US Grocery Retail Perspectives

Wilson Perumal & CompanyGrocery Retail: Perspectives

November 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

[email protected]@wilsonperumal.com

Asaf NavotSteve Liguori

[email protected]@wilsonperumal.com