Annual Report 2007

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Annual Report 2007

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Table of content

Mekonomen Annual Report 2007 | Table of content

5 Year in brief

6 Mekonomen in 3 minutes 8 CEO’s comments

10 Business concept, vision and goal 12 Business

24 Market review 28 Operations in Sweden 30 Operations in Norway 32 Operations in Denmark 34 Share and shareholders 36 Corporate Governance 44 Five-year summary 46 Quarterly overview 47 Board of Directors’ Report 50 Income statement, Group 51 Cash-flow statement, Group 52 Balance sheet, Group

54 Income statement, Parent Company 55 Cash-flow statement, Parent Company 56 Balance sheet, Parent Company 58 Changes in shareholders’ equity 59 Notes

88 Auditors’ Report

89 Information to shareholders 89 Definitions

90 Board of Directors 92 Management Group 94 Where to find Mekonomen Mekonomen’s formal Annual Report

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Mekonomen Annual Report 2007 | We want to make CarLife easier

We want to make CarLife easier

Mekonomen wants to make CarLife easier. We will accomplish this through a broad and readily available offering of value for money and innovative solutions and products for consumers and companies.

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Year in brief | Mekonomen Annual Report 2007

Year in brief

New Group Management.

•

Establishment of new strategic focus, including

•

broadening of target groups.

Property portfolio in Sweden and Denmark divested

•

with a capital gain of SEK 156 M after tax.

Action program commenced in Denmark with

•

measures to improve EBIT.

Revenues increased to SEK 2,550 M (2,450).

•

EBIT increased to SEK 250 M (220).

•

EBIT margin rose to 10 per cent (9).

•

Earnings per share, including capital gain from

•

property divestments, amounted to SEK 11.03 (4.28).

The Board of Directors proposes an ordinary dividend

•

of SEK 6 (3) and an extra dividend of SEK 5 (7).

Key ratios

2007 2006 2005

Revenues, SEK M 2,550 2,450 2,333

EBIT, SEK M 250 220 170

EBIT margin, % 10 9 7

Profit for the year*, SEK M 348 140 118

Earnings per share*, SEK 11.03 4.28 3.61

Cash flow ** per share, SEK 10.32 8.61 4.06

Dividend***, SEK 11.00 10.00 3.25

Return on shareholders' equity, % 36 14 13

Equity/assets ratio, % 67 58 58

250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000

Revenue

2007 2006 2005 2004

2003 25

50 75 100 125 150 175 200 225 250 275 300

EBIT 2007 2006 2005 2004 2003

SEK M SEK M

1 2 3 4 5 6 7 8 9 10 11 12

SEK SEK

Earnings per share

2007 2006 2005 2004

2003 1

2 3 4 5 6 7 8 9 10 11 12

Dividend 2007 2006 2005 2004 2003

Earnings per share and dividend Revenue and EBIT

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WE STRIVE FOR An EASIER CARLIFE

Mekonomen offers a broad assortment of quality products that includes spare parts but also products from other phases of a consumer’s CarLife.

At the central warehouse, there are approximately 57,000 articles for 5,000 car models. Through cooperation with contracted suppliers that deliver directly to the stores, Mekonomen has access to an additional 400,000 products.

The store network covers all of Scandinavia. At the end of 2007, Mekonomen had 194 stores, of which 156 were wholly owned and 38 were partnerships.

At the end of 2007, 778 workshops were affiliated to Mekonomen Bilverk- stad. The affiliation implies that Mekonomen does not own the workshops but has a partnership that is regulated by contract. The average number of employees during the year was 1,271.

Our ambition is to be associated with the terms, value for money, total solutions, innovative, knowledge and high quality. These five terms shall permeate everything we do in order to achieve our vision to become the car owner’s first choice and strive for an easier CarLife.

Mekonomen in 3 minutes

Mekonomen Annual Report 2007 | Mekonomen in 3 minutes

Mekonomen wants to make CarLife easier.

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Mekonomen in 3 minutes | Mekonomen Annual Report 2007

number of stores number of workshops

net sales per market^* Cash flow^* and return on shareholders’ equity

0 40 80 120 160 200 240 280 320 360 400

Cash flow

2007 2006 2005 2004

2003 0

4 8 12 16 20 24 28 32 36 40

Return 2007 2006 2005 2004 2003

SEK M %

Equity/assets ratio

0 8 16 24 32 40 48 56 64 72 80

Equity/assets ratio 2007 2006 2005 2004 2003

% 0

100 200 300 400 500 600 700 800 900 1,000

Number of workshops 2007 2006 2005 2004 2003 Number

0 20 40 60 80 100 120 140 160 180 200

Total

2007 2006 2005 2004

2003 0

20 40 60 80 100 120 140 160 180 200

Wholly owned 2007 2006 2005 2004 2003 Number

0 500 1,000 1,500 2,000 2,500 3,000

Denmark Norway

Sweden

2007 2006 2005 2004 2003 SEK M

*⁾ Excluding Group-wide and eliminations *⁾ From operating activities

number of employees^*

0 200 400 600 800 1,000 1,200 1,400

Denmark Norway

Sweden

2007 2006 2005 2004 2003 Number

*⁾ Parent Company included in Sweden’s figures for the number of employees.

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The 2007 financial year was the best to date in Mekonomen’s history. Revenue increased by 4 per cent, and EBIT improved by 14 per cent. The figures were the result of sound efforts, competent employees, various improvements and the development of the foundation that was created earlier. In our entrepreneurial spirit and culture, we will continue to create value for customers, owners, employees and other cooperation partners.

At the same time, we are aware that competition is becoming increasingly intense. We will face it on a daily basis - and every hour - in close cooperation with customers, by making CarLife easier for customers in every sense of the word.

GROWTH In ALL MARKETS

Within the business world, we frequently use general terms when referring to the market. We try to define customers’ needs. Within Mekonomen, we have said that we shall live with the customers.

By being sensitive, customers will become part of the company’s development.

During 2007, Mekonomen advanced forward in all of our three markets, Sweden, Norway and Denmark. It is particularly gratifying that the operations in Denmark reported growth during the

second half of the year. Most of the measures we planned in Denmark commenced during the year.

This included reducing the number of warehouses from 38 to about 8, which means better control, more efficient flows and lower costs. The effort to change will continue during 2008.

In Norway, sales increased by 9 per cent and our market position was strengthened further. Stores in Norway have increased deliveries from Me- konomen’s distribution centre in Strängnäs, which contributed strongly to the favourable results.

Despite a general increase in salary expenses in Norway, Mekonomen’s costs declined in relation to NOK earned.

InCREASED FOCUS On BRAnD DEVELOPMEnT

During the year, Mekonomen has focused on developing the brand and invested in new forms of marketing. In Sweden, we launched TV com- mercials through cooperation with TV4. The objective is to reach broader consumer groups, in which women in particular play an important role. We also formed Team Mekonomen with a number of well-know Swedish skiers. Our way of promoting Mekonomen and clarifying the brand has definitely contributed to the increase in sales.

WE WAnT TO MAKE CARLIFE EASIER During the past year, we developed a new strategy for the company. In parallel, a number of improvements were implemented supported by the strategy work. It involved creating the prerequisites to increase sales and profits, and it was also about the business culture at Mekonomen, the manner in which we interact with customers and how we shall continue to develop our competencies, in stores and workshops.

The basis of the developmental work was to define our obligation to customers. The result was summarised under the motto to make CarLife easier for our customers. Many car owners believe that the relationship with workshops is complicated and that it is difficult to find the correct accessories. This perception may be based on the fact that the industry is gravitating toward larger units, where the focus was historically on products rather than customers’ needs. This represents a major opportunity for Mekonomen.

We shall be inspiring and flexible when coping with what customers perceive as a problem or a need. At the same time, we also want to surprise customers with solutions that they had not identi- fied themselves.

To facilitate CarLife for customers, we have also increased the accessibility of our stores and

CEO’s comments

Mekonomen Annual Report 2007 | CEO’s comments

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CEO’s comments | Mekonomen Annual Report 2007

”Our ambition is to make CarLife easier. It shall permeate the entire Mekonomen operation.”

Deregulation within the workshop sector signifies a major opportunity for Mekonomen. Today, large brand-based workshops do not have the monopoly for servicing new cars - without the new car guarantee being affected. However, this is relatively unknown to most car owners and companies with large fleet of company cars. By increasing awareness of this fact, Mekonomen will be able to compete with such advantages as personal service, flexibility and expertise.

MekoPartner was launched in January 2008 and means that we have acquired an additional advantage within the workshop sector. MekoPartner involves a somewhat diminished connection with Mekonomen. These workshops undertake to purchase a certain amount of spare parts from Mekono men and are not as tied to the Meko- nomen brand. MekoPartner will be successively available during the spring of 2008.

A strong competitive edge for Mekonomen is its skilled employees, in the workshops and stores.

Accordingly, we will continue to invest major resources in improving knowledge in total in the company. The vision is for customers to always re- fer to Mekonomen as the company with extensive specialist know-how.

FUTURE

During the past three years, Mekonomen has had an average annual growth of 5 per cent. Our long- workshops. We shall be part of people’s everyday

lives - on their terms. We tested this by increasing opening hours in a number of our stores in 2007.

The outcome was positive and from 1 January 2008, it became a standard. The assortment offered in stores shall be well-arranged and logically structured. During 2007, Mekonomen initiated improvements in stores and the effort will continue during 2008.

term goal is 10 per cent. I am convinced that we will achieve this by continuously strengthening our offering to customers.

The effort to strengthen our brand and customer offering will characterise 2008 in various ways. This involves the value we will create for our customers by making CarLife easier. One main issue is how we can contribute to a more environmentally friendly CarLife. It is also about, such factors as our range and how cars are used and maintained.

Our customers are environmentally conscious and we will bear this in mind.

At Mekonomen, we shall be part of customers’

everyday lives. Our customers shall feel that with Mekonomen as a partner, CarLife will be easier.

The focus is on satisfying every customer’s specific needs - since each person and thus each customer is unique. With this attitude, we will continue to develop Mekonomen, additionally strengthen our position and be productive for customers, owners, employees and other cooperation partners.

Kungens Kurva, February 2008

Håkan Lundstedt President and CEO

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BUSInESS COnCEPT

Through innovative concepts, high quality and an efficient logistics chain, Mekonomen shall offer consumers and companies solutions to make CarLife easier.

The business concept was rephrased during 2007. The new formulation implies a broader focus in which Mekonomen, in addition to spare parts, will increasingly provide accessories, products and services to make CarLife easier.

VISIOn

We are the first choice for car owners and strive for making CarLife easier.

GOALS Overall goal

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– The Group shall develop with continued favourable profitability and thus create value growth for shareholders.

Growth goal

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– Annual sales increase of 10 per cent. Expansion shall occur with retained financial stability.

Financial goals

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– Operating margin shall exceed 8 per cent.

– Long-term equity/assets ratio must not fall below 40 per cent.

DIVIDEnD POLICY

The intention of the Board of Directors is that Mekonomen will distribute a dividend of at least 50 per cent of profit after tax. When future dividends are determind, consideration will be given to investment needs, but also to other factors that the Board of Mekonomen may find significant.

nEW POSITIOnInG

Mekonomen is undergoing a change process, in which the goal is to be increasingly associated with the terms value for money, total solutions, innovative, knowledge and high quality. These five terms shall permeate all concrete activities that are implemented in order to achieve our goals and our vision.

To attain this position, we will continue to develop our strength factors in a number of areas that are described in detail on pages 11 - 23.

Business concept, vision and goal

Mekonomen Annual Report 2007 | Business concept, vision and goal

Inexpensive Value for money

Cars/car parts

Total solutions

Traditional Innovative

Only for car profes-

sionals Knowledge

High

quality High

quality

”We want to make

CarLife easier.”

”We make CarLife easier.”

”Profession- als for all

cars”

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Business concept, vision and goal | Mekonomen Annual Report 2007

BRAnD

The Mekonomen brand has a high level of recognition. The work will continue to focus on associating Mekonomen with value for money, total solutions, innovative, knowledge and high quality. Various types of alliances are also used to strengthen the brand.

A major part of marketing focuses on new target groups, such as families and companies.

COMPETEnCE

Mekonomen’s employees shall be highly skilled with regard to specialist knowledge and service.

RAnGE

Slightly less than 90 per cent of Mekonomen’s spare parts are original parts from the same plants that supply the automotive industry. Mekonomen offers three years’ guarantee on spare parts. The guarantee provided on repairs at Mekonomen’s workshops is as generous as brand-based workshops.

The broadening of the range that was initiated in 2007 will continue in 2008. Mekonomen shall offer a broad range of products to facilitate consumers’ CarLife.

AVAILABILITY

A central competitive advantage is rapid delivery of the correct components.

All orders to the central warehouse are delivered to stores the following morning, with only a few exceptions.

Accessibility to stores and workshops is being gradually increased by, for example, extended opening hours.

Independent workshops are offered two different workshop concepts, Mekonomen Bilverkstad and MekoPartner.

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Mekonomen Annual Report 2007 | Business

Business

Centralised warehouse Warehouse in Strängnäs

Contract suppliers

13%

Retailer network

194 stores, of which 156 owned and 38 affiliations 81%

End customer = Car owner Centralised warehouse has 200 suppliers

Other suppliers

6%

Workshops Brand-based and brand-

independent ~13,000 Workshops

778 affiliated brand- independent

Team Mekonomen, including Mathias Fredriksson, is one example of an alliance to strengthen the brand.

BUSInESS FLOW

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Business | Mekonomen Annual Report 2007

BRAnD

Mekonomen’s brand has a high awareness rate in Sweden. Work will continue to focus on Mekonomen being associated with value for money, total solutions, innovative, knowledge and high quality. Various types of alliances are also used to strengthen the brand.

EU regulations from 2003 signify that service and repairs at brand-independent workshops will have the same comprehensive guarantee as brand-based workshops. However, the challenge is that the majority of companies and consumers remain unaware of this information.

This means that there is major growth potential for Mekonomen’s workshops. An important challenge for brand development is ensuring that a significantly larger portion of potential customers have access to information concerning the comprehensive guarantees.

The corresponding challenge, in terms of spare parts, is increasing information that spare parts sold by Mekonomen are original parts or parts at least of equivalent quality. Mekonomen has attractive guarantee terms and offers three years’

guarantee on spare parts.

Alliances

To further strengthen the brand, Mekonomen has formed alliances with various types of players. One example during 2007 was the initiation of strategic cooperation in marketing with TV channels in Sweden and Denmark. During 2008, this cooperation will also be introduced in Norway.

Another example during the year was the forma- tion of Team Mekonomen, in which four of Sweden’s most famous cross-country skiers, Anders Södergren, Björn Lindh, and Mathias and Thobias Fredriksson formed a new training group and will receive their financial requirements for aiming for World Championship and Olympic medals.

Both of these alliances will contribute to strengthening the brand in a cost-effective manner and associating Mekonomen with value for money, total solutions, innovative, knowledge and high quality.

An important growth potential for Mekonomen is to reach new target groups. A feature of this is to increase marketing aimed at families. This effort is closely connected to the broadening of the assortment, which will place more significance on products for other parts of consumers’ CarLife than only repairs.

A number of marketing campaigns aimed at new target groups was implemented during the year with very positive results. One campaign, for example, resulted in the sale of as many car safety seats during five summer weeks as the total during the preceding ten months.

Another target group that is becoming more important is corporate customers, to which Mekonomen offers a combination of quality, availability and value for money. In an initial phase, a contract was signed in 2007 with Bravida comprising service, repairs, accessories and tyres for Bravida’s service vehicles. This cooperation means that Bravida will have access to Mekonomen Bilverkstad’s services in selected locations.

Spontaneous recognition of Mekonomen’s brand during 2007.

0%

10%

20%

30%

40%

50%

60%

Denmark Norway Sweden

Source: Norstat 2007.

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COMPETEnCE

Mekonomen’s employees shall have high competency pertaining to both specialist skills and service.

Employees’ skill is a central competitive advantage for Mekonomen. It involves solid knowledge of cars and products, which, in various ways, facilitate consumers’ CarLife, but also specialist skills within the areas of logistics and administration. A strong sense for customer service is very important.

Mekonomen’s customers shall always receive professional guidance and be treated in a pleasant manner.

Mekonomen continuously strives to further improve employees’ skills.

Internal training takes place at Mekonomen Academy where major invest- ments are made to be able to offer a broad training program that includes all employees.

During the year, all store managers in Sweden participated in a training course focused on leadership, labour laws and sales. The sales section of the training course was also offered to all store employees, of whom approximately 70 per cent participated in the course. In Norway, there is a special training program for workshop consultants, which was initiated during the autumn of 2007. In Denmark, all store managers participated in a management training program during the autumn of 2007. Team leaders from the central warehouse also participated in management training during the year. The range of courses is being successively increased.

For employees of workshops affiliated with Mekonomen Bilverkstad, there is a special course program within administration and vehicle technology. In Norway, a course program for employees of affiliated workshops was conducted during the year. Mekonomen also supports training of vehicle mechanics by offering motor mechanics schools in Sweden the use of its proprietary PC-based computer tool, Meko Tech 2000, free of charge.

When stores recruit personnel, demand is placed on technical experience, which can be vehicle technical training or practical experience that provides the corresponding knowledge. During 2007, a quality-assurance recruitment

process was introduced to further increase accuracy when recruiting key personnel.

The industry is traditionally male-dominated and Mekonomen strives to increase the recruitment of women. At the end of 2007, Mekonomen had 1,302 employees, of whom approximately 15 per cent were women.

During the year, an employee survey was conducted to determine the views of employees. The survey will be conducted annually and is an important tool for identifying improvement possibilities in the organisation. The most distinct results in the year’s survey were the levels of involvement, satisfaction and pride.

Employees’ health is also very important to Mekonomen. An important source of inspiration in this effort are the skiers and nutrition experts in

“Team Mekonomen.” By supporting preventive healthcare and rehabilitation, Mekonomen wants to encourage employees’ health and preventive healthcare, reduce sick leave and encourage employees with reduced capacity to return to work more rapidly.

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Mekonomen’s operation is based on a common basic value, which is summarised in five points:

Customer orientation

•

We place our customers first and our ambition is to surpass customers’

expectations. We are perceived as value for money, innovative and skilled by our customers.

Business

•

We deliver favourable financial results, with a balance between short and long-term perspectives. Our customers know that we stand for high quality.

Business qualities also mean that we defend our credibility and our ethics to customers, business partners and employees. Our offerings shall never promise more than we can deliver.

Responsibility

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We assume responsibility for our business surroundings, resources and environment. Our customers understand that we see the whole picture.

Internally, responsibility also means that we have confidence in our employees’ knowledge and ability. Our management contributes to our employees’

sense of motivation, loyalty and involvement in the development of the company.

Competency

•

We have excellent specialist skills and extensive experience within the areas in which we operate and are perceived as innovative and skilled.

Flexibility

•

We search for new ideas and have the ability to cope with changes in order to satisfy demands from our existing and future customers.

Employees’ competency is a central competitive advantage for Mekonomen.

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ASSORTMEnT

Slightly less than 90 per cent of Mekonomen’s spare parts are original parts from the same plants that supply to the automotive industry.

The guarantees provided on repairs at Mekonomen’s workshops are as comprehensive as brand-based workshops and spare parts have three year’ guarantee. In cases where a car is covered by a new-car guarantee, this also applies after service conducted by Mekonomen’s workshops.

Mekonomen offers products of the highest quality. The range of spare parts represents approximately 90 per cent of original spare parts or parts of equivalent quality, which are supplied from the same plants that supply the automotive industry.

According to the EU’s definition of the term original spare part, quality is crucial. There is reference to “original spare parts” and “spare parts of equivalent quality.” Mekonomen uses spare parts that maintain the quality of original spare parts and spare parts with equivalent quality.

Since 2003, Mekonomen has offered three years guarantee on spare parts.

Corresponding quality levels apply at Mekonomen’s workshops. The com- petitor situation between brand-based workshops and independent workshops has changed considerably since new regulations were introduced by the EU in 2003. Brand-independent workshops, for example, Mekonomen Bilverkstad or MekoPartner, are now able to perform service and repairs on new cars with unchanged new-car guarantees, on condition that the workshops perform the service in accordance with the automotive manufacturers’ specification and use original spare parts according to EU’s definition. Independent workshops are also entitled to relevant technical information, equipment and specialist tools on the same terms as brand-based workshops. The automotive industry can thus no longer limit car owners’ choice for service, repairs and spare parts.

Mekonomen offers

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The broadening of the assortment that commenced in 2007 will continue in 2008. The ambition is to offer a wider range of accessories to facilitate consumers’ CarLife.

Mekonomen has a wide assortment of quality products. In the central warehouse, there are approximately 57,000 articles for 5,000 car models.

Through cooperation with contract suppliers that deliver directly to the stores, Mekonomen has access to an additional 400,000 products.

The ten largest suppliers are: in no specific order, GoodYear (tyres), Tenneco (exhaust systems, shock absorbers), Bosch (generators, wiper blades, engine control), Brembo (brake pads), TMD (brake lining), Exide (batteries), Schaeffler (clutch, wheel bearing), Mahle (filters), Castrol (oil) and Lemförder (front-end parts).

During 2007, a process was introduced to additionally broaden the assortment. The assortment has now been broadened to also include products that will facilitate various phases of the consumer’s CarLife. The new focus is clearly reflected in stores in which these product groups have a prominent position.

While the range is being broadened, Mekonomen’s complete assortment of spare parts for various brands and year models remain.

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AVAILABILITY

Rapid delivery of the correct component is a central competitive advantage. All orders to the central warehouse are delivered to the stores the following morning, with only a few exceptions.

Customers place two fundamental demands on Mekonomen’s logistics.

The correct product shall be delivered and it shall be delivered quickly.

Mekonomen lives up to both of these demands to a high extent. All store orders are dispatched from the central warehouse the same day and transported by vehicle overnight in order to deliver to the stores the next morning with only a few exceptions.

The central warehouse is the hub of the Group’s logistics system. More than 80 per cent of the products that are sold in the stores pass through the central warehouse, slightly less than 15 per cent arrive from contracted suppliers and the remaining five per cent come directly to the stores from other suppliers.

In order to achieve rapid and accurate deliveries, the entire logistics chain must function efficiently. The chain includes goods flows from manufacturers through the central warehouse to stores and customers. Mekonomen has proprietary IT systems for stores management, which combines high efficiency with low risk of picking errors. Hand-held barcode scanners are used for customer order collections, incoming goods, continuous real time stock taking, rearrange- ment and top-ups.

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In addition to this, efficient logistics are also largely a culture issue. “We can dispatch that tomorrow,” is not part of the vocabulary at the central warehouse.

For a number of years, Mekonomen has participated in a pilot project in cooperation with the Swedish and Norwegian customs authorities. The project has been very successful and signifies a major simplification of the procedures for companies with daily deliveries across EU borders.

An important part of logistics is maintaining an adequate amount of products in stock. It involves a continuous balance between capital tied up and service rate. This balance is maintained using the Group’s system for stock optimization and forecasting.

The system makes it possible for Mekonomen to submit well-based forecasts on future delivery requirements to manufacturers.

Mekonomen’s entire assortment of all spare parts and accessories is available on Mekonomen’s website. Using the registration number of the car, the customer can locate the correct spare part, price and also order it at the nearest store.

Continuous improvement work means that the system will become increasingly more efficient and manage larger order flows.

An efficient logistic system will result in quick and correct deliveries.

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ACCESSIBILITY

Accessibility to stores and workshops is gradually being increased through extended opening hours. At the end of the year, 194 stores and 778 workshops were affiliated to Mekonomen, which provides excellent coverage and availability throughout Scandinavia. In practice, a large majority of consumers are very close to a Mekonomen store and workshop. The number of workshops that are affiliated is expected to increase further in conjunction with the introduction of the new workshop concept, MekoPartner.

Availability is also affected by opening hours. Mekonomen’s ambition is to extend opening hours to provide customers with increased choice, thus making it easier for customers to visit Mekonomen.

During the autumn of 2007, extended opening hours were tested in a number of stores in Scandinavia. The test was very successful, with positive sales performance and considerable appreciation from customers. Conse- quently, at the end of the year, Sunday open was introduced in all stores in Sweden, Saturday opening in all stores in Denmark and extended opening hours in Norway.

At the end of the year, Sunday opening was introduced in all stores in Sweden, Saturday opening in all stores in Denmark and extended opening hours in Norway.

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Sales channels

The store network comprises proprietary and cooperation stores. At the begin- ning of 2008, Mekonomen had 194 stores (192), of which 156 (147) were Group-owned. The proportion of proprietary stores increased during the year.

An important feature of Mekonomen’s concept is that store managers, as far as possible, shall be partners in their stores.

In addition to store employees, there are a number of workshop coordinators that cooperate with the stores. The coordinators assist stores in cooperating with all workshops near the stores.

The large number of stores means that Mekonomen has achieved critical mass in terms of efficiency and competitiveness. The geographic coverage is excellent. The store network covers all of Scandinavia.

Group- owned stores

Cooperating stores

Shop-in- shop

End customer Whole-

saler

Concept workshops

Cooperating workshops

External workshops

Other

A customer in Mekonomen’s store shall always receive professional guidance and be received in a pleasant manner.

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For workshops, there are two different concepts that corre- spond to varying needs from customers and workshops.

Mekonomen also makes CarLife easier for affiliated workshops through the rapid delivery of spare parts and access to comprehensive technical support.

At the end of the year, 778 workshops were affiliated with Mekonomen.

Affiliation means that Mekonomen does not own the workshops but has a strategic cooperation that is regulated by an agreement.

During 2008, a change in the workshop structure was implemented aimed at coping better with various needs for workshop services from consumers and companies. Complete market coverage is obtained through two workshop concepts, Mekonomen Bilverkstad and MekoPartner. Both Mekonomen Bil- verkstad and MekoPartner have access to Mekonomen’s advanced diagnostic system, training, comprehensive assortment and are marketed to the private market. The primary difference is that Mekonomen Bilverkstad is a more centrally controlled concept.

The workshops have access to Mekonomen’s advanced diagnostic system, training and comprehensive assortment.

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The Scandinavian aftermarket for cars older than three years amounted to approximately SEK 60 billion during 2007. Of this, spare parts in workshops accounted for 21 per cent, work in workshops 27 per cent, ‘do-it-yourself’

spare parts 8 per cent, accessories 14 per cent, wheels and tyres 13 per cent and bodywork 17 per cent. The market grew during the year by approximately 1 per cent.

MARKET PLAYERS

Players in the market can be divided into two primary groups, the branded-goods sector and brand-independent companies.

The branded-goods sector comprises of stores and workshops affiliated to a car brand and which concentrates mainly on sales and repairs of that specific brand. The price level is generally higher in the branded-goods sector than in brand-independent chains. Car dealerships traditionally have a weak position compared to automotive manufacturers. However, car dealerships have strengthened

their positions in recent years through consolida- tion, which has resulted larger units. These larger units tend to expand to more automotive models and thereby reducing the dependency on an indi- vidual manufacturer.

Apart from the branded-goods sector, there is a number of independent companies, such as Mekonomen. Each geographic market is dominated by a few such companies. The common as- pect of major independent companies is that their ranges cover basically all automotive brands and independent workshops are the largest customer group.

In each country, there is also a small number of low-cost chains with a wider range of accessories and leisure products than traditional specialist retailers.

As Mekonomen’s range expands to include more products to facilitate various aspects of customers’ CarLife, competition is increasing from other types of players.

Market review

Mekonomen Annual Report 2007 | Market review

Car accessories

Petrol stations

Super- markets

Branded- goods sector

Children’s stores

Electronics/

Media

Internet

Consumer channel choice - Store

When Mekonomen’s range was broadened, competition increased from other types of players.

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Market review | Mekonomen Annual Report 2007

CUSTOMER GROUPS

Another way to divide the market is according to the principal customer groups, meaning workshops and consumers. Various players have varying distribution between customer groups, whereby specialist retailers generally target primarily workshops, while discount stores target nearly exclusively consumers. In Sweden, approximately 60 per cent of Mekonomen’s sales occur directly to workshops, while 40 per cent is to consumers.

The corresponding figures for Norway are 85 and 15 per cent, respectively. In Denmark, specialist retailers traditionally target the workshop market.

Consequently, consumers account for a smaller proportion of Mekonomen’s sales in Denmark compared with Sweden and Norway.

WORKSHOPS

In Sweden, Norway and Denmark, there are a total of approximately 13,000 automotive workshops, of which approximately 10,000 are independent. New cars are becoming increasingly complicated and require more advanced equipment for repairs and service. This results in an increase in investment requirements in workshops, which in turn propels development to larger units at the expense of smaller workshops.

In Norway, there is a start-up inspection, in which authorities place certain demands pertaining to, for example, machinery equipment and environment. The control is valid since Norwegian workshops also fulfil the function of motor-vehicle inspection. A consequence of the demand is that Norwegian workshops on average are larger than those in Sweden and Denmark.

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Mekonomen Annual Report 2007 | Market review

nEW EU REGULATIOnS

The protected position of the branded-goods sector and brand-based workshops has weakened in recent years through the introduction of new EU regulations. Historically, the branded-goods sector sold “original spare parts”

while this was not possible for independent retailers. According to the EU’s definition of the term original spare parts, quality is now the crucial factor.

Competition between brand-based workshops and independent workshops has changed now that the EU’s regulations have made it possible for brand-

Scandinavian aftermarket for cars older than three years amounted to approximately SEK 60 billion during 2007.

Distribution by category, % Distribution by country, %

independent workshops, for example, Mekonomen, to perform service and repairs on new vehicles with unchanged new car guarantees. This is on condition that the service is performed in accordance with the automotive manufacturers’

specifications and using original spare parts according to the EU definition.

Independent workshops are also entitled to necessary technical information, equipment and special tools under the same conditions as brand-based workshops. Thus, the automotive industry can no longer limit car owners’ options for service, repairs and spare parts.

Workshop, parts, 21

DIY (do-it-yourself), 8 Accessories, 14

Tyres and wheel rims, 13 Bodywork, 17

Workshop, work, 27 Norway, 25

Denmark, 24

Sweden, 51

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Market review | Mekonomen Annual Report 2007

CAR STOCKS GROWInG

At the end of 2007, there was a total of slightly less than 8.6 million cars in Scandinavia, distributed into 4.3 million in Sweden, 2.1 million in Norway and 2.2 million in Denmark. Sales of new cars follow the economic trend and are relatively easy to forecast. In 2007, 598,672 new cars were registered in Scandinavia.

In Sweden, Norway and Denmark, a relatively high proportion of the total car fleet during 2007 was older than 10 years - 37, 44 and 38 per cent respectively.

Demand for spare parts tends to increase during an economic downturn, while demand for accessories increases during an economic upswing. In total, this means that the industry is relatively non-sensitive to economic fluctuations.

Car fleet and new registered cars Sweden

norway Denmark

0 750 000 1 500 000 2 250 000 3 000 000 3 750 000 4 500 000

07 06 05 04 03 02 01 00 99

98 0

75 000 150 000 225 000 300 000 375 000 450 000

07 06 05 04 03 02 01 00 99 98

Source: Opplysningsrådet for Veitrafikken AS Number of new registrations Number of cars

0 750 000 1 500 000 2 250 000 3 000 000 3 750 000 4 500 000

07 06 05 04 03 02 01 00 99

98 0

75 000 150 000 225 000 300 000 375 000 450 000

07 06 05 04 03 02 01 00 99 98

Source: Bil Sweden Number of new registrations Number of cars

0 750 000 1 500 000 2 250 000 3 000 000 3 750 000 4 500 000

07 06 05 04 03 02 01 00 99

98 0

75 000 150 000 225 000 300 000 375 000 450 000

07 06 05 04 03 02 01 00 99 98

Source: www.dst.dk Number of new registrations Number of cars

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Mekonomen Annual Report 2007 | Operations in Sweden

Both sales and EBIT increased during the year. The EBIT improvement was partly due to increased volume and partly to the increased efficiency in stores. The enhanced efficiency facilitated benchmarking of key ratios between stores.

The number of stores declined from 115 to 114. At the same time, the proportion of proprietary stores increased when three cooperating stores were acquired by Mekonomen.

2007 2006

Net sales, SEK M 1,270 1,218

EBIT margin, % 17 16

EBIT, SEK M 216 198

Average number of employees* 687 684

Number of stores 114 115

- of which, owned by Mekonomenen 93 88

Number of workshops 337 329

*⁾ Including Parent Company

STORES AnD WORKSHOPS

As a phase in the ambition to improve availability, Sunday opening was tested during the summer and autumn in 12 stores. The results were distinctly positive. From 1 January 2008, Sunday opening was introduced in all stores.

During the year, there were clear indications of increasing interest from workshops that spontaneously contacted us and wanted to be affiliated with Mekonomen Bilverkstad. The number of affiliated workshops increased to 337.

As an initial phase in Mekonomen’s investment in company customers, an agreement was signed with Bravida in 2007 comprising service, repairs, accessories and tyres for Bravida’s service vehicles. The cooperation means that Bravida will have access to Mekonomen Bilverkstad’s services in selected locations.

CEnTRAL WAREHOUSE

All the Group’s stores are stocked with goods from the central warehouse in Strängnäs. The central warehouse contains approximately 57,000 articles and is the hub of the Group’s logistics system. More than 80 per cent of the products that are sold in the stores pass through the central warehouse. All store orders are dispatched from the central warehouse the same day and transported by vehicles overnight to arrive, with few exceptions, the next morning.

During the year, improvement work continued, which means that the logistics system will continuously become more efficient.

COMPETITIOn

The Swedish aftermarket for cars older than three years amounted to approximately SEK 30 billion.

Mekonomen competes with the branded-goods sector and a number of independent companies. Mekonomen is the largest player in the Swedish market. With regard to accessories, Mekonomen competes with a number of retail sales companies.

In Sweden, there are more than 6,000 workshops. Of these, approximately 1,000 are brand-based workshops. The latter have a stronger position in Swe- den than in most European countries. During 2007, the branded-goods sector increased its efforts to connect customers to their workshops through various forms of service packages in the sale of both new and used cars.

Operations in Sweden

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Operations in Sweden | Mekonomen Annual Report 2007

MARKETInG

During the summer, marketing on TV was initiated target- ing primarily women and families with children. A similar campaign was implemented in December. The outcome of both campaigns was very positive.

FOCUS 2008

Important focus areas in 2008 include additionally increasing availability and sales expertise in stores, and increasing the volume of workshop customers with the help of sales efforts from workshop coordinators. The ambition is also to further develop the Bravida agreement and increase the number of corporate customers.

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Mekonomen Annual Report 2007 | Operations in norway

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Mekonomen Norway reported strong growth during the year.

Growth in the market as a whole was not as rapid, which meant that Mekonomen captured market shares.

EBIT improved due to an increase in sales, intensified management by objectives and efficient cost control, which resulted in cost increases being limited.

2007 2006

Net sales, SEK M 584 537

EBIT margin, % 14 11

EBIT, SEK M 81 58

Average number of employees 202 185

- of which owned by Mekonomen 25 21

The number of stores increased by three through new start-ups in Kolbotn, Horten and Sandefjord. The number of workshops declined somewhat, as a result of a number of workshops not living up to Mekonomen’s high quality standards. From 1 January 2008, availability in all stores increased through extended opening hours on Saturdays. The sales trend during the year was particularly strong within the workshop segment. Mekonomen continued to successfully cultivate workshop customers. In Norway, there is a start-up

inspection for workshops, which means that authorities place certain demands pertaining to, for example, machinery equipment and environment. The inspection is necessary since Norwegian workshops also conduct motor - vehicle inspections. A consequence is that Norwegian workshops on average are larger than those in Sweden and Denmark.

A pilot project in cooperation with the Norwegian and Swedish customs authorities continued successfully during the year. The project means a simplification of procedures for companies with daily deliveries across EU borders.

These simplifications will allow deliveries to Norway that are as smooth as those to Denmark.

COMPETITIOn

The Norwegian aftermarket for cars older than three years amounted to approximately SEK 15 billion.

Mekonomen is market leader for spare parts in Norway. Competitors com- prise brand-based warehouses and a number of independent chains.

MARKETInG

The brand was strengthened during the year through continued large-scale marketing in the trade press, daily newspapers and radio as well as through arena advertising.

FOCUS 2008

A continued strong focus on the workshop market combined with development of stores and range.

Operations in Norway

Operations in norway | Mekonomen Annual Report 2007

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Mekonomen Annual Report 2007 | Operations in Denmark

Net sales during the year were basically unchanged, while growth was reported in the second half of the year. Taking into account certain non-recurring items, the underlying results improved.

During the year, an action program was initiated to improve profitability. The measures included rationalisation of the distribution system.

2007 2006

Net sales, SEK M 661 663

EBIT margin, % -3 -1

EBIT, SEK M -22 -6

Average number of employees 382 388

- of which, owned by Mekonomen 38 38

The number of Mekonomen stores was unchanged at 38. One store was discontinued and one new store opened during the year. All stores are wholly owned. From 1 January 2008, opening hours increased by introducing Satur- day opening in all stores.

The number of workshops increased from 114 to 136. A clear trend was that more workshops spontaneously contacted Mekonomen.

During the year, a number of value-creating activities for workshops were introduced.

One example was the establishment of a workshop pool, where it is possible for workshops to borrow cutting-edge special tools.

During 2007, the Danish tax on cars changed in a manner that largely benefited small, fuel-efficient and environmental cars. Previously, the car stock in Denmark comprised mainly small cars. Uncertainty with regard to the tax reform resulted in a weak new car market for a time during the spring of 2007, which then regained momentum later on.

ACTIOn PROGRAM

In 2007, an action program was initiated to create satisfactory profitability in the Danish operations.

A central part of this is the regionalisation of the distribution system.

The aim is to establish regional warehouses. The short distances in Denmark facilitate speedier deliveries to customers on the same day from the regional warehouses. The first regional warehouse will be opened in Copenhagen in February/March 2008 and the rest will be gradually added during the year.

The regionalisation is expected to be completed by the end of 2008.

Rapid deliveries from regional warehouses make it possible to radically reduce stocks in the stores, which often tend to be too high.

Despite large stocks in relation to sales in respective stores, the range is not sufficiently broad to offer adequate customer service. Therefore the stores from time to time have had to find other channels to be able to provide the customers with the products asked for. Accordingly, stores were often forced to look for other channels from which to rapidly procure the products that were lacking. The consequences were unnecessarily high purchase costs and

Operations in Denmark

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Operations in Denmark | Mekonomen Annual Report 2007

relatively low proportion of purchases from the central warehouse.

All in all, it was estimated that regionalisation would result in better customer service, lower tying up of capital and lower distribution costs. Another advantage is that the regional organisation is expected to facilitate recruitment of qualified employees. The cost for the action program amounted to SEK 15 M during the year.

COMPETITIOn

The Danish aftermarket for cars older than three years amounted to approximately SEK 14 billion.

Competition between the four largest independent players in the market for spare parts and accessories remained intense. Furthermore, Mekonomen competes with the branded-goods sector.

The fact that distances are shorter in Denmark than Sweden and Norway contributes to more intense competition since workshops normally have many suppliers from which to choose within their immediate surroundings.

MARKETInG

A comprehensive marketing campaign was conducted in Danish TV to increase the flow of customers. The campaign was followed by advertising in leading daily newspapers.

FOCUS 2008

The implementation of the action program with improved distribution, range and marketing of Mekonomen’s workshops will be in focus in 2008.