What’s Leading Edge With Today’s Leading Mass Volume Retailers?

1. American Logistics Association Exchange Roundtable What’s Leading Edge With Today’s Leading Mass Volume Retailers? March 8, 2005 Dallas, TX www.hoytnet.com 8912 East Pinnacle Peak Road • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

2. Based on most recent research, the top 3 retailers shoppers rank as literally “indispensable” to their daily lives are Wal-Mart, Target and Costco: • Meyers Research: “Retailers Consumers Could Not Live Without” (Aug, 2004) Source: Meyers Research, Aug, 2004

3. Not coincidentally, Wal-Mart, Target and Costco are also the same retailers that consumers find the “most fun to shop”: • Specific Retailers Consumers Find Most Fun To Shop Source: Meyers Research, Aug, 2004

4. Today: • What is it about Wal-Mart and Target that makes them so successful, not only with shoppers, but from a business standpoint in general? • What lessons can Exchanges take away from this, given their objectives and the constrictions under which they operate? • Q&A

5. The Leaders – Snapshot of Current Vital Statistics: Source: Company 10Ks & 10Qs; Hoyt & Company, LLC, 2003 - 2004

6. While Wal-Mart and Target are very different retailers, both share the same objectives as all other retailers– specifically: • Grow profitable sales by aligning and focusing all marketing, merchandising, buying and logistics functions on one or more of the following objectives: Exchanges • Increase customer count (new customers) X • Increase trip frequencies (current customers) Yes • Increase transaction size (current customers) Yes • Increase productivity (Human and Financial) Yes • Reduce costs (COG’s and Operations) Yes • As you will see, the paths that Wal-Mart and Target have chosen to achieve these objectives represent today’s industry Best Practices.

7. The 800 lb. Gorilla In Every Retailer’s Living Room! $284B – Largest company in the world – greater than the GDPs of Austria, Colombia, Czechoslovakia, Denmark, Greece, Norway, Portugal, Sweden, Switzerland, Ukraine and Vietnam $20K in profit per minute! 13% WW CAGR – projected to do $1 trillion by 2014 $233B U..S. sales – CAGR of 9.9% to 2007 3,711 U.S. stores: 1,706 Super Centers 1,370 Discount 549 SAM’s Clubs 86 Neighborhood Markets 500+ new stores/remodels planned for 2005 Objective is to become the largest retailer in every market in which it operates (now #1 in only two countries out of 10)

8. So what are the key growth drivers that enable Wal-Mart to sustain the momentum of this juggernaut? • Let’s look at these from the standpoint of what’s relevant to Exchanges in terms of: • Marketing and Merchandising • Buying • Logistics

9. The key elements of the Wal-Mart marketing mix – elegant and sophisticated – way beyond just “Always Low Prices”: 1. EDLP made possible by EDLC – Global buying and relentless pressure on COGs and operating costs 2. Use of consumables (food and non-edible CPG items) to drive traffic and transaction size 3. “OPP/good/better/best” merchandising ladder (private labels –> national brands) • Localization – Demographic assortments 5. Ancillary businesses – hearing aids, optics, stores within stores, etc. 6. Consumer-centric versus supplier-centric business model – all allowances are driven into price and not used to subsidize operating profits

10. The key elements of the Wal-Mart marketing mix (cont’d) 7. Shop-ability – wide aisles, mucho signage, well lit, easy to navigate 8. Speed to market – new items and promotions – 24/7 + 48 hour turnaround 9. Community involvement – parking lot extravaganzas, fishing contests, high school marching bands, etc. 10. Retail-tainment – in-store TV sets, trendy promotions (Shrek 2 and Britney Spears) 11. EDLP reinforcement – roll backs, action alley, special buys and multiple clearance items 12. Clicks and bricks synergy – what you can’t get in-store, you can get online 13. Store managers have broad discretion – can tailor assortments, authorize local displays and recommend new distribution of local items

11. Wal-Mart strategy to drive trips/provide one-stop shopping convenience – sell need (read “food”) items! • Wal-Mart’s March To The Top of the U.S. Food Chain: 2001 - 2010(Food & Drug Sales Only) 35% 2010 $195B Bigger than Kroger, Albertsons, Safeway and Ahold combined 2007 $162B +17.0%/Year Compounded Vs. 4.0% For Supermarkets! 2004 $112B Bigger than Kroger & Albertsons Combined 2003 $95B 2002 $82B Surpasses Kroger as the nation’s #1 food retailer 2001 $63B Source: Retail Forward, Food Industry Outlook, February, 2004; ACNielsen, 2002 and 2003

12. The Wal-Mart Merchandising Ladder BEST = Typically National Brands BETTER GOOD OPP = Opening Price Point in the category(typically, Private Labels) Source: MVI 10/28/2004

13. Wal-Mart Buying – What lies behind the glitz • Wal-Mart buyer responsibilities: • Development of innovative merchandising solutions • Understand customer needs and trends and set the pace of new product development & brand strategy • Management of a diverse supplier base – from major brands to own label • Achievement of business plan targets • Development and delivery of the category’s trading strategy

14. Wal-Mart Buying – How Buyers are Measured • Sales • Units • Dollars • Profit dollars • Margin % • Turns • Markdowns (e.g., maintained margin) • In-stock • Comparable store sales growth (in certain categories) • Wal-Mart Buyer – Key Performance Measures • Less tangible measures: • Respect for the individual • Service to customers • Strive for excellence

15. To achieve their objectives, Wal-Mart buyers proactively utilize suppliers to help run their business: • Wal-Mart Buyer –> Supplier Expectations • Annual plan -- rolling 12 months by month and quarter • New items • Tab ideas • Modular suggestions • MCAPS -- community store merchandising • Weekly monitoring: • Item P&Ls vs. plan • Sales, initial margin, markdowns, contribution margin • Problem stores/districts, as well as items • Competitive situations • Co-managed Inventory • Replenishment • New item/promotional • Economic order quantities Source: MVI, Selling Wal-Mart 10/28/2004

16. Sales Measurements Overall % Increase Comps Avg. Sales/Store Sales at Full Price vs. Markdown Markdown Measurements Markups and Markdowns (Dollars, Units and %) Prior and current retail price Margin Measurements Initial margin Average retail price Average cost Gross profit at item level Gross profit/item/store Margin mix Inventory Measurements Replenishable store inventory Non-replenishable store inventory Warehouse inventory Lost sales from OOS Excess inventory DC outs Total owned inventory Return Measurements Customer defective returns Store Claims Wal-Mart Vendor ScorecardExtensive measurements for Wal-Mart and Suppliers Source: Hoyt & Company Records

17. Wal-Mart Logistics – How does Wal-Mart stack up versus its leading competitors? • Wal-Mart has the highest inventory turns… • Wal-Mart Turns vs. Kmart + Target: 1998 - 2003 Source: Company Reports; MVI, 10/28.2004

18. Wal-Mart Logistics – How does Wal-Mart stack up (cont’d) • …and the lowest # of days sales on hand: • Wal-Mart vs. Leading Competitors: # Days Inventory On Hand: 1998 - 2003 Source: Company Records; MVI, 10/28/2004

19. Wal-Mart – Key Inventory Management Drivers: • Replenishment & Logistics • Co-managed/vendor managed inventory • Two-Tier Distribution (Replenishment vs. Promotional) • Collaborative Planning, Forecasting and Replenishment (CPFR) – works with suppliers to determine appropriate levels • The Future: Radio Frequency IDs (RFID) • Systems • UCCnet • Internet EDI • Merchandising Systems • Modular-based merchandising • Modular Category Assortment Planning System (MCAPS) /Store of the Community

20. Why is Wal-Mart so good at logistics? • Because the buyer’s open-to-buy is based on inventory management and supply chain movement: • Wal-Mart Buyer Open-To-Buy • What the buyer is able to order here • Depends on how much $ he/she has tied-up in these “buckets” New Item In The DC In Transit In Store Promotions • – PLUS – Replenishment Seasonal On Order In Route • + • = why suppliers are so eager to work with Wal-Mart in helping to generate maximum sales off the lowest possible inventory base.

21. Net on Wal-Mart: EFFICIENCY! • Consistent, clear positioning – “Always Low Prices” – everyone knows precisely what Wal-Mart stands for • Relentless focus on the fundamentals • Cost suppression and cost reduction is a mantra • Cooperation with suppliers to achieve mutual objectives • Combination of food (consumables) and traditional discount creates a low price one-stop shopping mecca • Lightning speed to shelf on new items/trendy promotions • “Fun place to shop” – in-store TV, on trend promotions, parking lot extravaganzas and tie-ins with local community events • Fierce competitor – will price comp anything, anywhere • Store manager discretion means stores can be traited and tailored demographically

22. “Expect More/Pay Less” $47.1B in ‘04 sales – a 15.1% increase vs. ‘03 (less Mervyn’s and Fields) 8.9% CAGR between now and 2007 – projected to do $61B versus today’s $47B 1,313 stores – 1,177 Targets + 136 Super Targets Comparisons to Wal-Mart are dangerous: Different business model Different consumer Different merchandising strategy No attempt to compete on same basis Is much more like an Exchange in assortment and operations: Careful balance of high end vs. commodity merchandise – PLs and exclusives are key Limited CPG food representation (changing quickly) Super centers are NOT the primary growth engine Distinct department store heritage and orientation

23. Target Challenges: • Narrow customer base: • 81% female • 50% between 30 and 44 • Low trip frequencies vs. Wal-Mart, Costco and even Dollar Stores! • Supercenters behind the curve • Too “Department Store-y” for a discounter: • Clean, uncluttered store policy sometimes perceived as sterile and boring • Too much emphasis on “want” vs. “need” merchandise – not enough everyday consumables to drive trips, create excitement or get shoppers started on the merchandise ladder • Highly centralized operations – Store Manager’s role is compliance and execution – no local discretionary authority = 71% of Trips and 80% of Spending

24. Target Heavy Shopper Trip Frequencies – Just Not Enough! Source: IRI Panel Data 52 weeks ended Dec 31, 2003

25. Being perceived as more “Department Store-y” than “one-stop discount/convenience” these days is not exactly on trend: The U.S. Department Store Death Spiral: 1990 - 2010Department Store Share of Non-Auto Retail Sales Source: Retail Forward, 2003

26. Despite these seemingly core negatives, Target has consistently out-paced Wal-Mart in both sales and comps ever since it jettisoned Mervyn’s and Marshall Fields in 2003 Target vs. Wal-Mart sales and comparable store growth – 2004 Source: Company 10Qs and monthly financial reports—MVI, Dec 09, 2004

27. So what is Target doing to achieve such exceptional results? • Target keys to success: • Clear, concise, consistent positioning – “Expect More, Pay Less”: • Not just words but the basis for all buying and merchandising decisions • The framework for Target’s Merchandising Ladder • A short, simple slogan that shoppers can remember and relate-to • Non-price differentiation – Through captive brands, designer exclusives, partnerships with other retailers, trendy P.L. merchandise, celebrity endorsements and “Buzz Marketing” • Emotional Connection with its customers – “My Target”

28. So what is Target doing to achieve such exceptional results, cont’d? • Heavy advertising – Over $1B in 2004 – to heighten awareness, sell promotions and build equity for the Target name • Quick response segmented merchandising – To capitalize on the latest generational and lifestyle shifts – expanded pharmacies (seniors), Hispanic advertising and Merchandising, “One Spot” (dollar sections), always on-trend merchandise (soft goods, apparel and housewares) and seasonal promotions • Rapidly adding everyday “need” consumables to drive trips and increase traffic – significantly expanded food sections in all stores. Recently added extensive wine section.

29. Target Positioning: “Expect More, Pay Less” EXPECT MORE PAY LESS Great quality at a low price makes Target merchandise a great value. Really low prices are the number one reason to shop at Target. Bright, clean stores and fast checkouts make shopping at Target easy and fun. We’re on top of trends so you will find the latest and greatest at Target. STYLE SERVICE PRICE QUALITY • Increase share of wallet • Platform for differentiation • Fashion/“Want” items • Drive trips/build traffic • Create low price impression • Consumables/”Need” items

30. Target’s “Expect More/Pay Less” Positioning has enabled Target to place itself squarely between commodity discounters and traditional department stores and avoid competing with either on their terms: • Target’s Positioning vs. Discount and Department Stores • Drive Value Focus • Drive Trend Focus • Discount Stores • Low Margins (23%) • Follow Trends • Price Sensitive • Price/Convenience • Moderate margins (32%) • Trend Seekers • Quality/Value Sensitive • Trend/Quality/Convenience • Department Stores • High Margins (50%) • Early Adopters • Quality Sensitive • Fashion/Selection • This positioning has become a major asset: • Enables Target to attract a wealthier shopper than traditional discount stores. • Improves sales per store, transaction size and gross margins (Target’s are highest in the channel at 32.8%).

31. Target Buying – Key Levers • Trend Planning – Crucial to “Expect More”: • Trend merchandisers travel to seek-out latest colors, fashions and designs • Research coordinated across departments • All items, color schemes, etc. are tested ahead of the season • Customization – Pressure on suppliers to co-brand or custom-pack merchandise to reinforce Target’s differentiation objectives • Competitive Line Reviews – Basically auctions consisting of competitive bidding for line distribution or promotion support: • Target even calls these “shoot outs” • Series of elimination rounds • Contracts can be up to one year • Reverse Auctions – Online competition to provide lowest cost for commodity items or private label consumables • Global Sourcing/Direct Imports – Target is doing as much as it can to buy direct from lowest cost producers willing to meet product specs

32. Target Buying – Supplier Mandates • Reduce cycle times—allow for “just in time inventory” • Zero tolerance for orders delivered before/after scheduled time • One Purchase Order per Truck—while trying to reduce overall # of POs • Tiered in-stock level requirements – identify when Target begins to lose sales – maintain in-stocks above this level • 97% “in stock” for top 2500 items • 92-95% “in stock” for remainder of items • Perfect match of invoice to receipt of product

33. Target Supplier Report Card • Target’s scorecard is the most complete of the three largest Discounters:

34. Target Supply Chain/Logistics Initiatives – 2005 and Beyond: • SKU Reduction – To facilitate focus on fewer, more important items and be “more important to fewer vendors” • Automated Receiving Technology – Electronic labeling system that utilizes real-time information about where product is needed: • Automatically labels each carton • Significantly accelerates the flow of goods • Eliminates time-consuming, labor intensive procedure • Rollout starting December, 2004 • DPIA – Direct Import, Pre-distro & Assortment Programs • Converts indirect imports (no middlemen) to direct • Have suppliers pack store-specific and store ready pallets, reducing DC workloads and storage space • Have suppliers combine multiple items in cartons to reduce the number of cartons sent to DCs in stores • Estimated savings of $71MM in 2005 • RFID – Mandatory for pallets and cases by spring, 2007

35. Target From The Supplier’s Standpoint: • Multiple opportunities to tie-in with Target’s marketing and merchandising initiatives • “Expect More/Pay Less” platform • Target community giving/cause-related sponsorships • Co-Marketing to build upon each other’s equity • Current, intense emphasis on “Pay Less” • Multiple vehicles – Target TV and print advertising, circulars and website, etc. • Supplier Aids: • Partners On Line (POL) – provides suppliers with same data that buyer has (like Wal-Mart’s Retail Link) • InfoRetriever – Available to Category Captains and top vendors – provides a deeper level of information on a more current basis + 2 years of back data

36. Net on Target: EMOTIONAL CONNECTION! • Non-price differentiation – no attempt to compete with Wal-Mart on its own terms • Willing to settle for a piece of the pie rather than going after the whole enchilada: • Consumer target is not the universe but primarily women and young singles • Clear, precise, consistent positioning that enables Target to fill the void between commodity discounters and traditional department stores • Unique understanding of the needs, wants and aspirations of its target shopper: • Designer clothes, soft goods and housewares at great prices • Clean, uncluttered stores with contemporary colors and thematic consistency • Ancillary services that cater to Target shoppers lifestyles, needs and shopping proclivities (pharmacies, Minute Clinics, photo, Starbucks and Pizza Hut, etc.)

37. Net on Target: EMOTIONAL CONNECTION (cont’d) • Product assortments that cannot be purchased anywhere else – designer exclusives and captive brands, etc. • Strong, centralized control to ensure uniformity and thematic consistency throughout all store presentations and activities • A conscious policy of transferring as many costs as possible to the supplier community while, at the same time, offering suppliers a strong upside through Target’s aggressive advertising, merchandising and product exclusivity policies • Awareness of and willingness to react quickly to current issues – for example, Target’s current campaign to significantly increase its consumables representation to increase traffic and trip frequencies

38. While Target and Wal-Mart have each chosen to walk different paths on route to their success, there are certain factors common to both of these retailers that make them leading edge vs. most others in the retail community. • Ten factors, as follows: 1. Differentiation – Through constant juggling of the following elements: • Price • Formats • Captive Brands • Designer Exclusives • Successful Private Label Programs • National Brand Supplier Customization 2. Use of Consumables – To build traffic and increase trip frequencies. 3. Ancillary Departments – To increase convenience and share of wallet. 4. Fluid Merchandising (rapid ins and outs) – To create excitement, build trip frequency and reinforce differentiation objectives

39. Ten factors that separate the most successful from the rest, cont’d 5. “OPP/Good/Better/Best” Merchandise Ladders – To trade shoppers up in almost every category. 6. Speed to Market – Now more important than “Bigness” 7. Relentless Pressure on Costs and Productivity – Both in general and store-specific 8. Willingness to Experiment – New formats, ancillary businesses, stores within stores, partnerships, adjacencies, retail-tainment, etc. 9. Global Sourcing – Now direct from the lowest cost producer – no middle men. 10. Technological Innovation – RFID, etc. to reduce costs/increase speed

40. Moral of story: • It’s not just price; it’s a combination of factors, carefully blended and balanced to satisfy a particular consumer need or aspiration. Each retailer has to search within its own strengths to find the right formula. There are no easy answers.

42. A Special Thanks to Sylvia Harris and Cathy Ely of Luke AFB for their time and hospitality . . .

43. We Appreciate The Time and Attention You Have Given Us Today • Specifically, we want to thank Frank Jepson and the American Logistics Association for inviting us and P&G for sponsoring us and trust that this has been both fun and helpful. www.hoytnet.com 8912 East Pinnacle Peak Road • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

44. Appendix Some particulars that may be of interest . . .

45. Wal-Mart Corporation Wal-Mart US Target Corporation Kmart $400 $300 $200 $100 1999 2000 2001 2002 2003 2004E 2005E 2006E 2007E Target and Kmart U.S. Sales vs. Wal-Mart – Relatively Small • Wal-Mart vs. Target and Kmart Sales & Growth Projections: 1999 - 2007E $382.1B $309.4B $59.5B $19.4B Source: MVI 10/28/2004

46. By mid 2004, Wal-Mart U.S. had achieved 86% household penetration – almost 25 points more than its next largest competitor – which translates to over 130MM shoppers per month • Wal-Mart vs. Leading Competitor Household Penetration, Mid 2004 Source: IRI Panel Data (all shoppers - Total US)

47. Not content with this, Wal-Mart plans an additional 500 new store openings plus remodels in 2005, driven primarily by new Supercenters: • Wal-Mart Domestic Expansion Plans For 2005 – Total U.S. Supercenters Discount Stores SAM’s Clubs Neighborhood Markets Total New Stores Remodels/Relocations Grand Totals +240 - 250 +40 - 45 +30 - 40 +25 - 30 335 - 365 160 500+ Source: Wall Street Journal, 10/5/2005; Supermarket News, 10/11/2004 + 10/18/2004

48. Wal-Mart’s store expansion strategy is carefully calculated to capture new consumers at all levels of the income spectrum and to provide shoppers with easy accessibility: • Wal-Mart Format Expansion Strategy: Capturing Consumers at All Income Levels • Different formats: • Target the same consumer for different trips • Target new consumers Consumer by HH income Format A 75K+ walmart.com B 60-75K SAM’S C 45-60K N. Mkt Discount D 25-45K Supercenter E <25K Source: MVI 10/28/2004

49. Wal-Mart’s latest and greatest • Stores within stores: • Kid’s Connection – Candy, soda, clothes, toys • Personal Business Centers • Dollar Stores – plastic bunnies, etc. • Increased focus on soft goods: • Coordinated lifestyles • Heavy focus on Wal-Mart brands • Integrated merchandising – e.g., not just towels but everything for the bathroom • In-store TV support for “How to decorate your home” • Apparel: • Mary Kate and Ashley exclusives – in-store and online • Levi Strauss – 2003 • The Wal-Mart “George” line – men, women and children – big push! • Carter’s line in infants • Trend alert – partnership with Seventeen Magazine to offer teens “cool picks” in clothing and electronics

50. Target SuperTarget Growth vs. Wal-Mart Supercenters – Not exactly NASCAR competitive Source: MVI, Selling Target, 12/9/2004