Co-Marketing: What It Is and What It Is Not

Co-Marketing:What It Is and What It Is Not 1010 Washington Boulevard • Stamford, CT 06901 Phone (203) 352-0645 • Fax (203) 352-0798 • E-Mail: CHRIS_HOYT@MSN.COM

The U.S. Grocery Business Is a Business That Has Become Driven By Epidemics As Solutions To Its Problems: • 1980 — DPP • 1985 — Category Management • 1989 — “Partnering” • 1991 — “Activity-Based Costing” • 1993 — “ECR” • 1996 — “Home Meal Solutions” • Today — “Solutions Selling”

Fact: The Fundamental Problem With All Of These Initiatives Is That Their Primary Focus Has Been On The Relationship Suppliers and Retailers Have With Each Other Instead of On The Relationship Both Should Have With the Consumer

Results?

The U.S. Supermarket Industry Has Not Seen a Significant Increase In Top Line Dollar Sales Since 1992: Total U.S. Supermarket Sales: 1992 - 1997 (% Increase v. Previous Year) 1992 1993 1994 1995 1996 1997 Sales 3.9% 2.0% 3.1% 3.6% 3.7% 3.8% Food CPI 1.5 2.4 2.9 3.3 3.7 3.7% Real Gain 2.4% (0.4%) 0.2% 0.3% 0.0% 0.1% Source: Progressive Grocer, Annual Report of The Grocery Industry, 1993-1997 1996 - 1997 Same Store Sales = (0.5%)

Between 1996 & 1997, Supermarkets Lost Share In No Fewer Than 108 of 115 Edible and Non-Edible Packaged Goods Grocery Categories To Other Trade Channels, Mainly Mass Merchandisers: Examples - % Change in Total Share: 1997 vs. 1996 Food Stores Mass Edible Categories Cold Cereals -1.6 +1.7 Coffee -3.0 +2.8 Salty Snacks -1.2 +1.5 Soups -1.6 +1.5 Crackers -1.4 +1.7 Dinners -1.5 +1.6 Non-Edible Categories Detergents -1.8 +2.0 Dog Food -2.3 +2.4 Diapers -2.2 +2.9 Toilet Tissue -1.6 +1.8 Paper Towels -2.4 +2.6 Household Cleaners -1.7 +2.0 Source: IRI, 52 weeks ending 1/4/98 vs. 52 weeks ending 1/4/97

Although Food Industry Profits Have Increased Since 1992, The Gains Have Been Relatively Insignificant In The Absolute And Have Actually Gotten Progressively Smaller Since 1994: Here are the numbers which the FMI constantly trumpets as such a big deal since the introduction of ECR in ‘93: Supermarkets Net Profit Trends: 1991-1997 % Profit To Sales % Gain Vs. Prev. Year 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 0.96% 0.77% 0.49% 0.93% 1.14% 1.20% 1.08% — (19.8%) (36.4%) 89.8% 22.6% 5.3% (10.0%) } Note Source: Food Marketing Institute, 1992-1998 Average profits in U.K. (5 accounts, 70% of biz) = 6.5%

The Good News!! You Are Fortunate As An Audience Today Because You Will Not Have To Wait Until The End of This Talk To Hear Our Key Messages...

Key Message #1: • Supermarkets cannot compete on price alone with non-food trade channels. • Supermarkets must develop growth strategies which leverage their inherent strengths and force their competitors to define their own strategies based on what supermarkets are doing. • By attempting to compete with non-food trade channels on price, supermarkets are allowing these channels to dictate the way they (supermarkets) do business. • There is a way to create a low price impression without digging your grave in the process.

Because of the Nature Of Their Business, Supermarkets Are Financially Disadvantaged Versus Other Trade Channels Selling Nationally-Branded Packaged Goods Dry Grocery Products: Mass Volume Retailer Financials, 1997 (% Net Sales) Supermarkets Kmart Wal*Mart Supercenters BJ’s* Gross Margin 27.3% 24.5% 21.5% 21.9% 12.2% Operating Expense 21.2% 19.7% 15.8% N/A 7.4% Operating Margin 6.1% 4.8% 5.7% N/A 4.8% Net Profit Margin 2.1% 1.1% 3.0% 3.5% 2.2% Sources: Value Line, 1998. Supermarket numbers are composites.

This Disadvantage Can Translate to a Difference Of As Much As .35¢ or 17% Less Than Supermarket Retails, Given An Average Unit Cost of $1.50: Retails Required to Meet Gross Margins at $1.50/Unit Cost Trade Channel Avg. Gross Margin Minimum Retail Required Difference vs. Supermarkets % +/- Vs. $2.06 Supermarkets 27.3% $2.06 – – K-mart 24.5% $1.99 -$.07 -3.4% Wal*mart 21.5% $1.91 -$.15 -7.3% Supercenters 21.9% $1.92 -$.14 -6.8% BJ’s 12.2% $1.71 -$.35 -17.0%

When Applied to 1996 Average HH Food-At-Home Expenditures, This Difference Can Start Adding Up to Big Savings For the Average Family: Average Retail Margin Impact on 1996 Average F.A.H. Expenditures Trade Channel Avg. Gross Margin Margin Difference vs. Supermarkets 1996 Avg. $/HH Savings vs. $4,832 Supermarkets 27.3% – $4,832 – K-mart 24.5% -2.8% $4,652 ($180) Wal*mart 21.5% -5.8% $4,435 ($357) Supercenters 21.9% -5.4% $4,498 ($334) BJ’s 12.2% -15.1% $4,001 ($831) 1996 Food-At-Home Expenditures/HH = $4,832 ($478.4B ÷ 99MM HH),U.S. Census, 1998

It Is Because The Consumer Intuits These Price Differences That She Has Become Habituated To Shopping Different Trade Channels: • 86% shop supermarkets at least once per week • 79% shop discount stores once per month • 73% shop drug stores at least once per month • 50% shop convenience stores once per month • 26% shop clubs at least once per month Source: PLMA; 1996 Gallup Report on Store Brands and Retail Formats; Progressive Grocer, 3/96

Want To Create A Low Price Impression? Here Are The Categories With The Highest Consumer Sensitivity: • Top 15 Supermarket Product Categories Ranked In Order of Pulling Power HHPenetration PurchaseFrequency PullingPower X = Rank Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Median Bread & Baked Goods Milk Carbonated Beverages Snacks Paper Products Candy Juice, Drinks - Non-Frozen Packaged Meats - Deli Condiments, Gravies, and Sauces Fresh Produce - Partial Cereal Cheese Vegetables - Canned Pet Foods Cookies 99.6 98.0 98.1 98.5 99.5 98.1 97.5 96.5 98.9 96.6 97.0 97.6 96.8 70.6 95.6 80.1 36.5 35.0 31.3 26.7 24.4 22.2 21.2 19.0 17.9 18.3 18.2 17.1 15.1 20.1 14.8 6.7 3,635 3,430 3,071 2,630 2,428 2,178 2,067 1,834 1,770 1,768 1,765 1,669 1,462 1,419 1,415 475 Source: A.C. Nielsen Consumer Facts, 1996

Key Message #2: • Consumer shopping motivations are not difficult to figure-out. • The key for supermarkets is to match performance with consumer expectations of what a food store should deliver. • These expectations will differ significantly based primarily on the family status and income levels of the consumers who live in the area of your stores. • Supermarkets MUST move away from deal-driven merchandising and promote only to achieve specific consumer objectives.

To Understand Current Consumer Food Purchasing Behavior, One Only Has To Look At U.S. Population Income Trends Over The Past 25 Years: • Mean Income Trends By Population Fifths, 1970-1996 $115.5K (+44.4%) Top 20% Top 20% $80.0K $54.9K (+29.4%) 2nd 20% $45.2K $47.1K AVERAGE (+27.5%) $36.9K $35.4K 3rd 20% $32.1K (+10.7%) 4th 20% $19.9K $21.1K (+6.0%) 5th 20% $7.5K $8.6K (+14.8%)

Today, The U.S. Population Is Rapidly Segmenting Into “Haves” and “Have-Nots”, While The Traditional Middle Class Is Gradually Being Whittled-Down: • 1996 Distribution of Total U.S. Income By Population Fifths Quintile Mean Income % Distribution of Income } } I II III IV V 20% 20% 20% 20% 20% 46.8% 23.1% 15.8% 10.0% 4.2% $115.5K $54.9K $35.4K $21.2K $8.6K 69.9% 40% } Middle Class } } 14.2% 40% Source: U.S. Census Bureau, 1998; Dept of Commerce

Assuming These Trends Continue, Current Forecasts Are That Within 10 Years, There Will Be Three Very Distinct Groups of Shoppers Versus A Predominance of One Group At Present: 1997 2007 Affluent 15% Middle Income 30% Affluent 30% Middle Income 70% Poor 15% Poor 40% Source: Promar, USA

Underpinning These Trends Are The Following Facts: • The number of families with both parents working has grown from 50% to 74% of the population between 1970 and 1996. • 70% of women between the ages of 16 and 55 are now in the workforce. • The average family spends less than 20 minutes per day in meal preparation (vs. one hour in 1955). • 40% of the population say they have no idea of what they are having for dinner at 4:00 in the afternoon. • By 2010, the number of people 55 years and older will comprise 25% of the population vs. 21% at present — an increase of $20MM souls.

Net For Supermarkets: • Everybody is busy — the two pot dinner is history. • 60% of the population is busy and price conscious — willing to spend time shopping for the best deal (least desirable). • 40% is busy and time conscious — willing to pay more for the convenience of one-stop shopping to save time (most desirable). • There is an overlapping middle who are driven by both price and time considerations but this group is shrinking quickly (confusing). • Most supermarkets are presently geared to service this middle.

Moral: Pick Your Ground And Plant Your Flag: Income$115.5K • Ladies Who Lunch • Shopping is a personal, social experience • Otherwise, a telephone sale • Not a deal shopper • Multiple outlets but very store loyal • Highly desirable customer • Time Calibrators • One-stop shopping • Fast service is everything • Full variety is key • Premium quality • Blind to deals $55K $47K Hours0 Hours120 40 60 80 • Price Calibrators • Completely disloyal • Commodity vs. quality • Cherry-picking an art • Service, decor unimportant • A continually moving target • Opportunists • Multi-channel stock-up shopper • Use supermarkets for weekly variety fill-in • Fast service • Key P.L. shopper • Growing families, growing income — soon to be affluent $35K $21K $8.6KIncome

Key Message #3: • Supermarkets have unique strengths which clearly set them apart in the consumer’s eyes from other trade channels selling similar products. • Supermarkets have failed to leverage these strengths by imitating rather than leading. • The extent to which supermarkets can learn to leverage these strengths is the extent to which supermarkets will be able to move away from price-based merchandising.

So What Are Supermarkets’ Unique Strengths? • 1. Ability to Link Dry Grocery to Perishables — Now over 50% of sales and 58% of profits. • 2. Full Variety — Only channel that offers 30-50K+ FOOD items. • 3. Most Frequently-Shopped Channel — Measured in # of visits per week vs. other channels in # visits per month. • 4. Proximity — Short driving distance relative to other channels. • 5. Ability to tie-in with community events and configure assortment and service to local tastes.

To a Time-Starved Consumer, One of the Biggest Advantagesof U.S. Supermarkets is Store Proximity: Store Density and Locations Trade Channel # Stores # HH/Store Avg. Driving Distance (Miles) Supermarkets 29,870 3,314 3.2 Drug Chains 17,148 5,773 4.3 Mass Merch. 4,802 20,616 8.7 Clubs 782 126,598 20.0 Supercenters 736 134,511 20.6 Source: Progressive Grocer, 4/97; Drug Store News, 4/97; Management Ventures, Inc. 9/97; U.S. Census, 1998. Based on total U.S. sq. miles of 3,103.9MM which excludes Alaska and Hawaii.

Key Message #4: • There is no question that U.S. supermarkets must change the way they do business in order to survive and thrive. • Growing profitable topline sales must be the categorical imperative of every supermarket who wishes to remain in business long-term. • The single most important resource available to supermarkets to plumb the potential of their consumers and grow topline sales is the SUPPLIER community.

It Is Based On This Premise That In 1993, Hoyt & Company Developed The Concept of Co-Marketing: Co-Marketing is a collaborative relationship in which suppliers and retailers work pro-actively together to develop and implement a consumer-based approach to marketing their business — defined as categories, brands and differentiated store image.

Co-Marketing Is Based on The Premise That: • “One has to be effective before one can afford to be efficient.” • — OR — • “There is not much point in focusing all energies on making a shrinking pie more efficient.”

How Co-Marketing Differs: • The Consumer — not cost-cutting — is the strategic starting point. • The Retailer leverages the brand marketing expertise of Suppliers and their brand strengths to reinforce the Retailer’s differentiated image. • Both Supplier and Retailer focus all efforts on growing profitable topline sales. • Suppliers must add brand marketing expertise to account teams. • Results are measured in long-term brand and category share gains, increased transaction size and customer count — not short-term promotion “lift.”

Why Supplier Brand Marketing Expertise? • Key Functions of A Supplier Brand Manager: • Grow profitable sales, meet brand P&L objectives. • Profile and pillage the brand’s target consumer. • Position and package the brand for maximum impact and take-away. • Increase transaction size by introducing new SKUs. • Reduce supply-side expenses through accurate forecasting. • Develop growth strategies which competition cannot imitate. • Ensure brand has a key point of differentiation demonstrable in consumer advertising. • Allocate spending for proper balance between consumer advertising, trade and consumer promotion. • Write annual brand plan encompassing all of above.

“Merchandising” is Selling More to Customers Who Already Shop In A Store... Merchandising Present Customers

“Marketing” is Directed At All of the Consumers Who Live in The Area of a Store: Its Function Is To Attract and Hold New Customers — i.e., To Build Store Customer Count! Current Customer Store New Customer

What Do We Mean By Differentiated Store Image? • A DSI sets one retailer apart from another in the consumer’s eyes on a basis other than just price. • A DSI “brands” the total shopping experience as something your customers can expect every time they shop your stores: • This should satisfy either time or price decision-drivers on a store-by-store basis • Your DSI should stimulate word of mouth referrals among neighbors • A DSI can be continually leveraged in creative ways to attract and hold new consumers. • A DSI is total store initiative, reflecting the decision of top management about, “who we want to be when we grow up.”

Co-Marketing Will Help You Put the Big Picture First, Then Provide the Framework for Effective Category Management... • Attract and hold new consumers • Get differentiated store image right and rest will follow • Make shopping experience fun, exciting and interesting • Can be implemented within framework of existing retailer organization • Primary focus is on relationship with consumer • External • Macro Co-Marketing Category Management • Sell more, more efficiently to present customers • Get pricing, product selection and assortment right • Manage categories as strategic business units • Requires complete retailer re-engineering • Primary focus is on relationship between supplier and retailer • Internal • Micro

Co-Marketing Banks on The Assumption That Both Suppliers and Retailers are Equal in the Resources They Have to Offer Each Other... • Brand Equity & Positioning • Reach & Frequency • Brand Drawing Power • Marketing Expertise • Analytical and Interpretive Skills • Thinking Time • Advertising and Promotion Experience • Implementation Capability • Financial Resources Suppliers Retailers • Differentiated Corporate “Image” • Customer Count • Store Locations • Merchandising Expertise • Movement Data • No Time • Customer Databases • Manpower Shortages • Local Knowledge

The Idea of Co-Marketing Is To Combine The Supplier’s and Retailer’s Advertising, Promotion and In-Store Merchandising Expertise To Thoroughly Plumb The Potential Of The Mutual Consumer: • Advertising • TV • Radio • Print • Consumer Promotion • Coupons • FSIs • Bonus Packs • Direct Mail • On-Packs • Etc. Co-Marketing Supplier Marketing Retailer Marketing Positioning Reinforcement • Advertising • TV • Radio • Print • Trade Promotion • Scan-Downs • Displays • Coupons • Sampling • Demos • Etc. Consumer

Chief Components: • Develop a differentiated store image which, in effect, will “brand” the store in the consumer’s eyes. • Consumers shopping your stores for reason other than price alone. • Customer count, same store sales and transaction size. • Brand and retailer market share • ROI (both parties) Objectives End Result Measurement Criteria

The Supplier’s Responsibility In Co-Marketing Is To Provide Retailers With the Knowledge and Programs To Complement And Reinforce Their Differentiated Store Image: Category Manager (Retailer) Category Marketer (Supplier) Revenue Generation Cost Reduction (ECR) Private Label Promotion Dev/Mktg. Merchan-dising Adminis-tration Customer Service Buying MIS • Consumer Demo-graphics • Store Clusters • Event Marketing • Distribution • Assortment • Inventory • Shelf • POS • Media • Displays • Content • Format • Analysis • Invoices • Bill Backs • Deduc-tions • Coupons • Payments • EDI • UCS • Costs • Logistics Store Clusters #1 #2 #3 #4 Grouped By Demographic Profile

The Retailer’s Responsibility Is To Share The Growth Risk By Investing Trade Promotion Dollars Into Ideas and Activities Directed At Growing Profitable Topline Sales For Both Parties: Assigning Personnel and Sharing Information Working With Manufacturer to I.D. Common Issues/Objectives Joint Advertising Programs Research on Consumer Demographics Joint Promotion Programs Trade Promotion $ Corporate & Store Positioning and Image Circulars andRotos In-Store P.O.P. and Merchandising Materials Developing Advertising, Promotion and In-Store Merchandising Executions Database Marketing and Continuity Mailings

Combining Supplier’s and Retailer’s Promotion, Advertising and In-Store Merchandising Expertise Means Building the Customer Base for Both Parties. The Idea is To: • Leverage the manufacturer’s reach, frequency and brand loyalty in behalf of individual retailers to attract and hold new customers. • Leverage the retailer’s customer count and store visit frequency to sell more of the manufacturer’s product to current customers.

In Net: • Use your suppliers’ consumer marketing expertise to help “brand” your stores and replicate the shopping experience trip after trip. • This way, “price” becomes less of an issue and frees up promotion dollars to invest in “image” building vs. brand and profit degradation. • If you don’t know how or where to start, ask your leading branded goods suppliers (who we are certain would jump at the opportunity).

Thank You,It Is An Honor! 1010 Washington Boulevard • Stamford, CT 06901 Phone (203) 352-0645 • Fax (203) 352-0798 • E-Mail: Chris_Hoyt@msn.com

Co-Marketing: What It Is and What It Is Not