1. Relationship of Packaging to Unsaleables
Presented by:
Paul Weitzel
Managing Partner - Willard Bishop
&
Mike Stuckey
Director of Marketing, Food Packaging - MWV

2. Topics New Insights on the Real Cost-to-Serve the Grocery Store
Implications for Packaging
Research into Unsaleables

3. Grocery Store Realities
For a Typical Food/Drug Grocery Store:
There are more than 200 categories in the store
1 in 4 categories lose money today
There are 40,000 SKUs in the center store
57% of center store SKUs lose money = 23,000 SKUs
Many SKUs sit on the shelf
56% of SKUs sell less than one unit per week
95% of center store demand is covered by 46% of the SKUs
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

4. Average Grocery ABC Per-Unit Sold
Retailer ABCs to Shelf
Average Grocery ABC Per-Unit Sold
(Through Retailer Warehouse)
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

5. Average HBC ABC Per-Unit Sold
Retailer ABCs to Shelf
Average HBC ABC Per-Unit Sold
(Through Retailer Warehouse)
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

6. Retailer Profit After ABCs to Shelf
Supermarket True Profit If Unit Sold
* Includes promotional monies, slotting RDAs, etc.
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

7. Retailer Profit After Unsaleables
* Includes promotional monies, slotting RDAs, etc.
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

8. Product Gets to the Store Many Ways
Typical Grocery Store Gets More than 80 Deliveries a Week:
65+ DSD Deliveries a Week
10+ Warehouse Deliveries a Week
5+ Distributor and Other (UPS) Deliveries

9. Product Is Also Handled Many Ways
In the Backroom…
Backrooms can look like parking lots and receivers serve as traffic cops
Daily Delivery Storage
Promotional Volume Storage
New Item Storage
Surplus DSD Inventory Storage
Lockup Storage
Seasonal Storage
Cases are often ripped open and verified

11. Product Is Also Handled Many Ways
In the Backroom…
Backrooms can look like parking lots and receivers serve as traffic cops
Daily Delivery Storage
Promotional Volume Storage
New Item Storage
Surplus DSD Inventory Storage
Lockup Storage
Seasonal Storage
Cases are often ripped open and verified
We have to deal with cold, heat, pallet jacks, lifts, elevators, and obstacles that test packaging design and strength

17. Product Is Also Handled Many Ways
On the Sales Floor…
Product is often double and even triple handled
Night stocking crew often can’t complete their work, lack of time creates excess damage
Packout rules are often violated, lack of >1.25 packout creates excess handling and increases damage
When we stock, we have to deal with…
Flat shelves, dividers, pegs, gravity, spring-loaded pushers, rear load, doors, pallets, cases, trays, and other obstacles
Increasing interest to reduce labor costs
Front-facing fixtures gaining attention
Increasing interest in retail-ready and one-touch merchandising

26. Packaging Plays an Important Role in Reducing Costs
Share of Unsaleables (By Type)
Source: The Impact of Sales & Procurement on Reverse Logistics Management, GMA/FMI 2010

27. Looking Ahead What are the Implications for Packaging?
ABCs show there is no room for waste, we have to continue to tackle this $2.5B industry opportunity
Need to improve packaging materials
Need to reconsider case pack size changes
Increasing pressure to reduce inventory
Leverage to grow in alternative channels
Discontinued Out-of-Code
Unsaleables Trend
Source: The Impact of Sales & Procurement on Reverse Logistics Management, GMA/FMI 2010

28. Average Grocery Store Inventories Dollars on Shelf
Avg. Inventory $ in Food/Drug Supermarket
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

29. Average Grocery Store Days-of-Supply
Avg. Days-of-Supply Across Food/Drug Supermarket
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

30. Average Grocery Store Days-of-Supply
High DOS Grocery Categories in Typical Food/Drug Supermarket
Typical Grocery POGs are Developed Based on 7 DOS
Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

31. Looking Ahead What are the Implications for Packaging?
Need to plan for increasing use of front-facing fixtures
Increasing pressure to reduce labor costs
Eliminates afternoon pulls but, often increase damage
Need to plan for more retail-ready handling
Full pallets, half pallets, shippers, trays, etc.
Increasing use of shopper insights will drive more shelf changes and packaging will need to keep pace

32. Damaged Packaging Research

33. Unsaleables Background
Unsaleable products cost the food industry $15 billion annually
Average unsaleables rate is .8% of gross sales for food manufacturers and 1.2% of gross sales for food retailers
While these costs are significant, they are only part of the story
Substantial resources associated with managing, handling, transporting and reclaiming these products
Reproducing the wasted food has a major environmental and economic impact
Product packaging is a major component of unsaleable products
Increasing use of “eco-friendly” CRB packaging
Certain packaging configurations simply cannot withstand the stress of the supply chain, resulting in increased damage rates
Given the financial implications to manufacturers and retailers, MWV regularly conducts research to understand how material selection affects product damage
Other possible causes of unsaleables could be expired products or discontinued items
MWV is focused on becoming a subject matter expert in this area
Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

34. Research Process Three different testing methods employed
GENCO’s Damage Research Team
Physical testing of products at Michigan State University
Perception Research Services
110-year, privately held, non-asset based company
2007 Gross Revenue ~ $712 Million
125+ operations throughout U.S. and Canada
6,700+ award winning teammates
Suite of supply chain visibility and data analysis tools
Formal process to provide initial and ongoing value
The leader in Reverse Logistics
Damage Research & Prevention
Pharmaceutical Returns processing
Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

35. Paperboard Packaging 101 Three different testing methods employed
Physical testing of products at Michigan State University
GENCO’s Damage Research Team
Perception Research Services
110-year, privately held, non-asset based company
2007 Gross Revenue ~ $712 Million
125+ operations throughout U.S. and Canada
6,700+ award winning teammates
Suite of supply chain visibility and data analysis tools
Formal process to provide initial and ongoing value
The leader in Reverse Logistics
Damage Research & Prevention
Pharmaceutical Returns processing
Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

36. Performance materials
Solid Bleached Sulfate (SBS)
Bleached paperboard for use in packaging and printing applications
Aseptic board for non-refrigerated food and beverage packaging
Specialty paperboard for food and healthcare applications
Premium coated liner and bleached display liner for corrugated boxes
Uncoated board for use in foodservice and office products

37. Performance materials
Coated Unbleached Kraft (CUK)
Used in beverage multi-packs, food folding cartons, and filter frames
Superior wet tear strength substrate for beverage packaging
High strength folding cartonboard with a smooth printing surface engineered for demanding markets such as frozen foods

38. Performance materials
Coated Recycled Board (CRB)
Lowest cost per ton of any substrate
Mostly used for dry foods (cereal, crackers, cookies, etc.) and applications that don’t require high strength requirements. Occasionally used in frozen food applications.
Perception of sustainability since made with 100% recycled content

39. Study Scope
Purpose: Document the percentage and types of damage of various substrate materials at Gulf Coast retail store outlets
CNK, CRB, SBS, SUS
100 retail stores across multiple chains
Gulf Coast United States
28,000+ packages inspected
Retailer
Store Count
Wal-Mart 22
Winn-Dixie 20
Publix 17
Albertson’s 11
Market Basket 8
Target 5
HEB 4
Kroger 3
Adriens Supermarket 1
Brookshire Brothers
Calandros Supermarket
Food Lion
Le Blancs
Mathews Supermarket
Piggly Wiggly
Rouses Market
Save A Lot
Sweet Bay
TOTAL
100
Baton Rouge, LA
Tallahassee, FL
New Orleans, LA
Port Arthur, TX
Corpus Christi, TX
Gainesville, FL
Lake Charles, LA

40. Study Findings

41. Total crushed and open units
Damage Rate By Material Type
Material
Units Inspected
Crushed Units
Open Units
Total crushed and open units
Damage Rate
CUK 1
3,255 4
0.13%
CRB
5,265 22 6 28
0.53%
SBS
11,202 21 14 35
0.32%
CUK 2
8,566 8 11 19
0.22%
TOTAL
28,288 55 31 86
0.31%
100% of the units on the shelf were inspected

42. In-Store Damage Research
GENCO Supply Chain Solutions is a third party logistics company
Leader in Damage Research & Prevention
MWV commissioned a study in June of 2009 to assess damage frequency
Examined over 28,000 frozen food packages in 100 retail stores
Encouraged by our findings with Michigan State University, we wanted to test our performance in real world conditions
The 2009 study was a follow up to our initial Genco research that took place in 2005; 2009 study added CRB and reinforced our initial findings on the other substrates
Product packaged in CRB is 4x more likely to suffer damage than Custom Kote

43. Freeze-Thaw Compression Strength
MWV commissioned the research with Michigan State University in 2005
Compression strength is the ability of a carton to hold its shape and form
For food manufacturers, this translates into how well the paperboard used withstands freeze-thaw moisture
Started our research several years ago in the academic arena
Tested 50 identical carton samples
Frozen peas evenly distributed throughout the cartons, avoiding concentrations of frozen material or large air pockets
Each carton subject to one-hour of freezing at 0º F followed by 30 minutes thawing at 72º F – five cycles
Peak Force (lbs)
Custom Kote retains 46% of its original strength; CRB retains only 27%

44. Damaged packaging diminishes brand and retailer trust
Consumer Behavior
MWV commissioned a study with Perception Research Services
Independent research firm that utilizes a variety of techniques to understand shopper’s perception of damaged products
Findings
75% of shoppers will push a damaged package aside
If a slightly damaged package is the last one on the shelf, 45% will leave the brand and 29% will buy another brand
If a highly damaged package is the last one on the shelf, 55% will leave the brand and 36% will buy another brand
For competitive shoppers, “Brand you trust” perception drops from 73% to 41% with even slight damage
25% of the most brand-loyal shoppers question the safety of the product when the package is only slightly damaged
72% viewed the retailer displaying damaged packaging as offering lower value products than their competitors
MWV has gathered lab and store information, but we wanted to understand the impact of damaged product on the shopper
PRS Techniques include eye tracking technology, behavioral observations and surveys
Damaged packaging diminishes brand and retailer trust

45. Research Summary
Michigan State study revealed that MWV's Custom Kote has a significant compression strength advantage over competitive products in a freeze thaw environment
Genco Unsaleables Study found that Custom Kote is 4x less likely to be damaged than products packaged in CRB
Perception Research Consumer Behavior study confirmed that damaged products have a quantifiable impact on the shopper and their perception of the brand and the retailer
MWV’s Custom Kote is the benchmark packaging material to help protect against the lost sales and diminished trust associated with damaged packaging