1. US Grocery Retailing: Who Grows and Why?
Presented by:
John Rand, Senior Vice President
Alida Destrempe, Senior Analyst
Grocery Retailing Webinar Series January 30, 2014

2. Copyright © 2014 Kantar Retail. All Rights Reserved.
501 Boylston Street, Suite 6101, Boston, MA (617) No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photography, recording, or any information storage and retrieval system now known or to be invented, without the express written permission of Kantar Retail. The printing of any copies for back up is also strictly prohibited. Disclaimers The analyses and conclusions presented in this seminar represent the opinions of Kantar Retail. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion. This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.

3. Today’s Agenda
The Year Ahead
Looking in the Mirror: H-E-B & Kroger

4. Trend: Growth No Longer Comes from Large, Efficient Players
Top 20 Supermarket Retailers:
account for 94% of sales added from 2013E-2018E
Source: Kantar Retail analysis; company reports

5. What Has Changed? Who dropped off the list?
Safeway, Sprouts, Stater Bros.
Safeway fell to 73 ranked by sales added between 2013E-2018E
Sprouts is now listed at 21. Sprouts has yet to make an appearance on Kantar Retail’s top 20, but continues to move “up the list.”
Stater Bros. dropped to the 24th spot. It was previously in 19th.
Who is ‘new’ to the Top 20?
Both Top’s Market and Demoulas Market Basket are making their first appearance on the list.
Supervalu jumped back onto the Top 20 after falling off pre-divestiture.
Both Kroger & Walmart have held the #1 and #2 spot in the last few years.
Source: Kantar Retail analysis; company reports

6. Supermarket Diffusion Still Underway
Grocery channel continues to fragment into retailers that understand they have a targeted shopper and a brand and have made decisions accordingly
the only way you succeed is to stand out in the crowd
you need to know who you are and who you serve
Source: Kantar Retail analysis

7. Hybrids Proliferate in Diffused Retailing
Source: Kantar Retail analysis

8. Fragmentation & Differentiation Becoming a Trend
The market is more different than most companies realize
Many efficiency strategies (production, trade spend, customer investment) are grounded in the 20th Century
Fragmented markets + standardized programs = significant competitive gaps
If we hope for a more balanced customer environment, this is good
Simply put, there’s more variation in retailers’ go-to market strategies than in the CPG community
Do NOT concentrate resources on a few key customers. Simplistic approaches are flawed and do not match marketplace reality.
Source: Kantar Retail analysis

9. One Thing is Clear
Retailers with a clear brand outgrow the market #1 #2
Natural/
Organic
Value
‘13E-’18E CAGR =
9.2%
‘13E-’18E CAGR =
7.5% #4 #3
Premium
Clubs
‘13E-’18E CAGR =
5.4%
‘13E-’18E CAGR =
6.3%
Source: Kantar Retail analysis

10. How to Make Sense of it All?
Advanced, stable, pre-transitional
Expected to lead financial growth within the industry.
Retailers that have a clear brand message and strong understanding of its shoppers.
Thought leaders with strong and consistent execution of strategies.
Example: Kroger, H-E-B
Advanced
Retailers that are not at immediate risk, but have gaps in either or both execution and strategy.
Competent retailers that are relevant, but have a less clear and coherent shopper base.
Steady outlook for growth in line with the channel.
Example: Ahold, Giant Eagle
Stable
Pre- Transitional
Retailers that are troubled and are expected to have difficulty sustaining growth in (minimal to low growth or decline)
Inconsistent execution of strategies and/ or lack ability to leverage shopper understanding.
Example: Safeway, Delhaize US
Source: Kantar Retail analysis

11. 2014 Grocery Channel Trends: Rise of New Markets

12. The Windy City: Chicago
Loss of Safeway creates new opportunities +4
Source: Kantar Retail analysis; Chain Store Guide Market Share (2012)

13. Texas: Where the Big Keep Getting Bigger
Dallas is probably the next major market for H-E-B.
Aldi opened stores aggressively in 2013.
Kroger outlined that Dallas will be a “fill-in” market for 2014.
Growing footprint of Neighborhood Market
Entrance of WinCo
A home to specialty retailers
Opened distribution center
Growth from the “unfamiliar”
H-E-B experimenting?
Hello! WinCo
Core market for Neighborhood Market
Source: Kantar Retail analysis; company reports

14. Mid-Atlantic/Southeast Market
The regional grocer fight
Publix continues to move North
Delhaize making changes to Food Lion
Harris Teeter will be part of Kroger
Continued pressure from Walmart
6,000 items
HeraldOnline.com

15. Competition Heating Up!
Most chain retailers have achieved competitive scale
Critical skill for most retailers will be to grow store sales, built by:
Making stores more effective and putting emphasis on remodels and revamps
Maintain & drive traffic through loyalty, marketing, and relevancy
Competitive pricing depends on competitive efficiency
Retailers need help in understanding where and why their shoppers go to another retailer
Source: Kantar Retail analysis

16. 2014 Grocery Channel Trends: Health & Wellness

17. Focusing on “Eating Well & Being Well”
The message attached to services is more important and will play a larger role in overall store brand, marketing, and merchandising.
Fit
Pharmacy
Food
Source: Kantar Retail analysis; store visits

18. Shelf tags to Shopper insights
A Guide to Eating Right
Leveraging its core purpose: food
Shelf tags to Shopper insights
Source: Kantar Retail analysis; store visits & materials, retailer websites

19. A Resource to Managing Needs
Leveraging the pharmacy business
Shoppers can discover the convenience of having a grocer prepare their ‘scripts while they shop for groceries—and retailers can gain a lot of traffic and basket
Suppliers that play in the HBA and Rx spaces should take notice
How can your items play off of the pharmacy/OTC/HBC departments?
Source: Kantar Retail analysis; store visits & retailer websites

20. Completing the Health Package
Handling the diet plus the exercise
What we have seen……
Source: Kantar Retail analysis; company websites; HealthyAlbany.org, TimesUnion.com

21. Health & Wellness Conclusion
H&W trends may allow supermarket retailers to become a provider, a resource, a guide, but most importantly...
An Editor
Source: Kantar Retail analysis; store visits

22. 2014 Grocery Channel Trends: Digital Development & Price Pressure

23. Digital Development
Enhancements and changes to current digital strategies
Will present new and more marketing opportunities
Leveraged to create engagement and capture the shopper
Websites will become an integral part of pre-trip planning (recipes, solutions, find savings, organizing the trip, etc.)
Expect more retailers will launch online shopping initiatives.
more engagement
new marketing
more online
Source: Kantar Retail analysis; company materials

24. Continued Price Pressure
Clarity of value to shoppers will be a must
Digital may push retailers to personalized pricing.
Maintaining price leadership will drive retailers to offer more stable prices, especially in a world where shoppers have gained ongoing price transparency.
Conventional retailers “in the middle” (not premium, nor value) will continue to feel squeezed and have a harder time with growth.
Source: Kantar Retail analysis; company materials

25. Digital Impact: 100%
Even if you don’t sell much online (today), the impact extends well beyond eCommerce
Source: Kantar Retail analysis

26. A Committed Change in Strategy Could be Beneficial
The era of the dominant promotion is ending
Variety of retailer pricing models emerging:
Intensified EDLP
Limited assortment
- Margin (Dollar, Convenience)
- Velocity (Club, Limited Assort. Grocery)
Dominant depth
- Category specialists
“Match and Switch”
“KVI & Draft”
Identify key value items to be at/near price leader on
Hybrid pricing strategies trending toward EDLP are foundational in a world where shoppers have gained ongoing price transparency
Source: Kantar Retail analysis

27. Looking in the Mirror: Kroger vs. H-E-B

28. Continued Financial Success
Strong outlook and growth
Supermarket Sales (includes sales from only supermarket formats)
1st
5th
Source: Kantar Retail analysis; company reports

29. What Are the Drivers of Performance?
Goes Deeper Than Supply Chain, Strategy, etc.
Purpose
Process
Outcome
New stores, new formats, loyalty program, great prices, SHE stores, Urban Fresh, supply chain, etc., etc., etc.
EBITDA (service the debt)
Shareholder value (stock price, dividends, etc)
Marginal sales gains, protracted traffic loss
Divestiture of banners
Shopper satisfaction/loyalty
Well run, attractive stores with good prices
Basket/wallet share growth
Strong sales, maintained traffic, increase loyalty
Well run, attractive stores with regional elements and good prices
Source: Kantar Retail analysis

30. The Importance of the Corporate Culture
Helps define a company’s success
Rodney McMullen
CEO since January 2014
President/COO since 2009
EVP – Strategy, Planning & Finance since 2000
GVP and CFO in 1995
Multiple planning & finance rolls since 1989
Joined the company in 1978 as a part-time stock clerk
Charles Butt
CEO since 1971
Third generation grocer
Started as a bag boy at age 8. H-E-B was founded by his grandmother in 1905.
Source: Kantar Retail analysis; kroger.com

31. What Role Does Culture Have in Performance?
What is “culture”?
It’s the manifestation of the retailer’s purpose in people’s actions/behaviors
The retailer’s internal “brand”
Roots in company’s history/ownership
Culture and performance are inextricably linked
Source: Kantar Retail analysis

32. Ownership has a Huge Impact on Retail Metrics
Not What is Tracked, But What is Important
How a company is owned is important to any industry
But in retail, there are some key factors that come into play to be considered
Sweat Equity – Low Threshold of Entry
Pervasive Customer Interaction
High Cash Flow to Profit Ratio
High Capital Investment – Fixed and Fluid
Intense Competition
What do you think will be the major factors influencing H-E-B’s & Kroger’s growth over the next months?
Source: Kantar Retail analysis

33. Differentiated Format Development
Square footage
Targeting:
Cater to different trips
Each offer different baskets
Aimed at certain shopper demographics
…and more
Source: Kantar Retail analysis; store visits, retailer websites, HoustonChronicle

34. Both Growing Store Footprint
Expansion plans in the making
Dallas
“H-E-B has been considering stores in DFW for roughly 15 years and it continues evaluating the market.” ?
Year-to-date = $1.8 billion in capital investments
-Leslie Sweet Director of Public Affairs, HEB
Growth to
fight competition
Dallas
Expand in “fill-in” markets:
Source: Kantar Retail analysis; company reports

35. Overall Success Driven by Profitable Stores
Sales per average square foot
sales/ avg. sq. ft.
Forecast
Source: Kantar Retail analysis; company reports

36. At Store Level Greater sophistication as means to capture trips
Entertainment through live demonstrations, taste testing
Interactive elements
Educational signage
Highlighting merchandise
Source: Kantar Retail analysis; store visits

37. Work Hard to Convey Value
% at Presence who think the brand costs more than they are prepared to pay
Source: Kantar Retail analysis; BrandZ and store visits

38. Offset Margins One Way or Another…
KVI’s vs. Price Comping
Premium loyal customer appeal, Basket driver, Trip driver, Item affinity, Item uniqueness, Shopper price elasticity
Known Value Item:
Get the price “right” with these SKUs
Non-KVI:
Take margin and profit with these SKUs
Inputs
Match
Comparable
Price Comping
Unique Economics
Real Estate
Increase Non-Comparable
Captive Branding
Analysis Criteria
Actions
Source: Kantar Retail analysis

39. Pricing Strategy Execution
Price investments maintain sales momentum
Comps EVERYONE
KVI
Multiple saving opportunities
Draft
Not just a campaign, H-E-B price comps against out of market players as a strategic initiative also
ETC….
Source: Kantar Retail analysis;

40. Understands Regional Staying relevant in local markets
Source: Kantar Retail analysis; store visits and retailer websites

41. Similar Challenges With every “up” there is a “down”
Online/digital efforts.
Increase of competition.
“Comping” the prior year performance will become more difficult the more successful you are.
Increasing demand for brand clarity in a diffused market.
Source: Kantar Retail analysis

42. Summing Up H-E-B & Kroger
H-E-B & Kroger have several characteristics which set both apart from the rest of the channel
Both have considerable scale, but H-E-B is still very much a regional retailer, whereas Kroger “reacts regionally.”
Both are showing impressive growth despite the recession and competition from leaders like Walmart and outside of grocery channel
No fear of Wall St.:
H-E-B is a family owned retailer which frees it from Wall St. pressure, but can make it challenging to work with
Though public, Kroger has cares more for shopper value than shareholder value
Both demonstrated competency at leveraging multiple capabilities at the same time, which can increase complexity
Both have sophisticated marketing capabilities and a clearly defined brands
Source: Kantar Retail analysis

43. John Rand
Senior Vice President T: M:
Alida Destrempe
Senior Analyst T: