Wilson Perumal & CompanyGrocery Retail: Perspectives

October 2013

2Wilson Perumal & Company, Inc.

Introduction and Background

*For further information on Wilson Perumal & Company, see Appendix 2, pg 35

• Even by grocery retail standards, the industry is undergoing high levels of change, creating sizeable complexity as well as new opportunities

• Wilson Perumal & Company*, a management consultancy, works with retailers to find advantage in this fast-changing environment

• In the course of our work, we have developed a point-of-view. In this document, we wish to share with you our perspective on key trends

• The 5 key trends we discuss are:1. Localization a “must-do”; question is what scope/how far to go2. Race to Omni-Channel impeded by execution issues3. As traditional promo strategies fail to drive lift, need for innovation in

promotions + promotional efficiency increases 4. Big Data “arms race” means that many personalized offerings are now

expected and for free 5. Contraction and consolidation of large grocery chains requires update of the

Operating Model

Wilson Perumal & Company, Inc. 3

Five key themes that are shaping the industry

Source: WP&C Retail and CPG research and analysis

Race to Omni-Channel impeded by execution issues

Localization a “must-do”; question is what scope/how far to go

Contraction of grocery chains requires revised operating model

As traditional promo strategies fail to drive lift, need for innovation in promotions + promotional efficiency increases

Big Data “arms race” means that many personalized offerings are now expected and for free

2

1

4

3

5

Grocery retail trends

4-5

12-13

6-7

8-9

10-11

Pages

Additional trends and Appendix on supplemental data 14-47

4Wilson Perumal & Company, Inc.Source: Nielsen consumer reports; US Census Bureau; Euromonitor report 2012; WP&C Analysis

Demographic shifts increasingly apparent...

Race/ethnicity and age mix changes rapidly, and it is not equally geographically distributed

Implications:Trend:

1

2512

17

64

3613

23

54

MixedAsianAfri. Amer.HispanicWhite & Oth

2035F

2012

Population by race and ethnicity (2012, 2035F)Percent of total population

14.0%

10.5%

5.3% 70.2%

$ Share of food spend

2035F

10.5%

20.0%

7.0%62.5%

White & Oth

Afr. Amer.

Hispanic

Asian

• Offer products to local demand • Re-assess price and promote

linkages between products• Re-select flag-product lines to

ensure stock availability

Prod

uct

Rang

e

• Select locations that match your brand image and offering

• Understand local behavior and adjust format offering

• Plan footprint with a long-term view on demographic changeFo

otpr

int &

fo

rmat

• Develop differential pricing • Understand customer segments

willingness to pay; lead customers towards high-margin products

• Plan promotions effectively to meet target audience’s needs

Pric

ing

Demographic trends require extensive localization from retailers

2012

5Wilson Perumal & Company, Inc.

Degree of localization Scope of Localization1 Localization vs. Scale1

1. Additional approaches to localization (scope & scale) are in the appendix to this presentation

…Prompting retailers to determine degree and scope of localization1

Our Perspective/Approach:

Standardi-zation

Unique clusters

Core / clustered

Core/clustered/ localized

True localization

Increasing complexity and cost • Few economies of scale• Complex supply chain• Hard to manage• Large CapEx required

• Economies of scale• Simple supply chain• Easier to manage• No additional CapEx

• All stores have their own unique offering

• Set a basic or core offering (i.e. 70%) carried in all stores.

• Clustered offering (i.e. 20%) for clusters

• Local offering (i.e. 10%) for each store

• Each cluster receives a standard product offering (same offering for all stores in each cluster)

• Set a basic or core offering (i.e. 80%) carried in all stores

• Vary remaining offering (i.e. 20%) in clusters

• No localization or clusters, same offering in every store

• Decision on degree of localization is based on: your strategy, size of your chain, timeline, available data and analytical capability, execution resources (capital and human), and the flexibility of your operations and organization

6Wilson Perumal & Company, Inc.Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites

Online channel grows rapidly, creating opportunity and challenges…

Online grocery sales continue to grow rapidly, driving leading grocers to invest in the sector

Emerging opportunities for grocer in the online space…

• Selling extended range

• Increasing reach to new customer segments

• Focused marketing efforts: personalized offering and promotions

• Improving cross-selling

..as well as new challenges • Developing a profitable operating model

• Facing channel and product cannibalization

• Developing consistent positive customer experience

• Stock management (balancing holding costs, waste, stock availability, etc.)

• Ensuring strategy, organization and operational coherence across channels

Implications:Trend:

2

2%Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012

$6 billionRevenue generated by online US. grocery sales in 2012, with expected 12.1% growth to 2016

1,620Number of online grocery businesses in 2012

55+Age group that buys the most groceries online, accounting for 24.5 percent of purchases

$175Average order size of pure-play UK-based Ocado amongst its 360K active customers’ base

7Wilson Perumal & Company, Inc.

…requiring greater omni-channel integration and coherence2

Growing product lines

Channel marketing

Fragmented supply base

Pace of change

Sources of Complexity The Challenge & Opportunity

Customer & portfolio coherence• Optimize mix of private label & branded• Localize assortment by region

Channel coherence• Align marketing initiatives across channels• Align pricing & promotional strategy

Supply chain coherence• Balance supply chain risk vs. cost• Optimize waste vs. out-of-stock

Strategy & execution coherence• Align processes to effectively exercise

strategic goals across silos

In today’s increasingly complex marketplace, retailers must prioritize coherenceCustomer OfferingStrategy Execution Channel Market Process Output

Our Perspective/Approach:

Wilson Perumal & Company, Inc.

1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions, 2) WP&C client analysis of US grocery chain

Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis, 8

Promotion effectiveness reduced due to complexity of increasing channels

Implications:Trend:

136139

Non-FoodFrozen Dairy

90

120

91

122123128

HBC

9396

Dry Grocery

114119

GM

Promotion1 Average Unit Lift (%) by Department

2012

2011

• Expanding channels in grocery segment have intensified price competition

• Shoppers have many low price options, and are fragmented across retail channels

• Price cuts and promotions remain critical tools to drive traffic/revenue

• However, traditional promotional power is eroding

Grocery retailers are spending significant time/resources on ineffective promotions

Traditional promotional levers are not driving the same level of lift previously achieved…3

% sales uplift units

0 10 20 30 40 50 60 70 80 90 1000

102030405060708090

100110

Case example: Avg. promotion uplift/week 4 month period2

% of promotional SKUs

Low-impact promotions are costly:• Supply chain: Inaccurate forecasting can lead

to out-of-stocks and overstocks• Corporate planning: Detailed planning with

multiple handoffs/rework each week• Store labor: Labor required to stock shelves,

assemble displays, customer service

9Wilson Perumal & Company, Inc.

…putting more pressure on identifying new promo innovations + efficient execution

The right promotions for the right segments…

…done the right way

EfficiencyEff

ectiv

enes

sLOW HIGH

LOW

HIGH• How well do promotions meet

their strategic goals?

• How well do promotions meet the needs of the customer?

• What is the expectation around promotion lift for product and basket?

• Is the promotion process operating as intended in each segment?

• Are there opportunities to make the promotion process faster / more flexible / more dependable / less expensive?

• What is the right governance to sustain better promotions?

Promotion Check-Up

Evaluate issues from a top-down & bottom-up approach

Top-down: Are promotions meeting the business’ strategic goals and the needs of the customer?

Bottom-up: Are individual promotions performing as expected in both effectiveness and efficiency?

Where we want to be

?

?

?

3Our Perspective/Approach:

10Wilson Perumal & Company, Inc.

1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2)“Question: What online or interactive tools/sites do you use regularly for planning your grocery shopping trip and/or which specific products you eventually decide to buy?. The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Source: WP&C research and analysis,

Implications:Trend:Grocery retailers are providing more personalized customer experiences to combat intense price competition

Consumers are becoming increasingly accustomed to direct communication1

Personalized, value adding extras are becoming expected services…4

55% 43%

43% 36%

Use my prior purchasing to offer me promotions

Use my prior purchasing to recommend new products

Involve me in new product ideas

Invite me to events

34%31%

Websites

36%35%

List/Notes Function on Phone

Group Buying Sites

7%8%11%

Mobile App.

9%

Email

10%11%

Social Networking

14%11%

2012

2013

Grocery retailers have more access to consumer info than ever before2

– The ‘Just for U’ program gives shoppers digital coupons and deals on items they regularly buy

– Amazon enhances one-on-one interaction with specific product recommendations

– Hyper-local advertising, the ability to target customers by location, is on the doorstep

– Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery

As more companies employ these services, they will become expected rather than value added extras

Wilson Perumal & Company, Inc. 11

…just as Big Data capabilities enable new levels of insight, value, and personalization

Evolution of Big Data trends… …Lead to new opportunities

Source: WP&C analysis

4

Better predictive analytics More effective advertising and service delivery strategies

Deeper Data MiningSuggests further cross-sell, up-sell and new product opportunities

Tailored promotions/cust. experienceIndividual level initiatives maximize sales and customer satisfaction

Accurate future value estimatesAccurate customer future values aid customer acquisition and retention efforts

More dataExponential growth in customer data from online interactions and loyalty cards

Better toolsReduced storage/processing costs, and better analytics tools allow mining of more data

Improved access

Easier testingSimple experimentation allows retailers to test customer responses

Multi-faceted view of customer available from multi-channel interactions & data vendors

Our Perspective/Approach:

12Wilson Perumal & Company, Inc.

1) 14 trx (total $9.3B) for NA. food retailers, up from $702M in all of 2012 (Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 )

Source: Neilson What’s In Store 2016; Willard Bishop, Includes both grocery and consumables; WP&C analysis

As industry contraction and consolidation continue…

Share of traditional formats continues to shrink , but with slightly lower pace

Heightened consolidation/contraction of chain size and change of ownership in 20131

Contraction/consolidation has direct impact on operating model…• Branch rationalization• Asset/footprint consolidation• Speed of migration• Post merger integration

..and the impact is not only on the physical stores but• Supply chain/inventory• Pricing• Branding• IT

Traditional formats need to also pull other growth levers• New (smaller) format• New categories• Private Label• Customer loyalty-localization• M&A

Implications:Trend:

5

$1.249T

45.0%

55.0%

$1.113T

46.5%

53.5%

2012 2017F

$ Share by Store Format: 2012-2017F

Non-Traditional• Supercenters• C-Stores • Wholesale Club• Drug Stores• Dollar Stores• Other Non-trad.

Traditional

• Supermarkets

• Ltd. Assortment

• Fresh Format

• Other Traditional

’1217.3%14.9%

8.7%5.4%2.4%4.9%

39.8%2.7%1.1%2.9%

’17F18.2%16.0%

9.0%5.5%3.1%3.2%

36.5%3.4%2.1%3.0%

13Wilson Perumal & Company, Inc.

Structured & strategic approach to integration will shorten timeline and smoothen transition

During the migration or integration of stores and back-end processes, complexity can arise exponentially unless carefully managed

Conducting holistic pre-integration planning is key to integration’s success

• Strategic fit and coverage• Operational and capability

assessment• Analytics and planning

From our experience this planning is frequently only done partially

… retailers facing new challenges in revising operating models & integrating acquisitions

Take the integration opportunity to cut complexity and set cost saving target

• Holistic business integration• Complexity reduction in org.,

processes and product lines• New strategic plan in new market,

if necessary

5Our Perspective/Approach:

Post

-inte

grati

onPr

e-in

tegr

ation

Organization

Value add

Non-value add

The Complexity Cube

Complexity is:

Too much complexity

is bad:

Product Process Organization

Number of products and services you offer

Number of assets, facilities, entities, partners, etc.

Number of processes, steps, handoffs, etc.

• Unwanted prod.• Cust. confusion• Poor service

• Duplication• Rework• Work-arounds

• Disarray• Confusion• Functional silos

Wilson Perumal & Company, Inc. 14

Additional trends in the grocery retail space to consider

Range growth

Fragmented, global supply base

Blurring across sectors

Influence of social media

Trend Description

Preparing for mobile commerce

Trust in private label

Cons

umer

Ope

ratio

nal

Indu

stry

1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013, 2) Market Force Information

New challengers (e.g., Dollar, Convenience, Drug, Online stores) enter the market while traditional grocers also expand (e.g., prescriptions)

Narrow margins force the continued optimization between cost, risk, and speed/flexibility in supply chain operations

In an effort to reach new segments, grocers continue to expand SKU ranges, often without control processes in place

Both consumers and grocery retailers are preparing for the new wave of mobile commerce. As demand increases, business flexibility will be critical

Nearly all consumers buy private label products when grocery shopping2. As quality to improve, trust in PL brands will grow

Social media is increasingly integrated into society, and a growing force in purchase decisions/awareness. Savvy grocers are already making their presence felt in this space

15Wilson Perumal & Company, Inc.

We will be happy to discuss with you…

1) Are these issues affecting your business?

2) Are you seeing other trends that can benefit or pose a threat to the business?

3) How are you reacting to these? Are you ahead of the game?

4) What is your competition doing to take advantage of these trends?

5) How can we help you in thinking through strategy and operations?

North America EuropeTwo Galleria Tower

13455 Noel Road, Suite 1000Dallas, TX 75240

+1 972-716-3930

Longcroft House2/8 Victoria AvenueLondon, EC2M 4NS

+44 (0)203 206 1496

Contact Us:

www.wilsonperumal.com

Stephen WilsonAnn Bryan

swilson@wilsonperumal.comabryan@wilsonperumal.com

Asaf NavotSteve Liguori

anavot@wilsonperumal.comsliguori@wilsonperumal.com

APPENDIX 1: Additional data and analysis by trend

APPENDIX 2: Wilson Perumal & Company background

18Wilson Perumal & Company, Inc.Source: WP&C press search and experience drawn from previous work with retailers on localization

Localization of stores is a “requirement” now, the question is how much localization is right

• Localization is a retailer’s norm nowadays. Customers expect local offerings with local marketing & local supply chains

– Younger generation values speed & healthiness; Higher income/more educated value a premium experience, from knowledgeable staff to wide product selection

– Consumer demographics are changing, and so are localization requirement—it needs to be dynamic

• Localization has moved beyond rule-based assortment planning to “Shopper Data” localization. Localization decision should be strategic and data-driven, but not IT-driven

• Retailers struggle to create the right level of localization and how to make it dynamic

Kroger is still ahead of the localization game—maintaining over 20 grocery banners, Kroger was able to cater to local market needs

“Increasingly you are going to hear us talk about the concept of localization and how important that is to our future going forward.” - Robert Edwards, President and CEO

Safeway (Jul 2013)

Walgreens’ localization strategy called “mass localization” uses cluster-based approach (since it has 7,000+ stores). This has led to 160 different planograms

Company Example:Trend:

1

Wilson Perumal & Company, Inc.Source: US Census Bureau, WP&C analysis 19

Demographic shifts become increasingly apparent US population by age and sex (2012, 2035) Population continues to age…

• The population above age 65 is expected to grow by 92% by 2035

– In 2056, the older, 65+ is projected to outnumber the young, under 18, for the first time in U.S. history

• Share of working-age (18 to 64) expected to decline from 63% to 57% by 2035

1

2012 2035Age

(years)

2512

17

64

3613

23

54

MixedAsianAfri. Amer.HispanicWhite & Oth

2035

2012

Population by race and ethnicity (2012, 2035)Percent of total population

…while race and ethnicity mix change rapidly • The Hispanic population expected to

grow by 63% in 20 years, from 53.3M in 2012 to 87M in 2035, and more than double to 128M by 2060

• Projections show the older group would continue to be predominately non-Hispanic white, while younger ages are increasingly minority

Wilson Perumal & Company, Inc. 20

Growing demographics not equally distributed…

Geographic variation emphasizes the need for localization of stores

2011 U.S. Hispanic % of designated market area

Source: Nielsen report

Changing demographics is more evident in certain areas…

1

Wilson Perumal & Company, Inc. 21

…and currently have higher grocery spending

Source: Nielsen consumer reports, Euromonitor report 2012; WP&C Analysis

14.0%

10.5%

5.3%

70.2%

Share of food spend - 2012

Forecasted share -2035

Changing weight of overall spend

10.5%

20.0%

7.0%62.5%

White & Oth Afr. Amer.

HispanicAsian

1White Asian Afr. Amer. Hispanic

#Shopping trips/HH/yr 149 152 167 142

$ per trip $47 $46 $37 $52Total $

spent/yr $7,003 $6,992 $6,179 $7,384

Interesting shopping

characteris-tics

Caucasian women purchasing decisions in store are influenced by promotions more than any other group

Bring home far more produce, nuts, dried fruit, pasta, yogurt, soup, juice, and drinks compared to US avg. 31% of purchase on deal are bought by Asian

Frequent dollar stores, c-stores, more than other groups

Spend more on categories which include baby products, hair care, toiletries, and beverage

Basket analysis of purchase categories by ethnicity is part of localization planning

Wilson Perumal & Company, Inc. 22

Demographic trends require extensive localization value proposition from retailers

• Adjust product offering to local demand

• Understand linkages between products to better price and promote

• Adjust choice of flag-product lines to ensure stock availability

• Select locations that match your brand image and offering

• Understand local shopping behavior and adjust format offering accordingly

• Plan your footprint with a long-term view on demographics change

• Develop differential pricing to match local willingness to pay

• Lead your customers, where possible, to high-margin products

• Plan promotions effectively to meet your target audience’s needs

Prod

uct r

ange

Pric

ing

Foot

prin

t and

fo

rmat

1Racial/ethnicity-mix shift/Aging population

• Extend growing demographics’ preferred product groups (e.g. for Hispanics: dried vegetables, baby products, etc.)

• Adjust product & expand value offering to meet aging population demand: healthy, fresh, home cooking

Required activities from retailers

• Launch differential pricing where possible • Consider foreign language promotions/ads.• Develop Private-Labels for growing

demographics’ preferred products• Manage simpler promotion offering

through channels fitting elderly communities

• Identify demographic trends; match store formats to population size and mix

• Analyze shopping behavior; adjust customer journey accordingly

• Plan accessible stores, with well-trained store ops

Areas of required localization

23Wilson Perumal & Company, Inc.Source: WP&C analysis and perspective

Localization effort is iterative and broader than just product offerings

• Retailers utilize sophisticated tools on “shopper data” such as assortment planning, flow modeling, price, promotion, and store size optimization

• Marketing, supply chain, and organizational structure need to be modified to maximize localization benefits• Pilot test in small # of stores recommended. Could start in certain product categories first. Capture

performance and feedback before nation-wide roll-out

Big Data & analysistechniques

Impact of demographic

changes

Localization overarching

strategyLocalized product

assortment and services

Dynamic process as consumers and competitors are constantly changing

Localization Scope

1

Loyalty programs

Advertising Promotions

Customer service

Social Media

Merchan-dizing

Localized Supply Chain

Pricing

Change to Org

Structure

24Wilson Perumal & Company, Inc.Source: WP&C’s Vantage Point: Localization with Scale; interview with Terry Lundgren, CEO, Macy’s

Localization with scale is possible

• Smaller, coordinating role • National initiatives on

“opt-in” basis• Less ability to leverage

national scale

National level

• Less resources at local level• Not empowered to

respond to local tastes and preferences

Local level

• Buying, planning centralized at regional level (~100 stores)

• Command & control relationship over stores

• Operate largely independently from national level and other regions

Regional level

• Buying pulled up to national level, with aggregate local input

• Greater strength with suppliers, leading to greater ability to tailor offerings

National level

• Inventory planning pushed down to local level (~ 10 stores)

• More responsive/ customized stores with greater employee ownership

Local level

and

Previously regional functions

stretched up to national

down to local level…

…requiring greater, richer and asymmetrical information flow between local and national levels

National

Local

Regional

National

Local

PREVIOUS REGIONAL STRUCTURE HYBRID LOCAL-NATIONAL STRUCTURE

My Macy’s InitiativeRestructured operating model with richer information flow allows stronger national scale and greater responsiveness to local customers

1

25Wilson Perumal & Company, Inc.Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites

Omni-channel strategy and integration a must2

Online has potential to be a leading segment

2%Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012

$6 billionRevenue generated by online grocery sales in 2012

$9.4 billionPredicted revenue in 2016, on an estimated 12.1 percent growth

8.8%Market share of largest online grocer Peapod, followed by Fresh Direct with 5.7 percent

46%Of shoppers said they were at least slightly likely to buy products directly from food producers online

55+Age group that buys the most groceries online, accounting for 24.5 percent of purchases

Many retailers invest to pursue that potential

1,620Number of online grocery businesses in 2012

23M Deliveries made by Peapod since it was established

$400MSales for FreshDirect in 2012

20Number of predicted urban areas AmazonFresh will expand to by 2014

$4 billionEstimated online grocery sales of Tesco.com in the UK in 2011

$175Average order size of pure-play UK-based Ocado amongst its 360K active customers’ base

Wilson Perumal & Company, Inc.

Click &

Collect

Emerging challenges and opportunities arise from online operations2

Extended RangeOpportunity: • Selling extended range• Centralized stock source for

premium productsChallenges:• Product cannibalization • Stock management (holding

costs, waste, stock availability, etc.)

Focused MarketingOpportunity: • Personalized offering and

promotions• Improved customer understanding

Challenges:• Misaligned marketing messages

between channels• Channel cannibalization and

customer confusion

New Customer SegmentsOpportunity: • Attracting customers that are

out of current geographical reach or are unlikely to enter your stores

Improved Cross-sellingOpportunity: • Improved cross-selling (e.g.

“customers who bought X, also bought Y”)

Challenges:• Maintaining easy and simple

online customer experience

Potentialbenefits of

onlineoperations

Extended range

New customer segments

Improved cross-selling

Focused marketing

Challenges:• Maintaining a profitable delivery

model• Avoiding channel cannibalization

26

27Wilson Perumal & Company, Inc.

Advantages:• Utilizing existing workforce• Lower fixed-costs model,

facilitating slow expansionDisadvantages:• High picking costs erodes profits• Dist. and merchandizing remain

major costs, low stock availability

Advantages:• Centralized model with cost

saving of store distribution and ops-time

• Automation of the picking processDisadvantages:• Requires significant scale to justify

the high capital expenditure

Advantages:• Allows centralized model for high

scale regions with localized solutions for low-scale regions

Disadvantages:• Hard to capture long-term scale

benefits: prevents investments in technology and equipment

F

ulfil

men

t

Del

iver

yRetailers continue trying to develop a sustainable and profitable omni-channel operating model2

Grocery retailers worldwide use different operating models to serve customers

Stores / dedicated online-stores

1

2

A hybrid modelA dedicated warehouse

Directly from stores Warehouse / via satellite stations Click & Collect

Advantages:• Utilizes existing geographic

presenceDisadvantages:• Higher cost-to-serve due to

lower scale• Inefficient delivery planning

Advantages:• Lower waste-level / higher stock

availabilityDisadvantages:• High operating costs to serve

remote areas• Requires profound analysis and

optimization planning of delivery

Advantages:• Utilizing existing workforce• No distribution costsDisadvantages:• Does not serve some needs of

online shoppers• Could cannibalizes store profits

27Source: Press search; WP&C analysis and perspective

28Wilson Perumal & Company, Inc.

Unit sales of promotions are up, but percentage lift is on decline

Traditional promotion power is eroding1) Promotion includes Temporary Price Reduction, Feature Ad, Display PromotionsSource: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis

2012

42.6

2011

42.1

2010

42.2

2009

42.4

% of Unit Sales with Promotion1

119

Non-Food

120

139

Frozen

91

136

122

90

GMDairy

123128

HBC

9396

Dry Grocery

114

Promotion1 Average Unit Lift % by Department

2011

2012

3

29Wilson Perumal & Company, Inc.Source: WP&C client analysis of US grocery chain

In response, retailers should identify truly effective promotion levers and ensure efficient execution

Promotional uplift per week

% sales uplift units

0 10 20 30 40 50 60 70 80 90 1000

10

20

30

40

50

60

70

80

90

100

110

Avg. promotion uplift/week – 4 month period

% of promotional SKUs

Small percentage of promotional SKUs driving majority of uplift…

…But low-impact promotions still impact the business operations

Supply chain

Corporate planning

Store labor

Promotions put a strain on supply chain operations that are responsible for keeping shelves full. Inaccurate forecasting often leads to costly out-of-stocks and overstocks at retail locations

Promotions require detailed planning from cross-functional teams. Multiple hand-offs across category, brand, space planning, and supply chain require significant resources each week

Promotions can only be successful if they are executed effectively. This requires store labor resources to stock shelves, assemble displays, and manage customer needs

WP&C Case Example:

3

30Wilson Perumal & Company, Inc.

As traditional approaches decline, consumers look for new forms of convenience and overall value

Grocery retailers can leverage new ways to deliver value and convenience outside of traditional printed pricing promotions

Source: 1)“The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing

Websites

31%

11%14%

Group Buying Sites

List/Notes Function on Phone

Mobile App.

10% 11%8%

11%

7%9%

Social Networking

Email

35% 36%34%2012

2013

Technology Use Growing1

What online or interactive tools/sites do you use regularly for planning your grocery shopping trip and/or

which specific products you eventually decide to buy?

Traditional Vehicles Losing Impact1

How often does each of the following impact whatyou buy on your grocery shopping trip and/or which

specific products you eventually decide to buy?

34%30%

Coupons you get from store flyer

Store flyers

33%36%

Coupons you clip from newspaper

or magazine

33%

39%

4

Advances in technology and access drive new perception

of value/convenience

31Wilson Perumal & Company, Inc.

1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2) The Economist Intelligence Unit Limited 2013 , 3) Retail Goes Shopping through Big Data – CNBC 04/15/2013

Grocery retail personalization examples

The ‘Just for U’ program gives shoppers digital coupons and deals on items they regularly buy Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery

Amazon enhances one on one interaction with specific product recommendations

Harris-Teeter unveiled a concept around higher service, e.g., in-store wine consultants1

Hyper-local advertising technology, the ability to target nearby customers, is on the doorstep

Company Example:Case example:

FreshDirect, the New York based online food retailer, has used big data to make shopping more personalized. Using previous purchases, from the current shopper - and others purchasing similar items - the online store can suggest ideas relevant to each specific shopping trip

We leverage data that “ranges from things that relate to the shopping ‘trip’ that the customer is currently on, to insights from past trips, to models of customers who are similar in an array of different ways”

- John Leeman, Chief Marketing Officer2

CEO David Dillon has called big data analytics his "secret weapon" in fending off other grocery competitors3

4

32Wilson Perumal & Company, Inc.

However, aligning operations across many access points is a growing challenge for grocers

Seamless operations necessary to deliver a truly cohesive customer experienceImages: Geekwire.com, formcollective.com, Google images

Customer journey

List preparation for shopping trip

Choice of delivery options

Recipes, tips and reviews

Personalized deals & price match

Loyalty and rewards

4

Social media & community

33Wilson Perumal & Company, Inc.

1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 Source: Neilson What’s In Store 2016; Press search; WP&C perspective and analysis

Contraction both in chain size and store size

Share of traditional formats continues to shrink , but with slightly lower pace• Traditional retail formats (mass merchants

and supermarkets) have yielded share to value formats (club, dollar, and supercenter) and drug stores

• Consolidation & contraction of overall chain size as well as change of chain ownership appears to be the trend of 2013

– 14 transactions announced for NA. food retailers, a total of $9.3B, up from $702M in all of 20121

Store size also expected to be smaller• Store footprints either get supersized for

one-stop-shop or downsized into smaller stores for speedy services, especially for urban areas

– Downsizing stores seems more apparent than supersizing

03/13 Supervalu completes sale of 5 chains to Cerberus for $3.3B

05/13 Bi-Lo acquisition of Delhaize America for $265M

07/13 Kroger acquisition of Harris Teeter for $2.5B

08/13 Canada Safeway sold to Sobey's for $5.8B

09/13 Tesco’s F&E sold to Yucaipa after limited success

Walmart Express, an urban solution one-tenth the size of its typical store show sign of success

Aldi and Trader Joe’s continue their limited-assortment store expansion plans

2013 Company Example:Trend:

5

34Wilson Perumal & Company, Inc.

Share of traditional formats expected to continue to decline and not keeping pace with inflation

In addition to Ecommerce, Fresh Format (e.g., Whole Food, The Fresh Market), Limited Assortment (Aldi, Trader Joe’s), and Dollar stores are physical formats expected to grow rapidly

$ Share by Store Format: 2012-2017

Source: Willard Bishop, Includes both grocery and consumables; WP&C Analysis

3.0%2.9%

5.5%5.4%

$1.249T

Fresh Format

36.5%

C-Stores

Whsl Club

3.4%

Supercenter

DrugDollar

Oth traditional

Oth non-trad.

Supermarkets

Ltd. Assortm’t2.1%

16.0%

18.2%

9.0%

3.1%3.2%

$1.113T

39.8%

2.7% 1.1%

14.9%

17.3%

8.7%

2.4%4.9%

Est. CAGR vs. Inflation: 2012-2017

Trad

ition

alN

on-T

radi

tiona

l

Whsl Club

C-Stores

3.2%

13.4%

3.2%

Fresh Format

Ecommerce

2.7%Supercenter

12.1%

Oth Non-trad.

Drug 3.4%

Dollar 6.0%

Ltd. Assort 6.2%

2.1%Oth Trad.

0.2%Supermkt

-6.3%

Assume 3% inflation

2012 2017F

5

Wilson Perumal & Company, Inc.

CoverageWhat are the gaps or

overlaps between the two firms? What is the value proposition, geographical

and customer segment coverage? Where and who

is the competition?

StrategyHow does the target

company’s offering align with our strategy?

How does this merger serve our strategy?

CapabilitiesHow is portfolio complexity impacting performance?

Is the organization set-up to implement change?

OperationsWhat are the implications on end-to-end operations? Can

our range be delivered effectively?

AnalyticsWhat is the economics of the new business? What synergies can we

capture from this deal? What is the level of scale benefits we could monetize?

BenefitsFrom where will benefits be realized? At what point are there step changes in cost?

StrategicFit

Operational Assessment

Analyticsand Planning

Structured & strategic approach to integration will shorten timeline and smoothen transition

Pre-integration approach

5

35

APPENDIX 1: Additional data and analysis by trend

APPENDIX 2: Wilson Perumal & Company background

37Wilson Perumal & Company, Inc.

Wilson Perumal & Company, at a glance

• A management consultancy with offices in the US & UK, combining operations strategy experience with depth in retail

• We are thought-leaders and hands-on practitioners: we have a unique perspective on the challenges facing grocery retail, and have a passion for helping grocery retail achieve results

• We focus on getting things done in the areas that matter to you: Enterprise performance; Range & Promotions; Customer & Channel; Supply Chain & Sourcing, and Operations Excellence

• We enjoy 100% client reference-abiliy

Wilson Perumal & Company, Inc.

We help retailers across 4 service areas

• Range optimization & localization• Pricing & promotion effectiveness• Product-lifecycle management• Operating model alignment

• Inventory management• Supply chain & sourcing optimization• Cross-channel fulfillment• Distribution model analysis

• Operations development• Lean retail & end-to-end operations• Store operations improvement• E-commerce process optimization

• Store & format strategy• Omni-channel integration• Customer insight & segmentation• Localization & clustering strategy

38

Strategy, Customer, Channel

Range & Promotions

Supply Chain & Sourcing

Operations Excellence

Strategy

Operations

Wilson Perumal & Company, Inc.

“This was a quick and painless way to understand our true product

profitability, and it challenges how we think about our business. I am

extremely pleased with the results.”—Fernando Palacios

EVP and Chief Integrated Supply Chain OfficerMillerCoors LLC

“WPC’s approach to complexity is the most direct route to an

efficient, profitable enterprise.”—Ed Lonergan

CEO of Diversey Inc.

“WP&C is helping us transform our business. Their insights are

phenomenal!”—David Hoogmoed

President, Land O’Lakes Purina Feed

“You are analytical and smart, but you also get things done!”

—Head of Commercial DevelopmentLeading European Retailer

“Best work I have seen in Operations Development. A case study for us as a

business”- CEO, European Electronics Retailer

“Very insightful work…it was a pleasure working with you and your

team.”-Senior Operations Director, Global 100 Retailer

39

Our clients attest to our ability to impact their bottom line

“I truly believe you got to some of the key issues at [Retail Co.]”

-Director of Supply Chain, Grocery Chain

40Wilson Perumal & Company, Inc.

We bring a team with deep sector and operational strategy experience (1 of 2)

Ann Bryan, Manager• Seasoned strategy manager with 15 years of experience in strategy & consulting• Previous project experience includes store clustering, portfolio review, new retail

format expansion, ecommerce strategy, and complexity management for various retailers and consumer goods companies

• Former Project Leader with BCG• Former Director of Corporate Strategy, Applied Materials Inc.• Hand-on operational experience through two successful entrepreneurial ventures • MBA (Kellogg); MS Operations Research UC Berkeley

Stephen Wilson, Managing Partner• More than a decade of experience advising senior executives globally on issues

relating to cost-competitiveness, operations and strategy• Recognized as a thought-leader on the topics of complexity, cost-reduction,

operating models and innovation; co-author of Waging War on Complexity Costs• MBA from the Wharton School in Strategy and Finance• Deep experience in grocery retail in a variety of key issues in a variety of

capacities: engaging with the board on operating models, helping build and deploy cost-reduction programs, to “walking the process” during overnight replenishment

41Wilson Perumal & Company, Inc.

We bring a team with deep sector and operational strategy experience (2 of 2)

Steven Liguori, Case Team Leader• Experienced Case Team Leader with focus on product and process complexity,

portfolio optimization, market analytics, and growth strategy• Grocery segment experience centered on promotional strategy & effectiveness,

portfolio transformation, and process improvement• Additional Retail and CPG experience in distribution strategy, space planning, and

operational efficiency • Previous experience as an Operations Strategy Consultant at George Group

Consulting and Scientist/Manager at Pfizer• MBA from Emory University and BA in Physics from College of the Holy Cross

Asaf Navot, Case Team Leader• Experienced Case Team Leader with focus on omni-channel integration, portfolio

optimization, operational improvements, and complexity management• Retail experience include omni-channel operations, space planning optimization,

stock management, ranging and promotions effectiveness, and process improvement

• Previous experience as F-16 fighter pilot and project manager at the Israeli Air Force, ranked Captain. Asaf is also a former Israeli national swimming champion.

• MBA from INSEAD, France/Singapore

Wilson Perumal & Company, Inc. 42

Increased EBITDA by 22% for major retailer by diagnosing issues and leading change program

“The best work I have seen from any [operations development] team in my time with the company”

-Group CEO

+ £18M in incremental Operating Profit

Captured £75M in lost sales

Doubled Online Market Share within 18 months

Exceeded initial project savings estimates by 3x

Eliminated missing SKU issues and over/under selling

Improved customer retention and drastically reduced

cancelled sales

• Competing in an Omni-channel world – One of Europe’s largest retailers was the leading player in the brick&mortar market , yet lagging behind in the fast growing online market. Omni-channel operations were dysfunctional: 15% of online SKUs were unaccounted for on the website, poor Exit Management led to channel cannibalization, and stretched-out operations affected both brick & mortar and online performance

Situation

Approach

Impact

Conduct top-down ecommerce diagnostic Optimize online operations Developed and led

mobilization plan

3-4 weeks

• Analyze ecommerce operations – analysis reveals that Product Setup process and Exit Management hindered the execution of online strategy

3-5 weeks

• Improve Product Setup process –reengineered Product Setup process to track SKUs from ranging to online launch

• Optimize Exit Planning –optimize exit across all channels. Created a decision tool to guide exit planning based on channel profitability

4-5 weeks

• Support client teams training

• Develop KPIs to measure recommendations implementation, and process compliance

Wilson Perumal & Company, Inc. 43

Reduced promotional costs by 40% while improving execution quality at $1B regional US grocery chain

Situation

• Struggling through strategic change - $1B regional US grocery chain was struggling through change from “every day low price” to “hi-low” promotions. Promotional planning tools and business rules were rules not in place as the process grew organically on the fly. The volume of promotions had grown unchecked, execution became slow and laborious, and promotional effectiveness plummeted.

Approach

Impact

• Top-down analysis - Leverage top-down thinking to quickly define benefit potential and implement quick wins to build momentum. Use hypothesis driven, answer-first tactics to avoid attempting to “boil the ocean” of over 25K annual promotions.

• Strategic alignment – Partner with management to align around process principles and overall promotion strategy. Close collaboration, especially at early stages, is vital to project success.

• Process redesign – Develop blueprint for process around leaner promotion model and just-in-time delivery. Segment process according to true lead times, remove non-value add steps, increase accountability, and track the correct metrics from initial concept to promo exit.

• High-impact business rules – Evaluate uplift, basket size, back margin, etc. to create simple business rules which reduce the number of low-impact promos to increase effectiveness while reducing costs.

“I truly believe you got to some of the key issues at [Retail Co.]”-Director of Supply Chain

40% reduction in costs $4-$5M overall benefit Improved effectiveness

Optimized selection, reduced volume, process redesign, forecasting improvements

Major impact from only 3 month project

Freed up execution resources to redeploy into

effectiveness planning

Wilson Perumal & Company, Inc. 44

Contributed £10M p.a. in incremental margin by leading analysis and PMO for complexity reduction

• Complexity in space layout and range– An £8B big-box retailer going through major turn-around, had identified that optimised effectiveness of new stores and store refit is a key competitive factor

• However, overly complicated space planning processes, put together with ineffective performance tracking and unclear process ownership, led to an underperforming retail space

• Management needed to understand space productivity while maintaining range and space flexibility

Situation

Approach

Space diagnostic and PMO structure establishment

Remove complexity from space planning

Align organizational space planning

processes1-2 months

• Map existing space processes

• Create database to capture current space accurately, analyse space financial performance

• Develop a 3-months transformation plan

1 month

• Analyse space usage and remove infrequently used space blocks to simplify future layouts

• Create a Standardization Scorecard to compare execution across stores and readily pinpoint future improvement areas

1-2 months

• Align Space Planning processes– redesigned key space processes: Annual Space Reviews, Trials, Range Change, and New Store Opening

• Develop a standard process for all space planning activities, including defining key decision points, business rules, and KPIs

+ £10M annual margin Saved 7,100hrs of unnecessary labor

Standardized and improved product densities

Processes facilitate less experienced employees and

free up expensive management resources

Reduced space blocks by 75%

527

2,673

Unattach-ed

Display Blocks

Unsupport-ed

New Target

Low Use

Impact