PLMA’s Annual Meeting and Leadership Conference

1. The Role of Promotion and AdvertisingIn the Store Brand Marketing Mix PLMA’s Annual Meeting and Leadership Conference Scottsdale, AZ March 22, 2002 www.hoytnet.com 8912 East Pinnacle Peak Road #650 • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

2. How Many of You Remember That Between 1988 and 1993, Supermarket Store Brands Grew At A Steady Pace of About 1% Per Year? U.S. Supermarket Store Brand Share Growth: 1998 - 1993 1988 1993 % +/- Units Dollars 14% 11% 19% 15% +36% +36% Source: IRI, 1989 + 1994

3. Based On These Trends, the Smart Bets Were That by 2003, Store Brands Would Control Between 35 and 40% of Industry Unit Sales and 30% of Dollars: • In 1993, David Nichol predicted in his keynote address at this same conference that U.S. Supermarket store brand UNIT sales would be “in excess of 40%” in 10 years – i.e., by 2003. • Gary Giblen of Paine Webber added support to this in early 1994 when he predicted a 35% unit share and a 30% dollar share by 2004 – estimates which he regarded as conservative. Source: Hoyt & Company Records; David Nichol, PLMA, 3/26/93 and Gary Giblen, Grocery Marketing Magazine, Jan, 1994 - pgs. 44-46

4. The Reality Is That Between 1993 and Today, Store Brand Growth Has Virtually Stalled, Not Only For Supermarkets, But On a Marketwide Basis: Supermarket Store Brand Share Growth: 1993 - 2000 1993 2000 Vs. Predictions Units Dollars 19.0% 15.0% 20.0% 15.5% -20% -15% Total Food/Drug/Mass Store Brand Shares, 2000 2000 Vs. Supermarkets ‘93 Units Dollars 18.5 14.2 -0.5% -0.8% Source: IRI, PLMA Private Label Yearbook, 2001

5. The Key Questions • What happened to grow the category between 1988 and 1993? • Why did it stall-out between 1993 and the present? • What needs to be done to re-ignite the growth and break out of this loop? • What role does store brand promotion and advertising play in this?

6. 1988 - 1993 • President’s Choice – Category “News” and Excitement: • TV & Radio – Image Advertising • Big, Colorful Newspaper Inserts 4 x’s/year • President’s Choice Recipe Videos • Infomercials • Sampling • Cookbooks • Restaurant Tie-in Promotions • Introduced to U.S. = lots of “juice”/category interest/rallying point • First viable alternative to high priced national brands • U.S. Supers upgrade “mean and nasty” private label lines to premium store brands – e.g., Safeway Select • Further impetus provided by 1990-1993 recession

7. 1993 - Present • ECR focus on cost-cutting rather than growing the top line. • Category Management provided National brands with a built-in platform to defend against Premium Pvt. Labels. • Initially, Category Buyers did not have responsibility for store brands which therefore were excluded from the “mix”. • CatMan enabled Nationals to control the retail selling environment. • Deep-cut price wars between supermarkets & non-food channels depressed national brand prices and made Pvt Labels less attractive. • To realize their projected potential, store brands required a classic brand marketing/equity-building strategic approach which retailers were not culturally or structurally prepared to do.

8. Today… • All the pieces and precedents are in place: • Shaw’s = 40% • Supermarkets – “stress private label” – now the #1 priority out of 26 on Progressive Grocer’s 2001 priority list • Consolidation makes it efficient – will force mega-retailers to differentiate on a non-price basis in order to improve profits • Manufacturer trade spending ($109B last year) provides the bucks • Mucho quality research from Wharton, Stanford and others has identified, quantified and prioritized the key components of a successful store brand program

9. The Big Issues With All This… • Retailer-embedded tactical vs strategic approach to marketing and merchandising • An industry habituated to making money on the buy rather than on the sell • A pathological belief that low prices are the answer to everything • Risk-averse investment mentality – “we’ll do it but it has to be on somebody else’s dollar” • Retailer reluctance to take responsibility for their own destinies on the demand side of the business: • Supplier-dependent for information and analytics • No back-end infrastructure for long term strategic planning or to benchmark supplier recommendations

10. And Then… We Always Get The Following: • “The U.S. is not Canada or the U.K.” • “The U.K. would fit in Rhode Island.” • “Bears and Beavers buy store brands, not Americans!” • “Americans are too heterogeneous, homogeneous, religious, atheist, rich, poor, fragmented, segmented, rural, urban, conservative, liberal, brand loyal, disloyal, pacifist, war-like, smart and dumb to buy store brands like the British or Canadians do…”

11. Truth Is… • Americans are actually much better than others when it comes to recognizing a good deal. • For U.S. store brands to reach the penetration benchmarks established in the U.K. and Canada, they have to be marketed just like National brands. • This, in turn, requires a comprehensive strategic approach to the entire proposition. • Despite mucho effort – Few U.S. retailers have developed a strategic approach to marketing their store brand program: • Investing in packaging, superior ingredients and in-house manufacturing is only the first step • The clincher is in building the information base, infrastructure and know-how to market one’s store brands on a head-to-head level with the nationals

12. Assuming Profit Pressures Will Eventually Change This, Here Are The Top Ten Key Components That Must Be Considered When Building A Strategic Store Brand Marketing Program: Component +/- “Swing Factor” ImpactOn Store Brand Market Share National brand competition in category Average # SKUs in category Private Label promotion and advertising Private Label quality assurance program Optimum store brand vs national brand price differential Category growth potential “CDI” EDLP vs Hi-Lo merchandising strategy National brand promotion in category Home values/income considerations Ethnicity/lifestyles of surrounding population TOTAL 8.06% 5.53% 3.28% 3.10% 2.93% 1.82% 1.80% 1.71% 1.27% 1.00% 30.50% Source: Stephen J. Hoch and S. Dhar: Why Store Brand Penetration Varies By Retailer, Wharton, Feb, 1996

13. It Is Based Upon How Different Retailers Blend And Prioritize These Components That We Get The Following Differences In Store Brand Performance For Retailers Competing In The Same Market Atlanta Store Brand Penetration Differences Among Major Supermarkets Market Average = 23.74% Source: Stephen J. Hoch and S. Dhar: Why Store Brand Penetration Varies By Retailer, Wharton, Feb, 1996

14. Our Job Today • To address the promotion and advertising component of store brand marketing. • This is the component that enabled President’s Choice to rocket to prominence and build Loblaw Stores as a recognizable “brand”. • In addressing this, we will assume that all other components are in place and integrated: • One cannot plan and implement an effective store brand promotion and advertising program unless one has first determined the optimum on-shelf price gaps. • Stephen Hoch of Wharton has done extensive research on this and spoke about this at the PLMA 2000 March Conference in Miami.

15. Store Brand Promotion and Advertising Strategy

16. The Job Of Store Brand Promotion & Advertising • #1 Increase profitable sales by leveraging existing store traffic • #2 Build equity for the brand – sets it apart on a non-price basis from other brands • #3 Build equity for the store – i.e., contribute to, or help create, a differentiated image that eventually becomes a draw in itself.

17. Store Brand Promotion Guidelines • Resist the temptation to deep price cut a store brand on promotion: • The price/value relationship is already established by the fact of the brand’s existence in the first place. • Reducing further cheapens the brand’s image and dilutes equity. • Many studies clearly show that reductions beyond the optimum shelf price gap create consumer credibility problems and can actually reduce sales. • What, when and where to promote and advertise must be a consumer-driven vs a deal-driven decision: • Right product, right time, right place • Create a solution or be part of a solution • Forget about making money on the buy – this is YOURbrand!

18. What to Promote and Where To Promote – Taking A Strategic Approach Albertson’s, Scottsdale, 3 Different Stores – 2001 Total Albertson’sArizona Store 969 Store 945 Store 955 Median HH Income Index to Average Median Home Value Index to Average Median Age Index to Average 55+ (% of Pop.) Index to Average $40.5 (100) $110.9 (100) 37.9 (100) 21.1 (100) $71.4 (176) $229.3 (207) 44.8 (118) 23.9 (113) $37.4 (92) $77.9 (70) 28.3 (75) 10.4 (49) $36.9 (91) $108.3 (98) 42.9 (113) 30.9 (146) Source: Spectra

19. The Job Of Store Brand Promotion #1Increase Profitable Sales By Leveraging Existing Store Traffic

20. Provide incentive to buy for the first time Provide incentive to switch Incent to repeat Buy store brand whenever they buy the category Get customers to buy more than they need between trips Take out of market for longer periods Circulars/ROP Catalina In-store sampling In-store demos Cross-promote as part of a solution On-pack guarantees Retailer FSPs/point programs Mail-in offers Next purchase cents off Set-building premiums Bonus packs Multiple purchase incentives (“2 fors”) In-store displays Larger sizes To Be Effective, The Store Brand Promotion You Develop Must Help Retailers Achieve At Least One Of the Following Objectives Per Event: • Objectives • Strategy • Vehicle • Trial(most expensive) • Continuity(least expensive) • Volume(middle)

21. Trial Solution – Leveraging Leading National Brand Beer To Sell Store Brand Chips At Regular Shelf Prices During Super Bowl Week

22. Volume – Creating a Low Price Image Via a Free Standing Self-Shipper Display (Which Is Actually Priced At Higher Than Normal Shelf Prices)

23. Volume – 24 Rolls At Only a 4% Price Reduction

24. Trial – Integrating Store Brand Cooking Oil With the National Brand Ingredients and a Recipe For Time-Pressured Consumers to Whip Up Some Cookies

25. The Job Of Store Brand Promotion #2Build Equity For The Brand

26. Equity • Equity is the value one builds into one’s store brand’s name • Equity is a combination of ACT: • Attributes – A blending of features, benefits and price that provides a viable alternative to national brands • Connection – Marketing and merchandising the product in ways to let the consumer know you are in touch with her lifestyle and lifestage needs (e.g. – Pepsi – Britney Spears/Michael Jackson) • Trust – Quality control that assures consumers that your store brands (all of them!) will perform as advertised every time • Equity is why consumers will pay a 15-20% premium for Tide, Coke or Dog Chow vs store brand equivalents • The stronger one’s brand equity becomes, the less dependent on price one becomes, although price is always important • Conversely, the more one uses deep discount pricing to sell store brands, the more one degrades the brand’s equity

27. It Is the Equity That National Brands Have Built in the Top 15 Edible Food Categories That Primarily Accounts for the Difference in Store Brand Penetration in These Categories 2001 Store Brand Penetration – Top 15 Edible Food Categories(U.S. Supermarkets) % Share PL Units Top 15 Food Items In Grocery Cat $ (MM) $6,600 3,400 5,600 6,400 3,600 6,700 3,800 13,100 3,100 4,500 3,300 4,400 7,800 7,600 $10,200 0.1% 0.3% 1.6% 7.2% 9.3% 9.9% 11.4% 13.7% 17.5% 19.2% 19.3% 26.8% 34.8% 39.6% 60.1% 20.7% Beer & Ale Wine Frozen Dinners/Entrees Salty Snacks Soup Cold Cereal Cookies Carbonated Soft Drinks Luncheon Meats Juice/Beverage - Ref Bottled Juices Ice Cream/Sherbet Cheese Fresh Breads & Rolls Milk Avg. Food PL Share in Grocery Source: PLMA: 2001 Private Label Yearbook

28. Smart! Building One’s Store Brand Equity Via Non-Price Advertising

29. Not So Smart! Heavy Price Promotion On A Store Brand Premium Product

30. Smart! Building One’s Store Brand Equity Through Non-Price-Based Print Ad Advertising

31. The Job Of Store Brand Promotion #3Build Equity For The Store

32. Store Equity • The reason why shoppers will drive 100 miles round trip from NYC to Norwalk every week to shop at Stew Leonard’s • Sets one retailer apart from another on a basis other than price: • Is totally corporate driven, not category driven • Can be continually leveraged in different ways to attract and hold new consumers while retaining current customers • Provides a strategic framework for all advertising and promotion activities • The retailer’s signature – his core reason for being

33. Building Equity For The Store by Creating A Differentiated Image Via Targeted Print Ads

34. Promotions That Help Build Total Store Equity All Aim to Accomplish One thing • The end result of these types of promotions is to: • Reward • Surprise • Pamper • It is in the context of these types of promotions that store brands can best achieve their core objectives of trial, continuity and volume. • Give The Customer An Emotional Reason to Return

35. Trial Promotions That Reward, Or Surprise Or Pamper • Spend $100/trip and spin the Wheel Of Fortune for a free store brand product • Spend $100/trip and get a next trip checkout “surprise” coupon for a free store brand product • Demo store brand franks, buns, condiments, chips, soda and crackers at a Saturday summer parking lot barbecue • Friday night in-store singles nights with branded wine and store brand cheese and crackers • Sample store brand ice cream and cookies at all Grand Openings, give coupons for repeat purchase

36. Continuity Programs That Reward, Or Surprise Or Pamper • Save UPCs from PL products and get cosmetic/bath items • Buy 10 PL products each week for 6 weeks and get flowers from retailer’s floral shop for Mother’s Day (tracked by Frequent Shopper Card) • Earn airline or hotel points with purchase of PL items • Earn phone card minutes with purchase of PL items • Earn local restaurant discounts with purchase of PL items (is trial for the restaurant!)

37. Volume Programs That Reward, Or Surprise Or Pamper • Buy 20 PL products and get a coupon for $5.00 off your next shopping trip or gas purchase • Buy 10 PL products for entry in a store sponsored sweepstakes for a trip to Ireland • Buy PL franks, buns, chips, pickles, ketchup & napkins and get a free “Picnic Special” dessert • Buy PL pasta, PL pasta sauce & PL parmesan cheese and get PL garlic bread for free • Bundle 6 PL cleaning supply SKUs into a free cleaning bucket

38. Your Role As A Private Label Manufacturer In Doing All This • Think strategically – e.g., not price but demographics • Think category – e.g., how to co-promote with nationals for a mutual win-win • Provide solutions – e.g., how store brands can add to the “quick, easy, convenient” consumer mind-set

39. All this is wonderful but where do we get the money?

40. The Optimum Funding Solution Will Materialize When One of Today’s Current Mega Retailers Finally Decides to Get Serious About Building ANDMarketing a Strong Store Brand Program • This will generate the funding, just like a new store opening • Because of the industry’s penchant for “competition-watching”, every other retailer who wants to survive and thrive will do the same in an instant • The key to all this will be CEO determination and commitment which, in turn, will engender total organization focus down and throughout • There are many forces at work in the current environment in this country which make Hoyt & Company think that this breakout will happen sooner than later

41. Until This Does Happen, What You Can Do As Store Brand Manufacturers To Fund Your Promotion Initiatives Is One Or All Of The Following: • Work in conjunction with your accounts to develop a store-specific strategy designed to maximize ROI – á la the Albertson’s example cited earlier • Develop a core of national brand manufacturers with whom you can umbrella-promote on a rotating basis • Collaborate to share costs of group promotions with other private label manufacturers • Sell your accounts on the benefits of cost-sharing: After all, it’s their brands and their stores who have the most at stake in creating a meaningful differentiated image

42. Changing Established Behavior and Attitudes is Tough But The Bright Side Is What Change Has Done For Us Over The Last 100 Years • In 1900: • Life expectancy was 47 • Only 14% of homes had bathtubs • Only 8% had a telephone • There were only 8,000 cars and 144 miles of paved roads • Maximum speed limit was 10 mph • Average wage was 22¢ per hour and the average worker made between $200 and $400 per year • 95% of all births occurred at home • Sugar cost 4¢/lb, eggs were 14¢/dozen and coffee 15¢/lb • Marijuana, heroin and morphine were all available over the counter in corner drug stores

43. Thank You So Much For Your Time and Attention Today! www.hoytnet.com 8912 East Pinnacle Peak Road #650 • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com