UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

Commission File Number 1-14626 

COMPANHIA BRASILEIRA DE DISTRIBUIÇÃO

(Exact Name of Registrant as Specified in its Charter)

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

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

José Antônio de Almeida Filippo, Chief Financial Officer
Phone: +55 11 3886-0421  Fax: +55 11 3884-2677

gpari@grupopaodeacucar.com.br

Avenida Brigadeiro Luiz Antonio, 3,142
01402-901 São Paulo, SP, Brazil

(Address of principal executive offices)

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

____________________

*The Preferred Shares are non-voting, except under limited circumstances.
**Not for trading purposes, but only in connection with the listing on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.

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

None

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

None

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

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

T Yes  1  No

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

1 Yes  T  No

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

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

T Yes  1  No

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

1 Yes  T  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer T         Accelerated Filer 1          Non-accelerated Filer  1 

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

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

Item 17 1   Item 18 1   

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

1 Yes   T  No

INTRODUCTION

All references in this annual report to (i) “CBD,” “we,” “us,” “our,” “Company” or “Pão de Açúcar Group”are references to Companhia Brasileira de Distribuição and its consolidated subsidiaries, unless the context requires otherwise, (ii) the “Brazilian government” are references to the federal government of the Federative Republic of Brazil, or Brazil, and (iii) “preferred shares” and “common shares” are references to our authorized and outstanding shares of non-voting preferred stock, designated as ações preferenciais, and common stock, designated as ações ordinárias, respectively, in each case without par value. All references to “ADSs” are to American depositary shares, each representing one preferred share, without par value. The ADSs are evidenced by American Depositary Receipts, or “ADRs”, issued by The Bank of New York Mellon.

All references herein to the “real,” “reais” or “R$” are to Brazilian reais, the official currency of Brazil. All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars.

We have prepared our consolidated financial statements included in this annual report in conformity with accounting practices adopted by the International Financial Reporting Standards, or IFRS, issued by the International Accounting Standards Board, or IASB, in reais.  

We have translated some of the real  amounts contained in this annual report into U.S. dollars. The rate used to translate the amounts in respect of the year ended December 31, 2010 was R$1.666 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect as of December 31, 2010, as reported by the Central Bank of Brazil, or the Central Bank. The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the real  amounts represent, or could have been or could be converted into, U.S. dollars at that rate or at any other rate. See “Item 3A. Selected Financial Data—Exchange Rates” for more detailed information regarding the translation of reais  into U.S. dollars.

FORWARD-LOOKING STATEMENTS

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

·         the effects of the global financial and economic crisis in Brazil,

·         our ability to sustain or improve our performance,

·         competition in the Brazilian retail industry in the sectors in which we operate

·         government regulation and tax matters,

·         adverse legal or regulatory disputes or proceedings,

·         credit and other risks of lending and investment activities, and

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

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

Item 1.     IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

Item 2.     OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3.     KEY INFORMATION

3A.       Selected Financial Data

We changed our financial reporting from Brazilian GAAP to IFRS, beginning with the financial statements as of and for the year ended December 31, 2009. Therefore, we present in this section summary financial and operating data derived from our audited financial statements as of and for the years ended December 31, 2008, 2009 and 2010 included in this annual report  and prepared in accordance with IFRS.

The following tables present certain of our summary historical consolidated financial and operating data for each of the periods indicated. Solely for the convenience of the reader, real  amounts as of and for the year ended December 31, 2010 have been translated into U.S. dollars at the commercial rate for purchase of U.S. dollars in effect as of December 31, 2010 as reported by the Brazilian Central Bank of R$1.666 to US$1.00.

_______

(1)   Includes the result of operations of Globex Utilidades S.A., or Globex, which operates under the brand name Ponto Frio as from July 1, 2009. For further information on the acquisition of Globex, see “Item 4A. History and Development of the Company.”

(2)   Includes the results of operations of Globex and the results of operations of Nova Casa Bahia S.A., or Nova Casa Bahia, which operates under the brand name Casas Bahia as from November 1, 2010. For further information on the acquisition of Globex and the association of Globex and Nova Casa Bahia, see “Item 4A. History and Development of the Company.”

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

(1)   In 2010, does not include the employees and the selling area of Casas Bahia stores.

(2)   In 2010, includes the results of operations of 110 Extra Hipermercados stores and 68 Extra Fácil stores. In 2009, included the results of operations of 103 Extra Hipermercados stores, 13 Extra Supermercado stores and 52 Extra Fácil stores.

(3)   In 2010, includes the results of operations of 101 Extra Supermercado stores, 17 Sendas  stores and 113 CompreBem  stores.

(4)   Includes the results of operations of Globex (Ponto Frio) as from July 1, 2009, and Extra Eletro stores, excluding the operations of Nova Casa Bahia. During 2010, we converted the Extra Eletro stores into Ponto Frio stores. For further information on the acquisition of Globex, see “Item 4A. History and Development of the Company.”

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

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

Exchange Rates

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures. The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching an exchange rate of R$3.53 per US$1.00 at the end of 2002. Between 2003 and mid-2008, the real  appreciated significantly against the U.S. dollar due to the stabilization of the macro-economic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per US$1.00 in August 2008. With the crisis in the global financial markets beginning in mid-2008, the real  depreciated 33.3% against the U.S. dollar over the year 2008, reaching R$2.34 per US$1.00 on December 31, 2008. On December 31, 2009 the exchange rate was R$1.74 per US$1.00 and on December 31, 2010 it was R$1.67 per US$1.00. The Central Bank has intervened occasionally to control instability in foreign exchange rates, buying or selling local currency.

The following tables set forth the commercial selling rate, expressed in reais  per U.S. dollar (R$/US$), for the periods indicated.

______________

Source: Central Bank

(1)   Represents the average of the exchange rates of each trading date.

3B.       Capitalization and Indebtedness

Not applicable.

3C.       Reasons for the Offer and Use of Proceeds

Not applicable.

3D.       Risk Factors

An investment in the ADSs or our preferred shares involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. The trading price of the ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.

Risks Relating to Brazil

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

The Brazilian government’s economic policies may have important effects on Brazilian companies, including us, and on market conditions and prices of Brazilian securities. Our financial condition and results of operations may be adversely affected by the following factors and the Brazilian government’s response to these factors:

·         interest rates;

·         monetary policy;

·         exchange rate and currency fluctuations;

·         inflation; 

·         liquidity of the domestic capital and lending markets;

·         tax and regulatory policies;

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

Uncertainty over whether the Brazilian government will implement changes in policies or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian issuers.  These uncertainties and other future events affecting the Brazilian economy could cause a material adverse effect on us and the market price of the preferred shares and the ADSs.

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

Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real  interest rates in the world. Between 2005 and 2010, the base interest rate (SELIC) in Brazil varied between 19.77% p.a. and 10.75% p.a. Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business. Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, which could negatively affect our business. We may not be able to adjust the prices we charge our customers to offset the effects of inflation on our cost structure. In addition, Brazilian government measures to combat inflation that result in an increase in interest rates may have an adverse effect on us as our indebtedness is indexed to the interbank deposit certificate, or CDI, rate. Inflationary pressures may also hinder our ability to access foreign financial markets or lead to government policies to combat inflation that could harm us or adversely affect the market price of our preferred shares and the ADSs.

Exchange rate instability may have a material adverse effect on the Brazilian economy and us.

The Brazilian currency fluctuates in relation to the U.S. dollar and other foreign currencies. The Brazilian government has in the past utilized different exchange rate regimes, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Since 1999, Brazil has adopted a floating exchange rate system with interventions by the Central Bank in buying or selling foreign currency. From time to time there have been significant fluctuations in the exchange rate between the real and the U.S. dollar and other currencies. For example, the real appreciated 11.8%, 8.7% and 17.2% against the U.S. dollar in 2005, 2006 and 2007, respectively. In 2008, as a result of the worsening global economic crisis, the real depreciated 32% against the U.S. dollar, closing at R$2.34 to US$1.00 on December 31, 2008. For the year ended December 31, 2009, the real appreciated 25.5% against the U.S. dollar, closing at R$1.74 to US$1.00 on December 31, 2009. For the year ended December 31, 2010, the real appreciated 4.2% against the U.S. dollar, closing at R$1.67 to US$1.00. The real may substantially depreciate or appreciate against the U.S. dollar in the future. Exchange rate instability may have a material adverse effect on us. Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and result in a material adverse effect on us. Depreciation would also reduce the U.S. dollar value of distributions and dividends and the U.S. dollar equivalent of the market price of our preferred shares and the ADSs.

Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect our business and the market price of Brazilian securities, including our preferred shares and the ADSs.

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

The global financial crisis that began during the second half of 2008 has had significant consequences, including in Brazil, such as stock and credit market volatility, credit retraction, a general economic slowdown, volatile exchange rates and inflationary pressure, among others, which may, adversely affect us and the market price of Brazilian securities, including our preferred shares and the ADSs.

Risks Relating to the Retail Industry and Us

We face significant competition, which may adversely affect our market share and net income.

We operate mainly in the food retail and home appliances sectors. The food retail sector in Brazil, including the cash-and-carry segment (atacarejo), a wholesale format in the retail food sector, and the home appliances sector in Brazil are highly competitive. We face intense competition from small retailers, especially from those that operate in the informal segment of the Brazilian economy. In addition, in our markets, and particularly in the São Paulo and Rio de Janeiro city areas, we compete in the food retail sector with a number of large multinational retail food and general merchandise and cash-and-carry chains, as well as local supermarkets and independent grocery stores. In the home appliances sector, we also compete with large multinational chains and large or specialized Brazilian companies. Some of these international competitors have greater financial resources than we have. Acquisitions or consolidations within the industry may also increase competition and adversely affect our market share and net income.

We are co-controlled by two groups of shareholders.

The group composed of Mr. Abilio dos Santos Diniz and other members of the Diniz family, or Diniz Family, and the Casino Guichard Perrachon Group, or Casino Group, have shared our control since 2005 through our holding company, Wilkes Participações S.A., which owns 65.6% of our voting shares and also the usufruct of 34.3% of voting shares held by the Casino Group. This holding company is also referred to in this annual report as the Holding Company. See “Item 7A. Major Shareholders.” Consequently, our two indirect co-controlling shareholders have the power to control our Company, including the power to:

·         appoint the members to our board of directors, who, in turn, appoint our executive officers,

·         determine the outcome of any action requiring shareholder approval, including the timing and payment of any future dividends, provided that we observe the minimum mandatory dividend established by Brazilian corporate law,

·         determine corporate reorganizations, acquisitions, dispositions and the transfer of our control to third parties,

·         deliberate on related party transactions and enter into new partnerships, and

·         deliberate on financings and similar transactions.

Our controlling shareholders may have conflicting interests with those of our other shareholders or holders of ADSs and the interests of our controlling shareholders may prevail over those of our other shareholders or holders of ADSs.

In addition, the co‑control of our Company could result in deadlocks and disputes between our controlling shareholders with respect to strategic, control and other important issues, which may adversely affect us. On May 30, 2011, the Casino Group and its affiliates Segisor S.A. and Sudaco Participações Ltda. filed a request for arbitration under the International Chamber of Commerce rules against Abilio dos Santos Diniz, Ana Maria Falleiros dos Santos Diniz D’Avila, Adriana Falleiros dos Santos Diniz, João Paulo Falleiros dos Santos Diniz, Pedro Paulo Falleiros dos Santos Diniz and Península Participações Ltda..  We are not a party to the arbitration proceeding and, therefore, are not aware of its content.  The arbitration proceeding is subject to confidentiality provisions and is aimed at ensuring compliance with the shareholders’ agreements between the controlling shareholders.  We cannot anticipate the effects of the dispute on us.  For additional information on shared decision-making, see “Item 7A. Major Shareholders — Conditional Put Option Agreement and Shareholders’ Agreements.”

Since 2003, Mr. Abilio dos Santos Diniz, the controlling member of the Diniz Family, has been the chairman of our board of directors.  He has also been the chairman of the board of directors of the Holding Company.  He may remain as chairman of our board of directors and that of the Holding Company until 2012.  Beginning 2012, the Casino Group will have the right to appoint the chairman of our board of directors and the chairman of the board of directors of the Holding Company, except if Mr. Abilio dos Santos Diniz complies with certain conditions.  In this case, the Casino Group will be obligated to appoint him for those positions.  For further information, see “Item 7A. Major Shareholders – Conditional Put Option Agreement and Shareholders’ Agreements.”

We may not be successful in integrating and capturing synergies from acquired companies.

As part of our growth strategy, we regularly analyze acquisition opportunities. Acquisitions involve risks and challenges, such as those related to the integration of operations, personnel, products and customer base of the acquired companies with ours, generation of expected return on the investment and exposure to liabilities of the acquired companies. The integration of acquired businesses with our business and our capturing of synergies from acquired companies may require more resources and time than initially expected. In addition, we may be required to obtain approval from Brazilian anti-trust authorities for certain acquisitions. The Brazilian anti-trust authorities may grant the approval subject to restrictive measures, such as sale of part of the assets, or may not grant it in a timely manner.

We have recently entered into an association agreement with the partners of Casa Bahia Comercial Ltda., which is still under the analysis of the Brazilian anti-trust authorities. Until these authorities approve the association agreement, we may not fully integrate the assets related to the association with our home appliances retail business nor capture synergies between this business and our Company.

If we are not able to successfully integrate acquired businesses with ours or to capture synergies as planned, we may be materially and adversely affected.

Change in control of the Holding Company may bring changes to our corporate governance structure.

Mr. Abilio Diniz has been Chairman of both the Holding Company and us since 2003. According to the terms of the Holding Company shareholders’ agreement, the Diniz Family granted a purchase option of one common share of the Holding Company to the Casino Group exercisable after June 22, 2012. If exercised, this purchase option will allow the Casino Group to obtain indirect control of our Company, resulting in the alteration in the control of the Holding Company, which may change our corporate governance structure.

We are subject to environmental laws and regulations.

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

We may not be able to renew or maintain our stores’ lease agreements on acceptable terms or at all.

Most of our stores operate in leased properties. The strategic location of our stores is key to the development of our business strategy and, as a result, we may be adversely affected in case a significant number of our lease agreements is terminated and we fail to renew these lease agreements on acceptable terms or at all. In addition, our lease agreements contain contractual provisions that allow the landlord to increase the rent periodically, in most cases, every three years. A significant increase in the rent of our leased properties may adversely affect us.

We face risks related to our distribution centers.

Approximately 85% of our products are distributed through our distribution centers located in the southern, southeastern, mid-western and northeastern regions of Brazil. If operations at one of these centers are adversely affected by factors beyond our control, such as fire, natural disasters, power shortages, failures in the systems, among others, and in the event that no other distribution center is able to meet the demand of the region affected, the distribution of products to the stores supplied by the affected distribution center will be impaired, which may adversely affect us. Our growth strategy includes the opening of new stores which may require the opening of new or the expansion of our existing distribution centers to supply and meet the demand of the additional stores. Our operations may be negatively affected if we are not able to open new distribution centers or expand our existing distribution centers in order to meet the supply needs of these new stores.

We have a financial partnership with Itaú Unibanco Holding S.A., or Itaú Unibanco, through which we have established Financeira Itaú CBD S.A. Crédito, Financiamento e Investimento, or FIC, which exclusively offers private label and co-branded credit cards, personal and consumer credit, extended warranties and insurance at our stores. See “Item 4A. History and Development of the Company—Amendments to the Partnership with Itaú Unibanco.” In addition, FIC raises funds from financial institutions in order to finance credit sales to our clients. We are subject to the risks normally associated with providing this type of financing, including risk of default on the payment of principal and interest and any mismatch of cost and maturity of our funding in relation to cost and maturity of financing to our customers, which could have a material adverse affect on us.

The retail segment is sensitive to decreases in consumer purchasing power and unfavorable economic cycles.

Historically, the retail segment has experienced periods of economic slowdown that led to declines in consumer expenditures. The success of operations in the home appliances retail sector depends on various factors related to consumer expenditures and consumers’ income, including general business conditions, interest rates, inflation, consumer credit availability, taxation, consumer confidence in future economic conditions, employment and salary levels. Unfavorable economic conditions in Brazil, or unfavorable economic conditions worldwide reflected in the Brazilian economy, may significantly reduce consumer expenditure and available income, particularly in the lower income classes, who have relatively less credit access than higher income classes, more stringent debt refinancing conditions and more susceptibility to increases in the unemployment rate. These conditions may cause a material adverse effect on us.

Unauthorized disclosure of customer data through breach of our computer systems or otherwise could cause a material adverse effect on us.

One of the main e‑commerce issues is the safe transmission of confidential information of our customers on our servers and the safe data storage on systems that are connected to our servers.  We depend on encryption and authentication technologies of third parties to safely transmit confidential information.  Technological advances, new encryption techniques and other developments may result in technological failures related to personal data protections provided by customers during purchasing.  Security breaches by third parties of our computer systems and unauthorized disclosure or use of confidential information of our customers may expose us to claims for fraudulent use of this information, loss of reputation and judicial claims with potentially high liability, which could cause a material adverse effect on us.

We depend on the transportation system and infrastructure to deliver our products to our stores.

Products destined for all of our stores are distributed through our distribution centers located in 14 States. The transportation system and infrastructure in Brazil is under‑developed and need investment from the Brazilian government to work efficiently and to meet our business needs. Any significant interruptions or reduction in the use of transportation infrastructure or in their operations in the cities where our distribution centers are located as a result of natural disasters, fire, accidents, systemic failures or other unexpected causes may delay or affect our ability to distribute products to our stores and may decrease our sales, which may have a material adverse effect on us.

Financial institutions in Brazil, including our subsidiary FIC, are subject to changing regulation by the Central Bank.

The regulatory structure of the Brazilian financial system is continuously changing. Our subsidiary FIC is a financial institution regulated by the Central Bank and is therefore subject to these regulations. Brazilian government rules and intervention may adversely affect our operations and profitability more than a traditional retailer without these financial operations. Existing laws and regulations may be amended, and their application or interpretation may also change, and new laws and regulations may be adopted. We may be adversely affected by changes in regulations, including those related to:

·         minimum capital requirements;

·         requirements for investment in fixed capital;

·         credit limits and other credit restrictions;

·         accounting requirements; and

·         intervention, liquidation and/or temporary special management systems.

Risks Relating to the Preferred Shares and ADSs

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

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

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

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

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

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

Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in more developed markets, and these investments are generally considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than more developed securities markets. The top 10 stocks in terms of trading volume accounted for approximately 53%, 58% and 49% of all shares traded on the São Paulo stock exchange (BM&FBovespa S.A. – Bolsa de Valores, Mercadorias e Futuros), or BM&FBOVESPA, in 2008, 2009 and 2010, respectively. Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depositary at any time, your ability to sell the preferred shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited.

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

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

Item 4.     INFORMATION ON THE COMPANY

4A.       History and Development of the Company

We were incorporated in Brazil under Brazilian law on November 10, 1981 as Companhia Brasileira de Distribuição. Our principal executive offices are located at Avenida Brigadeiro Luis Antonio, 3,142, CEP 01402-901 São Paulo, SP, Brazil (telephone: 55-11-3886-0421). Our agent for service of process in the United States is CT Corporation, 1633 Broadway, New York, New York, 10019.

We have been a pioneer in the Brazilian retail food industry, opening our first store, a pastry shop, in 1948 in the city of São Paulo under the name Pão de Açúcar. We established one of the first supermarket chains in Brazil, opening our first supermarket in 1959, and opened the first hypermarket in Brazil in 1971.

Brazilian economic reforms implemented in 1994, including the introduction of the real  as the Brazilian currency and the drastic reduction of inflation rates, resulted in an unprecedented growth in local consumer markets. This increase in available income and the resulting increase in consumer confidence broadened our potential customer base and provided us with growth opportunities.

We responded to these changes by strengthening our capital structure, increasing our logistics and technology investments and implementing an expansion strategy focused on the different consumer preferences of the Brazilian population. To support our expansion strategy, consisting of acquisitions and organic growth, we defined the format of our stores to tailor them to the expectations, consumption patterns and purchasing power of the different income levels in Brazil. Our stores have operated under different banners targeted at the various income segments of the Brazilian population. For further information on our banners, see “Item 4B. Business Overview — Our Company” and “— Operations.”

In order to implement that strategy and to increase our market share, between 1981 and 2002, we acquired important supermarket chains such as Coopercitrus,  Lourenção,  Barateiro (we operate these stores under the CompreBem  and Extra banners), Peralta,  Paes Mendonça,  ABC Supermercados,  Sé Supermercados and other small chains, such as São Luiz,  Nagumo and Rosado. 

In December 2003, we entered into an association called Sendas Distribuidora S.A., or the Sendas Association, with Sendas S.A. and investment funds of the AIG Group in order to acquire the Sendas  chain. The Sendas  chain operates retail stores in the State of Rio de Janeiro.

In July 2004, we entered into a financial partnership called FIC with Itaú Unibanco. FIC exclusively offers private label and co-branded credit cards, personal and consumer credit and insurance at our stores. For more information, see “— Amendments to the Partnership with Itaú Unibanco.” 

In November 2007, we acquired a 60% ownership interest in the Assaí  chain by purchasing 60% of the capital stock of Barcelona Comércio Varejista e Atacadista S.A., or Barcelona, a company holding all of the operating assets of the Assaí  chain. This acquisition enabled us to enter the cash-and-carry segment, a wholesale format in the retail food sector, in the State of São Paulo.

In October 2008, we started cash-and-carry operations in the State of Rio de Janeiro through Xantocarpa, a company that assumed the operation of three stores of Sendas Distribuidora, which were converted into Assaí  stores.

In July 2009, we purchased a 70.2% ownership interest in Globex, a company which operates in the home appliances sector under the brand name Ponto Frio. In this annual report, the term “home appliances” refers to sale of durable goods, i.e., electronics, furniture and other items for the home. In a tender offer triggered by the acquisition, our Company increased its ownership interest in Globex to 98.8%. For more information, see “—Acquisition of Globex (Ponto Frio).” 

Also in July 2009, we purchased Barcelona’s remaining stock for R$175 million, corresponding to 40% of its capital stock and, accordingly, we own 100% of the Assaí  chain.

In December 2009, we consolidated our leading position in the retail segment in Latin America and we believe we became one of the 10 largest companies in the electronic products segment worldwide as a result of the association with the partners of Casa Bahia Comercial Ltda., a Brazilian home appliances retailer. Pursuant to the association agreement, by means of a corporate reorganization, we and the partners of Casa Bahia Comercial Ltda. have integrated our respective businesses in the home appliances retail sector, and have unified the e-commerce operations conducted by our subsidiary, Globex. The agreement was approved by our shareholders at the general shareholders’ meeting held on January 11, 2010. For the year ended December 31, 2009, this transaction did not generate any effect on our accounting records. For the year ended December 31, 2010, Nova Casa Bahia’s results of operations for the months of November and December were consolidated with our results of operations. For more information, see “—Association Agreement with the Partners of Casa Bahia Comercial Ltda.”

Also in December 2010, we entered into a stock purchase agreement with Sendas S.A. related to the acquisition of the remaining shares issued by Sendas Distribuidora S.A., held by Sendas S.A. The acquisition was approved by our shareholders at the general shareholders’ meeting held on March 14, 2011. Upon the acquisition of the remaining shares, we and our controlled companies Sé Supermercados Ltda. and Barcelona became holders of 100% of Sendas Distribuidora S.A.’s voting capital.

Acquisition of Globex (Ponto Frio)

On June 7, 2009, we entered into a share purchase agreement with the majority shareholders of Globex Utilidades S.A., a company operating in the Brazilian home appliances sector under the brand name Ponto Frio for over 60 years, for 70.2% of its total voting shares. We paid a portion of the purchase price, R$373.4 million, in cash on July 7, 2009 and the majority shareholders of Globex had the option of receiving the remaining R$451.1 million either in cash, at the fourth anniversary of the closing, or by subscribing for class B preferred shares issued at R$40.00 per share. In the latter case, the majority shareholders of Globex were to receive the shares in the amount due in cash plus 10%.

We also offered the minority shareholders of Globex the right to sell us their shares under the share purchase agreement for 80% of the purchase price paid to the majority shareholders of Globex under the same conditions. One hundred and twenty (120) minority shareholders of Globex agreed to sell us their shares, corresponding to approximately 25% of the total voting shares of Globex, for R$236.8 million.

Pursuant to the Globex share purchase agreement, we increased our capital stock through the issuance of 16,609,046 class B preferred shares at a price of R$40.00 per share. This capital increase triggered the preemptive rights of our shareholders to subscribe for the new class B preferred shares, in accordance with Brazilian law. Wilkes Participações S.A., our controlling shareholder, transferred its right to subscribe for class B preferred shares to the Globex shareholders. Due to the increase in the trading price of our shares, a larger than expected number of our minority shareholders subscribed for the class B preferred shares. As a result of the unexpected demand for class B preferred shares, the preemptive rights transferred to the Globex shareholders were not sufficient to settle our entire purchase price payment obligations. The Globex shareholders were only able to subscribe to 4,673,600 class B preferred shares and we paid them the remaining outstanding balance of the purchase price for their Globex shares, R$451.8 million, in cash, on October 2, 2009. The total amount we paid in cash and class B preferred shares was R$1,155.8 million.

On December 22, 2009, we launched a tender offer for the remaining approximately 5% voting capital in Globex, in accordance with Brazilian regulation, under the same terms as the offer accepted by the initial 120 Globex minority shareholders. The tender offer was concluded on February 3, 2010 and we acquired approximately 3.3% of Globex’s capital stock for R$28.4 million and 137,014 class B preferred shares, resulting in us becoming holders of 98.8% of Globex’s capital stock.

Pursuant to the terms and conditions for the acquisition of Globex, the class B preferred shares were mandatorily convertible into class A preferred shares according to a pre-established schedule.  The last conversion date was January 7, 2011 and there was no outstanding class B preferred share.  On March 31, 2011, our shareholders approved at a general shareholders’ meeting the termination of the class B preferred shares and the change in the designation of class A preferred shares to preferred shares, without any alteration in the rights, preference, privileges or terms of the securities.

For further information on the acquisition of Globex, see note 16 (b) to our financial statements included in this annual report.

Amendments to the Partnership with Itaú Unibanco S.A.

In October 2004, we entered into a partnership agreement with Itaú Unibanco S.A., or Itaú Unibanco, for the creation of a financial institution named FIC to exclusively offer to our customers financial products and services, such as private label credit cards to be used exclusively at our stores, widely accepted card brands, direct consumer credit and personal loans. The initial term of duration of the partnership was 20 years.

In December 2009, we amended the partnership agreement with Itaú Unibanco to include the financial subsidiary of Globex into the partnership and to extend its term to an additional five years. Itaú Unibanco paid us R$600.0 million, of which, R$550.0 million related to Itaú Unibanco’s right to enter into similar partnerships with other retailers and R$50.0 million related to the term of the partnership until August 28, 2029. For further information on our partnership with Itaú Unibanco, see note 15 (a) to our financial statements included in this annual report.

Association Agreement with the Partners of Casa Bahia Comercial Ltda.

We entered into an association agreement with the partners of Casa Bahia Comercial Ltda., a Brazilian home appliances retailer, pursuant to which our Company and they will integrate their respective businesses in the home appliances sector, including their e-commerce activities. For further information on the e-commerce business, see “—Nova Pontocom.”

On December 4, 2009 we, Globex, Casa Bahia Comercial Ltda. and the partners of Casa Bahia Comercial Ltda., who are members of the Klein family, entered into a certain association agreement, aiming at combining the operations of Globex, of certain assets of Casa Bahia Comercial Ltda. and of Extra Eletro (CBD) into one company, or the Association  Agreement.

On July 1, 2010, certain provisions of the Association Agreement were amended: (i) the consolidation of Globex and certain assets of Casa Bahia Comercial Ltda. businesses into our home appliances sector, including home appliances retail activities performed by CBD at its Extra Eletro stores, and (ii) the consolidation of home appliances e-commerce activities carried out by Globex,  Casa Bahia Comercial Ltda. and CBD, or the Association. The amendment to the Association Agreement also provided for the necessary phases for the implementation of the Association.

In the Association preparatory stage, on October 1, 2010, the partners of Casa Bahia Comercial Ltda. partially spun-off Casa Bahia Comercial Ltda., or the Partial Spin-Off, which consisted mainly of certain operating assets and liabilities, rights and obligations related to the home appliances retail business of Casa Bahia Comercial Ltda., the lease agreements related to these assets and 25% of the capital stock of Indústria de Móveis Bartira Ltda., or Bartira, a furniture manufacturer company controlled by Casa Bahia Comercial Ltda.  The valuation of the assets of the Partial Spin-Off was based on the audited balance sheet of Casa Bahia Comercial Ltda. as of June 30, 2010.  The partners of Casa Bahia Comercial Ltda. transferred the assets of the Partial Spin-Off to a new and recently incorporated company, Nova Casa Bahia S.A.  Also, on November 9, 2010, Globex’s shareholders approved the capital stock increase by R$755,519,802.42 at the issue price of R$16.00 per share, fully paid-in by us through the transfer of all the assets and liabilities referring to the home appliances business related to our Extra Eletro stores, Bank Deposit Certificates and CBD receivables against companies under its control.

At the same shareholders’ meeting held on November 9, 2010, Globex’s shareholders approved the merger of 100% shares issued by Nova Casa Bahia into Globex, by means of the issue of new shares on behalf of the partners of Casa Bahia Comercial Ltda.’s partners, or the Merger of Shares. The partners of Casa Bahia Comercial Ltda. became the holders of Globex shares representing 47.56% of Globex’s capital stock and CBD became the holder of shares representing 52.41% of Globex’s capital stock.

According to the terms of the Association Agreement, Casa Bahia Comercial Ltda., CBD and Globex will be liable for the obligations resulting from events prior to the date of the Merger of Shares, except for those recorded on the date of the Merger of Shares.

We, Globex, Casa Bahia Comercial Ltda. and the partners of Casa Bahia Comercial Ltda. entered into a shareholders’ agreement with a six-year term, renewable upon request of any of the parties for an additional term of two years. The renewal is only valid if at the expiration of the original term, there are no outstanding shares corresponding to, at least, 20% of Globex’s capital stock and the partners of Casa Bahia Comercial Ltda. have sold a percentage lower than 23.64% of Globex shares that they held on the date of the Merger of Shares.  For further information on the shareholders’ agreement, see “Item 10C. Material Contracts.”

The parties to the Association Agreement jointly submitted the conditions of the Association to the Brazilian anti-trust authorities. On February 3, 2010, they executed a Provisional Agreement for Reversibility of the Operation with the Brazilian Administrative Council of Economic Defense – CADE, which establishes mainly that Globex and Nova Casa Bahia shall maintain:

·         their brands Casas Bahia and Ponto Frio separate as well as carry out separate promotional campaigns, ensuring that advertisement and marketing investments remain at levels compatible with previous years, except in the case of exceptional macroeconomic conditions;

·         in operation their current stores located in 146 municipalities where these two companies operate;

·         their respective distribution centers and Bartira furniture factory;

·         their respective credit granting policies; and

·         separate their procurement structures and commercial contracts.

Except for these specific conditions, the companies may adopt the measures they deem necessary to integrate their operations and businesses and capture the synergies resulting from this operation.

In addition, the companies undertake to maintain the same overall employment levels at the distribution centers and stores.

The transaction is subject to the approval of the Brazilian anti-trust authorities.

Reorganization of E-Commerce Operations

As part of the Association with the partners of Casa Bahia Comercial Ltda., the parties to the Association Agreement agreed to concentrate all e-commerce assets of the Pão de Açúcar Group and Casa Bahia Comercial Ltda. into PontoFrio.Com Comércio Eletrônico S.A., or Nova Pontocom, an e-commerce company controlled by Globex. On November 8, 2010, at the special shareholders’ meeting of Nova Pontocom, Globex approved a capital stock increase of Nova Pontocom. As a result of the capital increase, the new common shares to be issued will be paid-in by CBD and Globex, as follows: (i) the common shares subscribed by Globex will be fully paid-in through the transfer of assets, liabilities, rights and obligations related to its wholesale activity, and (ii) the common shares subscribed by CBD will be fully paid-in through the transfer of assets, liabilities, rights and obligations related to the home appliances e-commerce activities performed by Extra.Com.

Nova Casa Bahia licensed to Nova Pontocom the right to use all the intellectual property rights related to its e-commerce business, including the domain www.casasbahia.com.br.

In addition, on November 8, 2010, Globex and Nova Pontocom acquired the remaining equity interest of 55% in E-Hub, a service company in the e-commerce segment, which was a joint venture recorded as investment in affiliated companies. Former owners of E-Hub transferred their 55% equity interest to Globex and Nova Pontocom and paid R$20.0 million maturing on January 8, 2013 in exchange of 6% of Nova Pontocom.  For further information on the acquisition of E-Hub, see note 16(c) to our consolidated financial statements included in this annual report.

After completion of the reorganization of our e-commerce operations, Nova Pontocom has an experienced management team, a platform integrated with state-of-the-art e-commerce technology, a broad portfolio of assets – www.pontofrio.com.br, www.extra.com.br; www.casasbahia.com.br; wholesale activities and E-Hub – and a strong connection with our physical locations, all supported by our large size, logistics and IT infrastructure.  Globex is the controlling shareholder of Nova Pontocom, holding common shares representing 50.1% of its capital stock, CBD holds shares representing 43.9% and certain executive officers of Nova Pontocom hold the remaining shares, representing 5.53%.

Proposal Letter from Gama 2 SPE Empreendimentos e Participações S/A

On June 28, 2011, we received a proposal from Gama 2 SPE Empreendimentos e Participações S/A, a special purpose company held by BTG Pactual Principal Investments Fundo de Investimento em Participações.  The proposal contemplates a business combination of the Pão de Açúcar Group with the Carrefour Group, the second largest retailer worldwide, headquartered in France.  We attach the proposal in its entirety as Exhibit 15.(a)(1) to this annual report.

The proposed business combination is subject to approval in accordance with the terms of the shareholders' agreements filed in the Company's head offices, by Wilkes Participações S.A. and, as the case may be, by the relevant corporate bodies of our Company, as well as the competent authorities, in Brazil and abroad, including the Brazilian Securities and Exchange Comission - CVM and the administrative counsel for economic defense Conselho Administrativo de Defesa Econômica - CADE.

We will publicly disclose any material further development related to the proposed business combination.  

Capital Expenditures and Investment Plan

As part of our capital expenditures and investment plan, we have invested approximately R$3,641.8 million in our operations for the three years ended December 31, 2010. Our investments included:

Acquisitions of retail chains – In the food retail sector, when entering new geographic markets, we have generally sought to acquire local supermarket chains to benefit from existing know-how in the geographic region. For expansion within urban areas where we already have a presence, our preference has been to open new stores. To enter the home appliances retail sector, we acquired Globex and entered into an Association with Casa Bahia Comercial Ltda. Our main focus in both sectors, the food and home appliances retail sectors, is to expand organically, but we may continue carrying out strategic acquisitions, to the extent that they result in synergies and add value to our business. Since 2008, we have acquired 1,015 stores in the home appliances retail sector. We have spent an aggregate of R$3,641.8 million on acquisitions from 2008 through 2010.

The following table presents information regarding our acquisitions and the regional distribution of the stores we acquired since 2008:

______________

(1)   Acquired in July 2009.

(2)   Association Agreement entered into in December 2009. The results of operations of Nova Casa Bahia have been consolidated with our results of operations as from November 1, 2010.

Opening of new stores and purchases of real estate – In the food retail sector, we usually seek real estate properties to open new stores under one of our banners in regions where there are no local supermarket chain acquisition opportunities that suit one of our formats. We have opened 125 new stores from 2008 through 2010. The total cost of opening these new stores and purchases of real estate was R$833.5 million.

Renovation of existing stores – We usually remodel some of our Pão de Açúcar, Extra, Assaí stores every year. Through our renovation program we add refrigeration equipment to our stores, create a more modern, customer-friendly and efficient environment, and outfit our stores with advanced information technology systems. In 2010, we focused on the conversion of 50 Sendas  stores and 43 CompreBem  stores into Extra Supermercado stores and also on the conversion of Extra Eletro stores into Ponto Frio stores. The total cost of renovating stores from 2008 through 2010 was R$1,256.2 million.

Improvements to information technology – We view technology as an important tool for efficiency and security in the flow of information among stores, distribution centers, suppliers and corporate headquarters. We have made significant investments in information technology in an aggregate amount of R$382.4 million from 2008 through 2010. For more information on our information technology, see “Item 4B. Business Overview—Technology.”

Expansion of distribution facilities – Since 2008, we have opened distribution centers in the cities of São Paulo, Brasília, Fortaleza, Rio de Janeiro, Recife, Salvador and Curitiba. The increase and improvement in storage space enables us to further centralize purchasing for our stores and, together with improvements to our information technology, improve the overall efficiency of our inventory flow. We have spent an aggregate of R$59.4 million on our distribution facilities from 2008 through 2010.

The following table provides a summary description of our principal capital expenditures for the three years ended December 31, 2010:

4B.       Business Overview

The Brazilian Retail Industry

The Brazilian retail food industry represented approximately 5.5% of Brazil’s GDP (gross domestic product) in 2010. According to the Brazilian Supermarket Association (Associação Brasileira de Supermercados), or ABRAS, the food retail industry in Brazil had gross revenues of R$201.6 billion in 2010, representing a 7.5% increase compared with 2009.

The Brazilian retail food industry is highly fragmented. Despite consolidation within the industry, according to ABRAS, the three largest supermarket chains represented approximately 43.4% of the retail food industry, in 2010, as compared to 40.4% in 2009. Our gross sales represented 17.9% of the gross sales of the entire retail food industry in 2010, also according to ABRAS.

The cash-and-carry segment (atacarejo), a wholesale segment in the retail food industry, was created in order to serve customers within a market niche that was neither reached by self-service retail nor by wholesale. According to a Kantar World Panel study published on April 7, 2011, sales in the cash-and-carry segment increased 24% in 2010 compared to 2009 mainly due to the competitiveness in the market and the attractiveness caused by lower prices and promotions. 

The home appliances retail sector was the second most important segment in the retail business, after the food retail segment, which is explained by the favorable economic context in 2010, highlighted by the social ascension of an important portion of the Brazilian consumer market. The migration of lower income classes to lower-middle income classes drove consumption of higher value-added products.

According to the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the total population of Brazil was approximately 190.7 million in 2010, a 12.3% growth compared to 2000. Given that more than 83% of the population lives in urban areas (where most of our operations are located) and the urban population has been increasing at a greater rate than the population as a whole, our business is particularly well positioned to benefit from Brazil’s urban growth and economies of scale related to urban growth. The city of São Paulo has a population of approximately 11.2 million and the city of Rio de Janeiro has a population of approximately 6.3 million. These are the two largest cities in Brazil. The State of São Paulo has a total population in excess of 41.2 million, representing approximately 21.6% of the Brazilian population and is our largest consumer market. The State of Rio de Janeiro is our second largest consumer market.

The Brazilian retail industry is perceived as essentially growth-oriented, because retail margins are substantially more constrained compared to other industries. We are therefore intrinsically dependent on the growth rate of Brazil’s urban population and its different income levels. While living expenses in Brazil are lower than those in North America, Western Europe and Japan, Brazilian household income levels are also substantially lower.

The Precedent Sales Index (Índice Antecedente de Vendas – IAV) is an index based on information furnished by retailers that allows the Institute for the Development of Retail (Instituto para Desenvolvimento do Varejo – IDV) to analyze recent results of operations and project expectations of sales of retailers in the short term. According to the Precedent Sales Index, the sales in food retail industry, which is composed of supermarkets, hypermarkets, drugstores, cosmetic shops and eating out stores, increased 13.2% in December 2010 compared to December 2009, while the sales in the home appliances retail industry (furniture, electronics, durable goods, construction materials, among others) increased 9.2% in December 2010 compared to December 2009. The growth in both sectors was mainly due to favorable macroeconomic conditions that benefited consumption, such as lower interest rates in loans to individuals, increased consumer confidence and the lowest monthly unemployment rate of 5.7%, according to IBGE.

The following table sets forth the different income class levels of Brazilian households, according to the Consumption Potential Index (Índice de Potencial de Consumo – IPC) Maps 2011.

As per the study from IPC Maps 2011, classes A1 and A2 households will account for only 19.0% of the urban population and classes B1 and B2 households will account for 46.4% of the urban population. Classes C1, C2, D and E will collectively represent 34.6% of all urban households. In recent years, the number of class C, D and E households has increased in terms of total urban households and their average purchasing power has increased.

We expect that increased consumption by the lower income class levels will occur over time as a result of the gradual salary increases and a steadily growing population. The Brazilian monthly minimum wage has increased to R$545.00 in the middle of 2011. As seen in the years immediately following the introduction of the real, even small increments in purchasing power generally result in significant increases in consumption in absolute terms as well as increased expenditures in premium priced food products and other non-food items, including home appliances and consumer electronics.

In 2010, as a result of favorable macroeconomic conditions, there has been a migration of the population from lower income classes to lower-middle income classes, which has positively affected us. The Brazilian lower income population has been consuming products with higher added value in the retail food segment, such as yogurt and frozen food. In addition, they have gained access to products such as laptops, new furniture and flat screen TVs in the home appliances retail industry. In  terms of social mobility in urban areas, there is still a significant growth in the population from B2 and C1 income classes, evidencing Brazil’s middle class consumption is powering up. This quantitative increase in the number of people usually derives from C2 and D income classes, which in 2011 also presents higher consumption levels. Higher growth is expected in B2 income class, which covers 20.9% of urban households in 2011 (compared to 19.3% in 2010) and will account for 25.4% of Brazil’s consumption (compared to 23.7% in 2010).

Our Company

We are the largest retailer in Brazil in the food retail sector based on both gross sales and number of stores. In 2010, we had a market share of approximately 17.9% in the Brazilian food retail sector, according to ABRAS, with gross sales of R$36,144.4 million. As of December 31, 2010, we operated 1,647 stores, 81 gas stations and 153 drugstores in 19 States and the Federal District, in addition to a logistics infrastructure supported by 50 distribution centers located in 14 States.

We classify the various business segments in which we operate in four operating segments as follows:

·         Food retail segment, which consists of sales of food and non-food products to individual consumers at (i) supermarkets through the banners Pão de Açúcar, Extra Supermercado, CompreBem  and Sendas, (ii) hypermarkets through the banner Extra Hipermercados, and (iii) convenience stores through the banner Extra Fácil. 

Food products include non-perishable food products, beverages in general, fruit, vegetables, meat, bread, cold cuts, diary products, cleaning products, disposable products, and personal care products. In some cases, these goods are sold in the form of private label products at our food retail stores. We also sell non-food products, which include clothing items, baby items, shoes and accessories, household articles, books, magazines, CDs and DVDs, stationery, handcraft, toys, sports and camping gear, furniture, mattresses, pet articles and gardening. Some of the products listed above are also offered in the form of our private label products. We also sell our products in the food retail segment through our website www.paodeacucar.com.br. At our Extra stores, we also sell electronics, such as personal computers, software, computer accessories, and sound and image systems.

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

The food and non-food retail segments also include extended warranties that we provide to our customers on the sale of home appliances sold at our stores and bill payment services, in addition to the services directly offered at our stores, such as photo development.

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

·         Home appliances segment, which consists of sale of durable goods, i.e., electronics, home appliances, furniture and other items for the home, and provision of products and services, such as specialized and convenient sales and after-sales service through Casas Bahia and Ponto Frio stores. 

·         E-commerce segment, which consists of our e-commerce operations through the websites Extra.com.br, PontoFrio.com.br, CasasBahia.com.br, wholesale activities and E-Hub, owned by Nova Pontocom.

The following table sets forth the number of our stores by region as of December 31, 2010:

(1)   Consists of stores in 121 cities, including Campinas, Ribeirão Preto and Santos.

(2)   This area comprises the States of Espírito Santo, Rio Grande do Sul, Santa Catarina,Minas Gerais and Paraná.

(3)   This area comprises the States of Bahia, Piauí, Ceará, Pernambuco, Paraíba, Bahia, Rio Grande do Norte, Sergipe, Tocantins and Alagoas.

(4)   This area comprises the States of Mato Grosso do Sul, Mato Grosso, the Federal District and Goiás.

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

Segment Revenue and Income Distribution

The table below shows our revenues from our operating segments and their participation in our net revenues. Results of the operating segments are presented in IFRS, the measure used by management in evaluating the performance of and strategy for the four segments listed below.

The table below shows the profit or loss (as the case may be) from each of the operating segments and their participation in our net income. Results of the operating segments are presented in IFRS, the measure used by management in evaluating the performance of and strategy for the three segments listed below.

Operations

The following table sets forth the number of stores, the total selling area, the average selling area per store, total number of employees and the net sales revenue as a percentage of our total net sales revenue for each of our store formats as of December 31, 2010:

______________

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

(2)   Extra Fácil sales included in Extra Hipermercado sales. 

(3)   CompreBem  and Sendas  sales included in Extra Supermercado sales. 

(4)   Extra Eletro and Nova Casa Bahia sales included in Globex (Ponto Frio) sales since November, 2010. Nova Ponto.com sales included in Ponto Frio sales (Extra.com  as of May 2010 and CasasBahia.com  as of November 2010)

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

Food Retail Operating Segment

Pão de Açúcar Stores

Pão de Açúcar operates convenient neighborhood stores, which are predominantly located in large urban areas (with over one-third located in the greater São Paulo city area). We believe that the locations of our Pão de Açúcar stores are a competitive advantage since available sites in those urban areas are scarce. The Pão de Açúcar stores target the Brazilian class A and class B household consumers. The stores are characterized by a pleasant shopping environment, a broad mix of quality products, innovative service offerings and high level of customer service, with an average of 75.4 employees per 1,000 square meters of store space. Many of these stores feature specialty areas such as perishables, baked goods, wine, ready-to-eat dishes, meat, cheese and seafood departments. Many stores have shopping advisors that assist customers with inquiries about their particular needs, prices, special discounts and brand information.

As of December 31, 2010, we had 149 Pão de Açúcar stores. The Pão de Açúcar stores range in size from 120 to 4,670 square meters and as of December 31, 2010, had an average of 1,331 square meters of selling space. Food products represented 94.0% of gross sales revenue attributable to Pão de Açúcar in 2010 and non-food products represented 6.0%.

The Pão de Açúcar banner recorded gross sales of R$4,762.1 million in 2010, representing an increase of 12.1% relative to 2009. This increase was a result of the strong performance of the Pão de Açúcar banner in the Northeast and Midwest regions and the consolidation of the management of the Pão de Açúcar banner that helped to create a single identity for this banner in Brazil while respecting regional characteristics.

CompreBem Stores

CompreBem supermarkets offer competitive prices and services. CompreBem  stores target the Brazilian classes C, D and E household consumers. Generally, products offered at our CompreBem  stores are more competitively priced than products offered at our Pão de Açúcar stores. With an average of 64.3 employees per 1,000 square meters of store space, CompreBem  stores are characterized by a lower level of personalized services and different products and assortment of products, compared to Pão de Açúcar stores.

As of December 31, 2010, we had 113 CompreBem  stores. CompreBem’s  stores range in size from 316 to 3,125 square meters and had an average of 1,160 square meters of selling space as of December 31, 2010. Food products represented 90.6% of gross sales revenue attributable to CompreBem  stores in 2010 and non-food products represented 9.4%.

CompreBem sales are included in Extra Supermercado. We expect to convert the CompreBem  stores into Extra Supermercado stores by the end of 2011.

Sendas Stores

In December 2003, we formed the Sendas Association through which we subsequently acquired the Sendas chain. Similarly to our CompreBem  banner, the Sendas  banner offers competitively priced products and targets middle and lower income consumers (i.e., the Brazilian classes C, D and E). Sendas  stores are all located in lower‑income neighborhoods in the State of Rio de Janeiro.

As of December 31, 2010, we had 17 Sendas  stores. Sendas’s  stores range in size from 308 to 3,894 square meters and had an average of 2,669 square meters of selling space as of December 31, 2010. Food products represented 90.1% of gross sales revenue attributable to CompreBem  stores in 2010 and non-food products represented 9.9%.

 Sendas  sales are included in Extra Supermercado. We expect to convert the Sendas  stores into Extra Supermercado stores by the end of 2011.

Below we summarize the stock purchase agreement entered into between Sendas S.A. and the subsidiary Barcelona.

Sendas S.A. and its subsidiary Barcelona entered into a Stock Purchase Agreement and Other Covenants, to transfer the Sendas Distribuidora’s shares held by Sendas S.A. to Barcelona. This non-controlling interest acquisition was approved by our Board of Directors and approved in our shareholders’ general meeting.

Sendas S.A. transferred to Barcelona its entire interest in Sendas Distribuidora, corresponding to 42.57% of the capital stock for R$ 377.0 million to be paid as follows: R$ 59.0 million upon the transfer of shares and the remaining amount of R$ 318.0 million in six annual and consecutive installments of R$ 53.0 million, the first installment is due in July 2011, adjusted by IPCA (Extended Consumer Price Index) as of the fourth installment, and as from July to December 2010. This present value of obligation assumed at December 31, 2010 was R$ 324.3 million.

Extra Hipermercados Stores

Extra hypermarkets are our largest stores. We introduced the hypermarket format in Brazil with the opening of our first 7,000 square meter store in 1971. The Extra  hypermarkets offer the widest assortment of products of any of our store formats and have an average selling area of 6,961 square meters as of December 31, 2010. The Extra  stores target the Brazilian classes B, C, D and E. As of December 31, 2010, we had 110 Extra  stores, including stores that opened in 2010. The sale of food products and non-food products represented 61.6% and 38.4% of Extra Hipermercado’s gross sales in 2010, respectively.

Gross sales of the Extra  banner in 2010, including Extra Fácil sales, reached R$12,641.3 million, a 8.4% increase compared to 2009. This increase was due to the opening of seven Extra Hipermercados and 16 Extra Fácil stores.

Extra Supermercado Stores

As of December 31, 2010, we operated 101 Extra Supermercado stores. Our Extra Supermercado banner is characterized by stores with sales area of up to 464 square meters and a complete mix of food products and general merchandise. Our Extra Supermercado stores are complete neighborhood supermarkets with exceptional meat and bakery products, where families can stock up their pantries rapidly and economically and also acquire a wide range of household items, in an easily accessible, pleasant environment with exemplary customer service. The sale of food products and non-food products represented 92.3% and 7.7% of Extra Supermercado’s gross sales in 2010, respectively.

As part of our strategy to increase our operations in this segment and take advantage of the migration of the Brazilian population from lower income class to lower-middle income class, we have been converting CompreBem  and Sendas  stores into Extra Supermercado stores to unify our banners that are targeted at lower to middle income consumers.  Through this conversion process, we intend to strengthen our position in this increasingly growing segment of the Brazilian population and streamline our operations.

Gross sales of the Extra  Supermercado  format in 2010, including CompreBem  and Sendas  sales, reached R$5,066.7 million, a 6.1% increase compared to 2009. This increase was due to improvements in the shopping environment of the stores and assortment adjustments that delivered higher sales per store, specially at CompreBem  and Sendas. 

Extra Fácil Stores

With the establishment of the Extra Fácil banner in July 2007, we significantly increased our presence in the convenience store segment, where we had already been operating through our Extra Supermercado stores. We opened 16 new stores in 2010, bringing the total of Extra Fácil stores to 68 units as of December 31, 2010. Extra Fácil is characterized by small retail stores with up to four check-outs and offers convenience, proximity and facility. The sale of food products and non-food products represented 95.3% and 4.7% of Extra Fácil’s gross sales in 2010, respectively.

Gas Stations

As of December 31, 2010, we were operating 81 gas stations, two of which were opened in 2010. Our gas stations are located within the parking area of certain of our stores. The location of our gas stations allows our customers to both go shopping and refuel their car while they are on our premises. Our strategy for gas stations is based on competitive prices and the reliability and quality of fuel, which is assured by the brand. We expect to increase the number of gas station units, especially in connection with the Extra  and Assaí  banners, and increase synergies with drugstores and Extra Fácil stores.

Drugstores

With 153 units in operation, we operate one of the largest drugstore chains in Brazil’s retail food industry. We opened a total of three new stores in 2010. In addition, we recently launched a series of initiatives that we believe contribute to the success of our drugstores, including: (i) reorganization of management, (ii) successful renegotiation of prices with suppliers and (iii) strategic adjustments to the assortment and services offered at our drugstores.

Pão de Açúcar Delivery

The Pão de Açúcar Delivery, or PA Delivery, is an extension of our Pão de Açúcar banner. Through the PA Delivery, our clients order products through the Internet. As of December 31, 2010, we had nine PA Delivery units in Brazil, three located in the Greater São Paulo area, one in each of the cities of Indaiatuba (interior of the State of São Paulo), Bertioga (in the coastal region of the state of São Paulo), Rio de Janeiro, Brasília, Curitiba and Fortaleza.

Cash-and-Carry Operating Segment

Assaí Stores

The cash-and-carry segment (atacarejo segment), a wholesale segment in the retail food industry, is one of the fastest growing market segments in Brazil in terms of new store openings. This segment was created in order to serve institutional consumers like processers, retailers and users, offering highly competitive prices and quality products.

Assaí has been operating in the cash-and-carry segment for 37 years and as of December 31, 2010, Assaí had 9,253 employees and 57 stores. In 2010, we opened 17 new Assaí stores. Out of the 17 new Assaí  stores, 13 stores were newly opened and four stores were converted into Assaí format from other banners. In 2010, the Assaí  banner recorded gross sales of R$3,255.2 million.

Home Appliances Operating Segment

Ponto Frio Stores

Our Ponto Frio stores are specialized in home appliances such as consumer electronics and furniture. As of December 31, 2010, we were operating 506 Ponto Frio stores as a result of our acquisition of Globex in July of 2009. In 2010, Ponto Frio stores had gross sales of R$7,040.7 million. For more information on the acquisition of Globex, see “Item 4A. History and Development of the Company — Acquisition of Globex (Ponto Frio).” 

Through our Ponto Frio stores, we seek to provide our customers with the best purchasing experience for electronics, appliances, and household products.  Our Ponto Frio stores have a large variety of products and services and offer personalized and specialized services during and after sales.

Casas Bahia Stores

Our Casas Bahia stores are specialized in electronics/household appliances and furniture. As of December 31, 2010, we were operating 526 stores as a result of the Association with Casa Bahia Comercial Ltda. In November and December 2010, Casas Bahia stores’ gross sales totaled R$2,972.3 million. For more information on the Association with Casa Bahia Comercial Ltda., see “Item 4A. History and Development of the Company — Association Agreement with the Partners of Casa Bahia Comercial Ltda..”

Our Casas Bahia stores have a business and management model based on simplicity in the relationship with customers. This relationship allows Casas Bahia to provide easy and simple access to credit to customers, as well as respect and dedication to customers, suppliers and business partners.

E-commerce Operating Segment

In line with our strategy of expanding our share in the sales of home appliances through e-commerce, we consolidated our e-commerce operations by creating a new company called Nova Pontocom. This segment consists of sale of home appliances, i.e., electronics, furniture and other items for the home through the websites: Extra.com.br, PontoFrio.com.br and CasasBahia.com.br

Seasonality

We have historically experienced seasonality in our results of operations, principally due to traditionally stronger sales in the fourth quarter holiday season. Sales revenues in December are typically 40% above the average sales revenues in the other months. We also experience strong seasonality in our results for the month of April as a result of the Easter holiday where we offer specialized products for the occasion as well as in Soccer World Cup years where some of our products experience an increase in sales.

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

Our Products

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

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

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

We purchase our products in the home appliances retail sector from suppliers and resell them to our end-user consumers.

Suppliers

The purchasing of our products for our Pão de Açúcar, CompreBem, Sendas, Extra  Hipermercados,  Extra Supermercado, Extra Fácil and Assaí  stores is centralized and we purchase substantially on a spot or short-term basis from a large number of unaffiliated suppliers. As a result, we are not dependent on any single supplier.

The purchasing of our products for our Ponto Frio and Casas Bahia stores and for our e-commerce operating segment is separated and we purchase from a small number of suppliers. 

Distribution and Logistics

In order to efficiently distribute perishable food products, grocery items and general merchandise, we operate 51 distribution centers (including those of Nova Casa Bahia and Globex) strategically located in 14 States with a total storage capacity of approximately 1,366,814 square meters. We were the first retailer in Brazil to have a centralized distribution center. The locations of our distribution centers enable us to make frequent shipments to stores, which reduces the need of in-store inventory space, and limits non-productive store inventories.

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

In 2010, we focused on the following tasks: (i) opening of seven distribution centers, which we believe will support our growth through mid-2012; (ii) investment in technological advances, which provided us with accuracy, assertiveness and productivity gains; and (iii) advances in our distribution platform as a result of the implementation of a new system and our adoption of the software Oracle – Retail, which were key to our improvement in the management of the demand. For 2011, our strategy is to review our entire logistics network to include all of our businesses and optimize the use of our different sites, while assuring that the particularities of each business is respected. The expectation is to capture gains through the reduction of losses and working capital.

Our logistics and distribution processes are divided in accordance with the products and services sold under our banners. Accordingly, our distribution processes are guided by the following procedure:

Stores, Supermarkets and Hypermarkets

As of December 31, 2010, the logistic process to supply our stores, supermarkets and hypermarkets (excluding Ponto Frio, Casas Bahia, our e-commerce business, drugstores and gas stations) included 23 distribution centers located in the States of São Paulo, Rio de Janeiro, Ceará, Pernambuco, Bahia, Paraná and the Federal District, corresponding to a 397,000 square meters  area including both our own and outsourced distribution centers. Our distribution process is performed by an outsourced fleet that, on December 31, 2010, totaled more than 1,300 vehicles exclusively dedicated to this activity, all of which are tracked via GPS. As of December 31, 2010, our centralization rate (the percentage of the products supplied at our stores that come directly from our distribution centers) was 85%.

Orders made for our non-centralized products are made directly by the stores and delivered by the suppliers following the supply model known as “Direct Entry.” As of December 31, 2010, 15% of our stores sales corresponded to “Direct Entry” products, especially ornamental plants, cigarettes, ice creams, yogurts and magazines.

Electronic products and home appliances  – Casas Bahia and Ponto Frio stores

Our logistics process associated with our Casas Bahia and Ponto Frio stores involve an examination of Ponto Frio’s stores’ forecast for sales, which we use to submit orders to our suppliers. Once these orders are issued, the delivery of products is managed by Globex supply chain area, which analyzes inventory levels, sales estimates by store and other variables and schedules the delivery of the requested products with our suppliers. The products are delivered and distributed among Globex’s distribution centers, which as of December 31, 2010 totaled 16 distribution centers located in 11 States (Rio de Janeiro, São Paulo, Minas Gerais, Paraná, Bahia, Espírito Santo, Goiás, Mato Grosso, Mato Grosso do Sul, Santa Catarina and the Federal District.)

PA Delivery

Our PA Delivery units share the same inventories with our stores, where our PA Delivery units are strategically located, to take advantage of a larger area of delivery and profit from it.

Nova Pontocom

Our non-food products e-commerce network offers assistance to our clients through two distribution centers. These centers are used for storage and handling of goods; from the time they are selected and packed until the invoice is issued and the products are shipped. Upon the placement of the order on our website or through our call center and confirmation of the payment by the financial institution, the products are selected by a specialized team, are checked and packaged by our quality control department, and the invoice is issued.

Drugstores

Our drugstores are supplied with medications and similar products, the latter following the same distribution logistic used for our supermarkets and hypermarkets. Medications are delivered by specialized distributors who intermediate the process between our Company and the respective drug manufacturers. As of December 31, 2010, we maintained agreements with three major distributors as well as with some regional distribution companies. We do not maintain drug inventories. Medications are requested to distributors through purchase orders that are made according to the needs of our drugstores.

In 2010, through a dedicated logistics operator, BOMI – Farma, located in São Paulo, we have made direct purchases from the pharmaceutical industry. The distribution center operates in the interior of the State of São Paulo and currently serves our drugstores located in this State.

Gas Stations

Our gas stations are supplied by exclusive suppliers. As of December 31, 2010, we used five suppliers.  Supply orders are made individually by each station, and fuel is requested through purchase orders or pre-agreed daily supplies, pursuant to the respective services agreement entered into with each gas station. Fuel transportation is carried out exclusively by our supplier while unloading operations being closely followed by our employees for safety and quality control reasons. The process for compressed natural gas, or GNV is different. GNV is delivered by regional suppliers directly to the gas stations, through dealers and using pipelines connected to the entrance boxes located at the gas stations and holding fuel meters installed and controlled by the dealers themselves. This equipment regularly measures the GNV volumes supplied. GNV is sold through dispensers attached to these entrance box, using specific pipelines.

Marketing

Our marketing policy is aimed at attracting and retaining our customers. To this end, we conduct integrated marketing campaigns that are specific to each store banner in which we operate and are structured and directed at the target market for each store banner. Our marketing teams are media experts dedicated to developing quality marketing campaigns to emphasize our strength in terms of selection, service and competitive prices.

In 2008, 2009 and 2010 we spent approximately R$180.2 million, R$266.4 million  and R$281.0 million, respectively, on advertising (approximately 1.0%, 1.0% and 0.9% of total net sales revenues in each year, respectively). Also, 28.0%, 26.3% and 28.1% of our total marketing expenditures in 2008, 2009 and 2010, respectively, were spent on radio, newspaper and magazine advertising. Television advertisements accounted for 38.2%, 39.2% and 35.8% of advertising expenses in 2008, 2009 and 2010, respectively. We spent 33.8% in 2008, 35.6% in 2009 and 36.1% in 2010 on other promotional activities.

FIC and Investcred

Before our acquisition of Globex, it had entered into an association with Unibanco – União de Bancos Brasileiros S.A. (currently, Itaú Unibanco), Banco Investcred Unibanco S.A., or Investcred. In December 2009, we amended the Partnership with Itaú Unibanco to include Investcred into the Partnership and to extend the Partnership’s term to an additional five years. Itaú Unibanco paid us R$600.0 million, of which, R$550.0 million related to Itaú Unibanco’s right to enter into similar partnerships with other retailers and R$50.0 million related to the term of the partnership until August 28, 2029.

FIC operates service kiosks in our stores that have exclusive rights to offer private label and co-branded credit cards, personal and consumer credit and insurance. FIC has been operating for six years and has 7.8 million customers (including the customer base of Investcred), which represents approximately one third of our customers. Each of our Company and Itaú Unibanco holds 50% of FIC’s capital stock. Our Company holds 36% and Globex holds 14%. Itaú Unibanco is responsible for managing FIC and appointing the majority of its officers.

FIC’s share of our total gross sales amounted to 14.0% as of December 31, 2010. In 2010, FIC had an equity income of R$47.4 million – a significant improvement compared to the R$15.2 million in 2009. This performance was in line with our strategy to increase the FIC card’s share of sales, making it the best payment option in the stores and e-commerce operations, with exclusive benefits and advantages for card-holders.

The table below sets forth the breakdown of FIC’s customers in 2008, 2009 and 2010.

______________

(1)   Including Globex (Ponto Frio).

(2)   Excluding Globex (Ponto Frio).

Credit Sales

In 2010, 54.3% of our net sales revenue were represented by credit sales in the form of credit card sales, installment sales, post-dated checks and purchase vouchers. The allowance for doubtful accounts is based on average historical losses complemented by the Company's estimates of probable future losses:

Credit card sales. All of our store formats accept payment for purchases with MasterCard, Visa, Diners Club, American Express and our co-branded credit cards. Sales to customers using credit cards accounted for 40.6%, 43.6% and 45.8% of our net sales revenue in 2008, 2009 and 2010 respectively. From this total, sales through private label and co-branded credit cards accounted for 15.5% of our net sales revenue in 2010. An allowance for doubtful accounts is not required as credit risks are substantially assumed by credit card companies or issuing banks.

Purchase vouchers. We accept as payment in our stores vouchers issued by third party agents to participating companies who provide them to their employees as a fringe benefit. Purchase vouchers accounted for 1.0%, 7.5% and 5.9% of our net sales revenue in 2008, 2009 and 2010 respectively. An allowance for doubtful accounts is not required as credit risks are substantially assumed by the companies that issue the vouchers.

Credit sales. Our Extra  hypermarkets, Ponto Frio and Casas Bahia stores offer attractive consumer financing conditions to our customers who frequently purchase home appliances on an installment basis. The installment sales accounted for 1.5%, 1.0% and 2.6% of our total net sales revenue in 2008, 2009 and 2010 respectively. These sales are split in:

Post-dated checks. Post-dated checks are used as financial instruments in Brazil to make purchases. Post-dated checks are executed by a consumer with a future date (up to 60 days) instead of the date of the purchase. The retailer typically deposits the check only as of this future date, and interest for the time elapsed is included in the amount of the check. We currently have post-dated check programs in which interest is computed on the settlement amount based upon a fixed monthly rate of interest (to a lesser extent, for certain promotional programs no interest is charged). We limit the availability of post-dated checks to customers who meet our credit criteria and who hold our identification card. Sales to customers using post-dated checks accounted for 1.5%, 0.7% and 0.2% of our net sales revenue in 2008, 2009 and 2010, respectively.

Installment sales (“Crediário”). Our Casas Bahia stores offer easy access to credit through payment slips (“carnês”) to our customers to finance their purchases. Sales to customers using payment slips accounted for 2.4% in 2010.

We invested R$101.8 million in information technology in 2008, R$144.2 million in 2009 and R$136.4 million in 2010. Our information technology department is interconnected with our other departments, streamlining our strategic initiatives.

During 2010, we focused on continuing the projects that were initiated in 2009. We completed the project Oracle – Retail, the Company’s largest technology investment in recent years. During 2010, we concluded all stages of deployment. In 2011, we will commence the roll-out, by category, to the distribution centers and all of our stores. Oracle – Retail is expected to reduce the levels of inventory and breakage in the stores, maximizing employee work and minimizing consumers’ perception of lack of products on the shelves.

Other main projects developed during 2010 include:

SAP – SAP will be the platform used to integrate all of the companies in the Group. SAP is already operating in all areas of our financial back-office. In 2011, we will introduce the system in our cash-and-carry and home appliances segments. We believe that adopting a single platform will lead to better control, integrity and uniformity of processes among the companies.

DemandTec – We implemented DemandTec in all of the Company’s supermarkets, hypermarkets and proximity retail outlets. The tool facilitated the studies of price elasticity of products sold. The studies allowed us to maximize supply at the best price and improved margin.

Intellectual Property

We consider our brands to be one of our most valuable assets and have worked extensively to define the characteristics of each of our banners (Extra, Extra Supermercado, Extra Fácil, Pão de Açúcar, CompreBem, Sendas, Ponto Frio, Casas Bahia and Assaí) in terms of expectations, consumption patterns and purchasing power of the different income levels in Brazil. We believe that Brazilian consumers associate with each of our banners a specific combination of products, services and price levels.

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

As of December 31, 2010, our most important trademarks (Pão de Açúcar, Companhia Brasileira de Distribuição, Barateiro, Extra, Qualitá, CompreBem, Sendas, Taeq, Ponto Frio, Casas Bahia and Assaí, among others) were duly registered with INPI and we had approximately 2,419 trademarks registered or in the process of being registered in Brazil. We did not have any registered patents as of December 31, 2010.

Regarding Casa Bahia Comercial Ltda.’s trademarks, the parties executed the “Trademark Assignment and Transfer Agreement,” through which Casa Bahia Comercial Ltda. assigned and transferred the property of its trademarks registered in Brazil to Nova Casa Bahia.

We own the following domain names, among others: www.extra.com.br, www.paodeacucar.com.br, www.comprebem.com.br, www.assaiatacadista.com.br, www.pontofrio.com.br,  www.sendas.com.br  and www.casasbahia.com.br. Note that these domain names are for informative purposes only and the information contained in these websites is not incorporated by reference in this annual report.

Competition

Brazil’s leading retail food companies are controlled by companies headquartered abroad. Foreign presence in the Brazilian retail food industry started with French retail food chain, Carrefour. In the past decade, the U.S. chain Wal-Mart has also entered the Brazilian market, mostly through the acquisition of domestic retail food chains, increasing competition in the industry. Thus, the Brazilian retail food industry is highly competitive. Nonetheless, supermarket penetration levels in Brazil, in terms of the number of supermarkets in proportion to the country’s population and area, is estimated to be lower than the levels recorded in the United States, several Western European countries and some South American countries.

Recently, leading retail food companies, including our Company, have acquired various chains. One recent trend in the retail food industry is the migration of large chains to smaller formats, such as neighborhood banners. We believe that hypermarkets should increase their share in the clothing, general goods, electronic products, furniture and construction materials markets as well as in other categories of non-food products, in order to take advantage of the growth in department stores and stores specializing in this segment in Brazil.

Despite operating in various Brazilian regions, the dimension, wealth and importance of the State of São Paulo drive the concentration of our stores into this market, with the State of Rio de Janeiro being the second largest consumer market for our operations. 

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

The principal competitor of Extra hypermarket is Carrefour, which operates stores in the southeastern and southern regions of Brazil, and Walmart, which operates through various banners in the southeastern, northeastern and southern regions of Brazil.

Assaí chain competes with Atacadão, a wholesale chain with 34 stores purchased by Carrefour in 2007, Roldão, Tenda, Makro and Maxxi.

In the State of São Paulo, our CompreBem  stores face strong competition from various smaller regional chains. In the State of Rio de Janeiro, the main competitors of ABCCompreBem and Sendas are Guanabara, Prezunic, Zona Sul and Mundial.

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

In the home appliances market, the principal competitors of our Extra Eletro, Casas Bahia and Ponto Frio stores are Magazine Luiza, Pernambucanas, Ricardo Eletro and Lojas Insinuante.

In relation to our food products e-commerce, our PA Delivery units are market leaders and do not face competition at the national level; however there are relevant competitors in local markets, such as Zona Sul, which has a higher market share than us in the city of Rio de Janeiro, Mercadorama, which belongs to the Walmart group, in the city of Curitiba, and Sonda, in the city of São Paulo.

In non-food products e-commerce, our competitors are Brazilian and foreign companies. We believe that the competition from foreign companies is not material in this segment. According to a study by Exame, a Brazilian business magazine in the beginning of March 2010, Nova Pontocom (comprised by Extra.com.br,  PontoFrio.com  and CasasBahia.com), holds the second highest market share in this segment. Our competitors in this segment are B2W, the market leader, which owns Americanas.Com, Submarino and Shoptime, among others, Compra Fácil of the Hermes Group, Magazine Luiza, Walmart, Saraiva, Carrefour  and Fast Shop. 

Regulatory Matters

We are subject to a wide range of governmental regulation and supervision generally applicable to companies engaged in business in Brazil, including federal, state and municipal regulation, such as labor laws, public health and environmental laws. In order to open and operate our stores, we need a business permit and site approval, an inspection certificate from the local fire department as well as health and safety permits. Our stores are subject to inspection by city authorities. We believe that we are in compliance in all material respects with all applicable statutory and administrative regulations with respect to our business.

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

As a result of significant inflation during long periods in the past, it was common practice in Brazil not to label individual items. However, a recently enacted federal regulation established that products exposed to consumers must contain information about prices (for instance price tags, signs or bar codes which can be read with scanners) in order to facilitate the identification of prices of each product by the consumer. Pursuant to these new rules, the pricing information must be physically attached or adjacent to the product. When bar codes are used, the commercial establishment is required to provide easily accessible scanners. We believe that we are in compliance with these new provisions in all material aspects.

The Brazilian Congress is discussing a bill requiring a prior assessment of the impact of the construction of a hypermarket in excess of 1,000 square meters on the relevant neighborhood. The proposed regulation is intended to protect traditional family-owned retailers that have increasingly lost market share in Brazil to the larger chains and hypermarkets. Regulations of this type already exist at the municipal level. For example, governmental authorities in the city of Porto Alegre in the State of Rio Grande do Sul issued a city ordinance in January 2001 prohibiting the construction of food retail stores with a selling area greater than 1,500 square meters, which in May 2005, was amended as to increase from 1,500 to 2,500 squares meters the selling area of food retail stores. Other jurisdictions may adopt similar laws, and, if the bill pending before the Brazilian Congress becomes law, our future expansion and growth may be subject to significant constraints.

Environmental Matters

In 2008, we initiated a new policy of sustainable operations by structuring our actions in a single manner, aligned with our goals and business, thus strengthening our sustainability practices,  which are now measured and improved on a regular basis. We also incorporated sustainability into our operations company-wide, encompassing every sector of the organization. As a result, we created an internal working group and the Sustainable Development Committee, which is linked to our board of directors. The internal committee is organized by the sustainability department comprising representatives of different areas of our Company.

In 2002, we launched the “Caras do Brasil” (Faces of Brazil) program, which aims at enabling the selling of products made by small organizations and communities that demonstrate socio-environmental responsibility, but which would otherwise find it difficult to access large markets in which to trade their production. The program opens a sales channel for sustainable products and encourages conscientious consumption.

We offer approximately 1,000 sustainable items, including groceries, meat, fruit, greens and vegetables. The result of this type of product in our stores accounted for growth of 30% between 2008 and 2009, encouraging us to enhance these product lines in the years to come.

We have also adapted a program for tracking meat, fruit and vegetables, which enables us to offer products incorporating sustainable practices in their production process so as to ensure the health of our clients, proper treatment of livestock and environmental preservation.

In respect to environmental management, we have enhanced control of our consumption of water and energy resources, in addition to the volume of waste generated and proper disposal thereof. To that end we have installed flow reducers on the taps at most of our stores, so as to permit maximum efficiency in water usage, in addition to implementing daily monitoring of consumption at our stores located in the states of São Paulo, Rio de Janeiro and Brasília, in order to rapidly detect leaks. In the future we intend to adopt this control at our other stores. In regard to energy consumption, 26% of our consumption comes from renewable sources (9.5 10¹4 joules or 262.466.841,41 KWh), and this energy is acquired on the free electrical power market. This measure strengthens alternative energy production, reduces the environmental impact of electricity consumption and does not overload the national electricity transmission system.

In regard to gas emissions, our refrigeration systems (cold stores, air conditioning, refrigerators and freezers) use R-22 gas, a variation of refrigeration gas which is less damaging to the ozone layer, in substitution of R-12 gas. In our green stores, we use R-410 gas in the air conditioning system and R-404 gas in the refrigeration system, which have a minimum impact on the ozone layer and represent a new trend in refrigeration and air conditioning installations.

Six years ago we initiated the Top Log program to certify our suppliers who employ the best policies and practices in logistics and supply ascertained during the year. In 2010, 144 suppliers participated in the Top Log Program, and were evaluated regarding their service level, suitability to the client and integration. Sixteen questions related to sustainability, such as pollutant emissions’ reduction, route optimization and reverse logistics – focused on the disposal of packaging materials, were also applied.

We also aim to rationalize resources, while our operations adopt measures to mitigate their impacts, such as:

Waste generation: On-going study of the waste generated in our stores, with the aim of identifying environmentally correct disposal methods, where the focus is on applying the concept of the 3 Rs – reduce, re-use, recycle. Based on this assumption, we have adopted actions that seek to optimize re-usage of our recyclable and organic garbage, thereby reducing the volume of material discharged in landfills. This study resulted in the application of a system in the Green Store at Indaiatuba, creating a volume of disposable garbage close to zero. The same system can be found in over 20 stores and is being adapted for the others, covering all our banners throughout Brazil.

Use of materials: Replacement of equipment or introduction of more efficient new technologies with lower consumption, especially lighting, compressors and air conditioning systems.

Grease trap: The application of a natural biological product for degrading organic compounds.

Recycling stations: A pioneering initiative in Brazil, the program first appeared in 2001 at the Pão de Açúcar banner in partnership with Unilever, and was expanded in subsequent years to the Extra  banner in partnership with H2OH!, and CompreBem. The program seeks to make our clients aware of the importance of properly disposing of garbage, while also making available deposits for voluntary delivery of recyclable materials at our stores. In addition to reducing the environmental impact through correct disposal of garbage, this initiative benefits 27 recycling cooperatives while generating income for around 900 workers. As of December 31, 2010, we had recycling stations at 110 Pão de Açúcar stores, 110 Extra  stores and seven CompreBem  stores in 31 cities in the states of São Paulo, Ceará, Rio de Janeiro, Paraíba, Pernambuco, Piauí, Paraná and Goiás, in addition to the Federal District. Since this initiative began more than 40 thousand tons of garbage have been collected.

CompreBem Oil Collection: In 2010, oil collectors installed at 18 CompreBem  stores collected more than 17,443 liters of oil. Since its beginnings in 2008, more than 41,800 liters have been collected. All collected oil is donated to recycling cooperatives, which resell to companies that produce biofuels.

Caixa Verde (Green Checkout): A program that enables our clients to dispose of packaging at the time of purchase, the first retail pre-consumption recycling program. In 2010 we had 67 stores already with the project in operation.

 Re-usable bags: This encourages our clients to use plastic bags in a conscientious manner by offering re-usable bags in our stores while developing alternative programs, such as offering purchase vouchers (once a certain number of points is achieved) to clients participating in the Programa Mais (a loyalty scheme) and who use re-usable bags. In 2010, 659 thousand re-usable bags were sold at Pão de Açúcar stores, of the 7 models one of them has part of the income donated to SOS Mata Atlantica, 668 thousand at CompreBem  (one of the models being developed in partnership with Associação de Apoio à Criança Deficiente – (the Association for Children with Disabilities) or AACD), 835 thousand at Extra  stores (with part of the income raised from sales being donated to Casa Hope, which supports children with cancer). Lastly, yet another initiative we have adopted for reducing the volume of plastic bags used in purchases at our stores involves the use of more resistant bags that take up to 6 kilos.

We currently do not incur any costs with environmental regulations compliance, notwithstanding those costs associated with the implementation of the sustainability practices described above (among them the construction of a green store in the Vila Clementino, city of São Paulo), resulting in expenditures of approximately R$17 million for the year ended December 31, 2010.

We conduct our operations through Companhia Brasileira de Distribuição. We invest in subsidiaries primarily to acquire the share capital of other retail chains from third parties. In most cases, the retail operations are transferred to retail stores under existing banners or the stores acquired begin operating under our banners. We conduct our food retail segment operations under the Pão de Açúcar, CompreBem, Sendas, Extra Hipermercado, Extra Fácil,  Extra Supermercado banner and for cash-and-carry retail segment operations, under the Assaí  brand. We conduct our home appliances retail segment operations through our Ponto Frio and Casas Bahia brands. The chart below sets forth a summary of our organizational structure:

 For further information on our subsidiaries see note 1 to our financial statements included in this annual report.

4D.       Property, Plants and Equipment

We own 117 stores, 18 distribution centers and a portion of the real estate property where our headquarters are located. The remaining 1,530 stores and 32  distribution centers we operate and the remaining portion of the real estate property where our headquarters are located are leased. Leases are usually for a term of five to 25 years, and provide for monthly rent payments based on a percentage of sales above an agreed minimum value. We have 27  leases expiring by the end of 2011. Based on our prior experience and Brazilian law and leasing practices, we do not anticipate any material change in the general terms of our leases or any material difficulty in renewing them. As of December 31, 2010, we leased 17  properties from members of the Diniz Family and 61  stores from Fundo de Investimento Imobiliário Península, which is owned by the Diniz Family. In addition, all of the 526 Casas Bahia   stores are leased, of which 292 were leased as of the December 31, 2010 from members of the Klein family. Our management believes that the leases follow market standards, and are on an arm’s length basis. See “Item 7B. Related Party Transactions—Leases” and note 21 to our audited consolidated financial statements included in this annual report.

The following table sets forth the number and total selling area of our owned and leased retail stores by store format, the number and total storage area of our owned and leased warehouses and the total office area of our headquarters that we own and lease as of December 31, 2010: