Foodstuffs South Island Limited Annual Report 2011

SummARy RepoRt

ContentsDirectors and Executive Team ..................................................................... 2

About Us ...................................................................................................... 4

Annual General Meeting .............................................................................. 5

Chairman’s Review ...................................................................................... 6

Retail Review ................................................................................................ 14

Food for Thought ......................................................................................... 18

Foodstuffs (South Island) Community Trust ................................................ 19

National Progress Report ............................................................................ 20

Executive Team ............................................................................................ 24

Auditors’ Report ........................................................................................... 26

Foodstuffs South Island Limited Group Financial Statements ................................................................................... 27

The Network ................................................................................................. 32

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About UsFoodstuffs South Island Limited is a South Island, 100% New Zealand owned co-operative, formed in 1988 from the merger of two long-established grocery co-operatives Foodstuffs (Christchurch) Limited and Foodstuffs (Otago/Southland) Limited. Foodstuffs South Island Limited, whose membership consists of independent grocers who own and operate their own businesses and work together for their mutual benefit and the benefit of the co-operative, trades only in the South Island of New Zealand.

It has two sister co-operatives, Foodstuffs (Auckland) Limited and Foodstuffs (Wellington) Co-operative Society Limited, which trade in the northern and southern sectors, respectively, of the North Island of New Zealand.

The three co-operatives are independent of each other and have their own boards and executive structures.

The three co-operatives jointly own Foodstuffs (New Zealand) Limited, a small non-trading entity, which represents the three co-operatives’ interests on issues of national or grocery specific importance. They have also jointly entered into a purchasing group with an Australian grocery wholesaler to achieve economies of scale for the purchase of housebranded product.

Currently, Foodstuffs South Island Limited has a membership of 686 banner group, independent grocer or foodservice members.

These members recognise that shareholding in the co-operative confers on its members the right to enjoy the benefits of the co-operative and the shares are not held as a form of investment in equity shares. As such, our members are caretakers of the co-operative and its assets. They have a responsibility to hand them on to enable future generations of grocers to trade.

The co-operative is principally funded using Retained Patronage Shares (previously five-year Redeemable Preference Shares). These shares are issued to our members in direct ratio to their last year’s trading with the co-operative and paid for by deferring the physical payout of the year-end rebate of profits until each tranche of shares is redeemed.

Our membership generally falls in two categories; independent grocers trading as members of one of our banner groups:

PAK’nSAVE food warehouses

New World supermarkets

Four Square supermarkets

On the Spot convenience stores

Henry’s Beer, Wine and Spirits

or members who trade independently of these groups in the convenience grocery or foodservice industries.

Over recent years, the foodservice industry and the number of customers/members involved in that industry have grown dramatically. These people trade with our wholly-owned subsidiary, Trents Wholesale Limited. This subsidiary was specifically created to service this sector of the South Island economy and now has a strong South Island-wide customer base. Trents trade via seven Cash’nCarry sites throughout the South Island or through one of our Trents distribution partners.

Many of our grocery members lease their supermarket or shop premises from the Company which, in turn, is the registered proprietor or holds the head lease of the property concerned.

The Company offers a substantial degree of assistance to its members as well as its core activity as a wholesale merchant. These ancillary activities include the marketing of their business and products, industry-related training and education, food safety programmes, business services, merchant guarantee funding arrangements with major banks, and, at-call deposit facilities for trading members, former members and related parties.

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Annual General MeetingThe 23rd Annual General Meeting of Shareholders of Foodstuffs South Island Limited will be held on Thursday, 21 July 2011 at the registered office of the Company, 167 Main North Road, Christchurch at 5.00pm.

ordinary Business1. To receive, consider and adopt the Directors’ Report, Group Income Statements, Statements of Comprehensive

Income, Statements of Changes in Shareholders’ Equity, Balance Sheets and Audit Report for the year ended 28 February 2011.

2. To receive the results of the postal ballot conducted to elect two directors.

3. To fix the remuneration of directors for the ensuing year.

4. To authorise the Board of Directors to appoint an Auditor and fix the remuneration of the Auditors for the year to 28 February 2012. A tender for Auditor is being undertaken for the 2012 year.

5. To transact any other business whether by ordinary or special resolution that may be properly transacted at the Annual General Meeting.

‘A’ and ‘D’ Shareholders have the right and are entitled to attend and vote at the meeting. These members may appoint a proxy to attend and vote on their behalf. A form of proxy may be obtained from the Secretary. The completed proxy form must be deposited at the registered office of the Company not later than 48 hours before the time of the meeting. A proxy holder need not necessarily be an ‘A’ or ‘D’ Shareholder of the Company.

Dated this 14th day of June 2011.

By order of the board

K N DeGarnhamCompany Secretary

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Chairman’s ReviewOn behalf of the Board of Directors of Foodstuffs South Island Ltd, I present to you the 23rd Annual Report detailing our activities, highlights, challenges and financial results achieved for the year ended 28 February 2011.

During the reported period the after-effects of the recession were taking its toll on all businesses and uncertainty continued to plague the New Zealand economy. The lacklustre economic growth during the latter half of the year was further compounded by the Canterbury earthquakes, rise in fuel prices and increase in GST which placed an added burden on the already fragile New Zealand economy. Businesses had to re-evaluate their situation to incorporate the effects of the disaster. The cost of the two major earthquakes will ensure that financial restraint remains the norm as New Zealand slowly recovers from the recession.

The hospitality and food service industry was particularly hard hit by the recession which was even further exacerbated by the Christchurch earthquakes forcing numerous businesses to close. Coming out of the recession and the aftermath of the earthquakes, the Co-operative strived to place itself in the best possible position to capitalise on future opportunities available. Consequently, in the year under review members of the Co-operative devoted their energies, amongst other things, to;

• ensuring the fundamental business model and company strategy are still sound,

• further investigation to improve the visibility on margin management,

• managing the earthquake insurance process and ensuing costs,

• training within banner groups to

improve the customers’ overall shopping experience,

• dealing with changes in tax depreciation rules and the consequences thereof,

• realising the benefits of the past investments in information technology and investing in further retail technology initiatives,

• refurbishment and expansions of several retail properties,

• investment in the development of logistics infrastructure, and

• streamlining SAP procurement efficiencies.

The Board would like to congratulate the Crisis Management Team (CMT) and Foodstuffs South Island staff for the professional manner in which they conducted themselves after the September 2010 and February 2011 earthquakes. The Team’s methodical and solid approach was vital for the Co-operative in order to navigate the Company through these turbulent times. In addition, the Board also recognises the trying times our Christchurch Members went through after each earthquake and can only applaud our Members in getting their stores fully functional in such a short period.

The impact of the earthquakes on Foodstuffs South Island was largely mitigated due to a comprehensive insurance programme. This meant that despite the damage the Co-operative and its Members suffered during the September and February earthquakes there was no significant financial impact, as insurance fully covered all costs incurred.

The Co-operative has once again delivered a strong financial result for the 2010/11 financial year. Revenues increased despite the disruption caused by the Christchurch

Robin Brown

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earthquakes. Total distributable profit increased due to improved margins, increased supplier rebates and lower interest costs thereby contributing to an excellent trading result.

The banner groups traded steadily despite the difficult trading conditions. Over the reported year, competition has been fierce in the retail market and was driven by increased advertising and aggressive pricing between the major retailers. New World stores have experienced a steady trading period with increased sales despite the closure of New Worlds Kaiapoi, St Martins and Redcliffs. Henry’s Beer Wine & Spirits stores have showed significant growth. Their focus is placed on increasing the brand profile of Henry’s Beer Wine & Spirits to South Island customers.

Trents Wholesale Ltd, the Company’s specialist food and beverage sector subsidiary, experienced an extremely challenging and demanding trading environment across all segments of their business. The likely impact on the 2012 year for Trents from the February earthquake, particularly affecting Christchurch central business district, cannot yet be estimated but may be significant.

Group Sales and profitabilityPositive sales growth of $61M or 2.7% was recorded this year despite the challenging trading conditions. The first half of the year was characterised by slow growth with low food price inflation, while the second half of the year was impacted by the Canterbury earthquakes. Despite the disruption caused by the earthquakes, sales were broadly in line with expectations for the year.

The underlying profitability of the Co-operative was very solid, with total Operating Profit increased by $16M or 8%.

However, there are two significant items of note in the financials accounts.1. Operating Expenses include an

additional $31M of earthquake related costs incurred by the Co-operative this year, and Other Income includes a similar amount for the expected insurance payments received and to be received. The net impact of the earthquake in the Co-operative’s Income Statement this year is negligible, with all costs being offset by insurance revenues. While there is still a considerable amount of work to be carried out on the claims we are confident that all material costs will be covered under our insurance policies.

2. A net $35.863M deferred tax provision has been recorded this year in the Income Statement, as a result of both the Government’s removal of tax depreciation for buildings with a tax life of over 50 years, and the reduction in the corporate tax rate from next year. This entry is required under International Financial Reporting Standards, but is a non-cash, accounting entry only. As such, the Board have decided it will not affect the level of rebates paid to Members this year. However, it will mean that the Co-operative will record an accounting loss for the year.

Distribution to membersTotal value of distributions to Members this year is $215.5m, an increase of $17.3m or 8.7%.

We have continued our practice of paying monthly rebates, based on bulk and repack purchases during the year, and distributing these and supplier driven rebates directly to Members during the year. A total $145.7m will be distributed to Members in this manner.

Year end rebates will total $59.0m and be distributed in three main ways.

• Firstly there will be the standard Meat, Produce and Loyalty rebate totalling $38.9m, which will be issued this year through a combination of Retained Patronage Shares and cash dividends. 33 million shares will be issued, with a specified value of $1.00, partly paid up to a value of $0.92 per share. A $0.26 dividend will be paid immediately after these shares are issued, with $0.08 being used to fully pay up the share to its specified value of $1.00, and the remaining $0.18 paid as a cash dividend. The $0.26 dividend will be issued fully imputed.

• Secondly there will be the payment of two cash rebates totalling 1.1m. The Produce rebate will be based on purchases made under the new initiative to supply Produce ex-warehouse, and will be paid at a rate of 3% on qualifying sales. An IT Leasing rebate will also be paid out of extra profits made on the IT Leasing scheme and distributed pro-rata based on Members’ IT leasing charges.

• Thirdly there will be special $19.0m Trading Deposit rebate issued. This rebate will be distributed to Members based on their qualifying sales for the year ended 28 February 2011, and will be directly credited to Members’ Trading Deposit Account. Any amounts in excess of the required two weeks Trading Deposit or owing to ex-Members will be paid into their at call deposit accounts.

In addition to the year end rebates there are $5.0m of dividends on RPS shares which will be paid out fully imputed. Together with the imputation credits issued with the 2011 RPS

Chairman’s Review (continued)

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share dividend, imputation credits totalling $5.8m will be issued.

Rebates and DividendsIn summary, this year’s total rebates and dividends to Members are;

Bulk and repack rebate $126.9m

Supplier rebates $18.8m

Monthly cash rebates $145.7m

2011 Retained Patronage shares issued

$30.4m

2010 Retained Patronage dividend

– capitalised $2.6m

– cash $5.9m

Total RPS and dividend $38.9m

Produce rebate $0.5m

IT leasing rebate $0.6m

Trading deposit rebate $19.0m

Dividends on RPS shares $5.0m

Total dividends and rebates $209.7m

Imputation credits $5.8m

Total value of distributions to Members $215.5m

Information technology – Project Valentine / SAPIt is pleasing to report that SAP has become business as usual for Foodstuffs South Island and we are currently realising the multitude of benefits it holds for the Co-operative as well as our Members. Currently our main focus is on the deployment of SAP to our Members, and even with the adverse events we faced recently, we can report that the retail rollout has progressed well. The implementation has gained momentum as the rollout team acquired experience and confidence over the last year. By the end of the financial year we had 13 stores fully on SAP and 33 stores in various phases of implementation. SAP is a fundamental change in the way Members manage their businesses. Stores using SAP have the benefit of increased visibility and timeliness of data, more robust processes, penetration of eCommerce, better margin management, inventory management, purchasing

opportunities and operational efficiencies through the wireless handheld terminals.

Over the next year, the retail rollout programme will continue in the PAK’nSAVE and New World stores whilst a rollout strategy is being devised for the Henry’s Beer Wine & Spirits and Four Square banner groups.

Christmas Club2010 was the first year of operation for the Dunedin based Christmas Club call centre. The new electronic Christmas Club scheme has been very successful; not only has this scheme reduced administration overheads but it has resulted in a dramatic increase in funds flowing through the Christmas Club card scheme.

Retail DevelopmentLast financial year, Foodstuffs (South Island) Properties Ltd undertook the expansion and refurbishment of several of our retail properties and provided assistance to Co-operative Members undertaking refurbishment in leased properties.

The refurbishment of New World Rangiora was completed by the end of the financial year and it now boasts a new interactive bakery display, where products are baked in front of the customer for instant selection. New World Oamaru underwent a complete retail refurbishment which was completed early in 2011. The store now has new style flooring and ceilings and a modern wine display which allows the customers a better opportunity to peruse the expanded selection.

Henry’s Beer Wine and Spirit stores continue to expand and our 18th Henry’s opened in Greymouth in October 2010. We have seen

Chairman’s Review (continued)

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this group going from strength to strength over the last few years. Other projects undertaken over the last year included the refurbishment of Four Square Lawrence, Murdoch Manufacturing’s canopy extension, the chiller/ freezer facility in the Invercargill warehouse, refurbishment of our Papanui main office and IT department and various other minor refurbishments.

Foodstuffs South Island (Properties) continually strives to deliver energy efficient practices within our buildings to reduce our carbon footprint and lessen our retails Members’ use of electricity. These areas of focus continue to be on:• CO2 refrigeration• Rain water retention• Lighting controls• Double glazing• Increased windows / sky lights• Fluorescent & LED lighting• Heat reclaimation.

The year ahead will be a very busy period for the property team as they will oversee amongst other projects the construction of our new Hornby distribution centre (DC). This DC will have new state-of-the-art features and will strive to be the most efficient and effective DC in New Zealand, covering 38,000m2 and including greener energy and lightning systems, 11 metre high racking and enhanced staff facilities. Construction work is expected to commence late 2011 for completion in 2012. Other major projects earmarked will be the rebuilding of New Worlds Kaiapoi, St Martins and Redcliffs, which had to be demolished due to earthquake damage.

Wholesale operations & procurementOur Wholesale Operations and Procurement division have concentrated on further developing Foodstuffs Inbound (FIN) which currently has 102 suppliers with a further 20 scheduled to commence during the April / May period.

The reported year was also the 10th anniversary of our Vendor Management Inventory (VMI) Procurement Programme. Currently we have 77 vendors on board representing 68% of total purchase order volume into our distribution centres, representing 62% of total product SKUs. Over the years, this programme has improved service levels, inventory management and enhanced our relationship with our suppliers.

AdministrativeAfter reviewing our submissions, The Reserve Bank confirmed late in 2010 that Foodstuffs South Island Ltd would not be classified as a Non Bank Deposit Taker (NBDT). This was very positive news as complying under the Act would have been a major imposition on our Company as we would have been required to make significant changes to the way we operate.

Once again we have seen a significant lowering of both claim numbers and costs within the ACC Accredited Employers Partnership (AEP) program. These results are pleasing and can be ascribed to our continuing focus on case management practices and on claims handling.

During the reported year, we tendered our company medical insurance to various medical providers. After reviewing various providers we accepted the tender from Southern Cross which resulted in savings to the Co-operative whilst maintaining the same coverage.

SummaryTo summarise, I would like to reiterate that our Co-operative has once again delivered a strong financial result for the 2010/11 financial year.

Our Co-operative and Members are positive and in good heart even after the trials and tribulations we faced during the year under review. We now know that we are well equipped to face future challenges; we are strong, resilient and well positioned for the future.

On behalf of the Board, I would like to thank all our Executive, Staff, Members, suppliers and contractors whose help assisted us through this turbulent year!

Robin Brown Chairman

Chairman’s Review (continued)

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New World had a very successful year, recording strong sales growth and market share. These results were achieved during a period of difficult trading conditions and the unprecedented impact of South Island disasters.

• Canterbury Earthquakes which forced the closure of three of the 40 South Island stores – New World Kaiapoi in September and New Worlds St Martins and Redcliffs in February.

• The Southland Snow Storm in September, forcing the temporary closure of New World Windsor.

• The Pike River mine disaster, impacting the community on the West Coast.

The year has also brought a number of positives including the alignment of national marketing campaigns; Clever Baskets and the ‘Slice’ which showcase the banners core values of Service, Quality, Value and the

commitment to meeting customers’ different needs.

The New World Group welcomed Justin and Claire Vaudrey as the new Owners of New World Westport, a vacancy created with the relocation of Kathy and Wayne Frampton to New World Northwood, Christchurch.

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The PAK’nSAVE group had a steady trading year even during the tough economic conditions which caused reduced discretionary spending amongst consumers.

The Christchurch earthquakes caused heavy stock losses but we are pleased to report that our Members had their stores operational after each earthquake rapidly.

‘Stickman’ continues to be used nationally, maintaining the Group’s

key price grocery offer; ensuring customers are offered the lowest prices on everyday products.

PAK’nSAVE store standards continue to improve with the ‘Fresh’nUp’ project creating better product presentation, installation of new plant and refrigeration, self checkouts and neon lighting.

The PAK’nSAVE group are currently implementing SAP into stores with the entire group planning to use

the system by the end of 2011. Once SAP is fully operational in all PAK’nSAVEs, the group will look to use the benchmarking of KPIs to improve overall performance.

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The Henry’s BWS group has continued to grow and consolidate in the South Island. The number of stores is now 18 with the latest addition being Greymouth which opened in October 2010. June 2010 saw the Timaru store move into new premises in the completed Highfield Mall development. Both of these stores are an excellent example of the future of traditional liquor retailing.

The highlight during the last 12 months has been the very successful roll out of the new branding and signage. This has given the group a very vibrant but down-to-earth look and ensures that Henry’s continues to lead the way in store standards and presentation. In addition to the rebranding of the stores the group’s website has also been updated and now includes many new and interesting features.

Fly Buys continues to develop under the Henry’s brand and is now emerging as a very strong sales tool as customer awareness grows.

The group has achieved very good sales and customer growth during the last financial year and continues to look for opportunities to further increase store numbers.

During what was once again a difficult and competitive trading environment, we are pleased to report that The Four Square Group has once again had a good trading year achieving a sales growth of 4.94%.

The group continued to focus on the ‘Fresh’nUp’ campaign with operators’ emphasis on maintaining high store standards and focusing on customer services. The group has also improved their fresh foods offer whilst food safety and ranging remained a priority along with focus on loss prevention, liquor compliance and staff/owner training and development.

Highlights during the year included a ‘new look’ weekly circular, gross profit alignment through retail pricing analysis, the holding of regional forums along with the addition of Four Square Lyttelton to the family which unfortunately was affected by the 22 February Earthquake and is currently under repair.

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Trents has had a challenging year within the highly competitive South Island Foodservice market. Although sales growth has been difficult, the Trents company has been able to grow its share in liquor categories, especially in the off premise market segment.

During the 2010 financial year, Trents celebrated its 10th birthday with various customer promotional offers throughout the business which provided our customers with additional value.

The utilisation of Foodstuffs Wholesale Franchise Members to undertake the distribution of Chilled and Frozen products continues to add significant value to our collective offer.

In the previous year, we reported that there was a resurgence of customers increasing their purchasing of private label due to the recession. Last year we saw this stabilising, which impacted the growth that Murdoch Manufacturing had been experiencing.

During the year, Murdoch through our joint venture partner Metfood, undertook several tenders, a number of which were successful. Over all, the year end financial result for this subsidiary was extremely pleasing.

Murdoch Manufacturing played a significant role providing bulk fresh water to our Christchurch supermarkets who were impacted by the February earthquake, ensuring those supermarkets had water for fresh food processing.

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Food for thought

Summer kick start 2010Foodstuffs’ Wellness Initiative

In October 2010, the Food for Thought Trustees and the National Heart Foundation signed a Collaborative Agreement to pilot a joint programme called Food For Thought and Heart Start. The launch of the pilot was attended by the Honourable Tony Ryall, Minister of Health. The nutrition and exercise programme will pilot over the first two terms of 2011 within primary schools throughout New Zealand. The Food for Thought programme and the Heart Start programme complement each other and fit within the school curriculum requirements.

The Food for Thought Trust employs four nutritionists throughout New Zealand. The programme targets 9 to 10 year olds and meets the health and wellbeing components within the school curriculum. Students attend classroom-based nutrition sessions and an inquiry learning session within their local PAK’nSAVE, New World or Four Square supermarket. The owner/operator of their local supermarket then sponsors the ingredients for a healthy class lunch which is budgeted, planned and made by the students.

This year, Foodstuffs South Island Ltd introduced further wellness initiatives for all staff within the co-operative. The programme was to launch in spring, but the September earthquake postponed the launch to November.

The earthquake highlighted the importance of looking after our own health and wellbeing and Foodstuffs was proud to implement this initiative for its people.

The “Summer Kick Start 2010” offering included:• Free Fruit – one piece per person

each day for three months – November, December and February

• Nutrition support and weekly information

• A vegetable of the week (Friday each week for 3 months) – November, December and February

• An opportunity to submit a vegetable recipe to complement the vegetable of the week – with a prize per week for the winning recipe

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Community Trust ReportI am pleased to report another successful year for the Foodstuffs (South Island) Community Trust

major SponsorshipSt John presented their sponsorship report to the Board at the November 2010 meeting of the Trust and the Trustees agreed to sponsor the St John FEDs for a further two years.

With the help from the Community Trust, St John FEDs has been able to expand their services to Wairau Hospital, Dunedin Oncology Hospital Friends, Dunedin Hospital Host and Christchurch Hospital Care of Relatives of Community Deaths.

Volunteer hours have increased from 22,500 to 28,000 hours.

With further ongoing support from the Trust, St John would like to roll out a programme at Grey Base Hospital, Hospital friends in Oamaru, Balclutha and Ashburton Hospitals. That would increase volunteer hours by another 10,000.

First FoundationThe Trust is continuing to support Emma Muir and Hannah Davidson in their education pursuits.

Emma has had a successful year at Lincoln University. She is now in her third year studying two majors, namely accounting and finance. Emma works at Foodstuffs Papanui during the holiday periods.

Hannah our latest candidate has started studying at Otago University.

She is studying first year health science in anticipation of being accepted into medical school. She completed work experience at Foodstuffs head office during the Christmas break and has gained experience at Foodstuffs Dunedin and New World Gardens.

GrantsAs well as supporting the major grant recipients, grants in the following categories were distributed by the Trust

Education Grants $72,600

Community Grants $95,507

Earthquake Grants September 2010 $55,000

Earthquake Grants February 2011 $262,850

Hardship Grants $3,750

Canterbury earthquakeOn 4th September 2010, Canterbury was hit with a major earthquake and the Trust responded by distributing $55,000 in New World and PAK’nSAVE vouchers to 138 people who were adversely affected by the quake. This included vouchers to all New World Kaiapoi staff who lost their jobs due to the closure of the New World.

On 22nd February 2011, Canterbury was hit, yet again, with a far more devastating quake. The Trust to date has distributed $262,850 in New World and PAK’nSAVE vouchers to over 400 individuals who have suffered hardship as a direct result of the quake. This included vouchers to all Redcliffs and St Martins staff who lost their jobs in February.

The Trust has been overwhelmingly supported by many generous one-off donations from our South Island New World and PAK’nSAVE Members along with substantial assistance from Foodstuffs New Zealand Limited and several North Island stores.

Sponsors During the year, we welcomed nine new sponsors and two supporters.

New SupportersKim De GarnhamMalcolm Wratt

New Sponsors• Bond Ventures Limited

– New World South City • High Street Grocer Limited

– New World Greymouth • Wildelife Limited

– New World Stanmore • Evershot Supermarket Limited

– New World Northwood• J & C Vaudrey Limited

– New World Westport • Lincoln Supermarket Limited

– New World Lincoln • Anderson Supermarkets Limited

– New World Waimate • Roslyn Traders Limited

– New World Port Chalmers• CJ & JH Broderick Limited

– New World Redcliffs

ResignationsI and the Trustees would like to thank Grant and Robyn Stiven (New World Belfast) along with Doug and Lois Spence (PAK’nSAVE Moorhouse) for their past financial contributions and wish them well in their future endeavours.

In summary, the Foodstuffs (South Island) Community Trust is operating well and I am appreciative of all our sponsors, existing, new and those who have upgraded their contributions during the past year.

The Trust and Trustees thank Foodstuffs personnel for their assistance, PricewaterhouseCoopers for their voluntary auditing of accounts and, once again, all our sponsors.

Chris Griffin

Chairman Foodstuffs (South Island) Community Trust

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National Progress ReportThe year ended February 2011 proved to be a challenging one for the organisation, with the New Zealand economy recovering much more slowly than anticipated from the economic recession and international factors driving high commodity prices which, in turn, has fuelled food price inflation and an increase in operating costs in an otherwise flat market. The two Canterbury earthquakes provided additional challenges for our South Island Company.

The combined wholesale turnover for the three Foodstuffs companies was $8.07 billion, up $89 million or 1.12% on the 2010 result reflecting the stagnant retail market conditions.

During the year, new New World stores were opened in Mt Roskill, Waipukuarau, and Marton while major refurbishment projects were completed at New World Broadway, New World Levin, New World Wairoa, New World Rangiora, and New World Oamaru.

New PAK’nSAVE stores were opened in Papamoa and Te Awamutu, and store refurbishment projects completed at PAK’nSAVE Mill Street in Hamilton, PAK’nSAVE Palmerston North, and PAK’nSAVE Kapiti, Paraparaumu.

The companies continue to devote considerable energy to the regeneration of our Four Square heritage brand and this has translated to a busy store development programme for the group. New Four Square stores were opened in Papamoa, Ahuriri, and Foxton Beach while the store refurbishment programme included upgrades at Four Square Cloverlea, Four Square Patea, Four Square Kaponga, Four Square Eltham, Four Square Waterloo, Four Square BJ’s

Waitara, and Four Square Lawrence.

A new Henry’s Beer, Wine, & Spirits was opened in Greymouth, and five new fuel sites were opened – at PAK’nSAVE Mt Albert, PAK’nSAVE Tauranga, PAK’nSAVE Papamoa, PAK’nSAVE Te Awamutu, and New World Marton.

New markets and extensions to existing markets provided an additional gross retail floor area of 22,720m2. Nationally, at the end of February, Foodstuffs co-operative members operated 47 PAK’nSAVE stores, 132 New World stores (excluding the 3 New World stores in Christchurch which are being rebuilt after the Canterbury quakes), 278 Four Square stores, 148 On the Spot convenience stores, 19 Henry’s Beer, Wine and Spirit outlets and 37 fuel sites.

The companies continue to make substantial investments in their wholesale business infrastructure.

In the Auckland region, additional space was leased at the Wiri Foodstuffs Fresh Distribution Centre, increasing the facility’s capacity from 4,500 to 6,500 pallets. Foodstuffs (Auckland) Ltd shifted its ambient primary freight operations to this site.

The conversion of the Company’s Gilmours branches to owner-operated businesses was completed and 8 member-owned Gilmours stores now service the non-member trade business.

A major transformational project to increase business operational efficiency, called Project Lightning, was initiated to drive the adoption of more efficient business processes and enabling technologies across both the retail and wholesale business. The key focuses are making improvements in the

effectiveness of buying operations, inventory management, and business analytics.

Foodstuffs (Wellington) Co-op Society Ltd officially opened its Robert’s Line Distribution Centre on the 6th April 2010. This new facility has consolidated goods warehousing and manufacturing facilities for the Company and includes equipment for automated split-case picking. Stackflow machines, for mechanical milk crate picking, were installed at the Company’s Grenada and Mihaere Drive (Palmerston North) distribution centres to improve picking efficiency at those sites. The Company’s Silverstream warehouse was officially closed on 31 March 2011.

In a major IT development, the Company deployed a new software application which analyses product sales to predict the optimal retail pricing for individual product lines.

In February, Foodstuffs South Island Ltd announced the development of a new $45 million 25,000m2. distribution centre to be built in Hornby, Christchurch, adjacent to the Company’s existing 13,000m2. Hornby Distribution Centre. The plans include green energy and lighting systems, 11 metre high racking, and enhanced staff facilities. Construction commences late in 2011 for completion in late 2012. The existing Papanui Distribution Centre will be closed, and all Christchurch based distribution consolidated at the Hornby site when it is completed. The Company’s corporate headquarters will remain at the Papanui property.

The Company is continuing the roll out of the SAP information technology platform to its retail stores and has completed implementation at 13 stores while another 35

20

stores are part-way through their implementations.

The two Canterbury quakes lead to some disruption to the operations for the South Island Company, the temporary closure of most Christchurch stores and the Hornby ambient distribution centre and the longer-term closure of three New Worlds and a Four Square store. Operators, management, staff and suppliers demonstrated huge resilience and fortitude under pressure, and pulled together to resume near-normal services in a very short time.

After the first earthquake of 4 September, the Foodstuffs South Island Community Trust distributed $55,000 of grocery vouchers to 140 staff of Foodstuffs and members who experienced hardship due to the earthquake. Following the more widespread devastation of the 22 February earthquake, sponsors and supporters rallied round with extra funding and, along with donations from Foodstuffs (NZ) Ltd and our Auckland and Wellington members’ quake-relief funding, contributions rose to more than $500,000. At the time of writing, the Community Trust had assisted more than 400 individuals with finance totalling just under $275,000. It is expecting an influx of earthquake related requests from community groups over the coming months.

The companies’ joint primary freight initiative is progressing well. At year end FIN was providing primary freight services to 102 suppliers, an increase of 63 over the previous year.

In recent years the three companies have worked more closely together on national marketing initiatives and this continued in the year under

review. During the year, the New World group launched the “Different like You” brand campaign and “Cleverbaskets” to point customers to value buys. New World continued its association with the Silver Ferns International Netball series and ran another successful Eat Wise & Exercise promotion. National New World competitions included the highly successful Shop, Scratch, & Score competition and the “Great Car Give Away” in which every New World store gave away a Suzuki Swift car. National marketing collaboration will step up again in the 2011/2012 year with the appointment of a National Marketing General Manager.

The companies also work closely together on e-commerce initiatives and are making good progress increasing the penetration of supplier transactions processed electronically via the Foodstuffs eXchange. Around 86% of suppliers are now using the eXchange for one or more transaction type and 65% of supplier invoices are now transmitted via the portal. The GS1net project continues to gain momentum and steps taken by the companies to align and streamline their supplier engagement processes has seen the roll-out of GS1net speed up.

Other national projects included the adoption of unit pricing in retail stores and the redevelopment of Foodstuffs’ national websites, both now completed. The website projects involved upgrading of the retail brand sites, suppliers’ website, the development of an e-recruitment tool and the development of a supplier relationship management tool.

Foodstuffs (NZ) Limited, as the Federation Headquarters of the Foodstuffs Group of Companies, continued its role of co-ordinating Fo

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the national activities of the Group where appropriate. The organisation continues to be involved with administrative and secretarial activities for the wider group, including the production of calendars and the organisation of national meetings, and the Federation body plays an important advocacy role representing Foodstuffs’ views nationally.

National submissions were made in response to: the Alcohol Reform Bill, the Smoke-free (Controls and Enforcement) Amendment Bill, the Food Bill, two Employment Relations Amendment Bills, and the Holidays’ Amendment Bill. Submissions were also prepared for: the Ministry of Consumer Affairs’ review of Consumer Law, the MED’s draft fuel rationing regulations, the COAG Review of Food Labelling Law and Policy, Medsafe’s review of the medical classification of cough and cold medicines, and the IRD’s consultation on depreciation for non-residential building. An application was made for bakers to be reinstated on Immigration NZ’s Essential Skills Shortage Lists which will be decided mid-2011.

Foodstuffs Own Brands Ltd (FOBL) continues to be responsible for the development and management of private label products, as well as managing national procurement and supplier relations. During the year, the Company launched a new consumer marketing programme for Pams,

and launched a “Pick Me” label to assist consumers in identifying food healthier choices. FOBL, together with the national trans-Tasman joint venture, Metfood Pty Ltd, continues to run a joint tendering programme and has achieved considerable savings in procurement costs for the Foodstuffs group of companies.

Foodstuffs’ Food for Thought Trust, sponsored by Pams, signed a Collaborative Agreement with the Heart Foundation which runs a school programme named Heart Start. Under the Collaborative Agreement the two organisations promote each other’s programme as part of their dealings with schools. The venture has commenced with a pilot programme which will be reviewed in 2011. The Trust has employed a second nutritionist based in Auckland to meet increased demand for the programme from schools in the wider Auckland region.

In conclusion, as Chairman of Directors, I would like to express my appreciation to my fellow Directors and to the executives and staff of the respective Foodstuffs companies for the commitment and enthusiasm they show in ensuring the ongoing progress, development, and success of the Foodstuffs organisation.

I would like to make special mention of Tony Carter who stood down from the dual roles of Managing Director

of Foodstuffs (Auckland) Ltd and Foodstuffs (NZ) Ltd in late 2010 to pursue a career as a Company Director. Tony Carter’s contribution to the organisation over a 17-year period was enormous and we are very much indebted to him for his capable leadership over this time. We extend to Tony and his wife Frances our very best wishes for their future lives.

I would also like to thank all the retail members of the Foodstuffs group nationally for the support that they have shown both to their own Foodstuffs Company and to the national organisation. The Foodstuffs companies continue to face challenges at a wholesale and retail level, but the organisation has shown great resilience in the face of these challenges, drawing on the considerable strength that has built up over many years. The close co-operation which occurs between the three companies is a major strength of the organisation and we are confident that the organisation will continue to build on this foundation to make further progress in the year ahead.

Brian DrakeChairman

National Progress Report (continued)

22

Executive TeampAK’nSAVe executive Committee Marcel Gray [Chairman] PAK’nSAVE Wainoni

Stephen Boock PAK’nSAVE Northlands

Bryan Dobson PAK’nSAVE Invercargill

Andrew Howard PAK’nSAVE Richmond

John Lee PAK’nSAVE Hornby

Steven McDonald PAK’nSAVE Riccarton

William McDonald PAK’nSAVE Dunedin

Chris McDonald PAK’nSAVE Dunedin

Brad Spence PAK’nSAVE Moorhouse

Jason Williams PAK’nSAVE Timaru

New World executive Committee Chris Griffin [Chairman] New World Gore

Phil Blackburn New World Balclutha

Nigel Bond New World South City

Kathy Frampton New World Northwood

Warren McKenzie New World Windsor

Craig Nieper New World Centre City

Four Square executive Committee Rick Haaima [Chairman] Four Square Palmerston

Lynette Eddington Four Square Top Notch

Peter Gillaly Four Square Tarbert Street

Cushla Jones Four Square Fern Grove

John McDonald Four Square Pleasant Point

Graeme Neilson Four Square Ascot

John Niles Four Square Owaka

Ian Steele Four Square Hanmer Springs

Corporate executivesSteve Anderson Chief Executive Officer

Yvonne Botha Executive Assistant

Alan Malcolmson General Manager Retail Operations

Roger Davidson General Manager Property & Retail Development

Kim DeGarnhamGeneral Manager Administration & Members Services / Company Secretary

Philip Lemon General Manager Trents Wholesale Limited

John Mullins General Manager Wholesale Operations & Procurement

Malcolm Wratt General Manager Finance

Philip Wright General Manager Information Technology

Senior executiveFinance

Simon Hughes Group Finance Manager

Murray Trim Head of Decision Support

Andrew Wright Internal Audit Manager

Administration & Members Services

Ron Bitschcat Employee Services Manager

Chris Dorward Manager Membership Services

Information Technology

Chris Cameron Online Media Manager

Ana Connor eCommerce Manager

Gary Cowens IT Operation Services Manager

Gordon McCoy Business Systems Manager

Philip Smith Project Delivery Manager

Retail OperationsRetail Brands

Tim Donaldson Retail Brands Manager

Alan Smith Foodmarket Group Manager

Kent Mahon New World Group Manager

David Wise PAK’nSAVE Group Manager

Annie Hay Retail Merchandise Manager – Fresh

David MacKenzie Retail Merchandise Manger – Packaged

Support Services

Stephanie Feldbrugge Support Services Manager

Nick Dawson Group Communications Manager

Mark Hamilton Training & Development Manager

David Norton Loss Prevention Manager

Henry’s executive Committee

Carl Wild [Chairman]& Keith Miles

Henry’s CityHenry’s RollestonHenry’s New BrightonHenry’s RangioraHenry’s HornbyHenry’s WoolstonHenry’s BishopdaleHenry’s Tower JunctionHenry’s FerrymeadHenry’s Shirley

Craig Smith & Tracy Catanach Henry’s Kaikoura

Gerry Breen Henry’s Queenstown

Marty & Raewyn Hay Henry’s Centre CityHenry’s Foodlands

Brad Spence Henry’s Moorhouse

Howard Smith Henry’s Timaru

Kevin Ryan Henry’s Alexandra

Victoria Boyes Henry’s Greymouth

24

Murdoch Manufacturing

Paul Johnston General Manager

Wholesale Operations & Procurement

Kris Lancaster Logistics Operations Manager

Patrick O’Leary Article Master Manager

David Pawson Wholesale Merchandise Manager

Distribution Centres

Scott Fairweather Manager, Hornby, Christchurch

Bill Robertson Manager, Dunedin

Grant Weatherston Manager, Dunedin

Tony Ziolo Manager, Papanui, Christchurch

Trents Cash’nCarry

Phil Olsen Operations Manager, Christchurch

Anthony Haslam Manager, Greymouth

Allan McKenzie Manager, Tuam St, Christchurch

Paul Stanton Manager, Blenheim

John Warren Manager, Invercargill

Grant Watt Manager, Timaru

Paul Witty Manager, Nelson

Property & Retail Development

Rebecca Parish Property Development Manager

Clayton Young Property Manager

Trents Wholesale

Michael Arlidge Foodservices Sales Manager

Alan Wicks Promotions and Merchandise Manager

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We have audited the accompanying summary financial statements on pages 28 to 31 which comprise the 31, summary balance sheet as at 28 February 2011, summary income statement, summary statement of comprehensive income and summary statement of changes in equity and summary cash flow statement for the year then ended, and related notes, which are derived from the audited financial statements of Foodstuffs South Island Limited for the year ended 28 February 2011. We expressed an unmodified audit opinion on those financial statements in our report dated 14 April 2011.

The summary financial statements do not contain all the disclosures required for full financial statements under generally accepted accounting practice in New Zealand. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements of Foodstuffs South Island Limited.

Directors’ Responsibility for the Financial StatementsThe Directors are responsible for the preparation of a summary of the audited financial statements in accordance with FRS-43: Summary Financial Statements.

Auditors’ ResponsibilityOur responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (New Zealand) 810: Engagements to Report on Summary Financial Statements.

We have no relationship with, or interests in, Foodstuffs South Island Limited or any of its subsidiaries other than in our capacities as auditors, taxation advisors, consulting advisors and providers of other assurance related services. These services have not impaired our independence as auditors of the Company and Group.

OpinionIn our opinion, the summary financial statements derived from the audited financial statements of Foodstuffs South Island Limited for the year ended 28 February 2011 are consistent, in all material respects, with those financial statements, in accordance with FRS-43.

Restriction on Distribution or UseThis report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed.

Chartered Accountants Christchurch14 April 2011

Independent Auditors’ Report to the shareholders of Foodstuffs South Island Limited

26

Foodstuffs South Island Limited GroupFinancial Statements

Income Statements 28

Statements of Comprehensive Income 29

Statements of Changes in Shareholders’ Equity 29

Balance Sheets 30

Consolidated Statement of Cash Flows 31

27

Income Statementsfor the year ended 28 February 2011for the year ended 28 February 2011Income Statements

GRoup pAReNt2011 2010 2011 2010

$000 $000 $000 $000

Operating revenue 2,339,141 2,278,386 2,139,841 2,080,446

Other income 120,901 75,830 91,823 50,190

Total revenue and other income 2,460,042 2,354,216 2,231,664 2,130,636

Operating profit 219,273 202,989 193,482 175,982

Net finance costs 7,999 9,179 604 2,682

Rebates to members 196,112 177,575 195,987 177,575

Share of profit/(loss) from associates 140 ( 35) - -

Profit/(Loss) before tax 15,302 16,200 ( 3,109) ( 4,275)

Income tax expense:

Income tax before budget changes 3,300 4,100 ( 3,853) ( 4,523)

Income tax on change to tax depreciation on buildings 36,276 - - -

Effect of change in tax rate ( 413) - ( 88) -

Total income tax 39,163 4,100 ( 3,941) ( 4,523)

Net Profit/(Loss) for the year after tax ( 23,861) 12,100 832 248

Attributable to:

Shareholders of the parent company (23,861) 12,100 832 248

The loss attributable to Shareholders of the parent company is after a one-off tax change of $35,863,000 and before dividend distributions of $11,778,000, (2010:$11,911,000)which are disclosed in the Statement of Changes to Shareholder’s Equity.

The attached notes form part of and are to be read in conjunction with the audited financial statements.28

for the year ended 28 February 2011Statements of Comprehensive Income

GRoup pAReNt2011 2010 2011 2010

$000 $000 $000 $000

Net Profit/(Loss) for the year ( 23,861) 12,100 832 248

Other comprehensive income:

Movement in other reserves (not taxable) 482 202 122 38

Movement in available for sale reserve (not taxable) ( 3,296) 5,252 - -

Total comprehensive income for the year ( 26,675) 17,554 954 286

Attributable to:

Shareholders of the parent company ( 26,675) 17,554 954 286

GRoup pAReNt2011 2010 2011 2010

$000 $000 $000 $000

At 1 March 2010 203,190 180,672 29,016 23,766

Total comprehensive income ( 26,675) 17,554 954 286

Dividend on retained patronage shares ( 11,778) ( 11,911) ( 11,778) ( 11,911)

Total recognised income and expenses ( 38,453) 5,643 ( 10,824) ( 11,625)

Share issue 43,274 16,875 43,274 16,875

At 28 February 2011 208,011 203,190 61,466 29,016

Basis of preparationThese summary financial statements on pages 28 to 31, comprising the Income Statements, Statements of Comprehensive Income, Statements of Changes in Shareholders Equity, Balance Sheets, and Consolidated Statement Cash Flows are those of Foodstuffs South Island Limited (the “Parent”) and its subsidiaries (the “Group”). They have been prepared in accordance with Financial Reporting Standard No. 43 “Summary Financial Statements” and have been extracted from full financial statements that have been prepared in accordance with New Zealand Standards that comply with International Financial Reporting Standards. The full financial statements for the year ended 28 February 2011, authorised for issue and signed on 14 April 2011 have been audited by PricewaterhouseCoopers and given an unqualified opinion. The Group is a profit-oriented entity. For a complete understanding of the financial affairs of the Group, the full financial statements are available to qualifying members on request.

Statements of Changes in Shareholders’ equityfor the year ended 28 February 2011

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The attached notes form part of and are to be read in conjunction with the audited financial statements. 29

for the year ended 28 February 2011Balance Sheets

GRoup pAReNt2011 2010 2011 2010

$000 $000 $000 $000

ASSETS

Non-current assets

Property, plant and equipment 435,978 429,759 25,712 25,555

Intangible assets 17,457 18,660 17,167 18,108

Investments in subsidiaries - - 276,156 277,589

Investments in associates 5,035 4,895 803 803

Investments held at fair value:

Investments in listed companies 35,611 38,906 - -

Investments in other related companies 11,896 10,385 11,896 10,385

Total non-current assets 505,977 502,605 331,734 332,440

Current assets

Cash and cash equivalents 41,783 ( 7,356) 41,783 ( 7,356)

Trade and other receivables 153,784 176,487 132,301 162,385

Inventories 77,398 80,733 73,519 77,438

Current income tax receivable ( 1,042) 489 10,179 6,254

Total current assets 271,923 250,353 257,782 238,721

TOTAL ASSETS 777,900 752,958 589,516 571,161

EQUITY

Capital and reserves attributable to equity holders

Share capital 87,158 43,884 87,158 43,884

Other reserves 95,931 136,847 1,127 1,515

Retained earnings 24,922 22,459 ( 26,819) ( 16,383)

TOTAL EQUITY 208,011 203,190 61,466 29,016

Liabilities

Non-current liabilities

Borrowings 74,037 112,895 74,037 112,895

Retirement benefit obligations 1,902 1,902 1,902 1,902

Deferred income tax liability 42,013 6,991 3,084 2,876

Total non-current liabilities 117,952 121,788 79,023 117,673

Current liabilities

Trade and other payables 205,179 192,548 202,289 189,082

Borrowings 174,952 174,182 174,952 174,182

Rebates payable 71,054 60,522 71,034 60,480

Provisions 752 728 752 728

Total current liabilities 451,937 427,980 449,027 424,472

TOTAL LIABILITIES 569,889 549,768 528,050 542,145

TOTAL EQUITY AND LIABILITIES 777,900 752,958 589,516 571,161

On behalf of the Board

14 April 2011

Robin Brown, Director Stephen Boock, Director

The attached notes form part of and are to be read in conjunction with the audited financial statements.30

for the year ended 28 February 2011Statements of Cash Flows

GRoup pAReNt2011 2010 2011 2010

$000 $000 $000 $000

Cash flows from operating activities

Cash was provided from:

Customers 2,466,497 2,356,076 2,242,384 2,116,978

Insurance proceeds received (excluding Property, Plant, & Equipment) 5,439 - 5,439 -

Interest received 2,290 1,725 2,289 1,728

Member trading accounts 4,779 - 4,779 -

2,479,005 2,357,801 2,254,891 2,118,706

Cash was applied to:

Purchases, wages and expenses 2,201,938 2,119,102 2,011,449 1,924,401

Members rebates 185,558 154,468 185,412 154,182

Interest paid 8,266 8,410 592 1,546

Member Trading accounts - 4,831 - 4,837

Income tax paid 2,250 6,490 (224) -

2,398,012 2,293,301 2,197,229 2,084,966

Net cash flow from operating activities 80,993 64,500 57,662 33,740

Cash flows from investing activities

Cash was provided from:

Advances from other companies 6,670 2,518 4,514 1,521

Dividends 3,475 3,761 10,382 11,069

Insurance proceeds received for replacement Property, Plant, & Equipment 9,778 - 1,040 -

Sale of property plant and equipment 3,439 742 354 598

23,362 7,021 16,290 13,188

Cash was applied to:

Purchase of intangibles 3,489 4,142 3,440 3,628

Purchase of property plant and equipment 40,139 30,819 9,784 6,097

Advances to related parties 1,517 4,977 1,518 5,620

45,145 39,938 14,742 15,345

Net cash flow from investing activities (21,783) (32,917) 1,548 (2,157)

Cash flows from financing activitiesCash was provided from:

Share capital raised 43,274 16,875 43,274 16,875

43,274 16,875 43,274 16,875

Cash was applied to:

Interest paid on Redeemable Preference Shares 1,804 2,577 1,804 2,577

Dividends paid on Retained Patronage Shares 12,683 1,689 12,683 1,689

Long term borrowings 38,858 53,359 38,858 53,359

53,345 57,625 53,345 57,625

Net cash flow from financing activities (10,071) (40,750) (10,071) (40,750)

Net (decrease)/increase in cash held 49,139 (9,167) 49,139 (9,167)

Opening cash brought forward (7,356) 1,811 (7,356) 1,811

Ending Cash carried forward 41,783 (7,356) 41,783 (7,356)

Represented by:

Bank 41,304 (8,823) 41,304 (8,823)

Overseas currency accounts 467 1,455 467 1,455

Cash on hand 12 12 12 12

41,783 (7,356) 41,783 (7,356)

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The attached notes form part of and are to be read in conjunction with the audited financial statements. 31

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