2015 Independent Grocers Financial Survey Presented by: Bob Graybill | President & CEO | FMS Jon Cline |title | FMS 12015 Independent Grocers Financial

2015 Independent Grocers Financial Survey© 1

2015Independent Grocers Financial Survey

Presented by:

Bob Graybill | President & CEO | FMSJon Cline |title | FMS


Today’s agenda

Review of the Independent Grocers Financial Survey 2015 edition 153 companies, representing a great mix of independents

43.9%

36.5%

13.5%

6.1%

Stores1 2-10 11-30 31+ 46 Years — Average years in business

11.1% — Share with union staffers

68.9% — Share with loyalty program

45.3% — S-corps & 36.0% corporations


Good regional representation

Northeastwas stronglyaffected byabnormal fiscal year


THE BACKDROP

Economic, operational and political conditions driving the business landscape


On the mind of the independent grocer

Issue

Competition

Economy

Staffing/hiring/retention

Healthcare costs

Food safety

Impact in 2014

6.9

6.5

6.4

6.2

6.2

Issue

Competition

Staffing/hiring/retention

Healthcare costs

Gov. regulations

Technology investments

Expected impact in 2015-16

7.0

6.6

6.5

6.4

6.2


1. COMPETITION


Competition

1. Supercenters

2. Conventional supermarkets

3. Limited assortment stores

4. Gourmet/specialty stores

5. Other formats

Bodegas

Cash plus formats

Warehouse club stores

Convenience stores

Drug stores

Commissaries

Farmers’ markets

Meal assembly kits

Same day online delivery

4.4

4.1

3.7

3.4

2.5

Avg. score

80.5% of stores in the survey have a Walmart supercenter in their direct market areas


Regional differences

GourmetOther

Limited assortmentDrug

With increasedpresence of Walmartand online players

SupercentersLimited assortment

SupercentersConventional


The Walmart effect

2007 2008 2009 2010 2011 2012 2013 2014

1,075

508

2,256

3,288

112 407

579 632

16 74

The Walmart system

Discount Stores Supercenters Neighborhood Markets Sam's Club Small formats

Accelerated growth in Neighborhood Markets Small footprint fits in conventional space Pricing same as supercenters


Assortment-level competitive strategies

Sales up 60%SKUs up 56%

Sales up: 67%SKUs up: 72%

Sales up: 66%SKUs up: 58%

SKUs up: 60% SKUs up: 44% SKUs up: 29%


Advertising strategies

Ad budget: 1.3% of sales Move to more digital and social media

Advertising budget allocation 2015 2014 ChangeNewspaper (incl. FSIs, circular & RoP) 57.7% 58.9% ↓Direct mail/shared mail 14.6% 14.5% =Community donations 7.0% 6.2% =Social media/mobile marketing 6.2% 3.6% ↑Email/online marketing 5.0% 3.5% ↑Radio 4.3% 6.6% ↓TV 2.1% 1.2% ↑Billboards/outdoor signage 1.1% 1.3% =Other 2.0% 4.2% ↓


Ramping up social media efforts

Just getting started

Been using it for 6-12 months

Been using it for over one year

No experience, but plan to start

soon

No experience and no plans to

start

20.3%

10.2%

59.3%

6.8%3.4%

24.7%

13.0%

51.9%

6.5% 3.9%

Experience with social media

2015 2014


Store development strategies

1.57%Average capital expenses as % of sales

Versus 1.61% last year

2013 capital expenses budget vs. 2012

↑ = ↓49% 23% 27%


↑ = ↓40% 43% 17%


↑ = ↓33% 40% 27%

Average store size: 34,478 sq. ft.

Average selling space: 21,171 sq. ft.

78.9%

Remodels drive store development:• 21% opened 1 or more stores• 12% closed 1 or more• 50% remodeled 1 or more


“Right for the business” is top driver

Right for t

he business

Generating or p

rotecti

ng sales

Return-on-in

vestm

ent

Tax benefits

Cost sa

vings

68.0%

16.2% 13.8%

1.0% 1.0%

Deciding factor in capital investment allocation


2. THE ECONOMY


Uptick, and uncertainty, in many key indicators

5.3% in July 20156.2% annualized 2014

Noted exceptions, such as teenagers (16.2%)

Record # not in labor force

6.0%-6.7%: GA, AZ, AL, CA, LA, SC, MI, NM and AK

>6.8%: DC, NV, WV

Stock market shows long-term gains, butbig recent losses

Housing marketis struggling

GDP showing solid gains

2014Q3 +4.3%Q4 +2.1%

2015Q1 +0.6%Q2: +2.3%


And consumer caution persists

Consumer confidence >100,But spending remains subdued

40% “downtrodden and cautious”(IRi)

CPI 2014: 2.4%

With noted category exceptions, such as meat

2015 so far fairly flat

Gasoline prices remain down; HH savings of $750

SNAP beneficiaries still> 45M

% of sales double-digitsfor some retailers

Monthly benefit of $125


3. STAFFING, HIRING & RETENTION


Independents turn to PT employees

Turnover stable in 2014, but increases expected

Independents report rising share of PT employees 2012: 55.9% 2013: 56.8% 2014: 59.4% 2015: 65.2%

Turnover Full-time employees Part-time employeesOverall 12.4% 38.5%

Single-store 8.9% 25.1%Multi-store 17.2% 57.0%

1-store 2-10 11-30 31+56.8% 62.3% 68.9% 79.7%


4. HEALTHCARE COSTS


Healthcare costs prompt concern

1.6%Average cost of healthcare as % of sales

Up from 1.5%

Increase over prior year2011 2012 2013 20147.0% 7.6% 10.1% 4.4%

15% reduction 19% steady 66% increase


The 30-hour rule

44.2%25.0%

13.5% 11.5% 5.8%

50.0%32.4%

8.8% 5.9% 2.9%

Method of tracking non-fulltime employee hours

2015 2014


OPERATIONAL BENCHMARKSStaffing, turns, transactions, lane types and shrink


Transaction size grows

Transactions per store per week2012: 10,9722013: 10,7022014: 8,479

Transaction size2012: $23.882013: $24.382014: $26.75

While down, much of the decline driven by:• 2-10 stores• Northeast

Single stores: $25.21 vs. 31+ stores: $32.17Loyalty program: $30.14


2014

2013

2012

2011

2010

2009

2008

2007

17

17.2

16.4

16.1

18.63

18.03

17.99

18.62

Total store inventory turns

Inventory turns flat for total store

Dry grocery: 11.9

Dairy: 30.7

Meat: 35.6

Produce: 50.6


Independents total store shrink 3.0%

Best-in-class total store shrink 1.5%

Understandinghow to closethe gap

Operational shrink Some level of operational shrink natural in grocery

retailing, but…

Goal: avoid losses due to inefficient processes


DAIRY

2.8%

TOTAL STORE SHRINK

3 .0%

DRY GROCERY

1.7%

2015 Shrink levelsMEAT

4.2%

PRODUCE

5.4%

DELI

8.0%


What are achievable improvements?

All Top performers

Total store 3.0% 1.8%Dry grocery 1.7% 0.9%Dairy 2.8% 1.7%Produce 5.4% 4.2%Meat 4.2% 2.9%Deli/Prepared foods 8.0% 5.2%

What are the top performers doing differently?


Actively managing shrink

48%52%

Measuring shrink

At cost At retail

20%

80%

Ability to measure shrink @ the SKU level

Yes No

35%65%

Shrink management program?

Yes No

Lower-than-averageshrink @ 2.6%




Incentive-based shrink curbing program.

We set up a shrink committee of corporate and store-level employees.

We track all known and unknown shrink and generate reports for employees up

and down the organization. We found getting employees of all levels involved is

the best way to cut shrink.

We started scanning known waste as to put a price on it. We have programs in

place with our fresh department managers to try and reduce the waste.

We started setting goals by department and started measuring against those

goals in weekly shrink logs.

We actively track known and unknown loss and damages are managed at the

store level.

We track perishable shrink and tie it to overall performance.

We installed cameras and have floor walkers to curb loss.


FINANCIAL PERFORMANCESales, profits and the profit leaders


Independents struggle to maintain sales

Same store Food-at-home Realsales growth inflation

growth

+1.5% +2.4% -0.9%

2014

2013 +1.1% +0.9% +0.2%

% with negative growth: 27% vs. 33%% with growth < inflation: 58% vs. 42%


Regional differences (not inflation adjusted)

-0.3%16% sales losses86% growth < inflation

1.5%

-0.3%

2.3%


Sales distributionTotal grocery 57.12%Grocery 40.22%Dairy 7.39%Frozen 3.75%HBC 0.92%GM 0.83%Beer/wine/liquor 2.83%Tobacco 1.18%Total produce 11.23%Produce 10.78%Floral 0.45%Total meat 27.76%Meat 19.42%Deli 5.64%Bakery 2.17%Seafood 0.53%MiscellaneousPharmacy 1.51%Other 2.38%Total 100.00%


2014 2013 2012 2011 2010

25.87%

26.12%

26.48%

26.33%

25.68%

Total store gross margin 2010-2013

Total store gross margin down slightly

Single stores: 27.08%Multi-stores: 25.10%


Regional differences (total store GM)

27.06%

24.11%

25.89%

27.20%


Interest

Repair & maintenance

Depreciation

Advertising

Supplies

Utilities

Rent/CAM

Labor & benefits

0.29%

0.87%

0.96%

1.26%

1.25%

1.76%

1.81%

14.13%

Expenses as a percentage of sales in 2014

Expenses up due to labor & utilities

=

=

20.9%2009

22.6%2014

=

=

=

=


Store labor/benefits costs rise

Labor Benefits

11.42%

2.36%

11.45%

2.67%

Store labor and benefits 2010-2014

2010 2011 2012 2013 2014


Regional differences (total expenses)

27.68%

19.11%

22.34%

24.84%


Net profits down significantly: 0.91%

2006 2007 2008 2009 2010 2011 2012 2013 20140.50%

0.70%

0.90%

1.10%

1.30%

1.50%

1.70%

1.90%

2.10%

2.30%

2.50%

Average net profits before taxes 2006-2014

Single Multi All


Regional differences (net profit)

-2.33%

1.64%

0.84%

1.45%

Overall: 0.91%Minus the NE: 1.33%Minus NE & Canada: 1.22%

Profit leaders increase results vs. YAGO

Lowestprofitreported-3.62% | -7.89%

25th percentile0.17% | -0.50%

Median or 50th percentile1.27% | 1.03%

75th percentile2.64% | 2.44%

Profit leaders (Top 25%)4.10% | 3.89%

Highestprofitreported8.00% | 11.18%

The pack0.66% | 0.40%

2013 fiscal year2014 fiscal year


2009 2010 2011 2012 2013 2014

1.68%1.08% 1.12%

1.65% 1.51%0.91%

4.10% 4.07%4.67%

4.01%4.31%

3.88%

Net profit all respondents and profit leaders

All respondents Profit leaders

Profit leader gap

2.8


The profit leaders

Have lower-than-average shrinkAll Profit leaders

Total store 3.0% 2.2%Dry grocery 1.7% 1.4%Dairy 2.8% 2.4%Produce 5.4% 4.7%Meat 4.2% 3.3%Deli/Prepared foods 8.0% 5.9%


The profit leaders

Better manage inventoryAll Profit leaders

Total store turns 17.0x 17.2x

Dry grocery 11.9x 13.6x

Dairy turns 30.7x 33.4x

Meat turns 36.6x 37.8x

Produce turns 50.6x 51.2x

Emphasize fresh, especially produce, meat and deli Higher sales allocation Higher-than-average

gross margins


The profit leaders… Invest and reinvest in the business

“The Pack” Profit leaders

Capital expenditures 1.36% 2.05%*

Advertising 1.23% 1.31%

Share opening stores 15.9% 22.3%*

* Small sample


The profit leaders…

Focus on cost control

4.0 points difference in total expenses

The pack Profit leaders

Salaries and benefits 14.54% 13.17%

Rent/CAM 1.87% 1.60%

Utilities 1.83% 1.55%

Supplies 1.28% 1.11%

All expenses 23.35% 19.41%


The profit leaders…

Keep debts low and leverage assets

“The Pack” Top performers

Debt to asset ratio 1.4 0.8

Long-term debt* 32.6% 22.4%

Short-term debt* 31.8% 27.9%

* % of total liabilities and equity


Regional differences (share of profit leaders)

13.4% | 0.0%

23.5% | 25.0%

33.6% | 46.4%

16.1% | 17.9%

Canada: 13.4% | 10.7%


Conclusion

2014 was a tough year for all, but the overall numbers pulled down by the Northeast

Independents will recover with resilience and business savvy Draw on lessons from profit and shrink leaders who

manage above-average sales, margin and profit growth


Check www.fmssolutions.com for the report All participants receive a free copy of the report Contact us to participate in the 2016 study!

For questions: Bob: [email protected] Jon: [email protected]

Thank you!

Documents

2015 Independent Grocers Financial Survey Presented by: Bob Graybill | President & CEO | FMS Jon Cline |title | FMS 12015 Independent Grocers Financial