2018, the registrant had outstanding 99,679,851 Common Shares, no par value per share, and 167,165,057 Preferred Shares, no par value per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act

☒ Yes ☐ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

☐ Yes ☒ No

Note—Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒ Accelerated Filer ☐ Non-accelerated Filer ☐ Emerging Growth Company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 ☐ Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

 

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TABLE OF CONTENTS

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INTRODUCTION

All references in this annual report to (i) “CBD,” “we,” “us,” “our,” “Company,” “Grupo Pão de Açúcar” and “GPA” are references to Companhia Brasileira de Distribuição and its consolidated subsidiaries, unless the context requires otherwise; (ii) the “Brazilian government” are references to the federal government of the Federative Republic of Brazil, or Brazil; and (iii) “preferred shares” and “common shares” are references to our authorized and outstanding shares of non-voting preferred stock, designated as ações preferenciais, and common stock, designated as ações ordinárias, respectively, in each case without par value.  All references to “ADSs” are to American depositary shares, each representing one preferred share, without par value.  The ADSs are evidenced by American Depositary Receipts, or “ADRs,” issued by J.P. Morgan Chase Bank N.A. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil.  All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars.  All references to “€” or “euro” are to the currency introduced at the start of the third stage of the European economic and monetary union pursuant to the treaty establishing the European Community, as amended.

We have prepared our consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.

Our consolidated financial statements are presented in Brazilian reais.  We have translated some of the real amounts contained in this annual report into U.S. dollars.  The rate used to translate the amounts as of December 31, 2018 was R$3.8748 to US$1.00, which was the commercial selling rate of U.S. dollars in effect as of December 31, 2018, as reported by the Central Bank of Brazil, or the Central Bank.  The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the real amounts represent, or could have been or could be converted into, U.S. dollars at that rate or at any other rate. 

None of the information available on our website or on websites referred to in this annual report is incorporated by reference into this annual report.

FORWARD-LOOKING STATEMENTS

This annual report includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, principally in “Item 3D. Risk Factors,” “Item 4B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business.  These forward-looking statements are subject to risks, uncertainties and assumptions including, among other things:

●        global economic conditions and their impact on consumer spending patterns, particularly in Brazil (including, but not limited to, unemployment rates, interest rates, monetary policies and inflation rates);

●        our ability to sustain or improve our performance;

●        competition in the Brazilian retail industry in the sectors in which we operate;

●        Brazilian government regulation and tax matters;

●        adverse legal or regulatory disputes or proceedings;

●        our ability to implement our strategy, including our digital transformation initiatives;

●        credit and other risks of lending and investment activities;

●        our ability to expand our operations outside of our existing markets;

●        hedge risks; and

●        other risk factors as set forth under “Item 3D. Risk Factors.”

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The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements.  We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or otherwise.  In light of these risks and uncertainties, the forward-looking information, events and circumstances discussed in this annual report might not occur.  Our actual results and performance could differ substantially from those anticipated in our forward-looking statements.

PART 1

ITEM 1.                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2.                OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.                KEY INFORMATION

3A.          Selected Financial Data

Selected Financial Data

We present in this section summary financial and operating data derived from our audited consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 included elsewhere in this annual report and prepared in accordance with IFRS as issued by the IASB.

IFRS 9 – Financial Instruments became effective on January 1, 2018. The adoption of IFRS 9 did not have a significant impact on our accounting policies related to financial liabilities and derivative financial instruments. In addition, in accordance with IFRS 15 – Revenue from Contracts with Customers, which also became effective on January 1, 2018, we reclassified the rebates received from suppliers from selling, general and administrative expenses to cost of sales. We have retroactively adopted IFRS 9 and IFRS 15 as of January 1, 2016 and as a result, have restated our audited consolidated financial statements for the years ended December 31, 2017 and 2016. Our financial statements for the years ended December 31, 2015 and 2014 have not been retroactively restated and as such are not directly comparable. For further details on our adoption of new accounting standards, such as IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers, see note 5 to our audited consolidated financial statements included elsewhere in this annual report.

                The following tables present certain of our summary historical consolidated financial and operating data for each of the periods indicated.  Solely for the convenience of the reader, real amounts as of and for the year ended December 31, 2018, have been translated into U.S. dollars at a rate of R$3.8748 to US$1.00, which was the commercial selling rate of U.S. dollars in effect as of December 31, 2018, as reported by the Central Bank.

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(1)           As disclosed in note 32 to our audited consolidated financial statements included elsewhere in this annual report, operations of Via Varejo were classified as “discontinued operations” in 2018 and all prior periods presented. Starting on November 1, 2016, we began recording our investment in Cnova N.V., or Cnova, using the equity method of accounting.

(2)           Each preferred share received a dividend 10% higher than the dividend paid to each common share.  See “Item 8A.  Consolidated Statements and Other Financial Information—Dividend Policy and Dividends.”

(3)           IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers became effective on January 1, 2018. We have retroactively adopted IFRS 9 and IFRS 15 as of January 1, 2016 and as a result, have restated our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2017 and 2016. Our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2015 and 2014 have not been retroactively restated and as such are not directly comparable.

(4)           Capital expenditures  comprise are comprised of cash used in purchases of property, equipment and intangible assets, as reflected in the consolidated statement of cash flows.

 

 

 

(1)           Based on the full-time equivalent number of employees, which is the product of the number of all retail employees (full- and part-time employees) and the ratio of the average monthly hours of all retail employees to the average monthly hours of full-time employees.

(2)           Excludes gas stations and drugstores.

(3)           Includes Extra Supermercado, Mercado Extra and Compre Bem banners.

(4)           IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers became effective on January 1, 2018. We have retroactively adopted IFRS 9 and IFRS 15 as of January 1, 2016 and as a result, have restated our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2017 and 2016. Our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2015 and 2014 have not been retroactively restated and as such are not directly comparable.

 

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(1)                 Based on the full-time equivalent number of employees, which is the product of the number of all retail employees (full- and part-time employees) and the ratio of the average monthly hours of all retail employees to the average monthly hours of full-time employees.

(2)                 Includes revenues associated with rentals of commercial spaces.  Revenues of gas stations, drugstores, food delivery and in-store pick-up are included in the respective banner.

(3)           Includes Extra Supermercado, Mercado Extra and Compre Bem banners.

(4)           Calculated using the average of square meters of selling area on the last day of each month in the period.  

(5)           IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers became effective on January 1, 2018. We have retroactively adopted IFRS 9 and IFRS 15 as of January 1, 2016 and as a result, have restated our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2017 and 2016. Our audited consolidated financial statements, and financial information included in this annual report, for the years ended December 31, 2015 and 2014 have not been retroactively restated and as such are not directly comparable.

 

3B.          Capitalization and Indebtedness

Not applicable.

 

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3C.          Reasons for the Offer and Use of Proceeds

Not applicable.

3D.          Risk Factors

An investment in the ADSs or our preferred shares involves a high degree of risk.  You should carefully consider the risks and uncertainties described below and the other information in this annual report before making an investment decision.  The risks described below are those that we currently believe may materially affect us. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. Additional risks not presently known to us or that we currently deem immaterial may also impair our business operations. This annual report also contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” The trading price of the ADSs and our preferred shares could decline due to any of these risks or other factors, and you may lose all or part of your investment.  Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our Company described below and elsewhere in this annual report.

Risks Relating to our Industry and Us

We face significant competition and pressure to adapt to changing consumer habits, which may adversely affect our market share and net income.

We operate mainly in the Brazilian food retail industry. The Brazilian food retail industry, including the cash and carry (atacado de autosserviço) segment, and the home appliances sector are highly competitive. In this annual report, the term “home appliances” refers to the sale of durable goods (i.e., electronics, furniture and other items for the home). We compete with other retailers based on price, product mix, store location and layout and services.  Consumer habits are constantly changing and we may not be able to anticipate and quickly respond to these changes. We face intense competition from small and regional retailers, mainly in the retail segment, and especially from those that operate in the informal segment of the Brazilian economy.  We also compete with large chains in both the retail and cash and carry segments. In addition, in our markets, and particularly in the São Paulo and Rio de Janeiro metropolitan areas, we compete in the food retail sector with a number of large multinational retail food, general merchandise and cash and carry chains, as well as local supermarkets and independent grocery stores. In the home appliances sector, we also compete with large multinational chains and large or specialized Brazilian companies.  Acquisitions or consolidations within the industry may also increase competition and adversely affect our market share and net income.

If we are unable to compete successfully in our target markets (including adapting our store format mix or layout, identifying locations and opening stores in preferred areas, and quickly adjusting our product mix or prices under each of our banners and segments) or otherwise adjust to changing consumer preferences, such as shopping on mobile devices, we may lose market share, which would adversely affect our financial position and results of operations.

Our traditional supermarkets and retail stores face increasing competition from internet sales, which may negatively affect sales of traditional channels, and our digital transformation strategy might not be an effective response to this competition.

In recent years, retail sales of food, clothing and home improvement products over the internet have increased significantly in Brazil, and we expect this trend to continue as more traditional retailers enter into the online retail field or expand their existing infrastructure therein.  For example, Amazon recently announced that it would focus more resources on its business in Brazil.  Growth in the internet retail business of our competitors would likely harm not only our retail operations but also our internet retail operations. Internet retailers are able to sell directly to consumers, diminishing the importance of traditional distribution channels such as supermarkets and retail stores. Certain internet food retailers have significantly lower operating costs than traditional hypermarkets and supermarkets because they do not rely on an expensive network of retail points of sale or a large sales force. As a result, such internet food retailers are able to offer their products at lower costs than we do and in certain cases are able to bypass retailing intermediaries and deliver particularly high-quality, fresh products to consumers. We believe that our customers are increasingly using the internet to shop electronically for food and other retail goods, and that this trend is likely to continue. We have a digital transformation strategy, but we cannot provide any assurance that our strategy will be successful in meeting consumer demands or maintaining our market share in light of our competitors’ internet retail businesses. For information on our digital activities, see “Item 4A. History and Development of the Company—Recent Changes in Our Business—Digital Transformation.” If internet sales in Brazil continue to grow, consumers’ reliance on traditional distribution channels such as our supermarkets and retail stores could be materially diminished, which could have a material adverse effect on our financial position and results of operations.

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The Brazilian food retail industry is sensitive to decreases in consumer purchasing power and unfavorable economic cycles.

Historically, the Brazilian food retail industry, which includes the cash and carry segment, has experienced periods of economic slowdown that led to declines in consumer expenditures.  The success of operations in the food retail and home appliances sectors depends on various factors related to consumer expenditures and consumer income, including general business conditions, interest rates, inflation, consumer credit availability, taxation, consumer confidence in future economic conditions, employment and salary levels.  Reductions in credit availability and more stringent credit policies by us and credit card companies may negatively affect our sales, especially for  home appliances.  Unfavorable economic conditions in Brazil, or unfavorable economic conditions worldwide reflected in the Brazilian economy, may significantly reduce consumer expenditure and available income, particularly in the lower income classes, who have relatively less credit access than higher income classes, more limited debt refinancing conditions and more susceptibility to increases in the unemployment rate.  These conditions may have a material adverse effect on our financial position and results of operation.

Because the Brazilian retail industry is perceived as essentially growth-oriented, we are dependent on the growth rate of Brazil’s urban population and its different income levels.  Any decrease or slowdown in growth may adversely affect our sales and our results of operations.

Restrictions of credit availability to consumers in Brazil and Brazilian government rules and interventions affecting financial operations may adversely affect our sales volumes and operations, and we are exposed to risks related to customer financing and loans.

Sales in installments are an important component of the result of operations for Brazilian non-food retailers. The increase in the unemployment rate combined with relatively high interest rates have resulted in an increased restriction of credit availability to consumers in Brazil, which may be further increased if macroeconomic conditions in Brazil deteriorate.  The unemployment rate reached 12.3% in 2018, compared to 12.7% in 2017 and 11.5% in 2016.  These circumstances have not been appreciably improved by gradual reductions in the basic interest rate in Brazil, the SELIC rate, which was 6.5%, 7.0% and 13.8% in 2018, 2017 and 2016, respectively.

Our sales volumes, particularly for non-food products, and, consequently, our results of operations may be adversely affected if the credit availability to consumers decreases, or if Brazilian government policy restricts the granting of credit to consumers.

Additionally, we are involved in extending credit to customers through our partnership with Itaú Unibanco Holding S.A., or Itaú Unibanco, one of the largest privately owned financial institutions in Brazil, called Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento, or FIC. FIC exclusively offers credit cards, financial services and insurance coverage at our stores. For more information on FIC, see “Item 4B. Business Overview—FIC and Investcred.”

FIC is subject to the risks normally associated with providing these types of financing, including the risk of default on the payment of principal and interest and any mismatch of cost and maturity of our funding in relation to the cost and maturity of financing to its customers, which could have a material adverse effect on us.

Furthermore, FIC is a financial institution regulated by the Central Bank and is therefore subject to significant regulation.  The regulatory structure of the Brazilian financial system is continuously changing.  Existing laws and regulations may be amended, and their application or interpretation may also change, and new laws and regulations may be adopted.  FIC and, therefore, we, may be adversely affected by changes in regulations, including those related to:

●        minimum capital requirements;

●        requirements for investment in fixed capital;

●        credit limits and other credit restrictions;

 

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●        accounting requirements;

●        intervention, liquidation and/or temporary special management systems; and

●        interest rates.

Brazilian government rules and intervention may adversely affect our operations and profitability more than those of a retailer without financial operations.

Our business depends on strong brands.  We may not be able to maintain and enhance our brands, or we may receive unfavorable customer complaints or negative publicity, which could adversely affect our brands.

We believe that our Pão de Açúcar, Extra, Compre Bem  and Assaí brands contribute significantly to the success of our business.  We also believe that maintaining and enhancing those brands is critical to expanding our base of customers, which depends largely on our ability to continue to create the best customer experience, based on our competitive pricing and our large assortment of products.

Customer complaints or negative publicity about our product offerings or services could harm our reputation and diminish consumer confidence in us.  A diminution in the strength of our brands and reputation could adversely affect our business, financial condition and operating results.

Consummation of the sale of our shareholdings in Via Varejo may not occur.

In this annual report, “Via Varejo” refers to Via Varejo S.A. and its subsidiaries.  Via Varejo is one of our subsidiaries and as of December 31, 2016, we have reported its results of operations as discontinued operations. On November 23, 2016, our board of directors approved the disposal of our equity interest in Via Varejo, in line with our long-term strategy of focusing on the development of the food retail sector and cash and carry segment. Due to certain external factors out of our control, mainly related to the Brazilian macroeconomic environment, the sale of Via Varejo has not been concluded within the initially expected timetable. As the first step of our strategy for this divestiture, we reduced our shareholding through two total return swap transactions on December 27, 2018 and February 25, 2019. For more information about these transactions, see “Item 4E. Discontinued Operations.” While our board of directors instructed our management to actively pursue selling our remaining equity interest in Via Varejo to a strategic investor or through operations available in capital markets in order to complete the full divestiture in Via Varejo by December 2019, we cannot assure you that the transaction will be consummated under the expected terms, conditions and timing, or at all, due to events out of our control.  If this divestment does not occur according to our expectations, we may need to reconsider our long-term strategy as we will continue to own and operate Via Varejo, which could cause a material adverse effect on our business, operations, results of operations and financial condition. In addition, while this divestment has not yet occurred, our management team will need to continue to dedicate time and attention to the divestment efforts.

We may not be able to protect our intellectual property rights.

Our future success depends significantly on our ability to protect our current and future brands and to defend our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how.  We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark and patent applications seeking to protect newly developed brands and products.  We cannot be sure that trademark and patent registrations will be issued with respect to any of our applications.  There is also a risk that we could inadvertently fail to renew a trademark or patent on a timely basis or that our competitors will challenge, invalidate or circumvent any existing or future trademarks and patents issued to, or licensed by, us.  Although we have put in place appropriate actions to protect our portfolio of intellectual property rights (including trademark registration and domain names), we cannot be certain that the steps we have taken will be sufficient or that third parties will not infringe upon or misappropriate proprietary rights.  Any failure in our ability to protect our proprietary rights against infringement or misappropriation could adversely affect our business, results of operations, cash flows or financial condition, and in particular, on our ability to develop our business.

Our sales depend on the effectiveness of our advertisement and marketing campaigns, which may adversely affect our revenues and profitability.

To promote increased traffic of customers and attract them to our stores, we dedicate substantial resources to our advertisement and marketing campaigns. Our revenues and profitability depend on our ability to, among other things, identify our target consumers and decide on the marketing message and communication method to reach them most effectively.  If we do not conceive, plan or execute our advertisement and marketing activities in order to successfully and efficiently increase revenues and market share, our profitability and financial position may be adversely affected.

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We may not be able to renew or maintain our stores’ lease agreements on acceptable terms, or at all, and we may be unable to obtain or renew the operational licenses of our stores or distribution centers in a timely manner.

Most of our stores are leased.  The strategic location of our stores is key to the development of our business strategy and, as a result, we may be adversely affected in the event that a significant number of our lease agreements is terminated and we fail to renew these lease agreements on acceptable terms, or at all. In addition, in accordance with applicable law, landlords may increase rent periodically, usually every three years. A significant increase in the rent of our leased properties may adversely affect or financial position and results of operations.  Furthermore, we are party to an arbitration proceeding related to the lease agreements of 61 stores entered into with Fundo de Investimento Imobiliário Península, or Península, which is beneficially owned by members of the Diniz family (former shareholders of Wilkes Participações S.A.). We cannot assure you that the outcome of this arbitration proceeding will not adversely affect our business and operations.  For more information on this arbitration proceeding, see “Item 8A. Financial Information—Legal Proceedings—Península.”

Our stores and distribution centers are also subject to certain operational licenses. The inability to obtain or renew these operational licenses may result in the imposition of continuous fines and, as the case may be, the closing of the premises.  Given that smooth and uninterrupted operations in our stores and distribution centers are a critical factor in the success of our business strategy, we may be negatively affected in the case of a closing of these premises as a result of our inability to obtain or renew the necessary operational licenses.

Our product distribution is dependent on a limited number of distribution centers and we depend on the transportation system and infrastructure in Brazil to deliver our products, and any disruption at one of our distribution centers or delay related to transportation and infrastructure could adversely affect our supply needs and our ability to distribute products to our stores and customers.

                In our food retail segment (Multivarejo), approximately 75% of our products are distributed through our 15 distribution centers and depots located in the Southeastern, Midwestern and Northeastern regions of Brazil. In our cash and carry segment, approximately 40% of our products are distributed through nine distribution centers. The transportation system and infrastructure in Brazil are underdeveloped and need significant investment to work efficiently and to meet our business needs.

                Any significant interruptions or reduction in the use or operation of transportation infrastructure in the cities where our distribution centers are located or in operations at one of our distribution centers, as a result of natural disasters, fire, accidents, systemic failures, strikes (such as the May 2018 Brazilian truckers’ strike) or other unexpected causes, may delay or affect our ability to distribute products to our stores and may decrease our sales, which may have a material adverse effect on us.

                Our growth strategy includes the opening of new stores which may require the opening of new distribution centers or the expansion of the existing ones to supply and meet the demand of additional stores. Our operations may be negatively affected if we are not able to open new distribution centers or expand our existing distribution centers in order to meet the supply needs of these new stores. For more information on our distribution and logistics operations, see “Item 4B. Business Overview—Distribution and Logistics.”

Our systems are subject to cyberattacks and security and privacy breaches, which could cause a material adverse effect on our business and reputation. 

We, like all business organizations in the digital world, have been subject to a broad range of cyber threats, including attacks, with varying levels of sophistication.  These cyber threats are related to the confidentiality, availability and integrity of our systems and data, including our customers’ confidential, classified or personal information.

We maintain what we believe to be reasonable and adequate technical security controls, policy enforcement mechanisms, monitoring systems and management oversight to address these threats.  While these measures are designed to prevent, detect and respond to unauthorized activity in our systems, certain types of attacks, including cyberattacks, may occur.

 

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Furthermore, some of our suppliers and service providers have significant access to confidential and strategic information from our systems, including confidential information regarding our customers.

Any unauthorized access to, or release or violation of our systems and data or those of our customers, suppliers or service providers could disrupt our operations, particularly our digital retail operations, cause information losses and cause us to incur significant costs, which could have a material adverse effect on our business and reputation.

Our information systems may suffer interruptions due to factors beyond our control, such as natural disasters, hacking, failures in telecommunication and computer viruses, among other factors.  Any of these types of interruption may adversely affect our operations, thereby impacting our cash generation and our financial condition.

Failure to protect our database, which contains the personal data of our clients and employees, and developments in data protection and privacy laws, could have an adverse effect on our business, financial condition or results of operations.

                We maintain a database of information about our employees and customers, which mainly includes, but is not limited to, data collected when customers sign up for our loyalty programs. If we experience a breach in our security procedures that affect the integrity of our database, including unauthorized access of the personal information of our customers, we  may subject us to new legal proceedings, resulting in damages, fines and harm to our reputation.

 

                Currently, the processing of personal data in Brazil is regulated by a series of rules, such as the Federal Constitution, the Consumer Protection Code and the Internet Civil Registry. Failure to comply with certain provisions of such laws, especially in connection with (i) providing clear information on the data processing operations performed by us, (ii) respect for the purpose of the original data collection; (iii) legal deadlines for the storage of user data, and (iv) the adoption of legally required security standards for the preservation and inviolability of the personal data processed, can give rise to penalties, such as fines and even temporary or permanent suspension of our personal data processing activities.

 

                On August 14, 2018, Law No. 13,709, the General Data Protection Act (Lei Geral de Proteção de Dados), or GDPA, was enacted, which will come into force in August 2020 and will transform personal data protection in Brazil. The GDPA establishes a new legal framework to be observed in the processing of personal data, including that of our customers, suppliers and employees. The GDPA establishes, among other things, the rights of personal data owners, the legal basis applicable to the protection of personal data, requirements for obtaining consent, obligations and requirements relating to security incidents, data leaks and data transfers, as well as the creation of the National Data Protection Authority. In the event of non-compliance with the GDPA, we may be subject to the following penalties: (i) disclosure of the infraction after it has been duly investigated and confirmed, (ii) blockage of the personal data to which the infraction relates, (iii)  elimination of personal data to which the infraction relates and (iv) a fine, per infraction, of up to 2% (subject to a limit of R$50,000,000) of our billings in Brazil during the last fiscal year, excluding taxes. The National Data Protection Authority may revise data protection standards and proceedings based on the GDPA in the future.

 

In the event of non-compliance with the GDPA or any other applicable law related to personal data, or in the event of a personal data breach, we may be subject to legal proceedings, fines and damage to our reputation. The GDPA includes requirements related to the processing of personal data, and we have begun to review our internal policies and procedures with respect to implementation before the GDPA becomes effective in August 2020, which may materially affect our business.

Our controlling shareholders have the ability to direct our business and affairs.

Our controlling shareholders, the Casino Group (as defined in “Item 7B. Related Party Transactions”), together with its subsidiary Almacenes Éxito S.A., or Éxito, indirectly through their holding company, Wilkes Participações S.A., or the Holding Company, have the power to, among other things:  (i) appoint the majority of the members of our board of directors, who, in turn, appoint our executive officers; (ii) determine the outcome of the vast majority of actions requiring shareholder approval, including the timing and payment of any future dividends, provided that we observe the minimum mandatory dividend set by Law No. 6,404, dated December 15, 1976, as amended, or Brazilian corporate law; (iii) approve corporate reorganizations, acquisitions, dispositions and the transfer of our control to third parties; (iv) enter into new partnerships; and (v) deliberate on financings and similar transactions.  Our controlling shareholders’ interests and business decisions may prevail over those preferred by our other shareholders or holders of ADSs.

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Unfavorable decisions in legal or administrative proceedings could have a material adverse effect on us.

We are party to legal and administrative proceedings related to civil, regulatory, tax and labor matters.  We cannot assure you that legal proceedings will be decided in our favor.  We have made provisions for proceedings in which the chance of loss has been classified as probable by our external legal advisors, management and our audit committee.  Our provisions may not be sufficient to cover the total cost arising from unfavorable decisions in legal or administrative proceedings.  If all or a significant number of these proceedings have an outcome unfavorable to us, our business, financial condition and results of operations may be materially and adversely affected.  In addition to financial provisions and the cost of legal fees associated with the proceedings, we may be required to post bonds in connection with the proceedings, which may adversely affect our financial condition. See “Item 8A.  Consolidated Statements and Other Financial Information—Legal Proceedings” and note 21 to our audited consolidated financial statements, included elsewhere in this annual report, for a description of our material litigation contingencies.

We may be unable to attract or retain key personnel.

In order to support and develop our operations, we must attract and retain personnel with specific skills and knowledge.  We face various challenges inherent to the administration of a large number of employees over a wide geographical area.  Key personnel may leave the Company for a variety of reasons and the impact of these departures is difficult to predict, which may hinder the implementation of our strategic plans and adversely affect our results of operations.

We could be materially adversely affected by violations of the Brazilian Anti-Corruption Law, U.S. Foreign Corrupt Practices Act,  the Sapin II Law and similar anti-corruption laws.

Law No. 12,846, of August 1, 2013, or the Brazilian Anti-corruption Law, introduced the concept of strict liability for legal entities involved in harmful acts against the public administration, subjecting the violator to penalties both in administrative and civil law.  Similar to the Foreign Corrupt Practices Act of the United States, to which we are also subject, the Brazilian Anti-Corruption Law considers that an effective implementation of a compliance program may be used to mitigate the administrative penalties to be applied as a consequence of a harmful act against the public administration. 

Additionally, French Law No. 1,691, of December 2016, or the Sapin II Law, relates to transparency, preventing corruption and the modernization of economic activity, and stipulates that companies must establish an anti-corruption program to identify and mitigate corruption risks. Under the Sapin II Law,  any legal or natural person may be held criminally liable for offering a donation, gift or reward with the intent to induce a foreign public official to abuse their position or influence to obtain an undue advantage. The Sapin II Law is applicable to companies belonging to a group whose parent company is headquartered in France and whose workforce includes at least 500 employees worldwide. As such, the Sapin II Law applies to us. The key anti-corruption provisions of the Sapin II Law are in force since June 1, 2017.

Failure to comply with anti-corruption laws or any investigations of misconduct or enforcement actions could subject us to fines, loss of operating licenses, and reputational harm as well as other penalties, including individual arrests, which may materially and adversely affect us, our reputation, and the trading price of the ADSs and our preferred shares.

 We cannot guarantee that our service providers or suppliers do not use irregular practices.

Given the decentralization and outsourcing of our service providers’ operations and our suppliers’ production chains, we cannot guarantee that they will not have issues regarding working conditions, sustainability, outsourcing the provision or production chain and improper safety conditions, or that they will not use these irregular practices in order to lower service or product costs.  If a significant number of our service providers or suppliers engage in these practices, our reputation may be harmed and, as a consequence, our customers’ perception of our products may be adversely affected, causing a reduction in net revenue and results of operations as well as in the trading price of the ADSs and our preferred shares.

 

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Some categories of products that we sell are principally acquired from few suppliers and over-concentration could disrupt the availability of these products.

Some categories of products that we sell are principally acquired from few suppliers.  If any supplier is not able to supply the products in the quantity and at the frequency that we normally acquire them, and we are not able to replace the supplier on acceptable terms or at all, we may be unable to maintain our usual level of sales in the affected category of product, which may have a material adverse effect on our business and operations and, consequently, on our results of operations.

In addition, some of our principal suppliers are currently involved in “Operação Lava Jato” (defined below) and developments in the related investigations or possible convictions of such suppliers may adversely affect their ability to supply products to us and, consequently, our sales levels for such products. For more information, see “Risks Relating to Brazil—Ongoing political instability may adversely affect our business, results of operations and the trading price of the ADSs and our preferred shares” below.

We may be held responsible for consumer incidents involving adverse reactions after consumption of our products.

Products sold in our stores may cause consumers to suffer adverse reactions.  Incidents involving these products may have a material adverse effect on our operations, financial condition, results of operations and reputation.  Legal or administrative proceedings related to these incidents may be initiated against us, with allegations, among others, that our products were defective, damaged, adulterated, contaminated, do not contain the properties advertised or do not contain adequate information about possible side effects or interactions with other chemical substances.  Any actual or possible health risk associated with these products, including negative publicity related to these risks, may lead to a loss of confidence among our customers regarding the safety, efficacy and quality of the products sold in our stores, especially “exclusive” brand products.  Any allegation of this nature made against our brands or products sold in our stores may have a material adverse effect on our operations, financial condition, results of operations and reputation.

We are subject to environmental laws and regulations and any non-compliance may adversely affect our reputation and financial position.

We are subject to a number of different federal, state and municipal laws and regulations relating to the preservation and protection of the environment, especially in relation to our gas stations.  Among other obligations, these laws and regulations establish environmental licensing requirements and standards for the release of effluents, gaseous emissions, management of solid waste and protected areas.  We incur expenses for the prevention, control, reduction or elimination of releases into the air, ground and water at our gas stations, as well as in the disposal and handling of wastes at our stores and distribution centers.  Any failure to comply with those laws and regulations may subject us to administrative and criminal sanctions, in addition to the obligation to remediate or indemnify others for the damages caused.  We cannot ensure that these laws and regulations will not become stricter.  In this case, we may be required to increase, perhaps significantly, our capital expenditures and costs to comply with these environmental laws and regulations.  Unforeseen environmental investments may reduce available funds for other investments and could materially and adversely affect us.

Risks Relating to Brazil

The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions may adversely affect us and the trading price of the ADSs and our preferred shares.

The Brazilian government has frequently intervened in the Brazilian economy and has occasionally made significant changes in policy and regulations.  The Brazilian government’s actions to control inflation and affect other policies and regulations have often involved, among other measures, increases and decreases in interest rates, changes in tax and social security policies, price controls, currency exchange and remittance controls, devaluations, capital controls and limits on imports.  Our business, financial condition, results of operations and the trading price of the ADSs and our preferred shares may be adversely affected by changes in Brazilian policy or regulations at the federal, state or municipal level involving or affecting various factors, such as:

●        economic, political and social instability;

●        increases in the unemployment rate;

 

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●        interest rates and monetary policies (such as restrictive consumption measures that could affect the income of the population and government measures that may affect the levels of investment and employment in Brazil);

●        significant increases in inflation or strong deflation in prices;

●        currency fluctuations;

●        import and export controls;

●        exchange controls and restrictions on remittances abroad (such as those that were imposed in 1989 and early 1990s);

●        modifications to laws and regulations according to political, social and economic interests;

●        efforts to reform labor, tax and social security policies and regulation (including the increase of taxes, both generally and on dividends);

●        energy and water shortages and rationing;

●        liquidity of domestic capital and lending markets; and

●        other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies.  These uncertainties and other future developments in the Brazilian economy may adversely affect our business activities, and consequently our results of operations, and may also adversely affect the trading price of the ADSs and our preferred shares.

Such factors are compounded as Brazil emerges from a prolonged recession after a period of a slow recovery, with only meager gross domestic product, or GDP, growth in 2017 and 2018. Brazil’s GDP real growth (contraction) rates since 2016 were 1.1% in 2018, 1.0% in 2017 and (3.6)% in 2016. Our results of operations and financial condition have been, and will continue to be, affected by the weakness of Brazil’s GDP.  Developments in the Brazilian economy may affect Brazil’s growth rates and, consequently, the use of our products and services, which may adversely affect the trading price of the ADSs and our preferred shares.

Ongoing political instability may adversely affect our business, results of operations and the trading price of the ADSs and our preferred shares.

The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. Despite the slow economic recovery and the still high fiscal vulnerability, several Brazilian macroeconomic fundamentals improved during 2017-18. The main highlight was the deceleration of inflation and the achievement of historically low interest rates.

The economic outlook for 2019 continues to face significant uncertainties. The Brazilian economy is expected to continue recovering at a moderate pace. The median market forecast currently predicts that the GDP growth rate will accelerate from 1.1% in 2018 to around 1.95% in 2019 (according to Focus Report on April 12, 2019).

In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato,” have negatively impacted the Brazilian economy and political environment.

Under “Operação Lava Jato” members of the Brazilian federal government and of the legislative branch, as well as senior officers of large state-owned and private companies, have faced allegations and, in certain cases, convictions, or, also, entering into plea bargains, related to crimes of political corruption, involving alleged bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies.  The profits of these kickbacks allegedly financed the political campaigns of political parties of the government that were unaccounted for or not publicly disclosed, in addition to alleged personal enrichment of the recipients of the bribes and the favoring of companies in contracts with the Brazilian government. Furthermore, certain of these companies have or are also facing investigations, and, in certain cases, being convicted by the competent authorities, such as the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, the U.S. Securities and Exchange Commission, or the SEC, and the United States Department of Justice.  Certain of these companies have chosen to enter into leniency agreements with the competent authorities, when possible. The potential outcome of these investigations, convictions, plea bargaining and leniency agreements is still uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, political parties and on the general market perception of the Brazilian economy and political environment.  We cannot predict whether such investigations will lead to further political and economic instability or whether new allegations against government officials, officers and/or companies will arise in the future.  In addition, we cannot predict the outcome of any such investigations or allegations nor their effect on the Brazilian economy.

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We also cannot predict which policies the current President of Brazil, Jair Bolsonaro, may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. During his presidential campaign in 2018 and at the start of his four-year term beginning in January 2019, Bolsonaro reportedly favored the privatization of state-owned companies, economic liberalization, new pension legislation and tax reforms. However, there is no guarantee that Bolsonaro will be successful in executing his campaign promises or passing certain favored reforms fully or at all, particularly when confronting a fractured congress. Moreover, Bolsonaro was generally a polarizing figure during his campaign for presidency, particularly in relation to certain social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms. Any such new policies or changes to current policies may have a material adverse effect on us or the price of the ADSs and our preferred shares. Furthermore, uncertainty over whether the current Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the securities issued abroad by Brazilian companies.

Brazilian government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm us and the trading price of the ADSs and our preferred shares.

Historically, Brazil has experienced high inflation rates.  Inflation and certain actions taken by the Central Bank to curb it have had significant negative effects on the Brazilian economy.  Inflation and the Brazilian government’s measures to fight it, principally the Central Bank’s monetary policy, have had and may have significant effects on the Brazilian economy and our business.  Tight monetary policies with high interest rates have restricted and may restrict Brazil’s growth and the availability of credit.  Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business and increase the payments on our indebtedness.  In addition, we may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure.

Furthermore, interest rate decreases may affect our ability to maintain interest margins we charge on installment sales, which could have a negative effect on net operating revenue.  Brazilian government measures to combat inflation that result in an increase in interest rates may have an adverse effect on us, as our indebtedness is indexed to the interbank deposit certificate (Certificados de Depósito Interbancário), or CDI, rate.  Inflationary pressures may also hinder our ability to access foreign financial markets or lead to government policies to combat inflation that could harm us or adversely affect the trading price of the ADSs and our preferred shares.

Exchange rate volatility may adversely affect the Brazilian economy and us.

The real has historically experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies.  In 2016, the real appreciated against the U.S. dollar, reaching R$3.259 per US$1.00 as of December 31, 2016. In 2017, the real depreciated against the U.S. dollar in comparison to 2016, reaching R$3.308 per US$1.00 as of December 31, 2017. In 2018, the real depreciated further against the U.S. dollar in comparison to 2017, reaching R$3.875 per US$1.00 as of December 31, 2018. On April 15, 2019, the real/U.S. dollar exchange rate was R$3.873 per US$1.00. There can be no assurance that the real will not depreciate further against the U.S. dollar. Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which negatively affects the growth of the Brazilian economy as a whole, curtails access to foreign financial markets and may prompt government intervention, including recessionary governmental policies.  Depreciation of the real against the U.S. dollar has also, including in the context of an economic slowdown, led to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole.  Depreciation would also reduce the U.S. dollar value of distributions and dividends and the U.S. dollar equivalent of the trading price of the ADSs and our preferred shares.  As a result, we may be materially and adversely affected by real/U.S. dollar exchange rate variations.

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Developments and the perception of risk in other countries may adversely affect the price of Brazilian securities, including the ADSs and our preferred shares.

The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investors’ reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of our securities, and could also make it more difficult for us to gain access to the capital markets and finance our operations on acceptable terms, or at all.

Any further downgrading of Brazil’s credit rating may adversely affect the trading price of the ADSs and our preferred shares.

Credit ratings affect investors’ perceptions of risk and, as a result, the yields required on debt issuances in the financial markets.  Rating agencies regularly evaluate Brazil and its sovereign ratings, taking into account a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness and the prospect of change in these factors.

In February 2016, Standard & Poor’s downgraded Brazil’s credit rating to BB, maintaining its negative outlook, citing a worsening credit situation since September 2015.  In January 2018, Standard & Poor’s lowered Brazil’s rating to BB-minus with a stable outlook in light of doubts regarding this year’s presidential election and pension reform efforts.  In February 2016, Moody’s downgraded Brazil’s ratings to below investment grade, to Ba2 with a negative outlook, citing the prospect for further deterioration in Brazil’s debt service in a negative or low growth environment, in addition to challenging political dynamics. In April 2018, Moody’s reaffirmed the Ba2 rating, but raised the outlook from negative to stable, citing expectations that the winner of the October 2018 presidential elections will pass fiscal reforms.  Fitch also downgraded Brazil’s credit rating in May 2016 to BB with a negative outlook, which it maintained in 2017 and downgraded to BB- in February 2018.  As a result, the trading prices of debt and equity securities of Brazilian issuers were negatively affected.

Any further downgrade of Brazil’s credit rating could heighten investors’ perception of risk and, as a result, increase the cost of debt issuances and adversely affect the trading price of our securities.

Risks Relating to the ADSs and Our Preferred Shares

If you exchange the ADSs for preferred shares, as a result of Brazilian regulations you may risk losing the ability to remit foreign currency abroad.

As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by Itaú Corretora de Valores S.A., or the Custodian, for our preferred shares underlying the ADSs in Brazil, which permits the Custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the Custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of or distributions relating to the preferred shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration.  If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares.

If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner.  The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.  See “Item 10D. Exchange Controls.”

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You might be unable to exercise preemptive rights with respect to the preferred shares underlying the ADSs.

You will not be able to exercise the preemptive rights relating to the preferred shares underlying your ADSs unless a registration statement under the United States Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement or to take any action to make preemptive rights available to holders of ADSs.  Unless we file a registration statement or an exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will lapse and you will not receive any value for them.  In addition, we may issue a substantial number of preferred shares as consideration for future acquisitions or for any other fundraising needs, and we may choose not to extend preemptive rights to holders of ADSs.

The volatility and illiquidity of the Brazilian securities markets and of our preferred shares may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire.

Investing in securities that are traded in emerging markets, including in Brazil, often involves greater risk and are generally considered to be more speculative in nature than investing in securities traded in the securities markets of more developed countries.  These investments are subject to certain economic and political risks, including (i) changes in the regulatory, tax, economic and political environment that may affect the ability of investors to obtain a total or partial return on their investments; and (ii) restrictions on foreign investment and return of capital invested.

The Brazilian securities market is substantially smaller, less liquid, more volatile and more concentrated than major international securities markets, including the securities market of the United States.  The B3 had a market capitalization of R$3.5 trillion as of December 31, 2018.  The ten most traded stocks by volume on the B3 during 2018 accounted for approximately 51.2% of total trading on the B3 during that period.  Conversely, the New York Stock Exchange had a market capitalization of approximately US$30.4 trillion as of December 31, 2018.  Furthermore, the regulations of the B3 may differ from what foreign investors are accustomed to seeing in other international exchanges.  The characteristics of the Brazilian securities market may substantially limit the capacity of holders of the preferred shares underlying the ADSs to sell them at the time and price they desire and, consequently, may adversely affect the market price of our preferred shares.  If a liquid and active trading market is not developed or maintained, the trading price of our preferred shares may be negatively affected.

 

Holders of the ADSs and our preferred shares may not receive any dividends.

                According to our by-laws, we must pay our shareholders at least 25% of our annual net income as dividends, as determined and adjusted under Brazilian corporate law.  This adjusted income may be used to absorb losses or otherwise be appropriated as permitted by Brazilian corporate law and may not be available to be paid as dividends.  We may not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in view of our financial condition.

Our status as a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange, or the NYSE, limiting the protections afforded to investors.

                We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE listing rules, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Therefore, ADS holders do not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

                For example, as a foreign private issuer, we chose to rely on an exemption under Rule 10A-3(c)(3) of the Exchange Act of 1934, as amended, or the Exchange Act with respect to our audit committee.  For a further discussion of our statutory audit committee and the audit committee exemption, see “Item 6C. Board Practices—Committees of the Board of Directors—Audit Committee.”

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U.S. securities laws do not require us to disclose as much information to investors as a U.S. issuer is required to disclose, and you may receive less information about us than you might otherwise receive from a comparable U.S. company.

                The corporate disclosure requirements applicable to us may not be equivalent to the requirements applicable to a U.S. company and, as a result, you may receive less information about us than you might otherwise receive in connection with a comparable U.S. company. We are subject to the periodic reporting requirements of the Exchange that apply to “foreign private issuers.” The periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. For example, we are required only to file an annual report on Form 20-F, but we are not required to file any quarterly reports. A U.S. registrant must file an annual report on Form 10-K and three quarterly reports on Form 10-Q. In addition, we are required to file current reports on Form 6-K, but the information that we must disclose in those reports is governed primarily by Brazilian law disclosure requirements and may differ from Form 8-K’s current reporting requirements imposed on a U.S. issuer. Finally, we are not subject to the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the short swing insider trading reporting and recovery requirements under Section 16 of the Exchange Act.

ITEM 4.                INFORMATION ON THE COMPANY

4A.          History and Development of the Company

We were incorporated in Brazil under Brazilian law on November 10, 1981, as Companhia Brasileira de Distribuição.  Our principal executive offices are located at Avenida Brigadeiro Luiz Antonio, 3142, São Paulo, SP, Brazil (telephone:  +55-11-3886-0421).  Our agent for service of process in the United States is CT Corporation, 1633 Broadway, New York, New York, 10019.

We have been a pioneer in the Brazilian retail food industry, opening our first store, a pastry shop, in 1948 in the city of São Paulo under the name Pão de Açúcar.  We established one of the first supermarket chains in Brazil, opening our first supermarket in 1959, and opening the first hypermarket in Brazil in 1971. Brazilian economic reforms implemented in 1994, including the introduction of the real as the Brazilian currency and the drastic reduction of inflation rates, resulted in an unprecedented growth in local consumer markets.  This increase in available income and the resulting increase in consumer confidence broadened our potential customer base and provided us with growth opportunities.

We responded to these changes by strengthening our capital structure, increasing our logistics and technology investments and implementing an expansion strategy focused on the different consumer preferences of the Brazilian population.  To support our expansion strategy, consisting of acquisitions and organic growth, we defined the format of our stores to tailor them to the expectations, consumption patterns and purchasing power of the different income levels in Brazil.  Our stores have operated under different banners targeting the various income segments of the Brazilian population, with the aim to provide comprehensive and targeted coverage of the regions where we operate. For further information on our banners, see “Item 4B. Business Overview—Our Company” and “Item 4B. Business Overview —Operations.” In order to implement this strategy and to increase our market share, between 1981 and 2003 we acquired important Brazilian supermarket chains which were later and gradually converted into our current banners. We summarize below major events from 2004 to the present related to our organic growth, divestitures, acquisitions and other significant developments in our business.

Historical Changes in Our Business

In 2004, we entered into a financial partnership called FIC with Itaú Unibanco. FIC exclusively offers credit cards, financial services and insurance coverage at our stores. For further information on FIC, see “Item 4B. Business Overview—FIC and Investcred.”

From 2007 to 2009, we acquired a 100% ownership interest in Sendas Distribuidora S.A., which operates the Assaí chain. This acquisition enabled us to enter the cash and carry segment. For further information on Assaí, see “Item 4B. Business Overview—Our Company—Cash and Carry Operating Segment—Assaí Stores.”

In 2009, we acquired a 98.8% of ownership interest in Globex (which later changed its corporate name to Via Varejo), a company which operates in the home appliances sector under the brand name Ponto Frio.

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In 2010, through an association with members of the Klein family who represent the partners of Casa Bahia Comercial Ltda., or Casa Bahia Comercial, a Brazilian home appliances retailer which operates under the brand name Casas Bahia, by means of a corporate reorganization, we and the partners of Casa Bahia Comercial merged our respective businesses in the home appliances and ecommerce segments under Via Varejo. As a result we then owned 52.4% of Via Varejo. On December 27, 2013, Via Varejo concluded its public offering in Brazil.

In this annual report, the term “Cnova Brazil” refers to Cnova Comércio Eletrônico S.A., which until October 31, 2016 was a wholly owned subsidiary of Cnova, owning the Brazilian non-food ecommerce businesses of CBD and Via Varejo.  Following the completion of the corporate reorganization of Cnova (as detailed in “Cnova Reorganization” below) on October 31, 2016, Cnova Brazil became a wholly owned subsidiary of Via Varejo.

On November 23, 2016, our board of directors approved the disposal of our equity interest in Via Varejo, which also consolidates the results of Cnova Brazil, in line with our long-term strategy of focusing on the development of the food retail and cash and carry segments. Due to certain external factors out of our control, mainly related to the Brazilian macroeconomic environment, the sale of Via Varejo was not concluded within the expected timetable. For more information about our divestment of Via Varejo, see “Item 4E. Discontinued Operations.”

Recent Changes in Our Business

Digital Transformation

                In 2018, we created our Digital Transformation department as part of our strategy designed to offer customers increasingly more personalized solutions in order to guarantee them a better shopping experience. As part of this strategy, we began working more closely with foodtech startups. In the process, we formed partnerships with Liga Ventures, to sponsor the first retail start-up acceleration program in Brazil, Liga Retail, and with Cubo Itaú, an innovation and entrepreneurial hub, in order to accelerate innovation in the retail sector. We also created our own innovation lab, GPA Lab, located at our headquarters, in order to strengthen a culture of innovation. GPA Lab has three modern spaces, available to hold meetings, workshops, lectures, trainings and other internal and external events. Our Digital Transformation department is responsible for creating our digital products and helping to maintain the growth of our stores by increasing our efficiency. We believe that our digital transformation will help us become more agile, more productive and more efficient, bringing improvements to our online platforms as well as physical stores.

                Beginning in 2018, we have also pursued opportunities to integrate innovative businesses into our group by analyzing companies in the industry, which to date has resulted in:

(i)    Our November 2018 announcement of a partnership with Cheftime Comércio de Refeições Ltda., or Cheftime, a pioneering foodtech startup founded in 2015, that offers an online subscription service and sells individual gastronomic kits. These individual gastronomic kits are sold under the name “Cheftime by Pão de Açúcar” and feature ingredients from our private label. In the first quarter of 2019, we started the rollout of gastronomic kit sales in 23 Pão de Açúcar stores and six Minuto Pão de Açúcar stores. In accordance with the agreement entered into with Cheftime, we have the right to acquire a controlling interest in Cheftime within 18 months after the execution of the agreement, which can be extended to up to 24 months; and

(ii)   Our December 2018 acquisition of 100% of the capital stock of Leji Intermediação S.A., a startup that operates the super app James Delivery, which is a multiservice platform for ordering and delivering various products, connecting customers, deliverers and establishments. This acquisition complements the delivery methods that we make available to our customers: physical store purchases, next day, same day and express deliveries (within four hours) and “Click and Collect” withdrawals in physical stores). In 2018 and the first quarter of 2019, James Delivery  conducted a pilot program in Extra and Pão de Açúcar stores in the state of Paraná. In April 2019, James Delivery initiated operations in São Paulo and by the end of 2019, we expect the entire city of São Paulo will be served by the delivery platform. After São Paulo, the plan is to take James Delivery to 10 more Brazilian cities. This rollout is expected to occur during the course of 2019.

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                In addition, in 2018, we inaugurated Pão de Açúcar Adega, an online platform for the sale of special beers and wines with nationwide delivery and a brick-and-mortar store (in the city of São Paulo) providing our customers with an omnichannel experience.

                Furthermore, in 2018 we launched additional app tools, and we experienced record downloads and significant growth in the use of our app. “Express Check-out” allows consumers to preselect a checkout time to help them avoid lines and save time while shopping. “My Preferences” allows consumers to request electronic tickets. “My Rewards” allows consumers to win rewards by completing monthly challenges. For more information about our “My Rewards” program, see “—Food Retail Operating Segment—‘My Discount’ and ‘My Rewards’ Programs.” We established a partnership with the e-commerce service provider Livelo, enabling its customers to use the Clube Extra and Pão de Açúcar Mais apps and redeem their rewards directly at the relevant stores. We also offer blogs where we discuss products and recipes for each customer profile that has been converted into online sales.  

Introduction of Compre Bem

In March 2018, SCB Distribuição e Comércio Varejista de Alimentos Ltda., or Compre Bem, was created. We currently hold 100% of the capital stock of Compre Bem. During 2018, SCB opened 13 supermarkets under the Compre Bem banner, focused on the food retail market. This new banner represents an important strategy in diversifying our store format and coverage of key growth markets. For further information on Compre Bem, see “Item 4B. Business Overview—Our Company—Food Retail Operating Segment—Compre Bem.”

Repositioning our Private Label

                During 2018, we also focused on repositioning our private label portfolio, with a priority on improving quality and price competitiveness as an important process for building client loyalty in the markets in which we operate. As part of this initiative, we have started working more closely with suppliers, making long-term partnerships and ensuring higher production levels, which allow us to maintain our product launch rates and reach better margins. In 2018, we launched approximately 500 new products, supported by a new marketing model and new promotional campaigns.  We aim to increase the reach of our private label by 20% over the next two to three years.

Cnova Reorganization

In August 2016, Cnova, Cnova Brazil and Via Varejo entered into a reorganization agreement providing for the reorganization of Cnova, or the Cnova Reorganization. In December 2016, Casino launched concurrent tender offers to purchase any and all Cnova ordinary shares for US$5.50 per share in cash in the United States and in France.  These concurrent tender offers are referred to as the “Cnova Offers” in this annual report. The Cnova Offers were the second and final transactions constituting Cnova’s “going private” transaction. For more information, see note 32 to our audited consolidated financial statements included elsewhere in this annual report.

As a result of the Cnova Reorganization: (i)  Via Varejo became the sole shareholder of Cnova Brazil, operating the websites Extra.com.br, Pontofrio.com and Casasbahia.com.br, and was no longer a shareholder of Cnova; (ii) Cnova continued its ecommerce operations outside of Brazil, focusing entirely on Cdiscount S.A., or CDiscount; and (iii) CBD was no longer a majority shareholder of Cnova which became an associate of CBD. Consequently, since October 31, 2016, CBD has not consolidated the results of operations of Cnova. 

In accordance with IFRS 5 – non-current assets held for sale and discontinued operations, we presented Cnova’s results for the ten-month period ended October 31, 2016 and the year ended December 31, 2015, as follows: (i) the ecommerce segment outside of Brazil in one single line item in our statement of operations and comprehensive income in loss from discontinued operations;  and (ii) the related balances of assets and liabilities in the line items assets held for sale and liabilities related to assets held for sale, respectively, in the balance sheet as of December 31, 2015.  Starting on November 1, 2016, we became a minority shareholder in Cnova and we began applying the equity method of accounting to our investment in Cnova. 

Casino and CBD Support Letters

 In connection with the Cnova Reorganization, Casino and CBD made certain undertakings to each other pursuant to a letter agreement addressed to the CBD Special Committee and executed by Casino and CBD, dated August 8, 2016, or the Casino-CBD Commitment Letter, and a letter agreement from CBD to Casino, dated August 8, 2016, or the CBD Support Letter.  The Casino-CBD Commitment Letter and the CBD Support Letter are intended to govern the parties’ ongoing relationship in their capacity as shareholders of Cnova following completion of the Cnova Reorganization and the Cnova Offers.

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Pursuant to the CBD Support Letter, our board of directors approved, in accordance with the recommendation of the CBD Special Committee, the execution of a new operating agreement between CBD and Via Varejo, which established the terms and conditions for the commercial and strategic alignment of their retail and ecommerce activities, especially regarding the joint acquisitions of common products and the ecommerce activities under the brand Extra, which came into effect as of the implementation of the Cnova Reorganization. For more information about our divestment of Via Varejo, see “Item 4E. Discontinued Operations.”

You are encouraged to read the Casino-CBD Commitment Letter and the CBD Support Letter, included as Exhibits 4.(b)(6) and 4.(b)(7) to this annual report, respectively, carefully in their entirety, in addition to the cost sharing arrangements described in note 12.2(v) to our audited consolidated financial statements included elsewhere in this annual report.

Capital Expenditures and Investment Plan

                As part of our capital expenditures and investment plan, we have invested R$5.6 billion in our consolidated operations in the three years ended December 31, 2018. Despite a macroeconomic environment still marked by a slow and incomplete recovery, we maintained a high level of capital expenditures in our continuing operations in 2018 of R$1.7 billion, an increase of 28.8% compared to R$1.4 billion in 2017, which reinforces our confidence in the execution of our business strategy and in the improvement of the Brazilian economy. These 2018 investments principally related to the expansion of the Assaí banner, store renovations and store conversions. Our capital expenditures and investment plan for 2019 our continuing operations contemplates capital expenditures and investments of up to R$1.8 billion relating to (i) the opening of new stores, purchase of real estate and store conversions; (ii) store renovations; (iii) improvements to information technology; and (iv) improvements to distribution facilities. The Company has historically financed its capital expenditures and investments mainly with cash flow generated from its operations and, to a lesser extent, funded by third parties. The Company plans to continue financing its capital expenditures and investments principally with cash flow from its operations.

Our group’s investments in the last three years have included:

                Opening of new stores and purchases of real estate – In the food retail sector, we seek to rent or purchase real estate properties when there is an opportunity to open new stores under one of our banners or local supermarket chain acquisition opportunities that suit one of our formats. We have organically opened 60 new stores from 2016 through 2018, including those in the food retail sector. The total cost of opening these new stores and the purchase of real estate from 2016 through 2018 was R$1.9 billion.

                Renovation of existing stores – We usually remodel a number of our stores every year. Through our renovation program, we updated refrigeration equipment in our stores, created a more modern, customer-friendly and efficient environment and outfit our stores with advanced information technology systems. Also, in 2017, we started a special renovation program of the Pão de Açúcar banner stores, in which we renovated a number of stores using our next generation concept, or G7. In 2018, 15 stores were fully renovated using the G7 concept, bringing the total number of stores in the G7 concept to 20. In addition, another 23 Extra Supermercado stores were remodeled under the Mercado Extra concept and 13 stores were converted into Compre Bem, which have been delivering strong growth since their conversion. The total cost of renovating existing stores from 2016 through 2018 was R$1.8 billion.

                Improvements to information technology – We view technology as an important tool for efficiency and security in the flow of information among stores, distribution centers, suppliers and corporate headquarters. We have made significant investments in information technology, totaling R$850 million from 2016 through 2018. For more information on our information technology, see “Item 4B. Business Overview—Information Technology.”

                Improvements to distribution facilities –We own and lease distribution centers and depots located in the Southeastern, Midwestern and Northeastern regions of Brazil. The improvement in storage space enables us to further centralize purchasing for our stores and, together with improvements to our information technology, improve the overall efficiency of our inventory flow. We have invested R$1,010 million in our distribution facilities from 2016 through 2018.

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                The following table provides a summary description of our principal capital expenditures for the periods indicated:

 

                We believe that existing resources and operating income will be sufficient for our capital expenditure and investment plan and to meet our liquidity requirements. However, our capital expenditure and investment plan is subject to a number of contingencies, many of which are beyond our control, including the continued growth and stability of the Brazilian economy.  We cannot assure you that we will successfully complete all or any portion of our capital expenditure and investment plan.  In addition, we may participate in acquisitions not budgeted in the capital expenditure and investment plan and we may modify the plans.

4B.          Business Overview

The Brazilian Retail Industry

According to the Brazilian Supermarket Association (Associação Brasileira de Supermercados), or ABRAS, the Brazilian retail food industry represented approximately 5.2% of Brazil’s GDP in 2018, and the food retail industry in Brazil had gross revenues of approximately R$356 billion in 2018, representing a 0.7% nominal increase compared to approximately R$353 billion in 2017.

The Brazilian retail food industry is highly fragmented. According to ABRAS, the five largest supermarket chains that disclosed their revenues to ABRAS represented approximately 37.0% of the retail food industry in 2018, as compared to 39.7% in 2017 and 40.6% in 2016.  Our consolidated gross sales represented 15.1% of the gross sales of the entire retail food industry in 2018, as compared to 13.8% in 2017, also according to ABRAS.

According to data published in February 2019 by the IBGE, the volume of sales in the food retail sector increased by 4.4% in 2018 compared to 2017.

The cash and carry segment was created in order to serve customers within a market niche that was neither reached by self-service retail nor by direct wholesale. According to data published by The Nielsen Company (US), LLC, or Nielsen, in February 2019, the cash and carry segment in Brazil experienced an increase of 13.9% in sales and 12.8% in volume, respectively, in 2018. 

 

According to the IBGE, the total population of Brazil was approximately 209 million in 2018, representing a 1.4% growth since 2016. Given that more than 84% of the population lives in urban areas (where most of our operations are located) and the urban population has been increasing at a greater rate than the population as a whole, our business is particularly well positioned to benefit from Brazil’s urban growth and economies of scale related to urban growth. According to an IBGE survey, in 2018, the city of São Paulo had a population of approximately 12.2 million and the city of Rio de Janeiro had a population of approximately 6.8 million. These are the two largest cities in Brazil. The state of São Paulo has a total population in excess of 45 million, representing 22.0% of the Brazilian population and is our largest consumer market, with 709 stores as of December 31, 2018. The state of Rio de Janeiro is our second largest consumer market, with 141 stores as of December 31, 2018.

During 2018, private consumption in Brazil increased 1.9% while the country’s GDP increased 1.1%.  The GDP increase was mainly due to growth in the services segment, especially with respect to the performance of the retail and real estate sectors.

The following table sets forth the different income class levels of Brazilian households, according to the Consumption Potential Index (Índice de Potencial de Consumo), or IPC Maps 2018 published by IPC Marketing Editora.

 

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According to a study by IPC Maps 2018, class A households account for only 2.6% of all urban households and classes B1 and B2 households account for 22.3% of all urban households.  Classes C1 and C2, the most representative in Brazil, collectively represent 48.2% of all urban households and classes D and E collectively represent 27.0% of all urban households.  In recent years, the number of class C, D and E households has increased in terms of total urban households and their average purchasing power has increased.

We expect that increased consumption by the lower income class levels will occur over time as a result of gradual salary increases and a steadily growing population. The Brazilian monthly minimum wage increased 4.6% from R$954 in January 2018 to R$998 in January 2019.

For more information on the Brazilian economic environment, see “Item 5A. Operating Results—Brazilian Economic Environment and Factors Affecting Our Results of Operations.”

Our Company

                We are the largest traditional retailer in the food segment in Brazil and the second largest player in the cash and carry segment, which are our two operating segments. Within the Brazilian retail food industry, we had a total market share based on consolidated gross sales of approximately 15.1%  in 2018, as compared to 13.8% in 2017, according to information published by ABRAS. As of December 31, 2018, our total gross sales, taking into account only our food business categories, totaled R$53,616 million. On the same date, we operated 863 stores, 71 gas stations and 123 drugstores in 18 Brazilian states and the Federal District, in addition to a logistics infrastructure supported by 22 distribution centers and depots across Brazil. We operate in the retail segment of food, clothing, home appliances and other products by means of our hypermarkets, supermarkets, proximity and specialized stores, especially under the banners Pão de Açúcar, Minuto Pão de Açúcar, Pão de Açúcar Adega, Extra Hiper, Extra Supermercado, Mercado Extra, Compre Bem, Mini Extra, Assaí and Aliados Minimercado.

We classify our two operating segments as follows (see note 30 to our audited consolidated financial statements included elsewhere in this annual report):

●        Cash and carry segment, which consists of sales of food and some non-food products to resellers, intermediate consumers and retail customers through the Assaí banner.

●        Food retail segment, or Multivarejo, which consists of sales of food and non-food products to individual consumers at (i) supermarkets through the banners Pão de Açúcar, Extra Supermercado, Mercado Extra and Compre Bem; (ii) hypermarkets through the banner Extra Hiper; (iii) proximity stores through the banners Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado; and (iv) gas stations, and drugstores through the Extra and Pão de Açúcar banners. The food retail segment also includes revenues related to rentals of commercial spaces and ecommerce sales.

Food products include non-perishables, beverages, fruits, vegetables, meat, bread, cold cuts, dairy products, cleaning products, disposable products and personal care products. In some cases, we sell these goods under our private label at our stores an on our website. We also sell home appliances and other non-food products, which include clothing items, baby items, shoes and accessories, household articles, books, magazines, CDs and DVDs, stationery, handcraft, toys, sports and camping gear, furniture, mobile phones, mattresses, pet products, gardening equipment and tools and electronics products, such as personal computers, software, computer accessories and sound and image systems. We also offer some of the products listed above under our private label. In addition, we sell our products in the food retail segment through our websites www.paodeacucar.com and www.extra.com.br.

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We include in the food retail segment the non-food products we sell at our drugstores, such as medications and cosmetics, and the non-food products we sell and the services we provide at our gas stations.            

                We carry out our discontinued operations through Via Varejo, which is the sole shareholder of Cnova Brazil, and operates in the home appliances and ecommerce segments through stores under the banners Ponto Frio and Casas Bahia, in addition to the ecommerce platforms Casasbahia.com, Extra.com, Pontofrio.com and Barateiro.com. For more information about our divestment of Via Varejo, see “Item 4E. Discontinued Operations” and note 32 to our audited consolidated financial statements included elsewhere in this annual report.

Segment Revenue and Income Distribution

                The table below shows the breakdown of our consolidated gross and net operating revenue by banner and segment for the year ended December 31, 2018.

 

(1)   Includes Extra Hiper, Extra Supermercado, Mercado Extra and Compre Bem banners.

(2)   Includes Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado.

(3)   Includes drugstores, gas stations, food delivery and malls.

 

                We generate all of our operating revenue in Brazil.

                The table below shows the breakdown of our consolidated net income (loss) by operating segment. We present results of the operating segments in accordance with IFRS, the measure used by management in evaluating the performance of and strategy for the two segments listed below.

 

                For more information about our net operating revenue and net income (loss) by operating segment, see “Item 5A. Operating Results—Results of Operations for 2018, 2017 and 2016.”

Number of Stores

                The following table sets forth the total number of stores at the end of the periods indicated per store format:

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(1)   Excludes 71 gas stations and 127 drugstores.

 

Geographic Distribution of Stores

                The Company operates mainly in the Southeast region of Brazil, in the states of São Paulo, Rio de Janeiro and Minas Gerais. The Southeast region accounted for 70.0% of the Company’s consolidated net revenue for the year ended December 31, 2018, while the other Brazilian regions (North, Northeast, Midwest and South), in the aggregate, accounted for the remaining consolidated net operating revenue for the year ended December 31, 2018. In addition, none of these regions represents individually more than 18.0% of the consolidated net operating revenue.

                The following table sets forth the number of our stores by region as of December 31, 2018:

 

Operations

                The following table sets forth the number of stores, the total selling area, the average selling area per store, total number of employees and the net operating revenue as a percentage of our total net operating revenue for each of our store formats as of December 31, 2018:

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(1)   Based on the full-time equivalent number of employees, which is the product of the number of food retail employees (full- and part-time) and the ratio of the average monthly hours of food retail employees to the average monthly hours of full-time employees.

(2)   Excludes 71 gas stations and 123 drugstores.

 

                For a detailed description of net operating revenue for each of our store formats, see “Item 5A. Operating Results.”

Food Retail Operating Segment – Store Formats and Banners

                The Company presents a multi-channel, multi-format and multi-region portfolio ensuring a strong position in offering products and services to our customers. Our food retail operating segment operates under different formats and banners, which we also refer to as Multivarejo. We highlight below the differences in the behavior of our customers in the various food retail formats and banners:

Pão de Açúcar

                Our Pão de Açúcar banner is the premium supermarket chain of our Company. This banner is considered a reference for innovation in the retail industry, providing a high level of services and assortment of products to our customers and promoting concepts of healthy living and sustainability.

                Pão de Açúcar stores are supermarkets, which are predominantly located in large urban areas (with over one-third located in the greater São Paulo metropolitan area). We believe that the locations of our Pão de Açúcar stores are a competitive advantage since available sites in these urban areas are scarce. The Pão de Açúcar stores target the Brazilian class A and class B household consumers. The stores are characterized by a pleasant shopping environment, a broad mix of quality products, innovative service offerings and a high level of customer service. Many of these stores feature specialty areas such as perishables, baked goods, wine, ready-to-eat dishes, as well as meat, cheese and seafood departments and bakeries.

                As of December 31, 2018, we had 186 Pão de Açúcar stores in 13 Brazilian states, with an average sales area per store of 1,291 square meters. Food products represented 95.5% of gross sales revenue attributable to Pão de Açúcar in 2018 and non-food products represented 4.5%. In 2018, 15 stores were fully renovated using the G7 concept, which focuses on the shopping experience and presents a differentiated value proposition, strengthening perishables, wellness, organic products and services, reinforcing our healthy product positioning, and offering in-store Wi-Fi and store-in-store concept. These stores, together with those renovated in 2017, continue to deliver significant growth compared to non-renovated stores.               

The Pão de Açúcar banner recorded gross sales of R$7,471 million in 2018 (including record sales on Black Friday and during December 2018), which represented an increase of 3.1% compared to 2017. We believe that this performance was a direct result of various commercial initiatives that we started implementing in 2017 and continued implementing in 2018, such as (i) successful promotional campaigns (including our “Collect and Win” campaign, where loyalty program, Cliente Mais, participants can earn stickers for purchases made, which can be redeemed for prizes once a pre-determined number of stickers have been collected), especially during seasonal periods, (ii) the strong performance of our stores that were renovated to the G7 concept, which presented higher growth in sales, volume and customer traffic compared to our non-renovated stores, (iii) operational improvements and (iv) the evolution of our food ecommerce offering due to the reformulation of our website, the launching of our Pão de Açúcar apps and expansion of our express delivery model. Additionally there was an increase in the reach of the loyalty program, representing approximately 85% of Pão de Açúcar sales.

                We also introduced “Cheftime by Pão de Açúcar” in 2018. Through our partnership with Cheftime, Pão de Açúcar currently sells Cheftime gastronomic kits, which feature ingredients from our private label, on our website and also in 25 Pão de Açúcar stores and three Minuto Pão de Açúcar stores. For more information, see “Item 4A. History and Development of the Company—Recent Changes in Our Business—Digital Transformation.”

Extra

                Extra is our banner focused on meeting our clients’ demands related to different needs and occasions, with the formats of hypermarkets, supermarkets, drugstores and gas stations. With a product assortment tailored to each format, the Extra banner offers food, home appliances, bazar, clothing and other products, as well as services such as bakery, rotisserie, butchery and fishery.

 

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In 2018, the Extra banner increased same-store sales volumes, due to our seasonal marketing and promotional campaigns (such as our “Collect and Win” campaign, where participants of our loyalty program, Clube Extra, can earn stickers for purchases made, which can be redeemed for prizes once a pre-determined number of stickers have been collected), strong commercial activities, reinforcement of the quality and assortment of perishables, portfolio optimization adhering to the needs of our customers in each region, monetization of store area, efficiency gains, growth in the reach of our private label and growth in the number of downloads of our Extra loyalty program, Clube Extra, app. For more information on our same-store sales, see “Item 5A. Operating Results—Results of Operations for 2018, 2017 and 2016.”

                Extra Supermercado Stores

                As of December 31, 2018, we operated 150 Extra Supermercado stores. Our Extra Supermercado banner is characterized by supermarkets focused on middle-class customers, with an average sales area per store of 1,095 square meters, as of December 31, 2018, and a complete mix of food products and general merchandise, with a focus on increasing the reach of our private label. Our Extra Supermercado stores offer quality products, where families can rapidly and economically stock up on items for their pantries and also acquire a wide range of household items in an easily accessible and pleasant environment. The sale of food products and non-food products represented 96.3% and 3.7%, respectively, of Extra Supermercado’s gross sales in 2018.

                Gross sales of the Extra Supermercado banner in 2018, including Mercado Extra and Compre Bem, reached R$4,428 million, a 3.8% decrease compared to 2017, mainly due to the conversions of 35 Extra Supermercado stores into Mercado Extra and Compre Bem stores, which represented the temporary closure of the stores that were converted to the Compre Bem banner during the renovation process, and the permanent closing of three Extra Supermercado stores in 2018.

                Mercado Extra Stores

                In 2018, we initiated the process of converting some of our Extra Supermercado stores into the Mercado Extra banner. Our Mercado Extra stores aim to be innovative and bring a pleasant shopping experience to customers, creating a comfortable environment. These stores also offer fresh seafood three times a week. As of December 31, 2018, we converted 23 Extra Supermercado stores into Mercado Extra stores, which have been delivering strong growth since their conversion. Through these conversions, we achieved approximately 30% of sales growth in our Mercado Extra stores, as well as growth in the number and volume of sales. We have continued these conversions in 2019, already converting seven Extra Supermercados to the Mercado Extra banner in the first quarter. Mercado Extra stores aim to reinforce the quality of perishables, customer service and the penetration of our private label. The Mercado Extra stores target the Brazilian class B and class C household consumers. In 2018, the banner had positive performance in sales, volume and customer traffic.

                Extra Hiper Stores

                We introduced the hypermarket format in Brazil with the opening of our first 7,000 square meter store in 1971. The Extra Hiper stores offer the widest assortment of products of any of our store formats and are organized in a department store style, with an average sales area per store of 6,130 square meters as of December 31, 2018. The Extra Hiper stores target the Brazilian classes B, C, D and E classes. As of December 31, 2018, we had 112 Extra Hiper stores. The sale of food products and non-food products represented 62.0% and 38.0% of Extra Hiper’s gross sales in 2018, respectively.

                Gross sales of the Extra Hiper banner in 2018 reached R$12,827 million, a 1.0% decrease compared to 2017, mainly due to the closing of two stores during the year, in addition to two conversions into the Assaí banner and one converted into Compre Bem banner.

Compre Bem

                As of December 31, 2018, we completed the conversion of 12 Extra Supermercado stores and one Extra Hiper into the Compre Bem banner, which have been delivering strong growth since their conversion. The conversions allow us to enter in a market segment currently controlled by regional supermarkets. The Compre Bem store model focuses on locality, adapted to the needs of the consumers in each of the regions where stores are located. The service and assortment of perishables are reinforced, while other product categories have a leaner assortment. Compre Bem is managed independently from the Extra Supermercado banner in order to streamline operational costs, especially logistics and IT. In 2018, the Compre Bem banner had positive performance in sales, volume and customer traffic. In addition, GPA’s first self-checkout was introduced in 2018 in a Compre Bem store.

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Proximity Stores (Mini Extra and Minuto Pão de Açúcar)

                As of December 31, 2018, the Mini Extra and Minuto Pão de Açúcar stores had an average sales area per store of 245 square meters. The sale of food products and non-food products represented 98.6% and 1.4%, respectively, of gross sales in proximity stores in 2018.

                Gross sales of the proximity stores in 2018 totaled R$1,264 million, a 8.5% increase compared to 2017, mainly due to the (i) consolidation of our loyalty strategy in the fruits, vegetables and bakery categories and the growth in the reach of our private label, (ii) synergies in promotional actions aligned with the Extra and Pão de Açúcar banners, (iii) seasonal marketing and promotional campaigns and (iv) review of the assortment of products offered and adjustment of customer clusters for Mini Extra. The proximity format reached 235 stores as of December 31, 2018, of which 156 were Mini Extra and 79 were Minuto Pão de Açúcar. As of December 31, 2018, the majority of our proximity stores were located in the state of São Paulo.

                In 2016, GPA launched the “Aliados Compre Bem” project, which was renamed to “Aliados Minimercado” in 2018, a business model for neighborhood stores that consists of a partnership between GPA and independent retailers, in which GPA provides its operational expertise to meet and increase the sales potential of this market segment by supplying products to participating independent retailers. GPA was the first major Brazilian retailer to offer this type of service and ended 2018 supplying products to approximately 500 neighborhood stores.

Other Businesses and Services

                Other businesses include gas stations, drugstores, food delivery and revenues related to rentals of commercial property. Gross sales from other businesses increased by 12.9% in 2018, totaling R$2,704 million, mainly due to the positive performance of our gas stations and rentals of commercial property.

                Gas Stations

                As of December 31, 2018, we operated 71 gas stations, the vast majority of which are located within the parking area of certain of our stores, mainly in Extra Hiper stores. We also have gas stations that operate under our Pão de Açúcar, Assaí and Compre Bem banners. We also have partnerships with Ipiranga and Shell, two major gas station chains in Brazil, which we believe gives us a competitive advantage. Through these partnerships, we offer co-branded gas stations, such as Extra-Ipiranga,  Pão de Açúcar-Ipiranga and Assaí-Ipiranga. The location of our gas stations allows our customers to both shop and refuel their cars while they are on our premises. Our strategy for gas stations is based on competitive prices and the reliability and quality of fuel, which we believe is assured by the brand. Our gas stations performed well in 2018 mainly due to the standardization of services, renovations, participation in the “My Discount” program and the strengthening of the image of our prices.

                Drugstores

                As of December 31, 2018, we operated 123 drugstores in 15 states and in the Federal District. Our strategy, in relation to our drugstores, is to provide greater convenience to our customers by providing additional products, mainly in our Extra Hiper stores. We also have drugstores that operate under our Pão de Açúcar banner.

                Food Delivery and In-Store Pick-Up

                We have consolidated our leadership in food ecommerce through our food delivery platforms, including Pão de Açúcar Delivery, or PA Delivery, and Extra Delivery, through which our customers can order their products online and receive them at home (within 24 hours for “conventional” delivery and four hours for “express” delivery). This service also allows us to expand and deepen our client base, reaching new clients through our app and website, while also furthering our omnichannel approach for existing clients.

                We also offer our “Click and Collect” service, a purchasing option through which our customers are able to order online and choose the best time to pick up their food order at selected Pão de Açúcar and Extra stores.

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As of December 31, 2018, we offered the “express” and/or “click and collect” concepts at more than 70 stores under the Pão de Açúcar and Extra banners,  in the Southeast, South, Midwest and Northeast region of Brazil. In line with our digital transformation strategy, we plan to continue to increase the presence of Extra Delivery, including in our Extra Hiper and Extra Supermercado stores.

In December 2018, we launched Pão de Açúcar Adega, an online platform for the sale of special beers and wines with nationwide delivery and a brick-and-mortar store (in the city of Sao Paulo) providing our customers with a truly omnichannel experience. Pão de Açúcar Adega offers our subscription service, Pão de Açúcar Viva Vinhos, through which customers can have our wines delivered directly to their homes.

                As part of our Digital Transformation strategy, in 2018 we acquired the super app James Delivery, which is a multiservice platform for ordering and delivering various products, connecting customers, deliverers and establishments. This acquisition complements the delivery methods that we make available to our customers: physical store purchases, next day, same day and express deliveries (within four hours) and “Click and Collect” withdrawals in physical stores). In April 2019, James Delivery initiated operations in São Paulo and by the end of 2019, we expect the entire city of São Paulo will be served by the delivery platform. After São Paulo, the plan is to begin taking James Delivery to 10 more Brazilian cities during the course of 2019.

                “My Discount” and “My Rewards” Programs

                The “My Discount” program, launched in July 2017, consists of a mobile app that provides personalized discounts to customers who are members of the loyalty programs of the Pão de Açúcar and Extra banners. In the first year and a half period from July 2017 to December 2018, the platform reached 7.7 million downloads. In 2018, the total base of loyal customers in the “My Discount” program increased from 14.4 million on December 31, 2017 to 17.9 million people on December 31, 2018. In addition, as of December 31, 2018, approximately 40% the sales tickets at Pão de Açúcar stores included at least one item from the “My Discount” program. Our strategy in relation to the “My Discount” program is to develop a closer relationship with our clients, which will allow us to know and better meet their needs and convenience.

                In March 2018, we added the “My Rewards” program to our mobile app, providing personalized challenges to customers who are members of the loyalty programs of the Pão de Açúcar and Extra banners. These challenges can be completed monthly to receive prizes, such as coupons, products in-store and vouchers from our partner companies.

                GPA Malls

                GPA Malls is our real estate business unit, which is responsible for the creation and management of commercial spaces. As of December 31, 2018, GPA Malls was present in 22 states and the Federal District and managed around 250 commercial galleries in Brazil and two neighbourhood commercial centers. As of December 31, 2018, GPA Malls had more than 260,000 square meters of gross leasable area.

Cash and Carry Operating Segment – Store Format and Banner 

Assaí Stores

                Assaí has been operating in the cash and carry segment for more than 40 years and is focused on the commercialization of products that meet the needs of individual consumers and corporations, such as prepared food retailers (including restaurants, pizzerias and snack bars), conventional retailers (such as grocery stores and neighborhood supermarkets) and end users (including schools, small businesses, churches and hospitals). It offers more than 7,000 items of grocery, food, perishable, beverage, wrapping, hygiene and cleaning products, among others. According to a 2018 study by Nielsen, cash and carry is the most popular food sales format in Brazil, with 60%, and in certain large cities greater than 70%, of Brazilian households participating (for example, 76% of households in the greater São Paulo area).

 Assaí standard stores are strategically located and are characterized by wide aisles, high ceilings and larger cold rooms, which facilitate the loading and increase up to six times the storage capacity for goods, allowing for more accessible prices and lower distribution costs. In addition, other characteristic features of these standard stores include a larger assortment of goods and improved ambiance, including covered parking, in-store Wi-Fi, air conditioning and natural lighting. Assaí also features a sales floor where all supply transactions are fully automated and monitored.

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                In 2018, we continued to expand our cash and carry business and invested in organic growth by opening 16 new Assaí stores and converting two Extra Hiper stores to the Assaí banner, strengthening the Assaí banner’s national footprint and increasing our market share. During the opening and conversion of these new Assaí stores, more than 92,000 square meters of sales area were constructed. As of December 31, 2018, the Assaí banner totaled 144 stores in 18 Brazilian states (up from 14 stores in one Brazilian state when we acquired the Assaí banner in 2007), and reached gross sales of R$24,923 million, an increase of 24.2% compared to 2017. In addition, as of December 31, 2018, we already had more than 700,000 Passaí credit cards issued. Passaí is our branded credit card associated with the Assaí banner that offers cash and carry pricing on products for individuals customers.

Seasonality

                We have historically experienced seasonality in our results of operations, principally due to traditionally stronger sales in the fourth quarter holiday season and “Black Friday” promotions, which are relatively new in Brazil and help to boost fourth quarter sales in mainly non-food categories. In recent years, our average sales revenues during the fourth quarter have typically been approximately 19% above average sales revenues during the other quarters.

                We also experience strong seasonality in our results for the months of March or April as a result of the Easter holiday, when we offer specialized products for the occasion, as well as in FIFA World Cup years, when some of our event-focused products show an increase in sales.

                Seasonality relating to the availability of some of our products (such as fruits and vegetables) generally does not affect our results due to the large and diverse selection of products we offer to our customers.

Our Products 

                Our products in the food retail sector are mostly ready-for-sale products that we purchase and resell to our end-user consumers. Only a portion of our products are produced at our stores, by our technical team for the development of perishables. In certain circumstances, we have entered into partnerships with suppliers who deliver semi-finished products that are finished at our stores.

                The products manufactured or handled at our stores include: (i) fruits and vegetables, which are cut or packaged at our stores; (ii) meat (beef, pork, chicken and fish) as well as cold cuts and cheeses, which are cut, weighed and packaged at our stores; (iii) ready-to-eat meals sold at our deli counters; and (iv) bread, cakes and sweets made at the bakeries located within our stores.

                We do not manufacture the products sold under our private label. These products are manufactured by suppliers who are carefully selected by us, after we have thoroughly evaluated the quality of their services and their capacity to meet our demand. The development of products carrying our private label is guided by a detailed process, involving various areas of our Company, aimed at standardizing our products and ensuring the products’ manufacturing and launch within the commercial and strategic targets of our brands and compliance with our quality standards.

Suppliers

                The purchasing of food products for all of our Multivarejo banners, therefore excluding Assaí, is centralized and we purchase substantially on the spot or on a short-term basis from a large number of unrelated suppliers. The purchasing of products for Assaí is generally decentralized, with purchases being made directly from a large number of unrelated suppliers. As a result, we are not dependent on any single supplier. The prices of our food products may vary depending on inflation.

Distribution and Logistics

                In order to efficiently distribute perishable food products, grocery items and general merchandise, we operate 22 distribution centers and depots strategically located across Brazil, with a total storage capacity of approximately 670,000 square meters. The locations of our distribution centers enable us to make frequent shipments to stores, which reduces the need of in-store inventory space, and limits non-productive store inventories.

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                Our distribution centers are significantly supported by pd@net, a business-to-business technology platform, which links our computer automated ordering system to our distribution centers and suppliers in order to automatically replenish our inventory.

                We organize our logistics and distribution processes in accordance with the products and services sold under our banners. Accordingly, we guide our distribution processes by the procedures described below.

Stores, Supermarkets and Hypermarkets

                As of December 31, 2018, the logistics process to supply our stores, supermarkets and hypermarkets, excluding drugstores and gas stations, included 15 distribution centers located in the states of São Paulo (including a distribution center specifically focused on our proximity stores), Rio de Janeiro, Ceará, Pernambuco, Bahia and the Federal District, corresponding to a 518,700 square meter area including both our own and outsourced distribution centers. Our distribution process is performed by an outsourced fleet. As of December 31, 2018, our centralization rate (the percentage of revenue from the products supplied at our stores that comes directly from our distribution centers) was approximately 80% excluding our cash and carry operation, which we carry out through Assaí.

                Orders made for our non-centralized products are made directly by the stores and delivered by the suppliers following the supply model known as “Direct Delivery.” As of December 31, 2018, approximately 20% of our stores sales, excluding our cash and carry operation, corresponded to “Direct Delivery” products, especially ornamental plants, cigarettes, ice cream, yogurt and magazines.

Cash and Carry

                To support the growth of the cash and carry business and ensure the efficient supply of stores that work with high sales volume, we operate with nine distribution centers in six different Brazilian states and in the Federal District. The distribution centers are strategically located within these states to allow us to work with a high-frequency supply, reducing the need for inventory space, improving stock coverage and assuring better stock out rates in stores. These advantages are also sustained by the distribution center’s total storage area of 136,000 square meters, storage capacity of more than 150,000 pallet positions and a system which improves the operation management of the distribution centers. We consider the risks to our business in relation to the products supplied by the distribution centers to be low, since approximately 40% of our sales volume is supplied by the distribution centers.

                In 2018, we expanded our logistics operation to meet our business requirements. In the state of São Paulo, we unified dry goods operations by optimizing the distribution of items in this category and generating a 31% increase in storage capacity (pallet positions). In the Central West region, we inaugurated a  distribution center in Goiânia in the State of Goiás, improving service to stores in the region.

E-commerce Food Delivery

                Since 2016, we have operated a dedicated distribution center in the city of São Paulo focused on our online and proximity operations. This distribution center is responsible for regular online delivery requests. Additionally, certain of our stores offer express delivery (within four hours) services.

Drugstores

                Our drugstores rely on being supplied with medications and other products, such as cosmetics. The logistics system varies between centralized deliveries through our distribution centers and decentralized deliveries. We have supply agreements with the main pharmaceutical distributors in the country, as well as regional distributors across Brazil.

Gas Stations

                Our gas stations are supplied by exclusive suppliers. In 2018, we used two suppliers. Supply orders are made individually by each station, and fuel is requested through purchase orders or pre-agreed daily supply orders, pursuant to the service agreements entered into by each gas station. Fuel transportation is carried out exclusively by our suppliers while unloading operations are closely followed by our employees for safety and quality control reasons.

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                The supply process for compressed natural gas (gás natural veicular), or GNV, is different. GNV is delivered by regional suppliers directly to the gas stations using pipelines connected to the entrance boxes located at the gas stations and holding fuel meters installed and controlled by the dealers themselves. This equipment regularly measures the GNV volumes supplied. GNV is then sold to customers through dispensers attached to these entrance boxes, using specific pipelines.

Marketing

                Our marketing policy aims to attract and retain our customers. To this end, we conduct integrated marketing campaigns that are specific to each store banner in which we operate and are structured and directed at the target customer market for each store banner. Our marketing teams are media experts dedicated to developing quality marketing campaigns to emphasize our strengths in terms of selection, service and competitive prices. We recognize marketing campaign expenses as sales expenses as they are incurred.

                In 2018, our marketing efforts were focused on adapting to changing consumers’ needs in light of the economic downturn in Brazil, notably making adjustments to the assortment of available products and increasing competitiveness. These efforts with initiatives to improve operating efficiency and the introduction of new strategies in our loyalty programs, such as personalized offers and prizes provided by digital tools and the development of news apps.

                In 2018, 2017 and 2016, we spent R$573 million, R$508 million and R$489 million, respectively, in advertising, representing 1.16%, 1.14% and 1.18%, respectively, of total net operating revenue in each year.

FIC and Investcred 

                Before our acquisition of Via Varejo, Via Varejo had entered into an association with Unibanco – União de Bancos Brasileiros S.A. (currently, Itaú Unibanco), named Banco Investcred Unibanco S.A., or Investcred. In December 2009, we amended our partnership with Itaú Unibanco to include the original scope of the Investcred partnership within  FIC, in order to allow Itaú Unibanco to enter into similar partnerships with other retailers, and to extend FIC’s term through August 28, 2029.

                FIC operates financial services kiosks in our stores with exclusive rights to offer credit cards, financial services and insurance policies (except for extended warranties). FIC has been operating for more than ten years and as of December 31, 2018 had a portfolio of 3.6 million credit card accounts from customers (including the portfolio of Cartão Extra, Cartão Pão de Açúcar, Cartão Passaí and Cartão Ponto Frio). We and Itaú Unibanco each hold 50% of FIC’s capital stock. Our interest in FIC’s capital stock is split between 36% held by the retail segment through CBD and 14% held by the home appliances segment through Via Varejo. Itaú Unibanco determines the financial and operational policies of FIC and appoints the majority of its officers.

                In 2018, net profit in the credit card business was R$219 million. The decrease in net profit in the credit card business to R$186 million in 2017 was partially due to a regulation of the Central Bank regarding revolving credit that was passed that year and affected 2017 interest revenues and net profit. Net profit in the credit card business was R$236 million in 2016.

                We maintain our strategy to increase the share of FIC’s credit cards and financial services at our stores as an important loyalty tool and mechanism to increase sales and additional profitability. FIC’s credit cards offer payment options for the cardholders at our stores, aiming to provide them with benefits and convenience.

The table below sets forth the breakdown of FIC’s customers in 2018, 2017 and 2016:

 

Credit Sales

                In 2018, 51.1% of our net operating revenue was represented by credit sales, principally in the form of credit card sales, installment sales and food vouchers, as compared to 49.1% in 2017, as described below:

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                Credit card sales. All of our store formats and our ecommerce operations accept payment for purchases with major credit cards, such as MasterCard, Visa, Diners Club, American Express and co-branded credit cards issued by FIC. Our stores also accept virtual credit cards through methods such as Apple Pay. Sales to customers using credit cards accounted for 40.3%, 38.2% and 39.3% of the consolidated net operating revenue in 2018, 2017 and 2016 for our food retail and cash and carry segments, respectively. Of this total, sales through our FIC co-branded credit cards accounted for 16.3% of our net operating revenue in 2018. An allowance for doubtful accounts is not required as credit risks are assumed by the relevant credit card companies or issuing banks.

                Installment sales. Our Extra hypermarkets offer consumer financing incentives to our customers to purchase home appliances on an installment basis through our FIC co-branded and private label credit cards, as well as third-party credit cards. Sales to customers using credit cards on an installment basis accounted for 13.9%, 13.7% and 10.4% of our total credit card sales in the food retail segment in 2018, 2017 and 2016, respectively. An allowance for doubtful accounts is not required as credit risks for all installments are assumed by the relevant credit card companies or issuing banks.

Food Vouchers

                At our food stores, we accept food vouchers (issued by third-party agents to participating companies that provide food vouchers to their employees as a fringe benefit) as payment. Food vouchers accounted for 10.7%, 10.4% and 9.9% of the consolidated net operating revenue in 2018, 2017 and 2016 for our retail and cash and carry segments, respectively. The voucher-issuing companies assume the credit risk associated with these sales.

Information Technology

                We invested R$362 million, R$204 million and R$284 million in information technology in 2018, 2017 and 2016, respectively. We are identifying opportunities and mapping efficiency gains by integrating services and functions across our various operating segments, focusing on governance and our customers. Our information technology department negotiates the reduction of costs on projects and contracts with service and software suppliers, based on sharing services between us and our subsidiaries, thus creating economies of scale.

Intellectual Property

We consider our brands to be one of our most valuable assets and we have worked extensively to define the characteristics of each of our banners (Extra Hiper, Supermercado Extra, Mercado Extra, Mini Extra, Pão de Açúcar, Minuto Pão de Açúcar, Assaí and Compre Bem) with respect to the expectations, consumption patterns and purchasing power of the different types of customers and income levels in Brazil.  We believe that Brazilian consumers associate each of our banners with a specific combination of products, services and price levels.

In Brazil, to acquire a brand it is necessary to officially register it with the National Industrial Property Institute (Instituto Nacional de Propriedade Industrial), or INPI.  This registration gives the owner the exclusive right to use the trademark throughout Brazil for a specific period of time, which may be renewable.

As of December 31, 2018, our most important trademarks (Pão de Açúcar, Extra, Qualitá, Taeq, Assaí and Compre Bem, among others) were duly registered with INPI and we had approximately 2,998 trademarks registered or in the process of being registered in Brazil and abroad (2,655 trademarks in Brazil alone).  We did not have any registered patents as of December 31, 2018.

Our business relies on intellectual property that includes the content of our sites, our registered domain names and our registered and unregistered trademarks.  We believe that the Pão de Açúcar, Extra and other domain names we use in our ecommerce business are valuable assets and essential to the identity of our business.

We own the following domain names, among others:  www.extra.com.br, www.gpabr.com, www.paodeacucar.com.br, www.paodeacucar.com, www.deliveryextra.com.br and www.assai.com.br.  These domain names are listed for informative purposes only and the information contained in these websites is not incorporated by reference in this annual report.

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Competition

                Brazil’s leading retail food companies are controlled by companies headquartered abroad. Foreign presence in the Brazilian retail food industry started with the French retail food chain, Carrefour. In 1995, the U.S. chain Walmart also entered the Brazilian market, mostly through the acquisition of domestic retail food chains, increasing competition in the industry. Thus, the Brazilian retail food industry is highly competitive. For more information about risks related to competition, see “Item 3D. Risk Factors—Risks Relating to our Industry and Us—We face significant competition and pressure to adapt to changing consumer habits, which may adversely affect our market share and net income.” Nonetheless, supermarket penetration levels in Brazil, in terms of the number of supermarkets in proportion to the country’s population and area, is estimated to be lower than the levels recorded in the United States, several Western European countries and some other South American countries.

                Recently, leading retail food companies, including our Company, have pursued the following strategies:

●        development and expansion of cash and carry formats;

●        migration of large stores to smaller store formats, such as neighborhood or proximity stores;

●        conversion of hypermarkets stores into cash and carry stores;

●        expansion of small store formats;

●        investment in store renovations and in general asset quality;

●        investment in multi-channel strategy to reach more customers;

●        focus on fidelity programs for deeper understanding of consumer habits; and

●        increased promotional activities for hypermarkets and supermarkets, which have been most affected by customer migration.

                Our competitors vary depending on the regional location of the stores. Our main competitors in food retail in the state of São Paulo are Carrefour, Futurama, Mambo, Pastorinho, Sonda, Dia and Walmart. In the city of Brasília, our principal competitors are Big Box, Carrefour, Super Cei and Super Maia. In the state of Rio de Janeiro, our principal competitors are Guanabara, Mundial, Prezunic and Zona Sul supermarkets. In the states of Paraíba, Pernambuco, Ceará and Piauí, our principal competitors are the local supermarkets, in addition to Bompreço and GBarbosa.

                The principal competitor of our Extra hypermarkets is Carrefour, which operates stores in the Southeastern and Southern regions of Brazil, and Walmart, which operates through various banners in the Southeastern, Northeastern and Southern regions of Brazil.

                Our Assaí banner competes mainly with Atacadão, Roldão, Tenda, Makro and Maxxi.

                In our other regional markets, we compete not only with the organized food retail sector, but also with various small and medium-sized chains, family companies and food retail businesses.

                We are market leaders in food ecommerce, through the Pão de Açúcar and Extra banners. Our main competitors in this segment are Carrefour, Saint Marché, Mambo, Sonda and Zona Sul.

Regulatory Matters

                We are subject to a wide range of governmental regulation and supervision generally applicable to companies engaged in business in Brazil, including federal, state and municipal regulation, such as labor laws, public health and environmental laws. In order to open and operate our stores, we need a business permit and site approval and an inspection certificate from the local fire department, as well as health and safety permits. Our stores are subject to inspection by city authorities. We believe that we are in compliance in all material respects with all applicable statutory and administrative regulations with respect to our business. In addition, we have internal policies that in some instances go beyond what is required by law, particularly with respect to environmental and sustainability requirements and social and community matters.

 

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                Our business is primarily affected by a set of consumer protection rules regulating matters such as advertising, labeling and consumer credit. We believe we are in compliance in all material respects with these consumer protection regulations.

Environmental and Social Matters

                In 2018, we reviewed our operating strategy and designed a new medium-term vision (covering 2018 to 2020) with strategic projects and short-term objectives for 2018. Following that review, our Sustainability and Social Investment areas were brought together under the same department. We defined our new strategy based on the global priorities of our group and our businesses, as well as the results of the materiality matrix reviewed by our board of directors at the end of 2017).

                Based on this new strategy, we articulated our corporate purpose “To be an agent of transformation, improving and innovating our way of doing business in order to build a more responsible and inclusive society,” and we announced the six operating pillars for all of our business units:

●        Valuing our people: To be the reference in promoting diversity, inclusion and sustainability among our employees;

●        Managing environmental impact: To minimize and prevent the environmental impact of our operations;

●        Conscientious consumption and supply: To expand the offering of healthy and sustainable products as a strategic value in our brands and businesses, while influencing our supply chain and raising awareness among consumers to choose these products;

●        Transforming the value chain: To engage players across our value chains to make them more responsible towards the environment, people and animal welfare.

●        Engagement with society: To strengthen the relationship between customers, suppliers, employees and social organizations around our stores to work together as agents of social transformation.

●        Integrated management and transparency: To integrate sustainability into our business model and strengthen transparency in the relationship with our stakeholders.

                Our highlights in 2018 are the following:

                Transforming the value chain

                We evaluated our supply chain considering social and environmental risks. After prioritizing specific supply chains and product categories, we defined an action plan, which included the following actions in 2018:

●        Animal welfare for egg-laying hens: we promoted our private label cage-free, free-range and organic eggs through offers, promotions and media campaigns to raise the awareness of our customers. Consequently, the share of cage-free egg sales increased by 110% between 2017 and 2018.  

●        Working conditions at international factories: we audited 100% of the suppliers of our private label and no-name products from countries requiring additional scrutiny.

●        Diversity of fish species: we encourage consumption of lesser-consumed fish species, reducing concentration and promoting diversity of consumption.

●        Illegal deforestation: all of our suppliers adhered to our meat supplier policy, with the purpose of ensuring that the meat we sell is not sourced from deforestated areas. As a result, from 33 suppliers, 14 slaughterhouses (representing 42% of our meat suppliers) implemented a geomonitoring tool to control their own purchases of cattle (in compliance with the second step of the suppliers’ development program, which is a requirement of our meat supplier policy), and 8 other suppliers are in the process of implementing a geomonitoring tool. In the last three years, we canceled our purchase agreements with 15 suppliers due to the non-compliance with our meat supplier policy.

                Management of environmental impact and conscientious consumption and supply

                We continue to invest in projects to improve the energy efficiency of our stores, which allowed us to further reduce our energy consumption per square meter by 10.6% since 2015, consistent with our goal to reduce our energy consumption by 15% by 2020. In addition, we changed the packaging material in certain banners, replacing Styrofoam packaging with coated paper for cold cuts, and eliminating the use of straws in the café area in our stores. In addition, we installed solar panels at certain Assaí stores. We also improved the recyclability index of our waste (from 25% in 2017 to 37% in 2018) through a pilot project implemented in 12 stores. Finally, we increased the volume of perishable food donated by 71.8% in 2018 compared to 2017, thereby reducing food waste.

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                Valuing our people

                We have a gender equality committee and, in 2018, we created two other affinity groups for promoting racial equality and LGBTI+ rights, demonstrating our commitment to diversity and complementing our diversity initiatives

                Our committee and affinity groups foster strategic and operational discussions on diversity and raising awareness of our employees. We strengthened our activities  related to gender equality and persons with disabilities, which resulted in an increase of 3% in the number of women in leadership positions (managers and above) and an increase of 21% in the number of employees with disabilities in 2018 compared to 2017. In addition, male members of our leadership team signed our “Manifesto of senior male leaders for gender equality.” This manifesto identifies five areas with specific actions to be implemented in order to encourage greater equality in the workplace (increase women in leadership positions, new maternity and paternity policies, ensure equal pay, fight unconscious biases in interviews and prevent workplace discrimination).

                Engaging society

                GPA Institute, our social investment branch, is responsible for determining and implementing our strategy for social investments. From its launch in November 2017 to December 31, 2018, the platform “Assaí Bons Negócios” has already been accessed 742,869 times, received 24,546 registrations and certified 1,661 people. We also conducted three basic bakery and pastry courses in partnership with social institutions to 85 students, including 45 with disabilities. In addition, we invested in a nationwide mapping of healthy and sustainable community businesses, which identified more than 1,000 organizations and selected 21 projects to participate in a business incubator with our sales team in 2019. This incubator will include meetings with experts to improve business models, financing and marketing.

                Two significant highlights of 2018 were the results of Solidarity Day, through which we collected 1,100 tons of food to support more than 100 social institutions, exceeding by 22% the results of 2017 and the launch of Colabora, a volunteering app for employees of our group to participate, register and invite other employees for community service projects.

                All of these actions, combine with others used to value our people, promote conscientious consumerism, transform the value chain, preserve the environment and engage society to reinforce the pillars that guide our business strategy.

4C.          Organizational Structure

The chart below sets forth a summary of our organizational structure based on total capital stock as of March 25, 2019:

 

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(1)   The names of the entities shown on the chart above have been abbreviated for ease of reference. The complete names of such entities are as follows: (a) “Casino Group” refers to Casino and its subsidiaries, including Éxito, and controlling holding companies, including Rallye, and Euris, which are ultimately controlled by Mr. Jean-Charles Naouri; (b) “Éxito” refers to Almacenes Éxito S.A; (c) “Onper” refers to Onper Investments 2015, S.L.; (d) “Segisor” refers to Segisor S.A.S.; (e) “Wilkes” refers to Wilkes Participações S.A.; (f) “CBD” refers to us, Companhia Brasileira de Distribuição; (g) “GPA Logística” refers to GPA Logística e Transporte Ltda.; (h) “Novasoc” refers to Novasoc Comercial Ltda.; (i) “Sendas” refers to Sendas Distribuidora S.A.; (j) “CBD Holland” refers to CBD Holland B.V.; (k) “SCB” refers to SCB Distribuição e Comércio Varejista de Alimentos Ltda.; (l) “GPA M&P” refers to GPA Malls & Properties Gestão de Ativos e Serviços Imobiliários Ltda.; (m) “Green Yellow” refers to Greenyellow do Brasil Energia e Serviços; (n) “Leji (James)” refers to Leji Intermediação S.A; (o) “GPA 2” refers to GPA 2 Empreendimentos e Participações Ltda.; (p) “Bitz” refers to Bitz Fidelidade e Inteligência S.A.; (r) “Bellamar” refers to Bellamar Empreendimentos e Participações Ltda.; (s) “FIC” refers to Financeira Itaú CBD S/A Crédito, Financiamento e Investimento; (t) “FIC Promotora” refers to FIC Promotora de Vendas Ltda.; (u) “VVAR” refers to Via Varejo S.A.; (v) “GAS” refers to Globex Administração e Serviços Ltda.; (w) “VVLog” refers to VVLOG Logística Ltda.; (x) “Lake Niassa” refers to Lake Niassa Empreendimentos e Participações Ltda.; (y) “Banco Investcred” refers to Banco Investcred Unibanco S.A.; (z) “GAC” refers to Globex Administradora de Consórcios Ltda.; (aa) “Bartira” refers to Indústria de Móveis Bartira Ltda.; (bb) “Cnova Brasil” refers to Cnova Comércio Eletrônico S.A.; (cc) “CBD LuxCo” refers to Companhia Brasileira de Distribuição Luxembourg Holding S.à r.l.; (dd) “CBD DutchCo” refers to Companhia Brasileira de Distribuição Netherlands Holding B.V.; (ee) “Cnova N.V.” refers to Cnova N.V.; (ff) “Casino” refers to Casino, Guichard-Perrachon S.A.

For further information on our subsidiaries, see note 3 to our audited consolidated financial statements included elsewhere in this annual report.

 

4D.          Property, Plant and Equipment

                We own 133 stores, seven distribution centers (warehouses) and a portion of the real estate where our headquarters are located. We lease the remaining 730 stores and 15 distribution centers and depots we operate in Brazil and the remaining portion of the real estate where our headquarters is located. Leases are usually for a term of five to twenty five years, and provide for monthly rent payments based on a percentage of sales above an agreed minimum value. We have 76 leases expiring by the end of 2019. Based on our prior experience and Brazilian law and leasing practices, we do not anticipate any material change in the general terms of our leases or any material difficulty in renewing them. In addition, as of December 31, 2018, we had a lease agreement with the Klein Family and a sublease agreement with Via Varejo, regarding two properties (distribution centers) owned by the Klein Family. See note 12.2(v) to our audited consolidated financial statements included elsewhere in this annual report. Based on our management’s experience and knowledge of the Brazilian market, our management believes that our leases follow market standards.

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                The following table sets forth the number and total selling area of our owned and leased retail and cash and carry stores by store format, the number and total storage area of our owned and leased warehouses and the total office area of our headquarters that we owned and leased as of December 31, 2018:

                               

(1)   Excludes gas stations and drugstores.

(2)   Includes Extra Supermercado, Mercado Extra and Compre Bem banners.

(3)   Includes Mini Extra, Minuto Pão de Açúcar, Pão de Açúcar Adega and Aliados Minimercado.

 

                For further information on capital expenditures, see “Item 4A. History and Development of the Company—Capital Expenditures and Investment Plan.”

4E.          Discontinued Operations

On November 23, 2016, our board of directors approved the disposal of our equity interest in Via Varejo, in line with our long-term strategy of focusing on the development of the food retail and cash and carry segments. Due to certain external factors out of our control, mainly related to the Brazilian macroeconomic environment, the sale of Via Varejo was not concluded within the expected timetable.

On November 26, 2018, we held 559,521,085 common shares, corresponding to 43.23% of Via Varejo’s corporate interest. On December 21, 2018, our board of directors approved a total return swap transaction, involving the sale of 50,000,000 common shares held by us in Via Varejo, corresponding to 3.86% of Via Varejo’s capital stock. Further, on February 20, 2019, our board of directors approved another total return swap transaction, involving the sale of 40,000,000 common shares held by us in Via Varejo, corresponding to 3.09% of Via Varejo’s capital stock. These sales were carried out on the B3 on December 27, 2018 and February 25, 2019, respectively. As a result, our corporate interest in Via Varejo decreased from 559,521,085 common shares to 469,521,085 common shares, corresponding to 36.27% of Via Varejo’s capital stock. In addition, our board of directors instructed our management to actively pursue selling our remaining equity interest in Via Varejo to a strategic investor or through operations available in capital markets in order to complete the full divestiture in Via Varejo by December 2019.

As disclosed in note 32 to our audited consolidated financial statements included elsewhere in this annual report, the net income for the years ended December 31, 2018, 2017 and 2016 related to Via Varejo was classified in a single line item as “discontinued operations” in our statement of operations and comprehensive income and the assets and liabilities for Via Varejo (including Cnova Brazil) are classified as held for sale in our balance sheet as of December 31, 2018, 2017 and 2016.  Starting on November 1, 2016, we began recording our investment in Cnova using the equity method of accounting.  Furthermore, we restated the financial data as of and for the years ended December 31, 2015 and 2014 in the five-year table under “Item 3A. Selected Financial Data” for comparability across all periods.

Noncurrent assets and liabilities held for sale were, respectively, R$24,443 million as of December 31, 2018 compared to R$22,775 million as of December 31, 2017 and R$19,412 million as of December 31, 2018 compared to R$17,824 million as of December 31, 2017.  The net income (loss) from discontinued operations was a net loss of R$74 million in 2018 compared to a net income of R$356 million in 2017 and a net loss of R$1,036 million in 2016.

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Discontinued Operations – Operating Segments 

                We carry out our discontinued operations through Via Varejo, which operates in the home appliances and ecommerce segments through stores under the banners Ponto Frio and Casas Bahia, in addition to the ecommerce platforms Casasbahia.com, Extra.com, Pontofrio.com and Barateiro.com.

Via Varejo files financial statements and other periodic reports with the CVM, including the Formulário de Referência, which is an annual report that is prepared and filed in accordance with CVM Instruction No. 480/09 and can be accessed through www.cvm.gov.br, and on Via Varejo’s website that can be accessed through http://www.viavarejo.com.br. Information from those websites is not incorporated by reference into this document.

Ponto Frio and Casas Bahia Stores

                The Ponto Frio and Casas Bahia stores are specialized in sales of home appliances, such as consumer electronics and furniture. As of December 31, 2018, Via Varejo operated 1,035 stores 807 Casas Bahia stores and 228 Ponto Frio stores). In 2018, Via Varejo’s stores had net gross sales of R$23,668 million, an increase of 4.6% compared to 2017.

                The Casas Bahia stores target middle and lower-income customers (B and C income classes), who are attracted by flexible payment alternatives, including installment plans. Casas Bahia stores are generally larger than Ponto Frio stores. The Casas Bahia stores also offer a range of value-added services, during and after sales, such as extended warranties.

                The Ponto Frio stores target middle and higher-income customers (A and B income classes), but also provides flexible payment alternatives, including installment plans. Via Varejo offers these customers customized expert advice on its products, as well as a range of value-added services, during and after sales, such as extended warranties. In 2018, Via Varejo opened 89 new stores, of which 75 are Casas Bahia and 14 are Ponto Frio stores, and Via Varejo closed 25 stores, of which 19 are Casas Bahia stores and six are Ponto Frio stores, mainly due to low performance compared to our average performance.

Cnova Brazil

                According to GfK, a source of market information related to the ecommerce industry, in 2018, 26.3% of the total ecommerce transactions in Brazil, in terms of gross sales, were made through Via Varejo’s channels. As of December 31, 2018, Via Varejo offered approximately 2.0 million products through its direct sales and marketplace businesses. Via Varejo’s main websites are Casasbahia.com.br, Pontofrio.com.br and Extra.com.br. For the year ended December 31, 2018, Cnova Brazil’s gross sales were R$6,592 million, which represented a 10.7% increase as compared to 2017.

ITEM 4A.             UNRESOLVED STAFF COMMENTS

None.

ITEM 5.                OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read this discussion in conjunction with our audited consolidated financial statements prepared in accordance with IFRS and the related notes and the other financial information included elsewhere in this annual report.

5A.          Operating Results

Brazilian Economic Environment and Factors Affecting Our Results of Operations 

                Since most of our operations are in Brazil, our results of operations are affected by macroeconomic conditions in Brazil, including inflation rates, interest rates, Brazilian GDP growth, employment rates, wage levels, consumer confidence and credit availability.

                Although the Brazilian economy has shown signs of recovery, the economic environment remained challenging for our operations in 2018. Inflation increased in Brazil in 2018, having reached an annual rate of 7.55%, according to the General Market Price Index (Índice Geral de Preços - Mercado), or IGP-M, compared to (0.53)% in 2017 and 7.19% in 2016.  The IPCA inflation rate also increased, reaching 3.75% in 2018, compared to 2.95% in 2017 and 6.29% in 2016. Inflation has a direct effect on the final prices we charge our customers when they acquire our products.

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                The interest rates set by the Brazilian Committee of Monetary Policy declined in 2018, reaching an all time low of 6.50% at year-end 2018. The interest rates were 7.00% at year-end 2017 and 13.75% at year-end 2016.

                Foreign exchange reserves held by the Brazilian government slightly increased from US$379.577 billion as of March 2018 to US$384.165 billion as of March 2019.

Brazilian GDP decreased 3.6% in 2016, increased 1.0% in 2017, and increased 1.1% in 2018. The unemployment rate in Brazil reached 12.7% in 2017, the highest rate since the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, started publishing the current unemployment rate index in 2012. The unemployment rate decreased slightly in 2018, to 12.3%. These two indicators directly affect the purchasing power of the Brazilian workforce.

An economic recession and growth of the unemployment rate could lead to a decline in household consumption which could adversely affect our results of operations and financial condition.  In order to mitigate this risk, we are currently adapting our stores’ portfolio with conversion to our low-cost format.

On the other hand, a continuation of the recent trend of decreasing interest rates could have a positive effect on our results of operations and financial condition, as many of our rental contracts are partially indexed to Brazil’s national inflation index and the majority of our financial revenues and financial expenses have variable interest rates.

The following table sets forth data on real GDP growth, inflation and interest rates, and the U.S. dollar exchange rate for the indicated periods:

                               

(1)   Source: IBGE.

(2)   The General Market Price Index (Índice Geral de Preços-Mercado), or IGP-M, is measured by FGV.

(3)   Inflation (IPCA) is a broad consumer price index measured by IBGE.

(4)   The CDI is the accumulated rate of interbank deposits in Brazil during each year.

(5)   The official long-term interest rate (taxa de juros de longo prazo), or TJLP, is charged by Brazil’s National Development Bank (Banco Nacional de Desenvolvimento Econômico e Social), or BNDES, on long-term financing (end of the period data).

(6)   Annual average interest rate. Source: Central Bank.

(7)   Exchange rate (for sale) of the last day of the period. Source: Central Bank.

(8)   Average of exchange rates (for sale) of the period. Source: Central Bank.

 

Financial Presentation and Accounting Policies  

Presentation of Financial Statements

                The preparation of our consolidated financial statements, in accordance with IFRS as issued by the IASB, requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities, at the end of the reporting period. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

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Critical Accounting Policies

                We discuss below key assumptions and judgments concerning the future, and other key sources of uncertain estimates at the reporting date that have a significant risk of causing a material impact to the carrying amounts of assets or liabilities within the next financial year.

                For further details on our adoption of new accounting standards, such as IFRS 9 – Financial Instruments,  IFRS 15 – Revenue from Contracts with Customers and IFRS 16 – Leases see note 5 of our consolidated financial statements.

Annual impairment test of goodwill and intangibles

                We test annually whether goodwill is impaired, in accordance with the accounting policy stated in note 4.9 to our audited consolidated financial statements included elsewhere in this annual report and international accounting standard, or IAS, 36 - Impairment of Assets. Other intangible assets, the useful lives of which are indefinite, such as brands and commercial rights, are submitted to impairment tests on the same basis as goodwill.

                As of December 31, 2018, the Company calculated the recoverable amount of goodwill arising from past acquisitions, for the purpose of evaluating if there were decreases in the assets’ value resulting from events or changes in economic, operating and technological conditions that might indicate impairment.