US Grocery Retail Perspectives


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Wilson Perumal & Company's point of view on retail trends in the U.S. Grocery market

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US Grocery Retail Perspectives

  1. 1. Wilson Perumal & Company Grocery Retail: Perspectives October 2013
  2. 2. Introduction and Background • 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 go 2. Race to Omni-Channel impeded by execution issues 3. 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 *For further information on Wilson Perumal & Company, see Appendix 2, pg 35 Wilson Perumal & Company, Inc. 2
  3. 3. Five key themes that are shaping the industry Grocery retail trends Pages 1 Localization a “must-do”; question is what scope/how far to go 4-5 2 Race to Omni-Channel impeded by execution issues 6-7 3 As traditional promo strategies fail to drive lift, need for innovation in promotions + promotional efficiency increases 8-9 4 Big Data “arms race” means that many personalized offerings are now expected and for free 10-11 5 Contraction of grocery chains requires revised operating model 12-13 Additional trends and Appendix on supplemental data 14-47 Source: WP&C Retail and CPG research and analysis Wilson Perumal & Company, Inc. 3
  4. 4. 1 Demographic shifts increasingly apparent... Trend: Implications: Race/ethnicity and age mix changes rapidly, and it is not equally geographically distributed Demographic trends require extensive localization from retailers Percent of total population 54 2012 2035F 17 White & Oth 12 Hispanic 13 5 Afri. Amer. 6 Asian 2 3 Mixed $ Share of food spend • Develop differential pricing • Understand customer segments willingness to pay; lead customers towards high-margin products • Plan promotions effectively to meet target audience’s needs 20.0% Asian 10.5% 70.2% 10.5% Afr. Amer. 62.5% Hispanic 7.0% 2012 Footprint & format White & Oth 14.0% 5.3% • Offer products to local demand • Re-assess price and promote linkages between products • Re-select flag-product lines to ensure stock availability 23 Pricing 64 Product Range Population by race and ethnicity (2012, 2035F) • 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 change 2035F Source: Nielsen consumer reports; US Census Bureau; Euromonitor report 2012; WP&C Analysis Wilson Perumal & Company, Inc. 4
  5. 5. …Prompting retailers to determine degree and scope of localization 1 Our Perspective/Approach: Scope of Localization1 Degree of localization • • • • Economies of scale Simple supply chain Easier to manage No additional CapEx Standardization • • • • Increasing complexity and cost Unique clusters • No localization or • Each cluster receives clusters, same a standard product offering in every store offering (same offering for all stores in each cluster) • Localization vs. Scale1 Core / clustered • Set a basic or core offering (i.e. 80%) carried in all stores • Vary remaining offering (i.e. 20%) in clusters Core/clustered / localized • 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 Few economies of scale Complex supply chain Hard to manage Large CapEx required True localization • All stores have their own unique offering 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 1. Additional approaches to localization (scope & scale) are in the appendix to this presentation Wilson Perumal & Company, Inc. 5
  6. 6. 2 Online channel grows rapidly, creating opportunity and challenges… Trend: Implications: Online grocery sales continue to grow rapidly, driving leading grocers to invest in the sector 2% Emerging opportunities for grocer in the online space… Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012 $6 billion Revenue generated by online US. grocery sales in 2012, with expected 12.1% growth to 2016 • Selling extended range • Increasing reach to new customer segments • Focused marketing efforts: personalized offering and promotions • Improving cross-selling well as new challenges 1,620 • Developing a profitable operating model Number of online grocery businesses in 2012 • Facing channel and product cannibalization 55+ Age group that buys the most groceries online, accounting for 24.5 percent of purchases • Developing consistent positive customer experience $175 • Stock management (balancing holding costs, waste, stock availability, etc.) Average order size of pure-play UK-based Ocado amongst its 360K active customers’ base Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites • Ensuring strategy, organization and operational coherence across channels Wilson Perumal & Company, Inc. 6
  7. 7. 2 …requiring greater omni-channel integration and coherence Our Perspective/Approach: In today’s increasingly complex marketplace, retailers must prioritize coherence Strategy Execution Customer Sources of Complexity Offering Channel Market Process Output The Challenge & Opportunity Pace of change Strategy & execution coherence • Align processes to effectively exercise strategic goals across silos Growing product lines Customer & portfolio coherence • Optimize mix of private label & branded • Localize assortment by region Channel marketing Channel coherence • Align marketing initiatives across channels • Align pricing & promotional strategy Fragmented supply base Supply chain coherence • Balance supply chain risk vs. cost • Optimize waste vs. out-of-stock Wilson Perumal & Company, Inc. 7
  8. 8. 3 Traditional promotional levers are not driving the same level of lift previously achieved… Trend: Implications: Promotion effectiveness reduced due to complexity of increasing channels Grocery retailers are spending significant time/resources on ineffective promotions • 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 Promotion1 Average Unit Lift (%) by Department 139 128 119 123 2011 2012 114 96 Dry Grocery 93 HBC 91 90 Frozen Dairy Non-Food GM Case example: Avg. promotion uplift/week 4 month period2 % sales uplift units 136 122 120 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 110 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 % of promotional SKUs 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, Wilson Perumal & Company, Inc. 8
  9. 9. 3 …putting more pressure on identifying new promo innovations + efficient execution Our Perspective/Approach: Promotion Check-Up The right promotions for the right segments… • How well do promotions meet the needs of the customer? • What is the expectation around promotion lift for product and basket? 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? HIGH ? Where we want to be LOW ? ? LOW Effectiveness • How well do promotions meet their strategic goals? HIGH Efficiency …done the right way • 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? Wilson Perumal & Company, Inc. 9
  10. 10. 4 Personalized, value adding extras are becoming expected services… Trend: Implications: Grocery retailers are providing more personalized customer experiences to combat intense price competition Consumers are becoming increasingly accustomed to direct communication1 – 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 – Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery 55% 43% Use my prior purchasing to offer me promotions Use my prior purchasing to recommend new products 43% 36% Invite me to events Involve me in new product ideas Grocery retailers have more access to consumer info than ever before2 35% 36% 34% 2012 31% 2013 – Hyper-local advertising, the ability to target customers by location, is on the doorstep 11% As more companies employ these services, they will become expected rather than value added extras Websites Email 14% 10% 11% 8% 11% 7% 9% Social Group List/Notes Mobile Networking Buying Function App. Sites on Phone 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 Wilson Perumal & Company, Inc. decide to buy?. The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Source: WP&C research and analysis, 10
  11. 11. 4 …just as Big Data capabilities enable new levels of insight, value, and personalization Our Perspective/Approach: Evolution of Big Data trends… …Lead to new opportunities More data Better predictive analytics Exponential growth in customer data from online interactions and loyalty cards More effective advertising and service delivery strategies Better tools Deeper Data Mining Reduced storage/processing costs, and better analytics tools allow mining of more data Suggests further cross-sell, up-sell and new product opportunities Improved access Tailored promotions/cust. experience Multi-faceted view of customer available from multi-channel interactions & data vendors Individual level initiatives maximize sales and customer satisfaction Easier testing Accurate future value estimates Simple experimentation allows retailers to test customer responses Accurate customer future values aid customer acquisition and retention efforts Source: WP&C analysis Wilson Perumal & Company, Inc. 11
  12. 12. 5 As industry contraction and consolidation continue… Trend: Implications: Share of traditional formats continues to shrink , but with slightly lower pace $ Share by Store Format: 2012-2017F $1.113T $1.249T Contraction/consolidation has direct impact on operating model… 53.5% 46.5% 55.0% 45.0% Non-Traditional ’12 • Supercenters 17.3% • C-Stores 14.9% • Wholesale Club 8.7% • Drug Stores 5.4% • Dollar Stores 2.4% • Other Non-trad. 4.9% ’17F 18.2% 16.0% 9.0% 5.5% 3.1% 3.2% Traditional • Supermarkets • Ltd. Assortment • Fresh Format • Other Traditional 36.5% 3.4% 2.1% 3.0% 39.8% 2.7% 1.1% 2.9% 2012 2017F Heightened consolidation/contraction of chain size and change of ownership in 20131 • • • • 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 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 Wilson Perumal & Company, Inc. 12
  13. 13. 5 … retailers facing new challenges in revising operating models & integrating acquisitions Our Perspective/Approach: Pre-integration Structured & strategic approach to integration will shorten timeline and smoothen transition Non-value add Value add 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 Post-integration During the migration or integration of stores and back-end processes, complexity can arise exponentially unless carefully managed 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 The Complexity Cube Organization Product Complexity is: Number of products and services you offer Too much • Unwanted prod. complexity • Cust. confusion is bad: • Poor service Process Organization Number of Number of processes, steps, h assets, facilities, e andoffs, etc. ntities, partners, e tc. • Duplication • Disarray • Rework • Confusion • Work-arounds • Functional silos Wilson Perumal & Company, Inc. 13
  14. 14. Additional trends in the grocery retail space to consider Industry Trend Description Operational Fragmented, global supply base Narrow margins force the continued optimization between cost, risk, and speed/flexibility in supply chain operations Range growth In an effort to reach new segments, grocers continue to expand SKU ranges, often without control processes in place Preparing for mobile commerce Consumer Blurring across sectors New challengers (e.g., Dollar, Convenience, Drug, Online stores) enter the market while traditional grocers also expand (e.g., prescriptions) Both consumers and grocery retailers are preparing for the new wave of mobile commerce. As demand increases, business flexibility will be critical Trust in private label Nearly all consumers buy private label products when grocery shopping2. As quality to improve, trust in PL brands will grow Influence of social media 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 1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013, 2) Market Force Information Wilson Perumal & Company, Inc. 14
  15. 15. 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? Wilson Perumal & Company, Inc. 15
  16. 16. Contact Us: North America Europe Two Galleria Tower 13455 Noel Road, Suite 1000 Dallas, TX 75240 Longcroft House 2/8 Victoria Avenue London, EC2M 4NS +1 972-716-3930 +44 (0)203 206 1496 Stephen Wilson Ann Bryan Asaf Navot Steve Liguori
  17. 17. APPENDIX 1: Additional data and analysis by trend APPENDIX 2: Wilson Perumal & Company background
  18. 18. 1 Localization of stores is a “requirement” now, the question is how much localization is right Trend: Company Example: • Localization is a retailer’s norm nowadays. Customers expect local offerings with local marketing & local supply chains – Younger generation values speed & healthiness; Higher income/more educated value a premium experience, from knowledgeable staff to wide product selection – Consumer demographics are changing, and so are localization requirement—it needs to be dynamic • Localization has moved beyond rule-based assortment planning to “Shopper Data” localization. Localization decision should be strategic and data-driven, but not IT-driven • Retailers struggle to create the right level of localization and how to make it dynamic Source: WP&C press search and experience drawn from previous work with retailers on localization Kroger is still ahead of the localization game—maintaining over 20 grocery banners, Kroger was able to cater to local market needs “Increasingly you are going to hear us talk about the concept of localization and how important that is to our future going forward.” -Robert Edwards, President and CEO Safeway (Jul 2013) Walgreens’ localization strategy called “mass localization” uses cluster-based approach (since it has 7,000+ stores). This has led to 160 different planograms Wilson Perumal & Company, Inc. 18
  19. 19. 1 Demographic shifts become increasingly apparent US population by age and sex (2012, 2035) Age (years) 2012 Population continues to age… • The population above age 65 is expected to grow by 92% by 2035 – In 2056, the older, 65+ is projected to outnumber the young, under 18, for the first time in U.S. history • Share of working-age (18 to 64) expected to decline from 63% to 57% by 2035 2035 Population by race and ethnicity (2012, 2035) Percent of total population 64 2012 54 2035 17 23 12 13 5 White & Oth Hispanic Source: US Census Bureau, WP&C analysis Afri. Amer. 6 Asian 2 3 Mixed …while race and ethnicity mix change rapidly • The Hispanic population expected to grow by 63% in 20 years, from 53.3M in 2012 to 87M in 2035, and more than double to 128M by 2060 • Projections show the older group would continue to be predominately non-Hispanic white, while younger ages are increasingly minority Wilson Perumal & Company, Inc. 19
  20. 20. 1 Growing demographics not equally distributed… Changing demographics is more evident in certain areas… 2011 U.S. Hispanic % of designated market area Geographic variation emphasizes the need for localization of stores Source: Nielsen report Wilson Perumal & Company, Inc. 20
  21. 21. 1 …and currently have higher grocery spending White Asian Afr. Amer. Hispanic Changing weight of overall spend Share of food spend - 2012 14.0% 10.5% 5.3% 70.2% #Shopping trips/HH/yr 149 152 167 142 $ per trip $47 $46 $37 $52 Total $ spent/yr $7,003 $6,992 $6,179 $7,384 Interesting shopping characteristics Caucasian women purchasing decisions in store are influenced by promotions more than any other group Bring home far more produce, nuts, dried fruit, pasta, yogurt, soup, juice, and drinks compared to US avg. 31% of purchase on deal are bought by Asian Frequent dollar stores, c-stores, more than other groups Spend more on categories which include baby products, hair care, toiletries, and beverage Forecasted share -2035 20.0% 10.5% 7.0% 62.5% White & Oth Afr. Amer. Asian Hispanic Basket analysis of purchase categories by ethnicity is part of localization planning Source: Nielsen consumer reports, Euromonitor report 2012; WP&C Analysis Wilson Perumal & Company, Inc. 21
  22. 22. 1 Demographic trends require extensive localization value proposition from retailers Required activities from retailers Product range • Adjust product offering to local demand • Understand linkages between products to better price and promote • Adjust choice of flag-product lines to ensure stock availability • Extend growing demographics’ preferred product groups (e.g. for Hispanics: dried vegetables, baby products, etc.) • Adjust product & expand value offering to meet aging population demand: healthy, fresh, home cooking Pricing Racial/ethnicity-mix shift/Aging population • Develop differential pricing to match local willingness to pay • Lead your customers, where possible, to high-margin products • Plan promotions effectively to meet your target audience’s needs • Launch differential pricing where possible • Consider foreign language promotions/ads. • Develop Private-Labels for growing demographics’ preferred products • Manage simpler promotion offering through channels fitting elderly communities Footprint and format Areas of required localization • Select locations that match your brand image and offering • Understand local shopping behavior and adjust format offering accordingly • Plan your footprint with a long-term view on demographics change • Identify demographic trends; match store formats to population size and mix • Analyze shopping behavior; adjust customer journey accordingly • Plan accessible stores, with well-trained store ops Wilson Perumal & Company, Inc. 22
  23. 23. 1 Localization effort is iterative and broader than just product offerings Localization Scope Localization overarching strategy Pricing Impact of demographic changes Localized product assortment and services Promotions Localized Supply Chain Merchandizing Social Media Loyalty programs Big Data & analysis techniques Advertising Change to Org Structure Customer service Dynamic process as consumers and competitors are constantly changing • Retailers utilize sophisticated tools on “shopper data” such as assortment planning, flow modeling, price, promotion, and store size optimization • Marketing, supply chain, and organizational structure need to be modified to maximize localization benefits • Pilot test in small # of stores recommended. Could start in certain product categories first. Capture performance and feedback before nation-wide roll-out Source: WP&C analysis and perspective Wilson Perumal & Company, Inc. 23
  24. 24. 1 Localization with scale is possible PREVIOUS REGIONAL STRUCTURE National level National level • Smaller, coordinating role • National initiatives on “opt-in” basis • Less ability to leverage national scale HYBRID LOCAL-NATIONAL STRUCTURE National • Buying pulled up to national level, with aggregate local input • Greater strength with suppliers, leading to greater ability to tailor offerings National Regional level • Buying, planning centralized at regional level (~100 stores) • Command & control relationship over stores • Operate largely independently from national level and other regions Regional …requiring greater, richer and asymmetrical information flow between local and national levels Local level Local level • Less resources at local level • Not empowered to respond to local tastes and preferences Previously regional functions stretched up to national and down to local level… Local • Inventory planning pushed down to local level (~ 10 stores) • More responsive/ customized stores with greater employee ownership My Macy’s Initiative Restructured operating model with richer information flow allows stronger national scale and greater responsiveness to local customers Local Source: WP&C’s Vantage Point: Localization with Scale; interview with Terry Lundgren, CEO, Macy’s Wilson Perumal & Company, Inc. 24
  25. 25. 2 Omni-channel strategy and integration a must Online has potential to be a leading segment Many retailers invest to pursue that potential 2% Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012 1,620 Number of online grocery businesses in 2012 $6 billion Revenue generated by online grocery sales in 2012 23M Deliveries made by Peapod since it was established $9.4 billion Predicted revenue in 2016, on an estimated 12.1 percent growth $400M Sales for FreshDirect in 2012 8.8% Market share of largest online grocer Peapod, followed by Fresh Direct with 5.7 percent 20 Number of predicted urban areas AmazonFresh will expand to by 2014 46% Of shoppers said they were at least slightly likely to buy products directly from food producers online $4 billion Estimated online grocery sales of in the UK in 2011 55+ Age group that buys the most groceries online, accounting for 24.5 percent of purchases $175 Average order size of pure-play UKbased Ocado amongst its 360K active customers’ base Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites Wilson Perumal & Company, Inc. 25
  26. 26. 2 Emerging challenges and opportunities arise from online operations Extended Range Opportunity: • Selling extended range • Centralized stock source for premium products Challenges: • Product cannibalization • Stock management (holding costs, waste, stock availability, etc.) Improved Cross-selling Opportunity: • Improved cross-selling (e.g. “customers who bought X, also bought Y”) Challenges: • Maintaining easy and simple online customer experience Focused Marketing Extended range Potential benefits of online operations Improved crossselling Opportunity: • Personalized offering and promotions • Improved customer understanding Challenges: Focused • Misaligned marketing messages marketing between channels • Channel cannibalization and customer confusion New Customer Segments New customer Opportunity: segments • Attracting customers that are out of current geographical reach or are unlikely to enter your stores Challenges: • Maintaining a profitable delivery model • Avoiding channel cannibalization Click Wilson Perumal & Company, Inc. & Collec t 26
  27. 27. 2 Retailers continue trying to develop a sustainable and profitable omni-channel operating model Grocery retailers worldwide use different operating models to serve customers Fulfilment 1 Delivery 2 Stores / dedicated onlinestores Advantages: • Utilizing existing workforce • Lower fixed-costs model, facilitating slow expansion Disadvantages: • High picking costs erodes profits • Dist. and merchandizing remain major costs, low stock availability Directly from stores Advantages: • Utilizes existing geographic presence Disadvantages: • Higher cost-to-serve due to lower scale • Inefficient delivery planning Source: Press search; WP&C analysis and perspective A dedicated warehouse A hybrid model Advantages: • Centralized model with cost saving of store distribution and ops-time • Automation of the picking process Disadvantages: • Requires significant scale to justify the high capital expenditure Advantages: • Allows centralized model for high scale regions with localized solutions for low-scale regions Disadvantages: • Hard to capture long-term scale benefits: prevents investments in technology and equipment Warehouse / via satellite stations Click & Collect Advantages: • Lower waste-level / higher stock availability Disadvantages: • High operating costs to serve remote areas • Requires profound analysis and optimization planning of delivery Advantages: • Utilizing existing workforce • No distribution costs Disadvantages: • Does not serve some needs of online shoppers • Could cannibalizes store profits Wilson Perumal & Company, Inc. 27 27
  28. 28. 3 Unit sales of promotions are up, but percentage lift is on decline Promotion1 Average Unit Lift % by Department % of Unit Sales with Promotion1 42.6 139 2011 136 2012 128 123 42.4 122 119 120 114 42.2 96 93 42.1 2009 2010 2011 2012 Dry Grocery HBC 91 90 Frozen Dairy NonFood GM Traditional promotion power is eroding 1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis Wilson Perumal & Company, Inc. 28
  29. 29. In response, retailers should identify truly effective promotion levers and ensure efficient execution 3 WP&C Case Example: Small percentage of promotional SKUs driving majority of uplift… Avg. promotion uplift/week – 4 month period …But low-impact promotions still impact the business operations Supply chain Promotions put a strain on supply chain operations that are responsible for keeping shelves full. Inaccurate forecasting often leads to costly out-ofstocks and overstocks at retail locations % sales uplift units 110 100 90 Promotional uplift per week 80 Corporate planning 70 Promotions require detailed planning from crossfunctional teams. Multiple hand-offs across category, brand, space planning, and supply chain require significant resources each week 60 50 40 30 Store labor 20 10 0 0 10 20 30 40 50 60 70 80 90 100 Promotions can only be successful if they are executed effectively. This requires store labor resources to stock shelves, assemble displays, and manage customer needs % of promotional SKUs Source: WP&C client analysis of US grocery chain Wilson Perumal & Company, Inc. 29
  30. 30. 4 As traditional approaches decline, consumers look for new forms of convenience and overall value Traditional Vehicles Losing Impact1 Technology Use Growing1 How often does each of the following impact what you buy on your grocery shopping trip and/or which specific products you eventually decide to buy? 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? 39% 36% 33% 33% 2012 34% 30% 35% 36% 34% 31% 2013 Advances in technology and access drive new perception of value/convenience 14% 11% Coupons you clip from newspaper or magazine Store flyers Coupons you get from store flyer Websites Email 10% 11% 11% 8% 7% 9% Social Group List/Notes Mobile Networking Buying Function App. Sites on Phone Grocery retailers can leverage new ways to deliver value and convenience outside of traditional printed pricing promotions Source: 1)“The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Wilson Perumal & Company, Inc. 30
  31. 31. 4 Grocery retail personalization examples Case example: Company Example: FreshDirect, the New York based online food retailer, has used big data to make shopping more personalized. Using previous purchases, from the current shopper - and others purchasing similar items - the online store can suggest ideas relevant to each specific shopping trip We leverage data that “ranges from things that relate to the shopping ‘trip’ that the customer is currently on, to insights from past trips, to models of customers who are similar in an array of different ways” - John Leeman, Chief Marketing Officer2 CEO David Dillon has called big data analytics his "secret weapon" in fending off other grocery competitors3 1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2) The Economist Intelligence Unit Limited 2013 , 3) Retail Goes Shopping through Big Data – CNBC 04/15/2013 The ‘Just for U’ program gives shoppers digital coupons and deals on items they regularly buy Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery Amazon enhances one on one interaction with specific product recommendations Harris-Teeter unveiled a concept around higher service, e.g., instore wine consultants1 Hyper-local advertising technology, the ability to target nearby customers, is on the doorstep Wilson Perumal & Company, Inc. 31
  32. 32. 4 However, aligning operations across many access points is a growing challenge for grocers Recipes, tips and reviews Personalized deals & price match Choice of delivery options Customer journey List preparation for shopping trip Loyalty and rewards Social media & community Seamless operations necessary to deliver a truly cohesive customer experience Images:,, Google images Wilson Perumal & Company, Inc. 32
  33. 33. 5 Contraction both in chain size and store size Trend: 2013 Company Example: Share of traditional formats continues to shrink , but with slightly lower pace 03/13 Supervalu completes sale of 5 chains to Cerberus for $3.3B • Traditional retail formats (mass merchants and supermarkets) have yielded share to value formats (club, dollar, and supercenter) and drug stores 05/13 Bi-Lo acquisition of Delhaize America for $265M • Consolidation & contraction of overall chain size as well as change of chain ownership appears to be the trend of 2013 – 14 transactions announced for NA. food retailers, a total of $9.3B, up from $702M in all of 20121 Store size also expected to be smaller • Store footprints either get supersized for one-stop-shop or downsized into smaller stores for speedy services, especially for urban areas – Downsizing stores seems more apparent than supersizing 1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 Source: Neilson What’s In Store 2016; Press search; WP&C perspective and analysis 07/13 Kroger acquisition of Harris Teeter for $2.5B 08/13 Canada Safeway sold to Sobey's for $5.8B 09/13 Tesco’s F&E sold to Yucaipa after limited success Walmart Express, an urban solution one-tenth the size of its typical store show sign of success Aldi and Trader Joe’s continue their limited-assortment store expansion plans Wilson Perumal & Company, Inc. 33
  34. 34. 5 Share of traditional formats expected to continue to decline and not keeping pace with inflation $ Share by Store Format: 2012-2017 Traditional Non-Traditional $1.113T Oth non-trad. 4.9% 2.4% Dollar 5.4% 8.7% Drug Whsl Club 17.3% Supercenter C-Stores 14.9% Oth traditional Fresh Format 2.7% 1.1% 2.9% Ltd. Assortm’t Supermarkets 39.8% $1.249T 3.2% 3.1% Est. CAGR vs. Inflation: 2012-2017 Fresh Format 5.5% 9.0% Ecommerce 18.2% 13.4% 12.1% Dollar Ltd. Assort 6.2% 6.0% Drug 16.0% 3.4% 2.1% 3.0% 3.4% Whsl Club 3.2% C-Stores 3.2% Supercenter 2.7% Oth Trad. 36.5% 2.1% Supermkt 0.2% Oth Non-trad. 2012 Assume 3% inflation -6.3% 2017F In addition to Ecommerce, Fresh Format (e.g., Whole Food, The Fresh Market), Limited Assortment (Aldi, Trader Joe’s), and Dollar stores are physical formats expected to grow rapidly Source: Willard Bishop, Includes both grocery and consumables; WP&C Analysis Wilson Perumal & Company, Inc. 34
  35. 35. Structured & strategic approach to integration 5 will shorten timeline and smoothen transition Pre-integration approach Strategy How does the target company’s offering align with our strategy? How does this merger serve our strategy? Coverage What are the gaps or overlaps between the two firms? What is the value proposition, geographical and customer segment coverage? Where and who is the competition? Strategic Fit Operational Assessment Analytics and Planning Benefits From where will benefits be realized? At what point are there step changes in cost? Capabilities How is portfolio complexity impacting performance? Is the organization set-up to implement change? Operations What are the implications on end-to-end operations? Can our range be delivered effectively? Analytics What is the economics of the new business? What synergies can we capture from this deal? What is the level of scale benefits we could monetize? Wilson Perumal & Company, Inc. 35
  36. 36. APPENDIX 1: Additional data and analysis by trend APPENDIX 2: Wilson Perumal & Company background
  37. 37. Wilson Perumal & Company, at a glance • A management consultancy with offices in the US & UK, combining operations strategy experience with depth in retail • We are thought-leaders and hands-on practitioners: we have a unique perspective on the challenges facing grocery retail, and have a passion for helping grocery retail achieve results • We focus on getting things done in the areas that matter to you: Enterprise performance; Range & Promotions; Customer & Channel; Supply Chain & Sourcing, and Operations Excellence • We enjoy 100% client reference-abiliy Wilson Perumal & Company, Inc. 37
  38. 38. We help retailers across 4 service areas Strategy Strategy, Custom er, Channel • Store & format strategy • Omni-channel integration • Customer insight & segmentation • Localization & clustering strategy Range & Promotions • Range optimization & localization • Pricing & promotion effectiveness • Product-lifecycle management • Operating model alignment Operations Supply Chain & Sourcing Operations Excellence • Inventory management • Supply chain & sourcing optimization • Cross-channel fulfillment • Distribution model analysis • Operations development • Lean retail & end-to-end operations • Store operations improvement • E-commerce process optimization Wilson Perumal & Company, Inc. 38
  39. 39. Our clients attest to our ability to impact their bottom line “WPC’s approach to complexity is the most direct route to an efficient, profitable enterprise.” —Ed Lonergan CEO of Diversey Inc. “This was a quick and painless way to understand our true product profitability, and it challenges how we think about our business. I am extremely pleased with the results.” —Fernando Palacios EVP and Chief Integrated Supply Chain Officer MillerCoors LLC “WP&C is helping us transform our business. Their insights are phenomenal!” —David Hoogmoed President, Land O’Lakes Purina Feed “You are analytical and smart, but you also get things done!” —Head of Commercial Development Leading European Retailer “Best work I have seen in Operations Development. A case study for us as a business” - CEO, European Electronics Retailer “I truly believe you got to some of the key issues at [Retail Co.]” -Director of Supply Chain, Grocery Chain “Very insightful work…it was a pleasure working with you and your team.” -Senior Operations Director, Global 100 Retailer Wilson Perumal & Company, Inc. 39
  40. 40. We bring a team with deep sector and operational strategy experience (1 of 2) Stephen Wilson, Managing Partner • More than a decade of experience advising senior executives globally on issues relating to cost-competitiveness, operations and strategy • Recognized as a thought-leader on the topics of complexity, costreduction, operating models and innovation; co-author of Waging War on Complexity Costs • MBA from the Wharton School in Strategy and Finance • Deep experience in grocery retail in a variety of key issues in a variety of capacities: engaging with the board on operating models, helping build and deploy cost-reduction programs, to “walking the process” during overnight replenishment Ann Bryan, Manager • Seasoned strategy manager with 15 years of experience in strategy & consulting • Previous project experience includes store clustering, portfolio review, new retail format expansion, ecommerce strategy, and complexity management for various retailers and consumer goods companies • Former Project Leader with BCG • Former Director of Corporate Strategy, Applied Materials Inc. • Hand-on operational experience through two successful entrepreneurial ventures • MBA (Kellogg); MS Operations Research UC Berkeley Wilson Perumal & Company, Inc. 40
  41. 41. We bring a team with deep sector and operational strategy experience (2 of 2) Asaf Navot, Case Team Leader • Experienced Case Team Leader with focus on omni-channel integration, portfolio optimization, operational improvements, and complexity management • Retail experience include omni-channel operations, space planning optimization, stock management, ranging and promotions effectiveness, and process improvement • Previous experience as F-16 fighter pilot and project manager at the Israeli Air Force, ranked Captain. Asaf is also a former Israeli national swimming champion. • MBA from INSEAD, France/Singapore Steven Liguori, Case Team Leader • Experienced Case Team Leader with focus on product and process complexity, portfolio optimization, market analytics, and growth strategy • Grocery segment experience centered on promotional strategy & effectiveness, portfolio transformation, and process improvement • Additional Retail and CPG experience in distribution strategy, space planning, and operational efficiency • Previous experience as an Operations Strategy Consultant at George Group Consulting and Scientist/Manager at Pfizer • MBA from Emory University and BA in Physics from College of the Holy Cross Wilson Perumal & Company, Inc. 41
  42. 42. Increased EBITDA by 22% for major retailer by diagnosing issues and leading change program Situation • Competing in an Omni-channel world – One of Europe’s largest retailers was the leading player in the brick&mortar market , yet lagging behind in the fast growing online market. Omni-channel operations were dysfunctional: 15% of online SKUs were unaccounted for on the website, poor Exit Management led to channel cannibalization, and stretched-out operations affected both brick & mortar and online performance Conduct top-down ecommerce diagnostic 3-4 weeks Approach 3-5 weeks Developed and led mobilization plan 4-5 weeks • Analyze ecommerce • Improve Product Setup process – • Support client teams operations – analysis reengineered Product Setup process to training reveals that Product Setup track SKUs from ranging to online launch • Develop KPIs to measure process and Exit • Optimize Exit Planning –optimize exit recommendations Management hindered the across all channels. Created a decision implementation, and execution of online tool to guide exit planning based on process compliance strategy channel profitability + £18M in incremental Operating Profit Impact Optimize online operations Exceeded initial project savings estimates by 3x Captured £75M in lost sales Doubled Online Market Share within 18 months Eliminated missing SKU issues and over/under selling Improved customer retention and drastically reduced cancelled sales “The best work I have seen from any [operations development] team in my time with the company” -Group CEO Wilson Perumal & Company, Inc. 42
  43. 43. Reduced promotional costs by 40% while improving execution quality at $1B regional US grocery chain Situation • Struggling through strategic change - $1B regional US grocery chain was struggling through change from “every day low price” to “hi-low” promotions. Promotional planning tools and business rules were rules not in place as the process grew organically on the fly. The volume of promotions had grown unchecked, execution became slow and laborious, and promotional effectiveness plummeted. Approach • Top-down analysis - Leverage top-down thinking to quickly define benefit potential and implement quick wins to build momentum. Use hypothesis driven, answer-first tactics to avoid attempting to “boil the ocean” of over 25K annual promotions. • Strategic alignment – Partner with management to align around process principles and overall promotion strategy. Close collaboration, especially at early stages, is vital to project success. • Process redesign – Develop blueprint for process around leaner promotion model and just-in-time delivery. Segment process according to true lead times, remove non-value add steps, increase accountability, and track the correct metrics from initial concept to promo exit. • High-impact business rules – Evaluate uplift, basket size, back margin, etc. to create simple business rules which reduce the number of low-impact promos to increase effectiveness while reducing costs. 40% reduction in costs Impact $4-$5M overall benefit Improved effectiveness Optimized selection, reduced volume, process redesign, forecasting improvements Major impact from only 3 month project Freed up execution resources to redeploy into effectiveness planning “I truly believe you got to some of the key issues at [Retail Co.]” -Director of Supply Chain Wilson Perumal & Company, Inc. 43
  44. 44. Contributed £10M p.a. in incremental margin by leading analysis and PMO for complexity reduction Situation • Complexity in space layout and range– An £8B big-box retailer going through major turn-around, had identified that optimised effectiveness of new stores and store refit is a key competitive factor • However, overly complicated space planning processes, put together with ineffective performance tracking and unclear process ownership, led to an underperforming retail space • Management needed to understand space productivity while maintaining range and space flexibility Space diagnostic and PMO structure establishment 1-2 months Approach 1 month Align organizational space planning processes 1-2 months • Map existing space processes • Analyse space usage and • Align Space Planning processes– remove infrequently used space redesigned key space processes: • Create database to capture blocks to simplify future layouts Annual Space Reviews, Trials, Range current space Change, and New Store Opening accurately, analyse space • Create a Standardization financial performance • Develop a 3-months transformation plan + £10M annual margin Impact Remove complexity from space planning Standardized and improved product densities Scorecard to compare execution • Develop a standard process for all across stores and readily space planning activities, including pinpoint future improvement defining key decision points, business areas rules, and KPIs Saved 7,100hrs of unnecessary labor Processes facilitate less experienced employees and free up expensive management resources Reduced space blocks by 75% 2,673 527 Display Unattach-Unsupport- Low Use Blocks ed ed Wilson Perumal & Company, Inc. New Target 44