CATEGORY MANAGEMENT & PRIVATE LABEL PROFITABILITY

1. CATEGORY MANAGEMENT &PRIVATE LABEL PROFITABILITY W. Frank Dell II, CMC DELLMART & Company May, 2001

2. Agenda • Category Management • Introduction • Distributor Program • Supplier Program • Private Label Profitability • Introduction • Activity Based Costing • Net Profit Applications DELLMART & COMPANY

3. INTRODUCTION Objectives • Provide an overview of category management and its process • Identify strengths and weaknesses • Outline a supplier’s approach DELLMART & COMPANY

4. INTRODUCTION Definitions • Category A distinct, manageable group of products/services that consumers perceive to be interrelated and/or substitutable in meeting a consumer’s needs. • Category Management The distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value. DELLMART & COMPANY

5. From Push Salesperson Buyer/Seller Cost Averaging Deals Sales Drivers To Pull Business Team Account Management Cost to Serve Pay for Performance Profit Drivers INTRODUCTION Charter for Change DELLMART & COMPANY

6. From Data Protection Data Shelf Management Win/Lose Fast To Data Sharing Knowledge Assortment Management Win/Win Fastest INTRODUCTION Charter for Change DELLMART & COMPANY

7. INTRODUCTION Does Category Management Work? Copps Corporation - Wisconsin, USA • Snack Category 3 year increase 87% • Year 1 33% • Year 2 22% • Year 3 15% • Candy Category 2 year increase 111% • Year 1 60% • Year 2 32% DELLMART & COMPANY

8. INTRODUCTION Brand Management Product Development Advertising • Started in the 50’s & 60’s • Brand General Manager Brand Management Profit & Loss Responsibility Promotions DELLMART & COMPANY

9. INTRODUCTION Supplier Migration Brand Management Snap, Crackle & Pop Vs Tony The Tiger Vs General Mills Category Management Kellogg Vs General Mills & Breakfast Alternatives DELLMART & COMPANY

10. DISTRIBUTOR Components Collaborative Trading Partner Relationships Scorecard Strategy Business Process Information Technology Organization Capabilities DELLMART & COMPANY

11. DISTRIBUTOR Elements • Manage the category as a strategic business unit • Develop strategic category plans based on category goals, competitors and market conditions • Determine price, merchandising, promotion and product mix • Collaborate with suppliers DELLMART & COMPANY

12. DISTRIBUTOR Process Activities Category Definition Category Role Category Assessment Category Review Category Scorecard Category Strategies Category Tactics Plan Implementation DELLMART & COMPANY

13. Sub-Segment Segment Sub-Segment Sub-Category Sub-Segment Segment Sub-Segment Category Sub-Segment Segment Sub-Segment Sub-Category Sub-Segment Segment Sub-Segment Source: ECR Category Management DISTRIBUTOR Definition • What products are in a category? • How will categories be grouped? DELLMART & COMPANY

14. DISTRIBUTOR Category Role • Destination • To be the primary category provider and help define the retailer as the store of choice by delivering consistent, superior target consumer value. • Routine • To be one of the preferred category providers and help develop the retailer as the store of choice by delivering consistent, competitive target consumer value. • Occasional/Seasonal • To be a major category provider, help reinforce the retailer as the store of choice by delivering frequent, competitive target consumer value. • Convenience • To be a category provider and help reinforce the retailer as the store of choice by delivering good target consumer value. DELLMART & COMPANY

15. DISTRIBUTOR Assessment Market Market Share & Benchmarks Category Sub-Category Segment Brand SKU Consumer Distributor Buyer Profile & Purchase Behavior Contribution & Productivity Supplier Share & Efficiently DELLMART & COMPANY

16. DISTRIBUTOR Distributor Scorecard Consumer Current Target Retention Level _______________ _______________ Purchase Incidence _______________ _______________ Satisfaction Rating _______________ _______________ Share Category of Department _______________ _______________ Category of Market _______________ _______________ Sales Category $ _______________ _______________ Growth _______________ _______________ Sales/Sq. Ft/Week _______________ ______________ Profit Gross Profit $ _______________ _______________ Gross Margin _______________ _______________ Gross Profit Sq. Ft/Week _______________ _______________ Private Label Sales _______________ _______________ % of Gross Profit _______________ _______________ Gross Margin _______________ _______________ Product Supply Days of Supply _______________ _______________ Inventory $ _______________ _______________ Turns _______________ _______________ GMROI _______________ _______________ Service Level _______________ _______________ DELLMART & COMPANY

17. DISTRIBUTOR Consumer Strategies Category Roles Category Roles Category Strategies In-Store Service Distribution Marketing Procurement Attract Strategy - Traffic Building - Image Enhancing Build Loyalty Strategy - Transaction Building - Turf Protector Micro marketing Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - All EDI & EFT DC/Store Receiving - Auto Replenishment Transportation - DSD, Backhaul DC/Store Handling - Cross Dock - Sale-Ready Packaging Full Service - (If Necessary) Differentiated - (From Competition) Destination Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - Majority EDI & EFT DC/Store Receiving - Auto Replenishment Transportation - DSD, Backhaul DC/Store Handling - Minimize Handling - Reduce Shrink Semi-Service - (If Necessary) Non-Differentiated - (From Competition) Build Loyalty Strategy - Transaction Building - Turf Protecting Cluster Marketing Routine Self Service - (If Necessary) Non-Differentiated - (From Competition) Attract Strategy - Traffic Building - Excitement Creating Cluster Marketing Acquisition Strategy - Best Quality/Reliability - Best Cost & Terms Transaction Strategy - Some EDI & EFT Transportation - Reduce Transit Time DC/Store Handling - Reduce Shrink - Sale-Ready Packaging Occasional/ Seasonal Build Loyalty Strategy - Transaction Building Uniform Marketing Acquisition Strategy - Low Cost DC/Store Receiving - Auto Replenishment DC/Store Handling - Minimize Handling - Reduce Shrink Self-Service Non-Differentiated - (From Competition) Convenience DELLMART & COMPANY

18. DISTRIBUTOR Distributor Strategies Category Strategies Category Strategies Characteristics Traffic Building High Share, Frequently Purchased, High % of Sales Transaction Building Higher Ring-up, Impulse Purchasing Profit Contribution Higher Gross Margin, Higher Turns Cash Generating Higher Turns, Frequently Purchased Excitement Creating Impulse, Lifestyle-Oriented, Seasonal Image Creating Frequently Purchased, Highly Promoted, Impulse, Unique Items, Seasonal Turf Defending Used by Retailers to Draw Traditional Customer Base DELLMART & COMPANY

19. DISTRIBUTOR Distributor Tactics Category Tactics Category Roles Promotion Pricing Assortment Shelf Presentation Prime Store Location - High Traffic - High Exposure Time High Cube Allocation (Cube to Time Supply) Complete Variety - Sub-Categories - Segments - Brands - SKUs Leadership - Best Value (Per Unit or Use) - Entire Category High Level of Activity (If Necessary) - High Frequency - Long Duration - Multiple Vehicles Destination Broad Variety - Sub-Categories - Segments - Major Brands - Major SKUs Competitive/Consistent - Equal to Competition (Per Unit or Use) - Sub-Categories - Segments - Major Brands/SKU - Reduce Shrink Average Level of Activity (If Necessary) - Average Frequency - Average Duration - Multiple Vehicles Average Store Location - High Frequency High Cube Allocation (Cube to Time Supply) Routine Seasonal/Timely Activity (If Necessary) - Multiple Vehicles Good Store Location - High Traffic Average Cube Allocation (Cube to Time Supply) Timely Variety - Sub-Categories - Segments Competitive/Seasonally - Close to Competition (Per Unit or Use) - Sub-Categories - Segments Occasional/ Seasonal Available Store Location Low Cube Allocation (Cube to Time Supply) Select Variety - Major Brands/SKUs Non-Inflammatory - Within Reach to Competition (Per Unit or Use) - Major Brands/SKUs Low Level of Activity - Multiple Vehicles Convenience DELLMART & COMPANY

20. DISTRIBUTOR Retail Category Portfolio Sales Dollars High Low High Flagship Cash Machine Maintain/Grow Gross Margin Percent Core Traffic Under Fire Rehab Low DELLMART & COMPANY

21. DISTRIBUTOR Retail Category Portfolio Market Growth Low High High Sleeper Winners Retailer Share of Market Questionable Opportunity Gaps Low DELLMART & COMPANY

22. DISTRIBUTOR Consumer Based Category Roles Reach High Low High Staples Niches Frequency Necessities Fill-ins Low DELLMART & COMPANY

23. VP Merchandising Buyer Buyer Buyer Administration Advertising Retail Pricing Space DISTRIBUTOR Before Organization DELLMART & COMPANY

24. DISTRIBUTOR After Organization Product Supply Space Allocation Marketing Services Category Management Price/Data Integrity Retail Merchandising Category Analysis Advertising Coordination Retail Pricing Allowance/Cost Control DELLMART & COMPANY

25. 86.4% 83.1% 71.2$ 69.5% 66.1% 64.4% 61.0% 61.0% 44.1% 42.4% DISTRIBUTOR Responsibilities Responsibilities Retailers Wholesalers 84.6% Negotiation with suppliers Determine investment buys 76.9% Determine promotions- items/schedule 73.1% Sales/profit/market share goals 57.7% Develop strategic alliances 53.8% Budget development 50.0% Strategic category planning 46.2% Competitive store analysis 34.6% Optimize by store clusters 26.9% Develop shelf plan-o-gram 26.9% DELLMART & COMPANY

26. DISTRIBUTOR Category Definitions DELLMART & COMPANY

27. DISTRIBUTOR Review Frequency DELLMART & COMPANY

28. DISTRIBUTOR What’s Really Happening? • 1. Official approach leaves out consumer • Merchandisers see CM to lift sales • Executives see CM to raise margins • Neither see it for what it was intended: framework for understanding the consumer • 2. Wide gap between results and expectations • Cornell study ranged from 3 to 8 point lift in EBIT • 73% of CM practitioners rate experience “somewhat” or “not at all” successful • Many of the few that claim success can’t support it with metrics • 3. Official approach is too complicated • Only 15% claim to be following the guidelines • CEO at large chain: “We’d have to hire 14 full-time people just to fill out and maintain the templates.” • Personnel talent a problem • 4.“One-size-fits-all” is not working • 40% don’t even see need to assign roles • Half do not employ Activity-Based-Costing • Industry current-state is too diverse. Take merchandising approaches: high/low, every-day low, premium, limited selection, semi-warehouse, superstore, etc.. DELLMART & COMPANY

29. Cost Reduction Category Leader Alliance Preferred Supplier Respected Supplier SUPPLIER Scope DELLMART & COMPANY

30. SUPPLIER Sales Evolution Available Sales Share Category Management D.P.P. Gross Margin DELLMART & COMPANY

31. Differences Supplier Retailer Store Brands Check your bias at the door Bring your knowledge SUPPLIER Perspective DELLMART & COMPANY

32. SUPPLIER Principles • Consumer is the common focus • Mutually agreed objectives, strategies, tactics and scorecard measures • Rewards support collaborative goals • Relationships and trust are earned, not given • Information sharing is essential • Win/win is critical for success • Multifunctional access and communication • Openness to change traditional attitudes and relationships DELLMART & COMPANY

33. SUPPLIER Supplier Steps Preparation Coordination Execution • Create team • Develop plan • Collect information • Develop tools • Package program • Target customers • Present plan • Establish goals • Organize team • Develop scorecard • Establish schedule • Share information • Perform analysis • Develop plan • Implement plan • Monitor results • Modify plan DELLMART & COMPANY

34. INTRODUCTION Objectives • Provide introduction to Activity Based Costing (ABC) • Identify Net Profit Applications DELLMART & COMPANY

35. INTRODUCTION Why Net Profit? • Gross Margin ineffective management tool • Simple relationship - cost Vs retail price • Nota predictor of profit DELLMART & COMPANY

36. INTRODUCTION What is Net Profit? Sales - Cost of Goods Sold = Gross Margin + Direct Revenue - ABC Costs = Net Profit DELLMART & COMPANY

37. ABC Definition • ABC is a cost allocation or assignment methodology • Cost assignment based on: • Activities - Tasks within a process • Drivers - Factors creating costs DELLMART & COMPANY

38. ABC ABC Vs DPP DELLMART & COMPANY

39. Headquarters Management Merchandising Finance & Accounting Human Resources Warehouse Management Labor Benefits Space Utilities Transportation Labor Equipment Supplies Stores Management Labor Benefits Space Utilities ABC Allocates All Costs DELLMART & COMPANY

40. ABC Primary Processes DELLMART & COMPANY

41. ABC Costs Follow Product Flow DELLMART & COMPANY

42. ABC Greatest cost is Display Space DELLMART & COMPANY

43. ABC Sales By Department DELLMART & COMPANY

44. ABC Gross Margin By Department DELLMART & COMPANY

45. ABC Net Profit By Department DELLMART & COMPANY

46. ABC Superior Private Label Categories • Private Label products achieved results superior to branded in the following categories: DELLMART & COMPANY

47. APPLICATIONS PLMA Model DELLMART & COMPANY

48. APPLICATIONS Success Factors • Logical presentation • Reasonable assumptions • Demonstrate knowledge of business • Promote benefits • Consumer sales • Customer profits DELLMART & COMPANY

49. APPLICATIONS New Products • Life blood for retailers and suppliers • Primary driver of growth • Replacement Vs Cannibalization Strategy New & Improved DELLMART & COMPANY

50. APPLICATIONS Approach • Select items for replacement • Low sales • Matching consumer target markets • Collect customer and competitive data • Run model • Present • Current sales and net profit • Projected sales and net profit DELLMART & COMPANY