Are Traditional Retailers Turning the Corner?

1. Are Traditional Retailers Turning the Corner? Moderator:Brian Todd, The Food Institute Speakers:Jim Hertel, Willard BishopBill Bishop, Willard BishopWebinar: June 27, 20072:00 – 3:00 PM EDT

2. Food Institute • Moderator: Brian Todd • The Food Institute strives to be the best, “single source” for current, timely, and relevant information about the food industry from “farm to fork.” • For 78 years, we have aided and informed food industry professionals. • Resources include the weekly FOOD INSTITUTE REPORT, daily email updates, informational publications, seminars, and webinars • Consider us as a new career center for the food industry. • We are privileged to collaborate with Willard Bishop on today’s webinar as part of our series. • For more on the Food Institute, go to www.foodinstitute.com.

3. Format for today’s event • By now you should have received “The Future of Food Retailing Report” via email. This report provides an in-depth look at the data covered in today’s presentation. • To access a copy of the report during the webinar, go to www.foodinstitute.com\futureoffood.pdf.

4. Jim Hertel • Managing Partner, Willard Bishop • In addition to his role as managing partner, Jim leads the firm’s business development, client service, and strategy development practice. • Throughout his career, he has developed insight-based growth strategies for many of the top consumer-packaged goods companies in the industry. • Prior to joining Willard Bishop, Jim worked in brand management at Procter & Gamble and led the client service group at Spectra Marketing. • His B.A. degree in Economics is from Duke University.

5. Bill Bishop • Chairman, Willard Bishop • Bill has been involved in retail research and consulting for over 30 years. • In his new role as Chairman, Bill continues to provide strategic guidance and thought leadership to both the organization and the industry. • Throughout his career, he has led major studies on everything from pricing strategies, category management and new retail formats, to loyalty marketing and health and wellness at retail. • His education in Economics includes a Ph.D. from Cornell.

6. The grocery game is changing…again • Today, we’ll discuss: • The state of the industry—who’s doing well and what the future holds. • How supermarkets are fighting back and what it means to your business as a supplier. • How new players are changing the rules of the grocery game and what suppliers will need to do to keep up.

7. Five key takeaways from today’s presentation • Traditional supermarkets’ responses to the past decade’s competitive activity are taking hold. • Another round of format innovation is gathering momentum. • Retail growth results from strong shopper value propositions. • The implication for traditional retailers  Even more productive responses will be required in the future; this is no time to rest. • The implication for suppliers  The opportunity to collaborate for growth can be found in both traditional and non-traditional channels.

8. Who are the players? Traditional Retailers Traditional Supermarket Fresh Format Limited-Assortment Super Warehouse Other (Small Grocery) Convenience With Gas Without Gas Non-Traditional Retailers Wholesale Club Supercenters Dollar Stores Drug Mass Military Traditional Retailers see two-thirds or more of their sales coming from food and consumable products

9. While traditional retailers comprise the largest channel, non-traditional retailers are a major force • 2006 total industry sales grew 4% to $859 Billion. • Non-traditional retailers’ grocery volume is equivalent to 68% of food and consumables sold in the traditional retailer channel. • Non-traditional retailers account for one-third of groceries sold in the US. Sales by Segment(Billions) Share by Segment Source: Willard Bishop, 2007 Source: Willard Bishop, 2007

10. Over the past two decades, traditional retailers have lost significant ground • By 2013, non-traditional retailers will equal traditional retailers in food and consumables sales. Market Share by Segment Source: Willard Bishop, 2007

11. Traditional Supermarket sales show signs of recovery • …Still, they are projected to lose share over the next five years. Sales Growth Rate Current and Projected Market Share Source: Willard Bishop, 2007 Source: Willard Bishop, 2007 • Despite resurgent sales, Traditional Supermarkets will continue to lose share. • Sales were up 2.6% ($9.6 billion), compared to a 2.0% decline in 2005.

12. Non-Traditional retailers’ sales growth is slowing • …While their long term market shares projected to grow. Sales Growth Rate Current and Projected Market Share Source: Willard Bishop, 2007 Source: Willard Bishop, 2007 • Sales for Non-traditional retailers were up 6.1% ($16.7 billion) in 2006, compared to 6.9% growth ($17.7 billion) in 2005. • Supercenters continue to pace non-traditionals’ growth through 2011.

13. Convenience Store sales continue to grow Sales Growth Rate Current and Projected Market Share Source: Willard Bishop, 2007 Source: Willard Bishop, 2007 • C-store sales increased 4% ($5.3 billion) in 2006, compared to 2.4% ($3.2 billion) in 2005 • While C-store sales will increase over the next five years, market share will remain flat.

14. Supercenter, Dollar, Wholesale Club, and Drug are non-traditional formats positioned to grow at a rate that outpaces inflation. Non-traditional formats will continue to have the advantage in real sales growth rates Expected Compound Annual Sales Growth Rate vs. Inflation: 2006-2011(Grocery & Consumables) Inflation Compound Annual Rate: 2.9% Source: Willard Bishop, 2007; USDA, Economic Research Service

15. Traditional Supermarkets have been challenged on two fronts Fresh Format High • A “one-size-fits-all” approach left many Traditional Supermarkets in unsustainable middle ground. $$ TraditionalSupermarkets PriceImage $$ Supercenters Low Low High Quality Image

16. Successful Traditional Supermarkets have responded on both fronts… • …And strengthened their shopper value propositions against both price-oriented and premium competitors. Fresh Format High $$ TraditionalSupermarkets • Increased emphasis on “fresh” • Credible natural and organic offerings • Enhanced shopping experiences PriceImage $$ Supercenters • New pricing strategies • Increasing reliance on Private Label • High impact promotions Low Low High Quality Image

17. Grocers’ shopper value propositions must be multi-dimensional Price = Maintaining Parity Quality = Fresh is the Word Variety = Unique/Different Products/Services Service = People & Systems Facilities = Bright, Clean, Fun V = (Price x Quality x Variety x Service x Facility) • Price is critical when other elements of a grocer’s value proposition are equal to or at a disadvantage compared to competitors.

18. Shelf price is only one dimension of price image… Comparing Chain B Shopper Value vs. Typical Supercenter 5 Price Image Dimensions Chain B Advantage While Supercenters may beat Supermarket shelf pricing by 20% or more, Traditional Supermarkets can win on other dimensions of pricing. Chain B Disadvantage Promo Pricing Per Unit Pricing Price Communication Merchandising Shelf Pricing

19. Wegmans manages price image with “Hybrid EDLP” • Mix of national brands and strong private brands • Directly competitive with Hi/Lo merchandisers • “You can do real well on price there, and get great fresh items and service”

20. Hy-Vee manages price image in part through private brands • They are able to differentiate and improve price image simultaneously. Multiple price tiers Specialty Co-branded “hit” items food items

21. Ingles does a superior job with price communication • Same-store sales growth exceeds 5% • Well-entrenched Supercenter competition

22. …And pricing is only one element of the value equation Comparing Chain B Shopper Value vs. Typical Supercenter Other Shopper Value Equation Elements 5 Price Image Dimensions Chain B Advantage Rx Deli Bakery Location Chain B Disadvantage Meat HBC Produce Cleanliness Promotional Pricing Per Unit Pricing Community Support Facility Décor Merchandising Price Communication Customer Service Shelf Pricing HighImportance MediumImportance LowImportance

23. Innovative Traditional Supermarkets are meeting “Fresh Format” competition head-on • …In shopping environment Safeway Lifestyle store

24. Innovative Traditional Supermarkets are meeting “Fresh Format” competition head-on • …And, in Private Label, too.

25. Kroger takes broad-based action to enhance their shopper value proposition • Known for their customer loyalty programs • 40% of U.S. households have a Kroger Plus card • Customized offers • Three-tier private label program • Offer “Try it, Like it or Get National Brand Free” • They manufacture 55% of the private label items they sell • Committed to organics • Extensive perishables assortment • “Naturally Preferred” private label brand

26. Publix differentiates on customer service • Publix ranked number one in American Consumer Satisfaction Index* for supermarkets; Wal*Mart ranks last. • Motivated employees own 31% of Publix. • Same store sales +5.1%. • New GreenWise markets to offer product specialists in every department. *Published by University of Michigan

27. Leading Convenience Retailers are refocusing their merchandising efforts • Convenience Retailers like 7-Eleven and Wawa are taking a more strategic approach to merchandising, by: • Rethinking the inside of the store: • Consumer purchasing behavior • Promotional effectiveness • Assortment • Increasing focus on foodservice. • Building perishable programs. • Building private label programs.

28. Thornton’s stands for fresh, high-quality food-to-go • Leading C-store and gasoline chain in Midwest. • Bringing fresh salads, sandwiches, fruit, and other high-quality items to the “one-stop shopping” experience.

29. What’s next? Web grocers are growing again • 2006 Internet grocery sales are estimated at $2-3 billion/year. • Format advantages include: • Convenience. • Quality and low prices. • Personalized promotions. • Servicing the “long-tail” profitably.

30. What’s next? Tesco’s move to the U.S. will intensify competition • Tesco’s U.S. expansion: • Identified under-served consumer segments • Compete with Trader Joe’s, Whole Foods and Safeway Lifestyle stores • Emphasis on fresh, private-label, and value-added products • Targeting Hispanics • Projected to spend $400 million over 5 years • Large DC built for scale beyond announced stores

31. What’s next? New formats meet shoppers’ lifestyle needs

32. What’s next? Meal assembly centers attractshoppers and branded good suppliers • There are over 850 meal assembly centers in the US, and sales are doubling every year. • Sales reached $270 million in 2006. • Food manufacturers and distributors are entering into partnerships to capitalize on this emerging format.

33. Implications for Suppliers • Traditional supermarkets can still be sources of growth. • The best are meeting the value challenge. • They are seeing healthy same-store sales increases. • New opportunities for collaboration are emerging. • Don’t overlook mid-tier and smaller traditional supermarkets. • Emerging formats are opportunities as well. • Successful collaboration will require suppliers to “raise their game.” • Above and beyond category perspectives. • Customer requirements impact internal organization and work flow.

34. Implications for Retailers • Traditional supermarkets must remain on offense. • Many have responded well to “extreme value” challenges. • New and emerging formats will pose additional challenges. • Growing retailers can attract incremental supplier resources. • Growing retailers help suppliers expand their shares. • “Intellectual property” is cited as the most valuable resource. • Enhancing shopper value propositions can drive innovation and growth. • Within existing formats. • Creation of new formats.

35. Questions & Answers

36. For over 30 years, Willard Bishop has been working with retail and foodservice companies to solve business problems and identify opportunities to drive profitable growth. • To discuss today’s topic in more depth, or to arrange for us to present this in person, free of charge at your company, contact: • Jim Hertel, Managing Partner • jim.hertel@willardbishop.com847-756-3712