An InsiderAn Insider’’s Guide to s Guide to Retail SuccessRetail Success

FT. END CATEGORIES•OTC / Health

•Personal Care / Beauty

•Convenience Foods & Beverages

•General Merchandise

2011 - 2012

Coming AttractionsComing Attractions……..

Stats and Strategies of Today’s Chain Power Players

Your Customers’ Shopping Habits and Preferences

Category Performance by Retail Channel

An Understanding of the New Buyer-Seller Dynamic

Meeting the Challenge of Change - Actions that will

make a Difference in Achieving Retail Success

I.

II.

III.

IV.

V.

Source: Kantar Retail ‘10

F/D/M Channel Trends ForecastF/D/M Channel Trends ForecastCompound Annl. % Growth (5 yrs.) Share of F/D/M Retail $ Sls. (5 yrs.)

Channel 2005-2010 Proj. 2010-2015 2010 Proj. 2015

Drug 4.5% 4.5% 17.6% 18.4%

Mass (1.1) 0.4 9.8 8.4

Supermkts. 2.7 3.2 39.3 38.5

SuperCtrs. 7.2 4.2 20.0 20.6

Clubs 5.2 5.2 9.2 9.9

$ Stores 4.8 3.7 4.1 4.2

TTL. F/D/M Rtl. Sls. 2.4 4.3

*Online Retail Sales 11.8% 11.5%

The Power 12 F/D/M Players The Power 12 F/D/M Players

Dominating the Retail LandscapeDominating the Retail LandscapeCompany $ Vol * %∆∆∆∆ Sales # of Stores

1. Wal-Mart $408.2B (304.9**) 1.7% 8,416 (4,304**)

Supercenters 229.3 1.1 2,747

Discount Stores 28.9 (13.0) 803

International Div 100.1 1.3 4,112

Sam’s Club 46.7 (0.4) 596Market/Mktside. etc. 3.2 3.2 158

2. Kroger 67.9 3.4 2,460

Supermarkets 58.0 NA 2,280

Fred Meyer/Fry’s Mkt. 9.9 NA 1803. Target 65.8 3.7 1,750

Target Stores 49.8 3.5 1,499

Super Targets 16.0 4.6 251

4. Costco $76.3B (70.2*) 9.1 573 (496*)

5. Walgreens 67.4 6.4 7,562

*N.A. Retail Sales only ** U.S. only

The Power 12 F/D/M Players The Power 12 F/D/M Players

Dominating the Retail LandscapeDominating the Retail Landscape

Company $ Vol * %∆∆∆∆ Sales # of Stores

6. CVS 57.3 3.6 7,182

7. Sears Holding 43.3 (1.6) 2,271

8. Safeway 41.1 0.5 1,694

9. SuperValu 28.9 (8.6) 2,394

10. Rite Aid 25.2 (1.8) 4,714

11. Publix 25.1 3.3 1,034

12. Ahold 23.5 2.6 751

* N.A. Retail Sales only

Source: Barclays Capital, CitiGroup Investment ‘10

Drug Chain Channel ChartDrug Chain Channel Chart

Total Drug Chain Sales $161.6B

Average # of Turns (Ft.-end-3x/Rx>9x) 5x

Top 3 Chain Average Square Feet (of Selling Space) 12,000 sq. ft.

Top 3 Chain Average Sales per Square Foot $744

Compound Annual % Growth (5 Yr.) 4.5%

Average Gross Margin - Total Store 28.0%

Average Annual Front End Sales (Top 3 - $50B) $52.8B (33%)

Average Annual Front End Gross Margin (Rx – 21%) 38%

Number of US Chain Drug Companies (10+) 69

Number of US Chain Drug Stores

21,767

Source: Chain Store Guides, NACDS Report ‘10

Drug Chain FrontDrug Chain Front--End Sales End Sales

AnalysisAnalysis

Source: Nielsen Industry Report ‘10. NACDS Research

OTC/Health$14.9B

28%

Edible Cons.$14.1B

27%

Gen. Mdse./ Seasonals/Svcs.

$3.8B7%

Personal Care$7.4B

14%

Non-Edible Cons.$7.9B

15%

Cosm./ Frag.$4.7B9%

$52.8B Total

The Billion $ Volume Drug ChainsThe Billion $ Volume Drug Chains

Stats Walgreens CVS Rite Aid

Annual $ Sales $67.4B** 57.3*** 25.2

# of Stores 7,562 7,182 4,714

$ Vol. Per Unit $8.9 8.0 5.3

Sales per Square Foot $802 822 541

%∆∆∆∆ Sls 6.4% 3.6 (1.8)

%∆∆∆∆ Comp Sales 1.6% 2.1 (0.7)

* Retail $ Vol Only ** Calendar Year Estimate *** Plus est. $39B CareMark

Source: Barclays Capital CitiGroup Investment, Wm. Blair & Co., ’10

Ttl. Ft-End Sls $ $23.6 18.3 8.1Average Ft-End Sls per unit $3.1 2.6 1.7

Ft-End Comps % 6.8% 0.5 (0.3)

Average Gross Margin 28.1% 29.7 26.5

Net Profit Margin 3.1% 3.6 (2.2)

Proj. CAPEX $1.4B 2.0 300

EBITDA $s $4.6B 7.9 859

WALGREENS HQ TEAM

Alan McNallyChairman

Greg WassonPresident/CEO

Robert ZimmermanSVP Chief Strategy

Officer

Kim FeilChief Mktg.

Officer

Mark WagnerPres. Community

Mgmt. Div.

Mike ArnoultDVP/GMM Cust.

Centric Mktg.

Catherine LindnerDiv. VP Consumer Mktg.

Joe MagnaccaPres. Daily Living Prods. & Solutions

WALGREENS HQ TEAM

Shannon PetreeDVP/GMM

Beauty/Personal Care

Steve BroughtonDVP/GMM

Consumables/Electronics

Moe AlkemadeDVP/GMM PL

Robert TompkinsDVP/GMM Health

Bryan PughExecutive VP of Merchandising

Rachel BishopDVP Merchandising

Frank GrilliDVP & GMM

Gen. Mdse./Seasonals

Walgreens at a GlanceWalgreens at a Glance• Present in 50 states.

• 63% of U.S. pop. w/in 3 miles of store

• 5.9 mil. shoppers daily – 75% are women

• Entered 60 new mkts. w/ almost 5,000 new unitsin last 10 yrs. - dominant in all 65+ mkts.

• Unparalleled real estate mobility – only 8%of ttl. stores open in 1990 are in same location.

• 84% are free standing (industry leader)

• Youngest store base w/ avg. of 6 yrs. old

• 1,600 stores (85% drive thrus) open 24 hours

• Store mgrs. have high degree of autonomy

(mgrs. avg. 12 yrs. tenure. DMs - 21 yrs.)

• Enjoying a 5.5% mkt. share of total F/D/M

channel sales in top 60 catgs.

• > 50% of sls. from 6 fastest growing states - CA,TX, FL, IL, AZ, GA

• Moving from buying org. to selling org.

• Ft. end skus turn faster than ind. avg.

Goal: Adding one more item to the mix.

Focus: Gross profit per basket.

• “My Walgreens” – aims for ownership of “well.”

• OTCs are dominant % of ft.-end sales.

Cosmetics $ vol. 2nd only to Wal-Mart.

• Filling 19.5% of retail total scripts (778 mil.)

• Reaching 56 mil. households w/ Walgreens

Hlth. Corner - national 30 min. wkly. TV show.

• “More from the Core” – new model to leverage

the assets and synergies of store and specialty

pharmacies, in-store & work site clinics –

integrated program of “Complete Care.”

• “Rewiring for Growth” - aims to increase

efficiencies, reduce costs ($1B), and refocus on

Customer-Centric Retailing.

Goal: To become the preferred “routine

destination” store of choice.

• Increasing emphasis on Convenience & Beauty.

• Expanding food & Fresh to 400 “food deserts”.

• Destination depts. engender loyalty – Rx,

Health/Wellness, Beauty, Photo, Holidays

• Convenience catgs. build traffic – Rx, Pers.

Care, Consumables, everyday GM, Svcs.

• Segmenting the store by 4 major components:

Signature – convenient, core win categories,

i.e. Vitamins, Beauty, etc. – 29% of F-E sls.

Power – best drug catgs. – need strong

in-stock presence, i.e. Hair Care – 48%

Staples – commodity items w/ good

assortments & lmtd. skus, i.e. Tissues – 17%

Complement – impulse/convenience – 6%

• Cut skus by 20% (4,000 per store). Simplified

selection, reduced working capital, (saved $400

mil.) incr. ROI.

• Proj. 5,500 new CCR store formats by 2012 w/improved adjacencies, sharper pricing, and newmdsg. displays. Testing loyalty plan in 3 mkts.

• Re-identifying and meeting needs of customers:

“Efficient Eileens and Active Amys” – mission driven fast in-and-out shoppers. (most loyal & frequent).

“Sociable Stellas” - browsers, seeking new items and seasonal buys – influence others.

“Mary Marias” – loyal, ethnic shoppers often health caregivers who shop the store for grocery fill-in and all other needs. Makes the chain a routine destination of choice.

“Care-Seeking Carols” – coping with health issues… seeking counsel and advice on care.

• Reinforces #1 preferred healthcare transactionsite w/ acquisition of drugstore.com.

Walgreens at a GlanceWalgreens at a Glance

� Employing social networking media; smart phone apps, mobile website and Rx pick-up text messaging.

� Reducing store growth – 175 in 2011 – 1 new store every 48 hrs. – Goal: $1B savings by 2011.

� Relocated 29 regional Ops. VPs from HQ to field for faster response to local mkt. conditions.

� Customizing the mix (30% of skus), in store clusters utilizing Sims Plus and BDM.

� Re-introducing beer and wine storewide

� Enhancing margins and building loyalty thru PL initiatives. 75% of hsehlds. buy in 30 + catgs. PL currently 20% of ft.-end mix (proj. 30%) & 25% of gross margin $s. Transitioning from PL to private brand.

� Added 400 new work site clinics and 2,300 Take Care health clinics this yr.

� Rolling out PowerRx - central fill frees up pharmacists for counseling.

� Emphasizing collaborative data sharing w/ key catg. vendors to increase transparency, improve performance and encourage differentiation.

� Utilizing proprietary auto ID, demand forecasting, delivery optimization and price elasticity systems. Goal: efficient assortment, promotion & pricing.

� Employing a more streamlined and centrally-driven inventory replenishment system to match rate of sales more closely to rate of merchandising flow, integrating production, distribution and demand based reordering.

Walgreens at a GlanceWalgreens at a Glance

CVS HQ TEAMCVS HQ TEAM

Larry MerloPres./CEO/COO

Robert PriceVP Marketing

Mike BloomEVP Mdsg./Supply Chain./Supply Chain

Cheryl MahoneyVP Mdse Mgr.

Beauty

Judith Strauss-SansoneVP Gen. Mdse.Consumables

Jim TrappaniVP Mdse Mgr.

OTC/PC

• CVS/Caremark evolves toward “drug store ofthe future” model w/ 44% of ttl. $96B vol. in healthcare svcs. Retail segment = 59% ofsls. and 70% of profit

• In 41 states and D.C. – significant growth byacquisition.

• 75% of US pop. lives w/in 3 miles of stores.4 mil. + customers daily. Own 4.2% of stores.

• Opening 150-200 new units this yr.

• 75% of CVS stores are freestanding. 4,000 units are 24 hr./extended hour stores.

• 80% of shoppers are health destination driven

(Rx/OTC ).

• Increasing Convenience Foods presence to

build traffic.

CVS at a GlanceCVS at a Glance

• Extending ExtraBuck rewards to Rx patientsat register to promote ft.-end purchasing.

• OTCs has highest ft.-end sls. & profit per sq. ft.

• Focused on ft.-end margin improvement.

• 73 % of the customers are women:

“Carolines” – 25-35 yr. olds – 22% of cust. base(up 6 pts.) – beauty, health, fitness focus.

“Vanessas” – 35-54 yr olds –42% working women w/ children.

“Sophies” - 55+ yrs.- 36% and most profitable and most responsive customer.

“Anna Marias” - Hispanic

• Developing Beauty ($3B) w/ 400 beauty advisorsand a new ExtraCare Beauty Club.

• Expanding 25 upscale Beauty 360 formats and 800 Healthy Skincare Ctrs.

• 67% of chain front end sls. derived from

Extra Care program w/ 66 mil. members.

Avg. 4.5 basket items ($15) vs. non-card

shoppers 3.6 items ($12).

• Focusing on $1B inv. reduction over 2 yrs. – will

tighten planograms & incentivize teams to reduce inv.

• Expanding proprietary brands in PC/Beauty

& OTCs ie. PreVentin, Skin Effects, Life

Fitness & Playskool pdts.

• New Urban Cluster concept stores target Baby &

Consumables – proj. 1,400 in high pop. density mkts.

• Introducing Fresh & R-T-E grocery to urban areas –

proj. rollout to approx. 1,500 stores.

• CVS.com – “shopping aisle” on website

features high margin, home hlth. care and

speciality pdts.

CVS at a GlanceCVS at a Glance• PL/brand exclusive share 17%. Proj. 20%

front-end PL sales w/in 3 yrs.

• Just the Basics – a new opening price pt. PL lineof 100 essentials in 2011.

• Clustering prototypes – Ethnic, Resort,

Urban office, College, etc.

• Micro mdsg. store mix –special servicing

of high $ vol. stores (25% of units).

• RADAR –web-based info system linkshdqtrs. to field mgrs. and store mgrs.

• Enhanced CPFR system w/select vendors

provides total supply chain visibility.

• Doing 18% of total retail scripts (636 mil.)

annually – #1 in Rx sls. in half their mkts.

• Currently operating 500+ MinuteClinics

in 56 markets w/ 25% new customers. Adding

100 new units annually.

• Proj. 1,500 Rx dominant (80% Rx) units w/

25% less ft.-end skus.

The Billion $ Vol. Mass MerchantsThe Billion $ Vol. Mass Merchants

Stats Walmart (RA1 Only) Target Sears Holding (Kmart Only)

Annual $ Sales $304.9 28.9 65.8 43.3 15.6

# of Stores 4,304 803 1,750 2,271 1,307

$ Vol. Per Unit $71 36 38 19 12

% ∆∆∆∆ Sales 1.7% (13.0) 3.7 (1.6) (1.0)

% ∆∆∆∆ Comp Sales 1.0% -- 2.1 (1.6) 0.7

Avg. Gross Margin 24.8% -- 30.5 27.4 24.6

# of Inv. Turns 9.0X -- 6.3 3.5 --

Proj. CAPEX $14.0B -- 2.5 .5 --

EBITDA $s $31.4B -- 6.7 1.4 --

Source: CITI Investment Research Annual Industry Report,

Barclays Capital ‘10

WALWAL--MART HQ TEAMMART HQ TEAM

Mike DukePres. & CEO

Bill SimonPresident & CEO

Wal-Mart USA

Stephen QuinnExec. VP

Chief Mktg. Officer

John AgwunobiPres./SVP Health & Wellness

Duncan MacNaughton

Chief Mdsg. Officer

Scott McCallSVP Health &

Wellness Mdsg.

Mark LarsenCatg. Team Leader

Health & Wellness

WALWAL--MARTMART’’s TOP EXECUTIVESs TOP EXECUTIVES

Steve BreenSVP Snacks/Bevgs.

Carmen BauzaVP DMM

Beauty/Personal Care

Jack Sinclair

Exec. VP Food

Scott HuffSVP Consumables (PC/Cosmetics/Pet)

WalWal--Mart at a GlanceMart at a Glance

• Typically accounts for 20–35% of key supplier’s total business.

• Proj. $14B Capex (67% for U.S. expansion) - spending > $2.4B annually for advt.

• Seeking to re-establish product authority in key categories.

• Refocused on one stop shopping and lowest opening price points.

• Avg. 200 mil. + customer visits per wk. – Heavy shoppers avg. 28 trips per year

• 70% + are women. 60% of hshlds. < $45K. Avg. 21 minutes shopping time.

• 84% of hsehlds. make at least 1 purchase. 55% are core shoppers = 84% of sls.

• Proj. 10,000 units w/ $500B by 2013. 24.8% gr. margin. Profits = $20,000 per min.

• Targeting 15 “opportunity mkts.” (34% ttl. retail share) w/ smaller, higher efficiency.

formats. Goal: improving mkt. share avg. from 3.9% to 8.9% standard.

• Created 5 new regions w/ 340 mkt. mgrs. newly incentivized for performance.

• Store of the Community – joint effort w/ suppliers to customize mdse. mix.

• Renamed Neighborhood Markets as Wal-Mart Markets.

• Purchased Kosmix, social media co. w/ content organized by topic.

(also operates RightHealth, leading health & med. info site, by reach)

WalWal--Mart at a GlanceMart at a Glance• Formal AA program – leaves up to 15% of in-store displays at mgrs. discretion.

• Masters of supply chain efficiency:

Inventory < 10% of sales. O-O-S 7.9%

- Thru sku rationalization, growing inv. at < 1/2 rate of sls. growth

- Distributing over 105 million cartons of mdse. per week to stores – 79% thru 120 DCs.

- Avg. 9x inv. turns. 9 day avg. cycle from order to shelf. Selling 5.5B cases annually.

- Utilizing Network Remix, a velocity-driven system w/ palettes pre-sorted by aisle.

- PDQ system encourages more vendor pre-packs for faster turns.

- Mandating suppliers shift to internet-based EDI.

• Seeking exclusive mktg.and pkg. deals. Tracking prod. movement in every dept. & catg.

• Tying in w/ mfgrs. on strategic catg. planning - unique item development programs +

cross-catg. themed promo events. Prioritizing innovation.

• State-of-art CPFR with select category captains co-managing inv. program.

Retail link provides 2yrs. transaction data.

• Insistent on mfgr. data integrity, transparency, forecasting accuracy and logistics.

• Remodeling all units w/in 3 yrs. Opening

200+ new stores - 565 remodels this yr.

• After 9% overall sku cuts, refocusing on- broadening and deepening breadth ofassortments i.e., Health & Wellness (sq. ft. up 10%) / Grocery / Seasonals

- unbeatable prices – restoring EDLP/less price rollbacks

- cost control and operational efficiencies- consistent in-stock on everyday items

- promo intensity (Action Alley)

• 3 New multi format models: - Large – 150K sq. ft. (down from 199K)- Medium – 30 – 60K sq. ft. (will accelerate)- Express – 15K sq. ft. (city stores/fill-ins.)

- On Campus – small format retail Rxs.

• 70% of vendors concerned about driving“profitable sls. growth” over next 5 yrs.

• Project Rewind – will return autonomy & empowerment to mdsg. team. Prioritizes collaboration w/ suppliers, more risk taking & recognition of power in assortments.

• Rx/HBC/OTC = $49B sls. Doing 45%+

of all GM sls. - $150B+ in food sls.

• PL 20% of corp. sales, but refocusing on

branded feature displays to demonstrate value.

• Improving share in growth catgs.

Goal of 40% share in every category where

they compete.

• Dollar stores considered toughest

competition – seeking small sized, inexpensive

items from dollar store suppliers to compete.

• 30% direct imports - $27B annl. from China.

• The Clinic - Rolling out 400 in-store clinics w/

local hospitals over next 2-3 yrs.

• Introducing Humana Wal-Mart – Preferred

Medicare Rx plan w/ lowest premiums.

• Only 17% of shoppers taking meds

fill Rx scripts at Wal-mart – targeting

senior citizens and moms w/ children.

Core customers visiting 2x wkly.

• 40% of on-line orders picked up in stores.

WalWal--Mart at a GlanceMart at a Glance

WalWal--Mart Stores Sales AnalysisMart Stores Sales Analysis

Seasonals/Hardlines12%

Apparel/Shoes/Jewelry11%

Rx6%

Electronics/Ent./Toys13%

Cosm./Fragrances/Pers. Care

6%

Home5%

Grocery, CandyTobacco

43%

$304.9B Total

Source: Retail Forward ‘09

% Share by Category based on U.S. Sales Disc. Stores/SuperCtrs.

OTCs

4%

TARGET’s TOP EXECUTIVES

Gregg SteinhafelPresident/CEO

Rebecca FrechetteVP GMM, Health/Pharmacy

Michael FrancisExec. VP Mktg.

Kathee Tesija Exec. VP Mdsg.

Scott NygardVP GMM,

Beauty/PC/BabyHousehld

Jose BarraSr. VP Healthcare/Beauty

Annette MillerSr. VP Grocery

Stephanie Lucy VP GMM Beauty

Target at a GlanceTarget at a Glance

• Now in 49 states. Avg. 127,000 sq. ft. - $37 mil. per unit –

$282 sls. per sq. ft. 6.6 turns – 30.5% gross margin. CAPEX $2.5B.

• Slowing number of new store openings. Testing smaller format stores i.e., “City Targets”

(betw. 60 - 100,000 sq. ft. w/ 40% fewer skus) in 10 urban mkts.

• Purchased Zellers in Canada – will convert 100–150 locations in 2013/14 –

proj. 200+ units by 2015.

• P2009 design format rolling out this yr. w/ upscale exteriors, wider aisles and new

adjacencies for cross-shopping - pharmacy moving to front of store. Expanding basic

necessities, i.e. healthcare and food assortments. (60% of mix now discretionary items)

• Food is 37% of sales. PL 15%. Will have 4 dedicated food DCs this year.

• Added 450 PFresh expanded grocery sections - adding 400 more this yr. to capture

fill-in trips.

• 46% of sls. growth from comp. store sls. vs. only 37% for Wal-Mart.

• Comp. sales growth: approx. 2/3rds from mkt. basket and 1/3rd from customer count.

• 42% of heavy shoppers are young couples w/ kids w/ hsehld. incomes $50,000+avg. $40-45 spend 52% shop ttl. store.

• Shoppers avg. only 18 trips per yr. vs. Wal-Mart’s 36x annually.

• Spending over 2% of sls. on mktg. & advertising (vs. Wal-Mart’s .05%).

• Testing price matching program - trying to convey value and category dominance w/ “Good, Better, Best

mix. Aligning assortment with customer preferences. Continues focus on “Solution Selling.

• Trading up in quality/status categories (upscale bath & body). Trading down w/ commodity items.

• Differentiated brands anchor core categories. Trying to become destination for replenishment catgs.

• Utilizing customized, co-branded packs of store brand w/ branded products.

• Shifting to frequency-based strategy (“one more trip”) utilizing food, Rx, Starbucks & Pizza Hut.

• Targeting growth demogs, ie, young moms and aging boomers – Expanding health and wellness

• Grouping OTCs on solution themed end caps.

• Frequent shoppers rank HBC #1 catg. – 50% consider chain primary HBC source – 88% purchase.

• Personal Care & OTC now = 4-5% of ttl. $ sls. Non-food is 40% of ttl. sls. and 17% of HBC/OTC skus.

• Using “Up & Up” HBC store brands. PL is only 16% of food sls.

• Avg. only 140 scripts per store, per day – Rx < 5% of ttl. sls. but patient spends 3-5x more $s

• Target clinics in select metro mkts. –– 35% buy OTCs – 50% buy GM.

Target at a GlanceTarget at a Glance

• Most aggressive w/ competitive line reviews. Global sourcing (TSS) now 30%. Proj. 40% w/in 10 yrs.

• Vendor base trimmed to < 7,000 cos. – 72-75K sku count now tightest in the channel.

• Top 2,500 program ensures in-stock of best selling items (25% of unit vol. & 10% of sls.)

• Tailoring mix and pricing to neighborhood demogs – new markdown and assortment optimization tech.

• Promoting holiday events using aggressive high/low strategy + new Global Bazaar

product showcase

• Guest Relationship Mgmt. – transaction data on 30mil. enables mfgr. targeted promos.

• Using POS smart-chip technology for auto reordering, segmenting mdse. by rate of sale etc.

• CPFR tracking system provides complete supply chain visibility for 2,000 items.

• Requiring RFID from top vendors on pallets & cases of select items in-store.

• Engaging in collaborative negotiation w/ top vendors to drive product innovation and lower costs.

Target at a GlanceTarget at a Glance

Supercenter Channel FactsSupercenter Channel Facts• $270B+ total $ vol. w/ 3,400 units this yr.

• Avg. 185,000+ sq. ft. per unitw/ 125,000+ skus

• Avg. $80 mil.+ sls. per store - $438 sls. per sq. ft – 23.0% gross margin

• 68% household penetration – 70% female shoppers

• Avg. 2 trips per mo. (down 4.5%) - $63 avg. purchase per trip

• 29% of primary hsehld. shoppers = 64% of $ volume

• Capturing 30% of U.S. ttl. supermkt. type sales

• 44% of customers cross-shop these stores

• HBC/GM/Non-food cats. avg. 60% - Consumables 40% of sales

• PL avgs. approx. 16% of sales

Source: Nielsen Homescan Cons. Facts, CitiGroup Investment Research,Kantar Retail Industry Outlook 2010

The Billion $ SupercentersThe Billion $ Supercenters

Fred MeyerWal-Mart (Fry’s/SmithsSupercenters SuperTarget Meijer Kroger Mktplace)

Source: CitiGroup Investment Research, Kantar Retail Industry Outlook ‘10

Total $ Sales $229.3B 16.0 14.5 9.9

Share of Mkt. 85% 6 5 4

Avg. Sq. Ft. 185,000 186,000 190,000 150,000

# of Units 2,747 251 195 180

Sls. per Unit $84 mil 64 74 55

Sls. per Sq. Ft. $453 360 398 355

Walmart Supercenters at a GlanceWalmart Supercenters at a Glance

• $229B in sls. w/ 2,700+ units – Proj. $250B w/ 3,000 units by 2013.

• In 48 states -2/3rds of units outside top 100 metro mkts.

• #1 profit generator w/ 64% of U.S. ttl. units.

• Launching 155-165 new stores/relos this yr. 70% of growth from div. 1 conversions.

• 65% of units < 5 yrs. old. Stocking 125,000 skus and avg. 9 turns.

• Two formats: Urban “80,000” sq. ft.. for high density mkts. & “150” sq. ft. units.

• 140 mil. weekly shoppers. Avg. 96x shopper visits per yr. 61% of hsehlds. purchase.

• Pricing approx. 14% less than supermkts – inv. replenishment 4x faster.

• 1/3rd of shoppers use as primary supermkt. – 69% cross-shop the store (avg. 3.3 dept. visits).

• Food = 65% of SuperCenter sls. – #1 destination dept. (80%).

• #1 food retailer w/ 22% share of total food $ volume. Rolling out Mktside. R-T-E products.

• “Project Impact” - Rx and HBC #2 destination depts. (67%) - moving to front - center store.

Goal: “Conversion” – enhancing mkt. basket from existing cust. base.

• SmartNetwork – Upgraded, in-store TVs w/ ads repositioned in key depts. i.e . OTC-beauty.

• Wal-Mart Intn’l. – in 15 countries w/ 3,600 units doing 25% of ttl. $ sls.

SuperTarget at a GlanceSuperTarget at a Glance

•• 251 SuperTargets concentrated in high $ income, urban markets

• Upscale signage w/ “Wave” HBCs and high margin apparel and GM sales.

• Only 7% higher ticket but getting 2x shopping visits (36x per yr. ) vs. disky format.

• Returning virtually the same ROIC as conventional units, but higher sls. per sq. ft.

• Food proj. to grow from $5.8B to $12B by 2012 – emphasizing unique pkg. design, solutions,seasonal tie-ins, etc. Currently avg. 42% of unit sales.

• Only 35% of SuperT cust. cross shop store (avg. 2.7 depts.) vs. 69% at Wal-Mart. (3.3 depts.)

• Too little differentiation - 80% of sls. from pds. also found in conventional units.

• Adjusting assortments to reflect local mkt. food preferences – using heavy sampling.

• 49% of customers utilize as their primary grocery store – 28% are core shoppers.

• Introducing club-packs in most food categories to compete w/ Clubs.

• Expanding PL (35% of mix) – increasing skus, for Market Pantry & Archer Farms.

• Target.com fully integrated w/ stores. Expanding online assortment – served by dedicated DC.

• 5 yr. partnership w/ Amazon.com –access to 35 mil. consumer database.

• Co-branding w/ AOL to anchor customer loyalty.

The Supermkt./Combo ChannelThe Supermkt./Combo Channel• Industry Stats:

• 36,149 chain stores* doing $557B

• 69% female shoppers

• Avg. sls. per sq. ft. $571 – Gross margin 28%

• Stores avg. 49,000 sq. ft. – 50,000 skus

• Avg. 15.9 inv. turns – PL 20% of sales (proj. 24% by 2014)

• Now avgs. 62% share of ttl. grocery/food sls.

• Customer Base of Traditionals Eroding:• 33% now make superctrs. & club stores their primary

outlets for purchasing food (margins avg. 18%)

• By 2014, supercenters + clubs will acct. for 50% of all supermkt. type sls.

• Chains Respond:• Mining freq. shopper databases to adjust format & mix

• Experimenting w/ sharper pricing – limited assortments

• Emphasizing non-food growth catgs. – Rx/HBC fortraffic… Gen. Mdse. for margins.

• Aggressively incr. PL & developing multi-tiered store brands

• Expanding health & wellness offerings throughout store.

Source: GMDC/FMI Whole Health Best Practices Study, FMI Trends in the U.S., The Food Retailing Ind. Speaks

*Supermkt. combos of 500+ units

The Billion $ Supermkt./CombosThe Billion $ Supermkt./Combos

Annual $ Sales $67.9B 41.1 28.9 25.1 23.5

% ∆∆∆∆ Sales 3.4% 0.5 (8.6) 3.3 2.6

∆∆∆∆ Comp. Sls. 2.8% (1.8) (6.0) 2.3 0.8

# of States 31 21 40 5 11

# Units (U.S.) 2,460 1,694 2,394 1,034 751

Avg. Store Size 60,000 sq. ft. 46,700 40-60,000 46,500 55,000

Source: Kantar Retail, CITI Investment Research, Barclays Capital ‘10

Stats Kroger Safeway SuperValu Publix Ahold USA

$ Sls. per Unit $27.6 24.3 12.1 24.3 31.3

Sls. per Sq. Ft. $492 516 449 525 791*

Annl. Inv. Turns 12.8X 11.3 12.6 13.2 17.0*

Gross Marg. % 22.3% 28.3 27.5 27.9 26.8

Proj. CAPEX $1.8B 1.0 725 710 1.3

Net Profit % 1.4% 2.8 (1.2) 5.3 2.9

*Corporate

Kroger at a GlanceKroger at a Glance• $68B in total sales. In 31 states – 2,460 stores

• Operating under 24 banners, incl. Ralph’s, Fred Meyer, Food 4 less, Fry’s, King Soopers, Scott’s, Smiths, Dillon’s, QFC, etc.

• Expanding market share – 17.6% in top MSAs. Avg. $492 sls. per sq. ft.

• Focused on “The Shopping Experience” – improving the value equation for customersthru sharper pricing, better customer svc., greater convenience, higher quality pdt.offerings, in-store ambience and cleanliness.

• Up-scaling PL quality, pkg. and branding. PL now 27% of mix.

• Increasing mkt. share vs. Wal-Mart SuperCtrs. w/ more convenient locations, a broader

selection of Fresh and superior execution (high in-store svc. levels).

• Making better data-based mdsg. decisions, utilizing Dunhumby’s sophisticated loyalty

card data analysis of consumers’ shopping behavior.

• Rewarding loyalty card members with differentiated promos, targeted coupon offerings

(10-15 mil. per Qtr.) and discounts. Kroger Plus Card in 40% of U.S. househlds. – 2nd to CVS.

• Leveraging Fred Meyer’s gen. mdse. expertise to position Marketplace as a combo SuperCtr.

• Testing “Refreshment Centers” w/ color-coded aisles in beverage and snack depts.

• Testing Advantage checkout – high speed, bar code scan tunnels.

• Expanding from a base of 77 in-store Mini-Clinics (“The Little Clinic”).

• Filling 136mil. scripts. Rolling out $4 generic Rx program in their 2,000 pharmacies, nationwide.

Warehouse Club Channel ChartWarehouse Club Channel Chart• $122 B total sales – over 1,200 stores

• 51% of U.S. pop.shop warehouse clubs – 61% are women

• 58% of hsehlds. earn $70K+. Visit 1X weekly

• Membership $ rev. – avgs. 2.3% of total sales and equals 80-90% of EBIT.

• Avg. $95 mil. per unit – 15 mile radius shopping area

• 1/3rd of shoppers = 80% of $ vol. - $116 avg. ticket

• Experiencing 20% increased shopper visits

• Avg. 12x turns – > $800 sls. per sq. ft. – 10.8% gross margins

• Small business avgs. 3x # visits and 2x avg. ticket vs. individual shoppers

• Pricing avgs. 30% less than Supers – 17% less than diskys

• Channel accounts for 9% of Supermkt. type sls.

• GM/HBC + other non-food catgs. = 40% of sales.

• Champions of sampling & seasonal mdsg. - offer “treasure hunt” concept

• Item, not category merchants – avg. < 5,000 skus - will rotate products andeliminate SKU’s to freshen mix and heighten productivity

Source: Kantar Retail, Barclays Capital, CitiGroup Investment Research, ACNielsen 2010

The Billion $ Warehouse ClubsThe Billion $ Warehouse Clubs

Annual N.A. $ Sales $70.2B 46.7 10.6% ∆∆∆∆ Sales 9.1% (0.4) 8.3% ∆∆∆∆ Comp. Sls. 4.0% (1.4) 2.4# Units (N.A.) 496 596 189Avg. Size 143,000 sq. ft. 133,000 109,000CAPEX $1.6B 190Sales per Club $142 mil. 78 56Avg. Sls. per Sq. Ft. $989 589 515

Gross Margin 10.8% N/A 8.7Avg. # SKUs 3,900 5,500 7,000Annual Inv. Turns 13.1x 11.0 10.0# of Members 58 mil. 47 10Membership $ Rev $1.7 B 1.0 191Renewal % 88% 85 83

% Sls. From Bus. Members 55% 67 83% Units w/Rx *(N.A.) 98% 99 --% Ttl. Sls. From Supermkt Depts. 56% 62 66Net Income $1.3B 95

Source: Barclays Capital, CitiGroup Investment Research, Kantar Retail ‘10

Stats Costco Sam’s BJs

COSTCO TOP EXECUTIVES

Craig JelinekPres/COO

Charles BurnettSr. VP GMM

Pharmacy / OTC

Vic CurtisSr. VP Pharmacy

Dennis KnappSr. VP Non-Foods

Richard GalantiExecutive VP, CFO

Tim RoseSr. VP Food

Dick DiCerchioSr. Exec. VP

Doug SchuttExecutive VP Mdsg.

Costco at a GlanceCostco at a Glance• Largest club operator – 573 total units (496 in N.A.) – 58 mil. members.

• Has 53% market share of total club channel sales – opening 31 new units this yr.

• Now in 40 states – 27% of sales on W. Coast – Goal: 700 units in U.S. – 860 total.

• Overlaps w/ Sam’s in 64% of its mkts. – sls. per sq. ft. 60% higher.

• 6 business ctr. locations cater to small biz – 8am hrs. + delivery for a fee.

• 41% of customers avg. $100K+ household income – 19% > $100K.

• Avg. 3x visits per mo. w/ $123 avg. transaction - 52 clubs doing $200 mil+.

• Heavy shoppers avg. 23 trips per yr. - 1 mil. daily member transactions.

• Avg. only 3,900 skus (25% of inv. rotates) but adding more name brands to mix.

• PL at 19% - proj. 25% w/in 2 years and 37% long term. (Kirkland 15% of skus)

• Demanding customized jumbo value packs – insist on differentiation.

• Doing over $3.8B in HBC. Has 7.0% share of ttl. food mkt. ($9.5B in Fresh)

• Margins are 13% on branded – 15% on Kirkland. Avg. 10.8% on all pkgd. goods.

• Membership fees = 2.2% of sales ($1.7B) – 2/3rds of profitability.

• Exceeding $2B in e-commerce sales. Proj. $5B by 2012.

• More than doubled profits in last 5 years - Proj. CAPEX $1.0B.

SamSam’’s at a Glances at a Glance• Div. accts for 11.0% of ttl. co. $ vol. Only club in 60% of its mkts.

• 12 new units this yr. – 150 remodels - proj. 650 units doing > $50B by 2013.

• Leveraging corp. buying power, logistics and technology to reduce costs and increase turns.

• Project Portfolio – expanding growth catgs. i.e., OTC/HBC/Baby, etc. - localizing prod. assortments.

Investing in WOW catgs. – Health/Wellness and Food/Bvgs.

• eValues program – offers auto price reductions to “Plus” members, based on buying history.

• Avg. 67% of sls. from small biz. “Business Network Series” solicits 9 diff. SIC types.

Offering exclusive Gold Key shopping hrs. 7 – 10am.

• Tapping into Club of the Community corp. mkt. basket data warehse. to customizemix for local small biz members - 1,500 key items always in-stock at lowest price.

• 40% of hsehld. shoppers avg. < $50K. Members avg. $108 spending per trip.

• Adapting lowest price strategy - 24% <diskys – 32% <supermkts. & catg. killers.

• Localizing prices, by club, to beat competition. Goal: capture larger share of existing cust. wallet.

• Mdsg. Value Framework – slots catgs. into Everyday Needs, Simple Solutions, Excitement & WOW.

•Trending up by adding “affordable luxury” items to mix. Added $100 PLUS memberships.

• Prioritizing new treasure hunt items to create greater product differentiation and excitement.

• Joint Business Planning – promoting collaboration w/ key suppliers across all catgs.

Dollar Store Channel ChartDollar Store Channel Chart•• $27.6B ttl. ind. vol. w/ over 21,000 units. Proj. 1,000+ new units this yr.

• 65 mil. consumers shop $ stores – 31% will shop more often this yr. - 67% are women.

• Avg. shopper radius -5.7 miles. 26x hvy. shopper visits annly. - 32% are impulse.

• 76% visit 1x or more wkly. Avg. 4 items purchased per visit w/ $14 ticket.

• Expanding from rural/small towns to urban mkts. + suburban strip ctrs.

• Demographic – 73% female shoppers; 57% < $40K hsehlds. / 34% over age 55 / 31% ethnic

• Footprint typically < 15K sq. ft. – avg. 4,000-7,000 skus.

Source: Kantar Retail, Symphony IRI, Barclays Capital, CitiGroup Investment Research.

• Testing larger formats – 17,000 – 25,000 sq. ft.

• Gross margins in the 30% range w/ avg. 4x turns.

• Increasing demands by chains for channel specific new pds./pkg. from mfgrs.

• Food avgs. 70% of $ sales. Edible and non-edible consumables most purchased.

• Cosmetics, Vitamins, Pet Foods/Supplies targeted as undeveloped categories.

• Increasing % of PL products in mix.

• Brands still 2/3rds. of top 200 fastest turning skus.

Leading Dollar Store CategoriesLeading Dollar Store CategoriesTraffic Drivers % of Consumers Purchasing

Hsehld. Cleaning Products 51%Beverages (Single Serve) 46Candies/Snacks 45Hsehld. Paper Products 43OTC/PC/Beauty 39Greeting Cards/Gift Wrap 31

Source: Kantar Retail, Symphony IRI, $ Store Shopper Meyers Research Ctr. Study ‘09.

Freq. Purchased Items Annl. ∆∆∆∆% Consumer $ Spending

Cough/Cold 40%Edible Consumables 37%Greeting Cards 36%Medications/Remedies 33%Women’s Fragrance 31%B-T-S/Stationery 25%Batteries/Flash Lights 21%

The Billion $ Value StoresThe Billion $ Value Stores

Dollar Family Dollar 99 CentsStats General Dollar Tree Fred’s Only

Source: Kantar Retail, CITI Investment Research, Barclays Capital ‘10

Annual $ Sales $13.0B 7.9 5.9 1.8* 1.4Share of Mkt. 43% 26 20 6 5% ∆∆∆∆ Sales 10.5% 6.3 12.4 3.0 4.0% ∆∆∆∆ Comp. Sls. 4.9% 4.8 6.3 2.2 3.9# Units 9414 6,817 4,101 653* 279# of States 35 44 48 15 4Proj. # New Units 625 300 285 22 13$ Sales per Unit $1.4 mil 1.2 1.4 2.8 5.0

Average Sq. Ft. 7,200 8,500 8,400 14,300 21,500Avg. Sales/Sq. Ft. $201 164 174 197 281Annl. Inv. Turns 5.4x 5.3 4.2 4.3 4.7

Avg. Gross Margin 32.0% 35.7 35.5 28.6 39.3Proj. CAPEX $575 325 220 29 45SG&A % 22.3% 28.4 24.8 26.1 34.9EBITDA $ $1.5B 748 630 76 110

* 313 units w/ Rx (34% of ttl. $ vol.)

• $13.0B in total sales. In 35 states – 9,414 stores

• Has dominant 43% share of ttl. value store mkt.

• Present economy favors format – up >10.5% in annl. $sls.

• Annl. comp. sales 4.9% - Gross Margin 32.0%, PL 22%

• Stocking 10 – 12,000 skus – 5.4 annl. inv. turns

• Avg. 7,200 sq. ft. stores - $201 avg. sls. per sq. ft.

• New unit growth, CAPEX and EBITDA 2x competitors

Dollar General at a GlanceDollar General at a Glance

Jim ThorpeSr. VP Consumables

Rick DreilingChairman/CEO

Jeff ElliottSr. VP Non-Cons.

Todd VasosDiv. Pres./CMO

What Determines Your CustomersWhat Determines Your Customers’’ Chain of Choice Chain of Choice

Convenience & Price Convenience & Price -- the Drivers Across Channelsthe Drivers Across Channels

• Low prices

• Convenient locations – proximity to home

• Sales items / specials

• Neat and clean store – easy to shop

• Speed and accuracy in filling Rx – Insurance plan acceptance

• Pharmacist availability – employee helpfulness

• High quality produce and meat

• Wide variety of most wanted brands and merchandise

Source: FMI U.S. Shopper Trends, Kantar Retail, Nielsen Trends Report, Symphony IRI Shopper Research, M/A/R/C/ Research.

Customer Shopping Trip MissionsCustomer Shopping Trip Missions

Trip Missions

• Immediate consumption

• Rx scripts

• Immediate remedy

• Fill-in (food / essentials)

• Special occasion

• Big basket / one stop shop

Shopper Profiles

Shoptimizers – plan their trips, scan circulars, clip coupons

26% of US hsehlds. = 31% of all pkgd. goods spending – $7,100 per yr.

Mainstreeters – little prior planning – seek deals in-store – spend $6,300 per yr.

Carefrees – never use coupons – seldom seek deals – spend $5,600 per yr.

Source: Henkel Shopper Research 2010

Channel of ChoiceChannel of ChoiceWhere’s she shopping, how often, and what’s she spending?

Supermkt. 99% $42 4.8x (20.8)%

Drug Chains 79 25 1.2 (6.6)

Mass 76 48 1.1 (45.8)

SuperCenters 71 63 2.1 (4.5)

Dollar Stores 64 15 1.1 18.2

Clubs 51 98 1.0 20.0

Source: Nielsen U.S. Retailing & Consumer Trends/Homescan ‘10

Hsehld. Avg $ Spent Avg. # of Incr. / Decr.

Penetration per Visit mo. Trips # of TripsChannel

SuperCtrs. have 37% of sls. from younger women < 45 - (41% have kids < 12 yrs. old.)

HBCMedications & Remedies 7.1xOral Hygiene 6.8Hair Care 6.2Vitamins 5.8Pers. Soap/Bath Additvs. 5.7Adult Incontinence 4.7Cough/Cold 4.7

FoodBread/Baked Goods 28.7xMilk 25.5Carb. Beverages 23.8

Snacks 23.7

Candy 18.0

Pet Food 16.7Cereal 13.7

Source: Nielsen Channel Blurring Study ‘10. *F/D/M Excludes Produce, Meat, Baked Goods, Deli, Cheese, Frozen Fds.

Ft. End Categories that Drive Traffic*Ft. End Categories that Drive Traffic*

# of Annual

Category Visits per Hsehld.

# of Annual

Category Visits per Hsehld.

Non-FoodCigarettes 19.3xPaper Products 17.0Detergents 7.8Disposable Diapers 6.6Wrapping Mats. & Bags 6.5Laundry Supplies 5.8

General Mdse.Pet Care 7.5xStationery/BTS 6.3Magazines 5.4Pre-Recorded Video 4.5Batteries/Flashlights 3.4

Categories* % ∆∆∆∆ $ % ∆∆∆∆ Units $ Sls. Bil.

Remaining Snacks 7.6% 8.0% $ 4.6B

Chocolate Candy 7.4 6.5 4.6

Yogurt 7.0 2.5 5.0

Wine 6.0 6.2 7.3

Vitamins/Nutritionals 4.6 4.0 6.4

Cosmetics 4.0 (0.3) 4.4

Catg. Growth Trending Down Unit Growth Declining

HBC (0.3%) (2.1%)

Gen. Mdse. (7.2) (6.9)

Fastest Growing F/D/M CategoriesFastest Growing F/D/M Categories$s Rise $s Rise –– # of Winners Shrink# of Winners Shrink

* Exceeding 4% in $ growth – from categories over $3B.

• Approx. 2,000 new front-end pd. intros annl. – only 3% new brands, not line extensions.

• Overall success rate – 20%.

• Primary differentiator: New technologies/formulas delivering improved pd. effectiveness.

Source: Nielsen 52 wks. ’10, Nielsen Scantrack – U.S. Buying Trends 2010

� Women constitute approx. 2/3rds of all F/D/M shoppers.

� Just 1/3rd of customers (heavy/frequent shoppers) avg. twice # of trips and

83% of chain ttl. $ vol.

� Over 75% of Drug and Supermkt. customers shop w/ 5 miles of their homes.

� More than 50% of Mass, SuperCtr. and Club shoppers travel 10-20 miles.

� Chain drug traffic is heaviest Mon. – Thurs. (fill-in and convenience)

vs. Mass shopping Fri. – Sun. (1 stop shopping).

� 80% of in-store clinic patients make a ft.-end purchase – 38% buy OTCs.

� Seasonal shoppers avg. 3X the market basket and 3X the profitability.

� Consumers shopping both online and in-store spend 60% more at drug chains

and almost 40% more at Mass and Club outlets. 40% of all purchases digitally

influenced.

� 71% of comp store increases come from increased cust. count –

only 29% from market basket growth.

Source: Source: FMI U.S. Shopper Trends, TNS Retail Forward, Nielsen Trends Report & Consumer Insights,

IRI Shopper Research, M/A/R/C/ Research, OgilvyAction Global Study, PLMA, Retail Net Group ‘09.

Shopper DynamicsShopper DynamicsHow InHow In--Store Behavior Impacts Your Bottom LineStore Behavior Impacts Your Bottom Line

� Shopper Actions at Point-of-Sale- 45% of shoppers have a prior intent to purchase, but 81% of list makers don’t specify a brand.

- 35% of all F/D/M $ sls. were motivated by promos, i.e. TPRs, displays, sales, ads, etc.

- 35% of shoppers make brand decisions in-store (25% in a recession).

- 10% will actually switch brands based on sales or specials.

- 41% purchase on impulse. 39% try new products based on display.

- More than twice the number of impulse purchases are motivated by display, not price.

Source: FMI U.S. Shopper Trends, Market Force Info Survey, Nielsen Trends Report & Consumer Insights, ABI Research ’11,

IRI Shopper Research, M/A/R/C/ Research, OgilvyAction Global Study & Research, PLMA, ForSee Results Study ’11.

Shopper DynamicsShopper DynamicsHow InHow In--Store Behavior Impacts Your Bottom LineStore Behavior Impacts Your Bottom Line

- 29% will buy from “non-planned to shop” catgs. – decisions are made at shelf in 12 secs. or less

- 20% will leave the product they intended to buy on shelf.

- Mobile shopping – 30% of visitors to e-retailer sites are more likely to purchase on-line or in-store

- Mobile on-line shopping proj. to $119B by 2015.

- 55% of all shoppers are “frequent buyers” of store brands (highest in Supermkts./Ctrs.)

- 8 out of 10 consumers feel PL is equal to or better than brands. 30% buying more store brands.

- PL sls. growth still outpacing brands – Now 17% of F/D/M sls. & 22% of unit sls.

PL Impact on F/D/M FrontPL Impact on F/D/M Front--End CategoriesEnd CategoriesMarket Share Growth outpaces BrandsMarket Share Growth outpaces Brands

Source: Nielsen 52 Wks. ‘10

Top PL Catgs. PL Annl. PL $ Sls. PL Mkt.

F/D/M $ Sls. F/D/M % Incr. $ Share %

1. Milk $8.6B 2% 62%

2. Meds/Remed. 2.7 4 26

3. Eggs 2.1 2 60

4. Bottled Water 1.8 3 27

5. Vitamins/Nutritionals 1.7 3 26

6. Wrap. Mat./Bags 1.4 (1) 38

7. Cough/Cold 1.4 8 26

8. Ice Cream 1.2 (5) 27

9. Dispos. Plates/Cups 1.0 (3) 48

10. Pain Remedies 1.0 18 33

11. Nuts 958 4 31

12. First Aid 812 1 35

PL Unit Share Growth SlowsPL Unit Share Growth SlowsLead Brands Erode/Niche & MidLead Brands Erode/Niche & Mid--Tier Brands HoldingTier Brands Holding

F/D/M* Unit Share Trends

53.0%

20.8%

26.1%

21.8%

25.8%

52.3%

Change vs. 2008

-0.3 Pts.

-0.7

1.0

Store Brands Other BrandsLead Brands

Source: *Nielsen Scantrack 2010, 52 wks.

2008 2010

How Can Brands Meet The Challenge of PL?How Can Brands Meet The Challenge of PL?

1. View your category as an entity (brand & PL) in charting strategy.

2. Bring brand innovation* to the table and excitement to the shelf.

3. Contribute incremental sales to the category.

4. Develop a unique package or delivery system.

5. Build high consumer loyalty and create demand beyond the shelf thru doctor detailing and/or use of social networking media.

6. Alter existing sizes and weights to make price comparisons more difficult.

7. Be aware of chains’ current catg. pricing of both brands and PL.

8. Extend the line to include value-priced alternatives, travel sizes, bonus packs, etc.

9. Optimize brand equity by providing customer insights, category perspective, trend projections and movement forecasts.

10. Take collaborative approach in demonstrating how your brand assortment aligns well w/ PL – which of your skus make the best promo partners?

11. Give them what they want - develop channel and / or chain specific brand products, packaging / displays / sizes.

*PL share is 56% higher in catgs. with low innovation activity

The Pharmacy Factor Across ChannelsThe Pharmacy Factor Across ChannelsDriving Loyalty, Trips & Ft.Driving Loyalty, Trips & Ft.––End SpendingEnd Spending

• Rx anchors store loyalty – over 70% among Rx patients vs. > 50% among all shoppers

• 52% of hsehlds. patronize just one retailer to fill scripts – 43% utilize 2-3 outlets

• Drug chains w/ 40% + share of ttl. retail script $ vol. – Supermkts. 11% & Mass 12%

• On average, RX customers make more than one extra trip per mo. per hsehld. and add between

45-70% annl. incremental ft. end sales. 60% purchase Food/Bvgs. – 36% OTCs/Nutritionals

• 88% of Rx patients shop the ft. end of a chain as well

• Rx patients spend 22% more on ft. end pdts., but only 33% of Rx trips incl. a ft. end purchase.

• Customer perception of high pricing and/or lack of deals is the #1 reason for not buying

ft. end products where they fill their scripts

• The pharmacist is the consumers’ preferred source of OTC info.

• Pharmacists make an avg. of 26 OTC product recommendations weekly – over two million per yr.

• 81% of counseled patients buy the product the pharmacist recommends

• Pharmacist/patient interaction results in avg. 15% incremental ft. end purchasing

• 38% of shoppers use OTCs to avoid doctor visit/costs

• % purchasing OTCs at drug chains dropped from 63% to 35% in recession

Source: Nielsen HomeScan, Boehringer Ingelheim/Wilson Health Info. Study, Drug Store News Chain Pharmacy Study, Wyeth Rx/OTC Shopper, Novartis Trends & Forecasts. Whole Health Pds. GMDC & Fully Connected Store

Studies GMDC, American Pharmacists Assoc., Symphony IRI, Kantar Retail ’10.

Channel Shopping by Household $ IncomeChannel Shopping by Household $ Income

Source: Nielsen U.S. Retailing & Consumer Trends ‘10 Income Surveys div. U.S. Bureau of Census, Ameristat ’10.

CHANNELS $100K+ $50-100K < $20 - 50K

Supermkts. 24% 35% 42%

Mass Mdsrs. 24 35 42

Drug Chains 21 33 46

Clubs 37 37 26

SuperCenters 16 34 49

$ Stores 10 24 67

% of Shoppers by Household Income

Class Hsehld Annl. $ Income % of Pop.

Affluent $200K+ 4%

Living Well $100-200K 16%

Living Comf. $50-100K 30%

Getting By / Poor $5-50K 50%

Ethnic Diversity Presents Opportunities & ChallengesEthnic Diversity Presents Opportunities & Challenges

Source: U.S.Department of Commerce, Bureau of the Census.

White

+2%*

African-American

+19%* Hispanic

+29%*

16% Asian

+29%*

Yr. 2015

• 66% Mex. Amer.

• 75% of Latinos live in 10 states:

CA. TX. FL. NY. IL. NJ. AZ. CO.

NM. GA.

Other+28%

2010

64%

13%

5%

2%

38% Minorities126 Million

* Projected pop. percentage gain 2007 C2015.

50–64 (middle adulthood) 50.4 mil. 62.8 mil. 24.6%

65–79 (late adulthood) 26.0 mil. 34.4 mil. 32.3

80+ (elderly) 10.7 mil. 12.4 mil. 15.9

Source: U.S. Bureau of the Census Projections, Nielsen Homescan, CITI Investment Research Pop. div. Dept. of Eco & Social Affairs, UN Secretariat, Merrill Lynch.

Pop. ‘05 Pop. 2015 10 Yr. % ∆∆∆∆

A Graying Consumer Makes the MarketA Graying Consumer Makes the Market

• 30% of U.S. population = 70% of net $ worth

• Healthcare spending avg. $3,262 for ages 55-64 Climbing 20% per yr. for 65+ (Avg. 31 scripts per yr.)

• Purchase 2/3rds of all OTCs/ 7 out of 10 Rx scripts

• Women spend 2 out of 3 healthcare $s ($500B annually)

• Chain drug has 36% of all purchases by age 55+ seniors

50+Yr. 2009

• 50+ population – 110 million people

• Will control 2/3rds of all discretionary $s

• Will drive over 1/3rd of all outlet spending

50+By 2015

Annual Chain % Annual

$ Vol. (Bil.) ∆∆∆∆

Source F/D/M F-E Categories/Nielsen ‘10.

Top 10 $Vol.Top 10 $Vol.HBC CategoriesHBC Categories

Medications/Remedies $10.5B 1.7%

Hair Care 6.5 (0.8)

Vitamins 6.4 4.6

Oral hygiene 5.3 0.2

Cough/Cold Remedies 5.3 (3.9)

Skin Care Preparations 4.9 0.3

Cosmetics 4.4 4.0

Pain Remedies 3.1 (7.2)

Shaving Needs 3.0 0.2

First Aid 2.3 (0.9)

Categories Shopped % of Households # of Purchases Avg. $s Spent– All Channels Buying Per Yr. Per Yr. Annl. Per Hsehld.

Source: Nielsen Homescan Consumer Facts ‘10

OTC Shopper ActivityOTC Shopper Activity

Vitamins 80% 6x $86Nutritional Supplements 58 4 64

Multi-Vitamins 39 2 20

Other Vitamins 35 2 23

Minerals 28 2 20

First Aid 79% 4x $15

Cotton Swabs / Applicators 48 2 5

Adhesive Bandages 38 2 6

Germicidal Antiseptics 30 2 4

Treatments 22 2 10

Cough & Cold Remedies 78% 5x $39

Adult Cold Remedies 60 3 28

Cough Drops 27 2 5

Cough Syrups & Tabs 26 2 18

Nasal Products Internal 17 2 15

Categories Shopped % of Households # of Purchases Avg. $s Spent– All Channels Buying Per Yr. Per Yr. Annl. Per Hsehld.

Source: Nielsen Homescan Consumer Facts ‘10

OTC Shopper ActivityOTC Shopper Activity

Headache Pain Remedies 70 % 3x $20

Antacids 39 3 27

Laxatives 32 3 23

Lip Remedies – Solid 29 2 5

Medicated Products 22 1 6

Analgesic & Chest Rubs 21 2 12

Eye Drops / Lotions 19 2 15

Contact Lens Solutions 18 3 25

Fem. Hygiene 17 2 11

Medical Accessories 16 2 11

Insulin Syringes 53% 7% 17% 5% 3% --

Blood Pressure Kits/Accs. 45 8 4 18 9 --

Ice & Heat Packs 41 11 11 20 6 1

Analgesic & Chest Rubs 38 9 17 21 4 4

Tooth & Gum Analgesics 34 11 25 23 -- 3

First Aid 27 14 19 24 5 4

Lip Remedies 27 15 19 25 2 4

Family Plng. (contraceptives) 26 17 18 29 4 1

Foot Comfort 26 12 15 25 -- 5

Laxatives 26 9 19 24 14 2

Adult Incontinence 25 12 18 27 11 2

Feminine Needs 24 16 19 31 -- 4

Adhesive Bandages 24 15 24 25 3 5

Sleeping Aids 22 13 21 32 2 3

Source Nielsen Homescan Consumer Facts ‘10.

Super Super $

Drug Mass Markets Centers Clubs Stores

OTC/HealthOTC/Health% of Dollars Spent by Channel

Cough/Cold/Remedies 29% 10% 23% 22% 10% 3%Nasal Products 34 10 22 21 5 2Cough/Cold Throat Sprays 32 10 24 24 -- 5Cough Syrup & Tabs 31 9 22 22 9 2Cold Remedies - Adult 29 10 22 22 11 2Cold Remedies – Child. 28 12 22 25 8 2Throat Lozenges 26 9 31 20 2 7

Cough Drops 26 9 28 19 6 5Sinus Remedies 24 8 25 31 3 4Breathing Aids - Ext. 19 11 17 22 20 6

Antacids 23 10 22 25 14 2Vitamins/Nutritionals 22 7 19 18 19 1Pain Remedies 22% 10% 23% 25% 12% 4%

Back & Leg 36 9 13 32 -- 1Children's Liq. 25 17 23 24 6 2Arthritis 24 11 18 27 12 2

Headache 21 10 24 24 13 4Diet Aids 13 11 29 24 16 1

Source Nielsen Homescan Consumer Facts ‘10.

Super Super $

Drug Mass Markets Centers Clubs Stores

OTC/HealthOTC/Health% of Dollars Spent by Channel

Increasing OTC SelfIncreasing OTC Self--Treatment by ConditionTreatment by Condition

Annual Annual# of OTC $ Mkt. # of OTC $ Mkt.

Condition Hsehlds.* Potential** Condition Hsehlds.* Potential**

1. Allergies 74.8 $11.7B 11. Constipation 33.0 $5.3B

2. Headaches 73.9 10.1 12. Acne 41.2 5.2

3. Muscle/Joint Pain 52.4 8.2 13. Asthma/Bronchitis 30.9 4.5

4. High Cholesterol 50.5 8.1 14. Anxiety 31.5 4.4

5. High BP/Hypertens. 49.9 7.8 15. Heart Problems/Stroke 26.6 4.2

6. Heartburn/Acid Indigest. 49.1 7.6 16. Obesity 27.7 4.0

7. Pain Management 45.5 7.1 17. Diabetes 22.7 3.4

8. Arthritis/Osteoporosis 39.1 6.6 18. Osteoporosis 16.9 3.0

9. GERD/Reflux 33.1 5.6 19. Rheumatoid Arthritis 19.4 2.9

10. Insomnia/Sleeplessness 34.5 5.3 20. Other Heart Problems 17.6 2.8

*in millions

Source: SymphonyIRI Group 2010

Source: ComScore, Inc. ‘10, Pew Internet Project ‘11

Health on the InternetHealth on the Internet

1. Walgreen.com 1. Everyday Health

2. CVS.com 2. WebMD Health

3. Drugstore.com 3. Livestrong-eHow Health

4. Bodybuilding.com 4. Yahoo Health

5. RiteAid.com 5. Health.com Integrated Solutions

Preferred Commerce HealthCare Sites Preferred Info. Healthcare Sourcing

• 59% access health/wellness* info. online monthly or more

• Of those, 71% seek info. on a specific medical condition

• 17% of cell phone users use their phones to look up health info

• Avg. times spent at leading health sites: 5 mins. per day–1-1/2 days per mo.

• Online health spending proj. to $27B

• Web-influenced health spending proj. to $111B

Online Catgs.* Proj. 2011 Web $ Sls. Proj. 2011 Web-Influ. $s

OTC’s $2.9B $15.0B

Personal Care 3.1 22.0

DME/Supplies 1.4 8.0

Meeting The Challenge of Change Meeting The Challenge of Change

in the Buyerin the Buyer--Seller RelationshipSeller Relationship

7 Major Market Forces 7 Major Market Forces

Challenging Chain SuccessChallenging Chain Success

1. Increasing retail competition.

2. Waning customer loyalty.

3. Declining # of shopping trips.

4. Diminishing market basket.

5. Eroding margins.

6. Rising costs/declining productivity.

7. Faltering retail execution.

1. Differentiation- Prototyping formats to create points of difference, i.e. price/value,

convenience/replenishment, one stop shopping and/or lifestyle appeal

- Positioning exclusive & store brands as strategic differentiators

- Enhancing the shopping experience w/ both health & beauty solution ctrs.

- Introducing branded “store-within-store” formats to differentiate.

- Developing loyalty programs to anchor heavy shoppers

How Chains Strategize to AchieveHow Chains Strategize to Achieve

Market Share Growth &Sustainable ProfitabilityMarket Share Growth &Sustainable Profitability

2. Building Customer Count – New Customers / More Trips- Increasing mkt. density by filling in stores in key strategic mkts.

- Opening more free-standing corner location units

- Targeting desirable shopper segments, i.e. teens, 50+, mothers, Hispanics

- Leading with unique promotions and adding value sections

- Empowering district, store & dept. mgrs. to adjust product mix, pricing and

presentation to mkt. demographics, ie. micro-mdse. stores

- Identifying and promoting destination depts. and catg. specialization

- Expanding perishables and R-T-E depts. in urban mkts.

3. Customer Optimization – Increasing $ Value of Avg. Transaction- Experimenting w/ new forms of in-store media / Integrating online and in-store programs.

- Merchandising to “impulse and wants” of shoppers on need-driven trips

- Mining POS frequent/heavy shopper loyalty data, in real-time, for targeted mktg. efforts

- Actively seeking supplier insights into chain-specific shopper demographics & behavior

- Realigning catgs. & product adjacencies to reflect the way customers shop & buy

- Adding informative signage and digital media to the shelves

Chains Strategize to Achieve Chains Strategize to Achieve (Con(Con’’t)t)

4. Margin Enhancement, Cash Generation & Productivity Improvement

- Applying key performance indicators ($ sales/margins/turns) to improve catg. ROI

- Escalating demands for extended dating, free goods, pay-on-scan, vendor mgd. inv. etc.

- Expanding use of global sourcing/reverse auctions to reduce acquisition costs

- Employing smart store technology ie. smartphones, self-checkouts, express payment, and kiosks

- Utilizing technology (RFID, etc.) to improve supply chain efficiencies and control inv. flow

- Implementing demand forecasting, price elasticity and delivery optimization programs to adjust for seasonality, markdowns and promotional events

- Reducing # of vendors, downsizing formats, contracting shelf space, trimming non-productive

skus and optimizing the mix

• Suppliers are competing for time and attention of fewer power retailers

• Chain decision making is aggregating disciplines, i.e., Mdsg., Mktg., Logistics, Finance

and Purchasing.

• More HQ influentials at each chain are impacting on the fate of your pds.

• Manufacturers are developing programs to protect the equity of their brands.

• Major vendors are evolving into best-of-class category consultants w/ increasing

involvement in balancing brands & store brands to maximize catg. productivity.

• Partnering has become a reality, driven by chain need for closer collaboration on:

- Data-driven programs, leveraging supplier consumer insights into a

competitive business advantage for the chain.

- Mdsg. & mktg. strategies w/ enabling technologies as productivity drivers

• Responding to escalating chain demands, suppliers are:

- Evolving from tactical responses to strategic initiatives

- Engaging in top-to-top, joint mgmt. team planning meetings and more

frequent business reviews, with emphasis on projections.

- Focusing more trade spending on influencing shoppers before entering stores

(now avg. only 42% of ttl. spending).

How Suppliers are MeetingHow Suppliers are Meeting

The Challenge of ChangeThe Challenge of Change

CAUSE: Chains average 25% annual turnover of full-time store mgrs.- 69% of all chain stores fall below hdqtr.–mandated compliance levels

- 30%+ avg. non-compliance on new items, planograms& promo displays

- Only 1 in 4 displays will feature vendor-provided POP

- 33% of stores put up displays too late

EFFECT: Chains avg. 8.3% O-O-S* - 25% have product in-store, but not on shelf

- 47% of O-O-S caused by store ordering & forecasting problems

- 42% don’t have skilled labor needed to execute promotions

- 20% of mix is excessive and obsolete inventory

IMPACT: - 40% of shoppers encounter O-O-S on trips to the store- 45% of customers will substitute w/ another pd. (26% of them a diff. brand)- 31% will buy item at another chain

- 24% will not purchase

RESULT: - Suppliers lose an avg. 30% of sales due to O-O-S- Retailers lose an average $800 per wk. per store to O-O-S (4% of ttl. sls. lost!)

*A 10% improvement in planogram compliance would = 1% improvement in O-O-S.

Store Level Store Level ExecutionExecutionRanked Most Important Industry Issue by Both Chains & Suppliers

Source: P&G Retail OOS Study, Cannondale, FMI, POPAI, NACDS, Harvard Business Review, Nielsen Retail Execution Study

Greater use of MSOs by both suppliers and retailers improve execution

with real-time technology & shelf support:

• Speed-to-shelf thru new item cut-in

- Ensuring installation of POS material and POP displays

- Managing OOS of core items

- New store set-ups/remodels/installations

- SKU optimization (20% of skus = 80% of sales)

• Tailoring mix and mdsg. to store demographics

- Event mktg. and demos

- Audits and surveys

Meeting the Need for Meeting the Need for

InIn--Store SupportStore Support

Source: NARMS Survey of Mdsg& Mktg. Svc. Practices, Documenting the Value of Mdsg. Study.

Trade Promotion Compliance by Channel*

010203040506070

Gro

cery

Mas

s M

erch

ant

Dru

g

Clu

b

Pe

rce

nt

BOGO

Price DiscountsChange

Couponing/In-Store

Adv.

Floor Displays/Special

Pkg. & Custom Products

Market Basket/Cross-

Catg. Promos

EDLP

The ability, by channel, to plan a promotion at corporate level and execute at store level.

Success will come to retailers who define

themselves by who they sell to & how

they sell them, not by what they sell!

Success will come to manufacturers who

define themselves by who they sell to &

the solutions they solve for their

consumers & retail partners, not by

what they sell!

Source: Nielsen Co. Consumer 360

Going to Market Going to Market –– Illuminating SuccessIlluminating Success

1. Experimenting w/ down-sized boxes to tap into urban mkts. (82% of U.S. pop.) and convenience driven shoppers.

2. Capitalizing on the “stay at home” lifestyle trend by expanding solution and convenience offerings.

3. Utilizing Fresh and R-T-E products in target mkts. to increase traffic and anchor loyalty.

4. Promoting “essentials” i.e. consumer need, not want pdts. and adding more value offerings thruout the store.

5. Shifting emphasis away from rigidly dictated Mckinsey sku reductions toward enriching traffic building categories

and driving core competencies.

6. Exploring ways to reduce the impact of inflationary price increases at the shelf.

7. Rebalancing categories more carefully between brand and PL… re-emphasizing innovation.

8. Attempting to offset growing resistance to the “Ask” by tangibly linking up-front dollars requested to realistically

deliverable increases in suppliers’ ROI.

9. Utilizing predictive analytics, mining info from loyalty programs – tapping into suppliers’ info to anticipate trends

and provide greater insights into shopper behavior and segmentation.

10. Adjusting assortments, by markets to meet shopper demographic needs.

11. Demanding greater visibility into demand and supply cycles to trim inventory costs further and reduce OSS.

12. Urging suppliers to move toward more retail-ready packaging to cut labor costs and downtime.

12. Working more collaboratively with suppliers on creating customer driven programs offering “compelling” value.

14. Supporting only those brands and niche products that bring innovation, excitement and differentiation.

15. Increasing market share by extending their message to consumers thru new social networking media.

15 Trends That Will Impact Your Business In 15 Trends That Will Impact Your Business In ’’11 & 11 & ‘‘1212

Chains Will Increasingly Focus On:Chains Will Increasingly Focus On:

1. Understand chain’s “going to business philosophy - dedicate a well-trained,

cross-functional, qualified account team with adequate resources to provide

support in taking products to market.

2. Strive for simplicity and brevity in presentations – make info. actionable w/

clearly identified opportunities. Be willing to listen & respond.

3. Prioritize innovation – lead change w/ new concepts. Be open to testing in new

markets.

4. Co-create channel-specific mktg. programs that enhance customer value,

enrich margins and improve planogram productivity and catg performance.

Engage in focus group testing of new pkg./graphics, new catg. sets, etc.

5. Provide catg. perspective - trend projections and movement forecasts.

Analyze consumer data & sls. stats. Develop key insights & analysis to optimize

chain customer equity. Offer unique solutions.

6. Set collaborative goals, participate in shared risk programs, and create

actionable co-strategies. Be prepared to monitor and validate effectiveness.

Chain Expectations from Chain Expectations from

Best Performing SuppliersBest Performing Suppliers

7. Maintain an open issues / timing and action log for both parties to work from.

8. Recognize chain desire to be “best to market” w/ new products – collaborate to

time major new prod. launch dates to chain resets.

9. Invest in technology to interface w/ chain CPFR initiatives i.e., RFID and B2B.

10. Work together for greater promotional cost efficiency and effectiveness and

post-promo sls. sustainability. Support w/ info- oriented POP mktg. tools.

11. Be candid about which lead items you are investing in. Build brand equity by

supporting chain cross-mdsg. initiatives & in-store svc. departments.

12. Provide visibility into prod. lifecycle – collaborate on sku rationalization and

discontinued item disposition (exit strategy). Focus on ttl. catg. productivity.

13. Participate in supply chain initiatives that support and maintain targeted svc.

level goals and proactively support efforts to improve in-store execution.

Chain Expectations from Chain Expectations from

Best Performing SuppliersBest Performing Suppliers

http://www.forbesconnection.com

Email: jay@forbesconnection.com

Phone # 914-271-9001

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