1. THE CASE FOR SMALL STORE FORMATS Presented by Dr. David Rogers DSR Marketing Systems Inc. E-MAIL: dsrms@sbcglobal.netdsrms@sbcglobal.net Presented at The 2014 Gravitec Development Conference Clearwater Beach, FL May 8, 2014 COPYRIGHT 2014. DSR MARKETING SYSTEMS INC. 1

2. WHAT ARE WE DISCUSSING? Small grocery store formats 8,000-25,000 sq. ft. (total area) Update from 2009 Gravitec Conference. 2

3. WHAT ARE WE DISCUSSING? (cont’d) Two (2) main genres of small formats:- 1.Gourmet/Natural/Organic/Perishables 2.Limited Assortment Stores But also “Blended” small store formats. 3

4. GOURMET/NATURAL/ORGANIC/PERISHABLES Balducci’s Earth Fare Fresh Thyme Lucky’s Market Mrs. Green’s Natural Grocers by Vitamin Cottage New Seasons Sprouts The Fresh Market Trader Joe’s 4

5. LIMITED ASSORTMENT STORES Aldi Grocery Outlet Lidl?(not yet!) Ruler Save-A-Lot Valuland 5

6. BLENDED FORMATS Bottom Dollar Dollar General Market (?) PriceRite Smart & Final Walmart Express 6

7. SMALL STORE FORMAT POSITIONING Higher Pricing Balducci’s Earth Fare Mrs. Green’s New Seasons The Fresh Market Natural Grocers/Vitamin Cottage Trader Joe’s Walmart Express Fresh Thyme (?) Henry’s Lucky’s Market Sprouts Lower Pricing Aldi Dollar General Market Grocery Outlet Ruler Bottom Dollar Save-A-Lot Valuland PriceRite Limited SelectionWider Selection Perishables Selection 7

8. RECENT GROWTH Together with Supercenters, they are the growth formats in the U.S. supermarket industry. Accounted for 61% of the net growth in new grocery stores, 2007-12. But the picture is “clouded” by Whole Foods. Progressive Grocer data: 2007-2012:- 8

9. STORES BY FORMAT: 2007-12 Format20072012Change Conventional26,83226,791 -41 Supercenter3,0383,861 +823 Limited Assortment2,3493,088 +739 Natural/Gourmet2,1992,650 +531 Warehouse457487 +30 Commissary172176 +4 TOTAL34,96737,053 +2,086 Clubs1,1521,261 +109 9

10. SALES BY FORMAT: 2007-12 ($bn) Format20072012% Change Conventional357.5401.8 +12 Supercenter141.7148.4 +5 Limited Assortment11.015.2 +38 Natural/Gourmet17.728.5 +61 Warehouse3.33.8 +15 Commissary4.24.8 +14 TOTAL535.4602.6 +13 Clubs101.5122.3 +20 10

11. SUPERMARKET SALES BY FORMAT, 2012 Format # Stores % Sales % Conventional26,79172401.866.7 Supercenter3,86110148.424.6 Limited Assortment3,088815.22.5 Natural/Gourmet2,650728.54.7 Warehouse48713.80.6 Commissary176+4.80.8 TOTAL37,053100602.6100.0 11

12. LAS MARKET SHARES: INTERNATIONAL COMPARISONS % Market Share 20072012 Change Germany35.534.8-0.7 CanadaN/A36.0N/A U.K.4.86.9+2.1 USA2.12.5+0.4 12

13. REASONS FOR CONTINUED GROWTH Demographic trends Aging of the population (distaste for large stores). Increased attractiveness of urban living (the “new urbanism”). Large stores less feasible/necessary. Smaller households. Less need for product selections. 13

14. REASONS FOR CONTINUED GROWTH (cont’d) Lifestyle/social trends Increased health concerns, problems > natural/organic/ perishables stores. Increasing time pressures/disorganized lifestyles > more quick, fill-in trips. Favor small formats. Concerns about food deserts in deprived areas. 14

15. REASONS FOR CONTINUED GROWTH (cont’d) Income trends Falling real incomes > multi-store shopping patterns. Favor LAS and other price formats. Cuts in SNAP and Unemployment Benefits programs. High gas prices dissuade long trips to large Supercenters. 15

16. REASONS FOR CONTINUED GROWTH (cont’d) Competitive factors/opportunities Low standards/unhealthy image/male shopper orientation of U.S. c-stores. Mediocre perishables standards (and high prices) of many conventional supermarkets, e.g. Dominick’s “Fresh” stores. “Convenience” competition – for female shoppers - from Drug and Dollar stores > forcing response. 16

17. REASONS FOR CONTINUED GROWTH (cont’d) Online Retailing Online is reducing non-food margins which are key to Supercenter economics, e.g. Carrefour, Tesco Extra. Online is also reducing attractiveness of large stores which offer wide - but never comprehensive - product selections….the Big Box Category Killers from the 1980’s are dying. Online growth favors small store formats as pick-up points. 17

18. REASONS FOR CONTINUED GROWTH (cont’d) Real estate issues Environmental/traffic/zoning resistance. Especially to Walmart. Favors small stores. Continuing real estate glut providing easy, lower cost development opportunities for small formats. Book, consumer electronics, music, office, toy sectors are being decimated by Online retailing. End of the Big Box Category Killer era. 18

19. BUT IMPORTANT CONSTRAINTS Limited selection > inconvenience of extra stop. Small formats need powerful, positive image differentiation on one or more key dimensions for success….targeted offerings. Many are also highly targeted demographically. Therefore, vulnerable to inadequate/weak site research. 19

20. IMPORTANT CONSTRAINTS (cont’d) Many failures (Fresh & Easy, Fresh Market closures, Jewel’s Urban Fresh, Walmart’s Marketside, Mrs. Green’s, Planet Organic). Typical of new growth concepts, e.g. Clubs in the 1980’s- 1990’s. Inadequate operational disciplines have hurt many small formats – especially domestic LAS ventures. 20

21. IMPORTANT CONSTRAINTS (cont’d) Excessive SKU’s > inflated labor costs > inadequate price differentiation. Small stores have limited sales volumes and fragile economics. Lower volumes and profits per store have encouraged excessively fast rollouts and “corner-cutting” on Site Research. Reinforced by naïve senior management perceptions of lower investment risks per store. 21