Changing What Matters: Kantar Retail Breakthrough Insights

1. 1 The Retail and Shopper SpecialistsThe Retail and Shopper Specialists Breakthrough Insights FirstHalf2016 C H A N G I N G W H A T M A T T E R S

2. 2 The Retail and Shopper Specialists © 2016 – Kantar Retail LLC. All Rights Reserved. Disclaimer: The analyses and conclusions presented herein represent the opinions of Kantar Retail. The views expressed in this publication do not necessarily reflect the views of the companies covered by this publication. This publication is not endorsed, or otherwise supported, by the management of any of the companies covered herein. Copyright Notice: No part of this publication may be reproduced in any form or by any means without the express written permission of the copyright owner. Research Team Sara Al-Tukhaim Timothy Campbell Sébastien Delsemme Karolina Fiedler Ray Gaul Bryan Gildenberg Doug Hermanson Tiffany Hogan Theres Hoyos Luna Jia Simon Johnstone Laura Kennedy Vadim Khetsuriani Amy Koo David Marcotte Rachel McGuire Alvaro Morilla Leon Nicholas Brian Owens Mike Paglia Himanshu Pal Tudor Popa John Rand Nicole Santosuosso Kate Senzamici Diana Sheehan Robin Sherk Andrew Stockwell Elley Symmes Meaghan Werle Mary Brett Whitfield Jane Xu Yvonne Xu Han Yang Alexander Zhang Oceanne Zhang

3. 3 The Retail and Shopper Specialists Foreword............................................................................................................................ 4 Stressing the "Stress-Free" Shopping Trip ...................................................................... 7 Soft Retail Price Environment Masks Otherwise Solid Holiday 2015 Demand................. 13 As Asda Pulls Out, Does Black Friday Have a Future in the U.K.?................................... 15 Walmart International: An Analysis of Driving Forces and Challenges........................... 19 Robbing Peter to Pay Paul? Cross-Shopping at Sam’s Club and Walmart Supercenter........................................................................................................ 29 Prime Now: Amazon’s Fast Reach Into the Grocery Basket............................................. 37 The Disrupters Disrupted? Jet Takes on Amazon and Walmart.com on Price................ 41 Five Scary Scenarios for Supermarket Suppliers............................................................ 53 'Supermarketisation' of Discounters: Exposing the Myth................................................. 57 Omnichannel's Runway in Home Improvement: .............................................................. 63 Three takeaways on Home Depot's Digital Strategy Costco 2016: A Look Back and a Look Ahead .................................................................. 67 Subscription Boxes: A New Kind of Value in Apparel Retailing........................................ 75 In This Issue

4. 4 Foreword Welcome to the first of two 2016 Breakthrough Insights publications from Kantar Retail this year. In this document, we pull together the best of our analysis over a given time period – and by “best” we mean not just the research, itself but also the work that highlights the themes we think are most important to people trying to sell more effectively and profitably in the retail ecosystem. We have selected pieces that reflect the evolution of that ecosystem, highlighted in the “Changing What Matters” 2016 preview piece Kantar Retail compiled earlier this year. “Changing What Matters” broke the major changes we see in the world into two distinct buckets – how the environment is changing and how retailer and supplier work is changing. Bucket 1 we called “the smaller, harder world.” The basic thesis is that there are still many platforms for growth in the world of 2016-2020, but they tend to be opportunities smaller in scale and more difficult to access. We looked at this new world through three primary lenses: macro, retailer, and shopper. The “smaller, harder” macro world is explored in this edition from two directions. First, our lead economist Doug Hermanson interprets the U.S. holiday season’s retail results, which appeared softer than many expected. The deflation driven by sluggish global demand and low fuel prices during this period rears its head in interpreting the U.S. economic results. It also reflects a phenomenon that might be called “the flight from stuff” – as shopper wallets are increasingly deployed to services and away from goods, consumer spending writ large will recover faster than the purchase of goods will. From a multinational perspective, Amy Koo and our global Walmart research team pulled together a “state of the union” of Walmart’s international competitive position. Walmart’s international challenges and opportunity are deeply reflective of the smaller, harder macro environments in which the company competes. The retailer angle on the macro world bends nicely into the “smaller, harder” retail landscape. Here, Simon Johnstone’s look at the myth of the "Supermarketisation" of the global discount channel tackles head-on the assumption that existing formats are the norm and that emerging formats will morph into these existing formats. Discounters that are expanding fresh are not supermarkets – they are a distinct and new opportunity to be managed within their own unique context. One of the core appeals of discount is a simpler shopping experience, and this opens up the third part of the “smaller, harder world” segment of pieces on the shopper. Some of our best work as a company is rooted in our systemic study of U.S. shopping behavior, and The Kantar Retail Shopper Team’s excellent piece on “stress-free” shopping helps explain the importance of the functional and emotional components of reducing friction in the shopping trip. A retailer that has attacked this in practice is Home Depot – arguably the most successful omnichannel retailer in the world today. Even if you do not compete with or sell to it, Nicole Santosuosso’s blog post on its omnichannel initiatives is a must-read for anyone trying to understand retailers successfully winning in this “smaller, harder world.” The “smaller, harder world” articles conclude with Sara Al-Tukhaim’s perspective on Costco’s global operation. Costco is a retailer that has capitalized on this smaller, harder world with a distinctive positioning and relentless operational focus. But as a narrow-margin retailer, operating in multiple geographies, highly sensitive to fuel price variability, facing decisions around membership fee pricing and cap ex deployment, they are a great overall reflection of this “smaller, harder” ecosystem. The second bucket again separates into three parts – Winning with Retailers, Winning with Shoppers, and Winning Plans. Winning with Retailers gets summarized in the acronym ADDRESS, which highlights key aspects of a winning retailer strategy. The first “D” in ADDRESS is “discounted appropriately” – here the Kantar Retail Research Team investigates Asda’s decision not to repeat its Black Friday promotions in 2016. This also echoes the “smaller, harder world” theme – just because something works

5. 5 The Retail and Shopper Specialists in the U.S. doesn’t mean it globalizes well. U.K. consumers want Asda to deliver value differently, and that is exactly what Asda is going to do. This fragmentation isn’t just country to country but within countries as well, and John Rand’s piece on “Scary Scenarios” for U.S. supermarket suppliers has global implications for anyone trying to win with retailers that are trying to win the “smaller, harder world.” Assorted optimally, discounted appropriately, delivery ready, regionally aligned, eCommerce- enabled, smaller and specifically targeted – all seven of these are evident in John’s excellent summary of supplier competitive strategy. Granular competition reappears in the two pieces themed around Winning with Shoppers, summarized here by the concept of ACROSS. The “OSS” in ACROSS (outlet selection, strategic shopper insights, and shopper path-to-purchase understanding) is brought to life as Tim Campbell and Rachel McGuire unpack the thorny problem of how you help differentiate two massive retailers, owned by the same company, that often share a car park. Walmart and Sam’s are both parts of Walmart’s corporate portfolio and at times strong competitors for shopper wallets, and in this piece we take a shopper-centric view of how best-in-class suppliers are building strong plans for each. These play a significant role in big-box, small-box, or “just a box” retail – and the second ACROSS piece is Tiffany Hogan’s overview of subscription boxes in the apparel industry. Here the “ACR” in ACROSS (audience definition, contextualization, and redefined category strategy) is critical, as subscription services redefine the notion of what gets bought with what, when. We described Winning Plans as FLATTER. The two core attributes of these plans are that they are broader (going across and linking more organizational siloes) and more transparent (allowing you to move up and down through layers of your organization more seamlessly). New business models will drive the need for these FLATTER plans – and Sara Al-Tukhaim, Tim Campbell, and Nicole Santosuosso unpack the competitive disruption brought to the U.S. eCommerce landscape by Jet. The “TTE” in FLATTER refers to total market views, total business views and eCommerce ready, and how a more complex pricing environment forces suppliers and retailers to look at business planning more holistically. Jet may not be the competitor that long-term reshapes the market, but the idea of differing bundles of similar products providing markedly different value is one this article explores in great detail – and it is an idea that will become increasingly important as retailer competitive models become more complex. The “A” in FLATTER is “Amazon/Alibaba-ready.” No review of the 2016 retail landscape is complete without understanding something one of these two change agents is doing to disrupt the market. In the final piece profiled in this introduction, Robin Sherk maps the faster-than-expected expansion of Amazon’s Prime Now 2-hour delivery capability and the implications this has for Amazon’s strategy to expand its share of wallet more significantly into grocery. If the world is smaller and harder, FLATTER plans will be essential to capitalizing on the opportunities that world creates. Hopefully, these frameworks and this fantastic content put together by the Kantar Retail team prove valuable to you in your 2016 execution and 2017 planning. All the best, and I hope to see you at one of Kantar Retail’s many global retail events throughout the year. Sincerely, Bryan Gildenberg Chief Knowledge Officer

7. 7 The Retail and Shopper Specialists Stressing the "Stress-Free" Shopping Trip By: Kantar Retail Shopper Team Year-over-year ShopperScape® data shows that shoppers are focusing less on price and more on the overall shopping experience. Specifically, they are increasingly romanticizing the idea of a stress-free shopping trip. The key implication for retailers is that they now have an opportunity to appeal to shoppers in ways other than offering the lowest price by capitalizing on shoppers’ shifting mindsets. To successfully entice shoppers through stress-free shopping, it will be essential to understand what stress-free shopping means to shoppers and how different shoppers perceive “stress free.” Retailers will need to address both the functional and emotional stressors related to assortment, convenience, and the overall shopping experience to provide shoppers a true stress-free trip on the path to purchase. All Shoppers Driving the Charge Nearly 6 in 10 shoppers in 2015 ranked a stress- free shopping experience important when shopping in general – a significantly greater percentage compared with the same time in 2014 (Figure 1). When looking across shopper segments, it is clear that all demographic groups contribute to driving this shifting mindset: All generational cohorts and income segments were significantly more likely to rank a stress-free shopping experience as important when shopping versus the same time in 2014. Similarly, shoppers with children in their household and those without were more likely to value a low-stress trip in 2015 versus 2014. Considering the sweeping manner in which the stress-free mindset is gaining popularity and relevance among shoppers, retailers should prioritize making their shopping experience as stress-free as possible; those that do will have a competitive edge over those that do not. Figure 1. Shoppers Ranking a Stress-Free Experience as Important When Shopping (Share of shoppers who rank factor among top four most important) Note: Arrows indicate significant difference vs. 2014 (95% confidence level). *Have Nots are households with average income of less than $60,000. Haves are households with average income of $60,000 or higher. Source: Kantar Retail ShopperScape® , January–August 2014 and January–August 2015 55% 54% 54% 56% 56% 58% 57% 58% 59% 59% All Shoppers Gen Y Gen X Boomers Seniors 2014 2015 55% 54% 57% 55% 55% 58% 58% 59% 57% 59% All Shoppers Have Nots* Haves* Children in HH No Children

8. 8 Unpacking the Stress-Free Shopping Trip Shoppers perceive stress-free shopping as a multidimensional ideal state of shopping. When asked which factors are important to a stress-free shopping experience, shoppers emphasize different aspects of the trip – e.g., the overall experience, assortment, and time-saving/ convenience factors – at relatively similar rates (Figure 2). The top-ranked factors important to stress-free shopping cover three aspects of shopping: the ability to easily locate items the shopper needs, a quick and hassle-free checkout, and the ability to fulfill everything on the shopper’s list. More than 4 in 10 shoppers rank each of these factors as important to stress-free shopping – evidence of the multifaceted idealization of stress- free shopping. Other trip components that a substantial portion of shoppers associate with stress-free shopping include in-stock items (36%), a quick shopping trip (33%), ease of getting to the store (29%), and an enjoyable shopping experience (23%). Interestingly, the factors associated with good service – e.g., the ability to understand sales, return an item, and get help – are all lower on the totem pole of what constitutes stress-free shopping. Functional vs. Emotional Approach In looking at the aspects of stress-free shopping through an alternative lens, shoppers are more likely to associate the functional components of the trip with a less stressful experience compared with Figure 2. How Shoppers Describe Stress-Free Shopping (Share of all shoppers who rank factor among top four most important to a stress-free shopping experience) Source: Kantar Retail ShopperScape® , July 2015 17% 18% 21% 16% 36% 41% 11% 19% 20% 29% 33% 42% 9% 21% 23% 43% Easy to get help if I need it Knowing it will be easy to return an item if I need to Easy to understand what sales are available Having confidence that I'm buying high-quality items Specific items I want to buy are in stock Being able to get everything on my list Don't have to go to store; can get everything online Fast and free shipping Can shop when it's convenient to me Easy to get to the store Can complete shopping quickly Quick/hassle-free checkout I'm comfortable shopping there/other shoppers are "like me" Can navigate through the store/website easily An enjoyable shopping experience Being able to easily locate items I need Overall Experience Time-Saving& Convenience AssortmentService

9. 9 The Retail and Shopper Specialists the emotional components (Figure 3). The majority of the functional shopping stress reducers – e.g., the ability to locate items easily and complete shopping quickly – are most important in achieving a stress-free shopping trip. The components of the trip that are more about how a shopper will feel about the trip (as opposed to accomplishing the trip’s goals) – e.g., the ability to understand deals and get help – are not as crucial to a low-stress trip. Even though the emotional stress reducers are ranked as important to fewer shoppers overall, the emotional factors should not be ignored. Retailers that address both the functional and emotional stressors of the trip will be the ones that win in providing a truly stress-free trip. Stressors Vary by Shopper Segment Younger shoppers and older shoppers differ in which areas of the trip they are more or less likely to associate with stress-free shopping (Figure 4). Gen Y shoppers are more likely than the average shopper to emphasize the overall shopping experience – e.g., an enjoyable trip and easy navigation – as well as the factors associated with online shopping (e.g., fast, free shipping). The latter coincides with the fact that Gen Y shoppers overindex on favoring online formats – smartphone, tablet, and computer – over shopping in a physical store to achieve a stress-free shopping experience. Gen X shoppers are also more likely than the average shopper to associate the convenience factors of online shopping with stress-free shopping, as well as the ability to understand sales and deals. Both Gen Y and Gen X shoppers are less 9% 16% 17% 18% 20% 21% 23% 11% 19% 21% 29% 33% 36% 41% 42% 43% I'm comfortable shopping there/other shoppers are "like me" Having confidence that I'm buying high-quality items Easy to get help if I need it Knowing it will be easy to return an item if I need to Can shop when it's convenient to me Easy to understand what sales are available An enjoyable shopping experience Don't have to go to store; can get everything online Fast and free shipping Can navigate through the store/website easily Easy to get to the store Can complete shopping quickly Specific items I want to buy are in stock Being able to get everything on my list Quick/hassle-free checkout Being able to easily locate items I need Experience Time-Saving Assortment ServiceKey Functional Stress Reducers Emotional Stress Reducers Figure 3. Stress-Free Shopping Factors: Functional vs. Emotional Stress Reducers (Share of all shoppers who rank factor among top four most important to a stress-free shopping experience) Source: Kantar Retail ShopperScape® , July 2015

10. 10 likely to indicate that assortment factors – being able to get everything on the list and the retailer having their desired items in stock – are important to stress-free shopping. Gen Y shoppers also are not as likely to be stressed by long checkout lines or by any difficulty in getting to the store. In contrast, Boomers are more likely than the average shopper to associate the assortment factors with a stress-free shopping experience, and less likely to emphasize the factors specific to online shopping. They are also less likely to be stressed by difficulty navigating the store and by being surrounded by shoppers not similar to them. Seniors value being able to find products easily and finding the items they need in stock. They are less likely to associate fast shipping and the ability to understand sales with stress-free shopping. Shoppers with children in their household overindex on associating easy store navigation, shopping with like-minded shoppers, and fast shipping with stress-free shopping. They are less likely to associate ease of getting to the store with stress-free shopping – data that could be explained by the idea that shoppers with children are likely accustomed to the fact that getting to places is not as easy as it was before having children. With regard to household income, both high- income (Have) and low-income (Have-Not) shoppers are on par with the average shopper in how they assess the assortment, convenience, service, and overall experiential factors with stress-free shopping. : Gen Y Boomers Gen X Seniors Parents Income Segments Income does not influence shoppers’ ideas of stress-free shopping; lower-income and higher-income shoppers both on par with average. Overindex: -Navigation of store -Surrounded by similar shoppers -Fast, free shipping Underindex: -Ease of getting to store Overindex: -Getting everything on list -Desired items in stock Underindex: -Navigation of store -Surrounded by similar shoppers -Fast, free shipping -Don’t have to go to store; online Overindex: -Enjoyable shopping experience -Navigation of store -Fast, free shipping -Don’t have to go to store; online Underindex: - Easily find products - Quick checkout - Ease of getting to store - Getting everything on list - Desired items in stock Overindex: - Fast, free shipping - Don’t have to go to store; online - Understanding sales/deals Underindex: -Getting everything on list -Desired items in stock Overindex: - Easy to find products - Desired items in stock Underindex: -Fast, free shipping -Understanding sales/deals Figure 4. How Shoppers Describe Stress-Free Shopping, by Shopper Segment Source: Kantar Retail ShopperScape® , July 2015

11. 11 The Retail and Shopper Specialists Kantar Retail Point of View Widespread “stress-free” mindset: Because of greater price transparency, price-match guarantees, and their ability to thoroughly research prices ahead of the purchase, shoppers are defining value less from a pure price perspective, while increasingly valuing a stress-free shopping experience. This shifting mindset is universal: All shopper segments are increasingly looking to minimize stress on the shopping trip. Considering the extent to which this mindset is gaining popularity and relevance, retailers and suppliers should prioritize and address the common stressors their customers face. Understand before implementing: The first step to providing shoppers with a stress-free experience will be to unpack the multiple dimensions of how shoppers perceive stress-free shopping; retailers will not be successful unless they address all stressors shoppers could experience on the trip. Shoppers’ idealization of stress-free shopping centers on three key areas: a pleasant and easy overall experience, a convenient and quick trip, and an assortment that fulfills their list. Prioritizing these concepts in addition to elevating the functional stress reducers will be integral to providing shoppers with a true stress-free shopping experience. Different appeals for different shoppers: Retailers should consider how their target shoppers describe stress-free shopping and focus their efforts accordingly. Because younger shoppers are more likely to consider the overall experience and time-saving components of online shopping important to stress-free shopping while older shoppers value the right assortment, retailers should prioritize their stress reducers according to the shopper base. To be truly successful, though, retailers will need to address all stress reducers regardless of the age of their shoppers. Always room for improvement: Even with the heightened convenience available to shoppers in today’s retail landscape – thanks in part to eCommerce and same-day shipping – retailers have a long way to go to provide stress-free shopping. While some retailers are better than others in providing a low-stress trip, the reality is that a large portion of shoppers believes that no retailers offer stress-free shopping. A stress-free shopping experience should be an ideal state of shopping that retailers constantly innovate and strive to provide. 11 The Retail and Shopper Specialists

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13. 13 The Retail and Shopper Specialists Soft Retail Price Environment Masks Otherwise Solid Holiday 2015 DemandBy: Doug Hermanson Retail sales grew more slowly in the 2015 holiday fourth quarter than they did in the previous year despite shoppers indicating stronger holiday spending plans (Figure 1). Nominal growth trailed 2014’s pace mostly due to price deflation. Unit-demand growth, which adjusts for price decreases and tends to track closer with spending intentions, grew at a slightly stronger pace than holiday 2014. Another notable trend this holiday that dampened retail spending was a shift toward spending outside traditional holiday channels on categories such as food services, automobiles, and travel. Slower retail sales growth was focused in store as online sales outpaced even 2014’s very strong pace. Among the leading brick-and-mortar channels, the resurgent housing market was a key growth driver. The home improvement; furniture; and combined sporting goods, toy, and hobby channel were among the growth leaders this holiday. Other specialty channels posted meager or declining growth as shoppers’ appetite for apparel and consumer electronics waned and online competition intensified. The dampening effects of online sales on in-store growth at big-box mass merchandise and department stores were also very evident this holiday. Small-format value stores continued to gain share of holiday shoppers’ dollars, which also hurt some big-box retailers. Kantar Retail Point of View Outsized spending on restaurants and travel may indicate that shoppers are placing more weight on holiday experiences and entertainment, but strong unit-volume growth this holiday suggests shoppers did a fair amount of traditional gift giving as well. The relatively moderate retail sales growth for the majority of retailers compared with these alternative spending streams does, however, reinforce the point of view that retailers and suppliers need to take into account competition for shoppers’ dollars, time, and attention that comes from outside, not just inside, retail. In-store sales are especially at risk given how online is often better able to flex toward the variable time, attention, and place of a shopper. Taking into account these broader consumer spending trends also reinforces retailers' need to be more tactful about pricing and promotions during the holiday, given that shoppers are just as likely to use these retail savings to spend outside of retail as they are to buy more holiday goods at retailers. Figure 1. Top Line: Holiday 2015 Fourth Quarter (Actuals for Prior and Recent Quarter, Year-to-Year Growth) 4.6% 3.3% 13.9% 14.5% 3.9% 2.1% 4.1% 2.0% Brick-and-Mortar Channels⁵ Online² Major Consumables Channels³ Top-Line Retail Sales Measure¹ Holiday Q4 2014 Holiday Q4 2015 Apparel & Homegoods Specialists⁴ 1 Top-line measure excludes auto dealers, fuel, and food service channels; includes auto parts stores. 2 Online sales growth of 14.5% is actual as reported by the government in February 2016. Original holiday sales publication featured an estimate of 14.3%. 3 Includes drugstores, supermarkets, supercenters, discount department, warehouse clubs, and dollar stores. 4 Includes traditional department stores. 5 Channels include some online, catalog, and TV home-shopping sales in addition to sales from brick-and-mortar stores. Source: U.S. Department of Commerce; Kantar Retail analysis, January 2016

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15. 15 The Retail and Shopper Specialists Asda did not participate in 2015 Black Friday sales due to 'shopper fatigue' setting in around flash sales on big-ticket, nonessential items at Christmas. Based on customer feedback, the retailer said that rather than investing in a one-off day of sales, it would invest over GBP26 million in ‘sustained savings spread across a traditional seasonal shop’. According to the retailer, instead of one- or two-day sales on high-value items, Asda shoppers said that for 2015, they would prefer deals on value-for-money, high-quality products the entire family could enjoy. From the beginning of November through Christmas and into the New Year, Asda shoppers would 'see more and more offers landing in store and online on products that impact on their everyday lives including toys and gifts, Christmas food and drink, and household basics,' the retailer said in a statement. 'The decision to step away from Black Friday is not about the event itself', said Asda President and CEO Andy Clarke. 'Over the last two years, we’ve developed an organised, well-executed plan, but this year customers have told us loud and clear that they don’t want to be held hostage to a day or two of sales. With an ever-changing retail As Asda Pulls Out, Does Black Friday Have a Future in the U.K.? By: Kantar Retail Research Team landscape, now more than ever we must listen carefully to exactly what our shoppers want and be primed and ready to act the minute their needs change. When it comes to putting customers first, Asda has always led the way, which is why we’re just as confident in our decision to step away from Black Friday as we were in introducing it to the U.K'. Asda’s alternative promotions included half-price toy sales and deals on skincare, fragrance, and gifting with Asda’s biggest ever 3-for-GBP10 offer. On festive food and drink, the retailer invested in key quality seasonal products including beef, salmon, wine, spirits, and champagne. Shoppers were also expected to see price reductions on consoles and televisions, plus other gift ideas such as electric toothbrushes. Asda’s move reflects British shoppers’ desire for simplicity and clarity. Rather than the retailer limiting value to a short period on nonessential items, its commitment to everyday low pricing on products that actually matter will be well- received by shoppers who increasingly plan ahead for Christmas. Additionally, the retailer’s decision to pull back from Black Friday will help it avoid the cost and complexity of significantly remerchandising stores, bringing in specialist crowd-control staff, and reconfiguring staff schedules to cater to the early-morning surge in demand. Despite Asda (which was one of the U.K.’s Black Friday pioneers) stepping back from the initiative, plenty of other retailers like Amazon, B&M, Dixons, John Lewis, Sainsbury’s, and Tesco remained committed to Black Friday in 2015. However, Asda’s retreat might encourage other retailers to scale back on Black Friday in 2016.

16. 16 Black Friday Drawbacks While the event undoubtedly boosts physical footfall into participating stores and Web traffic to participating websites, a variety of drawbacks make Black Friday something of a double-edged sword for U.K. retailers: Lack of cultural relevance: Since Thanksgiving does not exist in the U.K., Black Friday has been introduced into the U.K. market as an entirely random happening. While signs indicate the event is gaining traction among shoppers, it is still something of a quirky invasive species. Incrementality: Some retailers have told us that Black Friday categorically results in incremental sales, but there is plenty of evidence – anecdotal, if nothing else – that a great deal of Black Friday spending is deferred or brought forward with bargain-hungry shoppers using Black Friday as a chance to save on an item they would have bought anyway.

17. 17 The Retail and Shopper Specialists Profitability: Likewise, there are two schools of thought on profitability. Some retailers work hard with suppliers to buy specifically with Black Friday in mind, generating decent margins on high- volume lines that might not be sold during the rest of the year. Other retailers simply hoist Black Friday banners above existing stock or react to other retailers’ Black Friday promotions. For the former group of retailers, Black Friday can be a profitable exercise. For the latter group, it is clearly dilutive. Brand equity: A number of retailers have suffered knocks to their reputations due to U.S.-style incidents of crowd disorder and squabbling over items. Thanks to social media, these incidents can rapidly snowball into unwelcome media stories. This means that putting the right crowd-control mechanisms in place is of paramount importance. Online retailing and supply chain: Simply put, Black Friday 2014 saw a number of websites fall over and a number of shoppers left frustrated as retailers’ fulfilment capabilities were stretched to the breaking point. Retailers and their fulfilment partners should set realistic delivery expectations for Black Friday purchases, or perhaps prolong the event over many days to discourage these crippling surges in demand.

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19. 19 The Retail and Shopper Specialists Walmart International: An Analysis of Driving Forces and Challenges By: Amy Koo and David Marcotte Executive Summary As the largest segment of the world’s largest retailer, Walmart US rightly garners the most attention from suppliers. But with more than 6,300 stores in 27 countries, and sales that would rank it as the world’s third-largest retailer, Walmart International demands consideration of its own. Kantar Retail offers global companies a guide to understanding the fundamentals of Walmart International’s business evolution, detailing lessons learned and outlining major concerns by theme. Walmart’s phases of international growth highlight the retailer’s success in developing viable strategies in some foreign markets, but also its setbacks from cultural, political, and structural obstacles in others. The breadth and diversity of Walmart International’s holdings is both its greatest strength and one of the biggest challenges to the company’s core operating Phase 1: 1991-1998 Walmart Supreme Phase 2: 1999-2005 Global Scale, Local Advantage Phase 3: 2006-2008 Focus on the Majors Phase 4: 2009-2012 Serving the Underserved Phase 5: 2013-2015 Pushing for ROI and Flexibility Phase 6: 2016+ Operational Excellence Figure 1. Walmart’s Phases of International Expansion Source: Kantar Retail analysis philosophy of efficiency and scale. Since it entered Mexico in 1991 – its first international expansion – Walmart has refined its international growth strategies, which fit broadly into six phases (Figure 1). Generally, Walmart’s country entries have coincided with periods of investor fervor, entering when a market is “hot” and about to be “up and coming” (Figure 2). Figure 2. Walmart International Market Entry and Exit Timeline Source: Kantar Retail analysis

20. 20 Phase 1: Walmart Supreme (1991-1998) Building on the success of its big-box domestic format and productivity loop, Walmart began its expansion by exporting its model into key target markets (Figure 3). This missionary-style approach was spearheaded by leaders who believed that success would come from hard work and superior execution of the existing U.S. mass merchandiser model. Along with close markets in the Americas, Walmart also focused on fast-growing countries in Asia. Opportunistic acquisitions, format conversions, and ground-up stores would be initially light in cost. Though Walmart successfully operates in some of these countries today – most notably Mexico – the retailer encountered a number of challenges that influenced its later international strategies, including: yy Market diversity: Walmart learned that its cut- and-paste strategy for format and processes did not always work in new markets. yy Lack of scale: This issue challenged Walmart’s ability to operate efficiently and expand rapidly to gain market share. yy Everyday low pricing (EDLP) and one-stop- shopping: These were not necessarily winning strategies in some markets, as market conditions resulted in different shopper preferences and trade-offs. yy Cultural resistance: The Walmart employee culture – complete with the cheer – was too much of a contrast with local norms for regional workers. Phase 2: Global Scale, Local Advantage (1999-2005) With several market entries and exits under its belt by this time, Walmart tried to merge bottom-up and top-down approaches. Walmart now understood the practical importance of having executives on the ground familiar with local conditions and customs. Through acquisitions, it started exploring format expansion beyond the big-box mass merchandising model. From the top, Walmart also established a unified management structure to support and serve as the cultural “glue” to bind its diverse set of market operations. While these adjustments were a lesson learned from previous challenges, they also led to certain complexities: yy In some countries, corruption was a standard part of business practices, even as Walmart required its international operations to follow U.S. law. yy After local executives rejected EDLP as untenable in the competitive environment on the ground, some markets turned to pragmatic pricing and promotion. Phase 3: Focus on the Majors (2006-2008) The need to drive efficiency and return on investment (ROI) led Walmart to push for greater market share in larger markets. While Walmart was most comfortable with its core hypermarket format, it stepped up its acquisitions of local retailers to gain scale and presence. As new banners came in, Walmart stopped rebannering stores to Walmart or Sam’s Club. Instead, some Buy for Less Sell for Less Grow Sales Operate for Less Figure 3. The Walmart Productivity Loop Source: Company documents banners retained their local brand equity. It was during this phase that the number of locally bannered stores began to outnumber those under Walmart’s original banners. The focus on financial metrics also encouraged leadership to exit countries if it determined it could not build scale and/or profitability in the market. Walmart’s increased flexibility in format management meant that: yy Multiple formats and businesses required thoughtful differentiation on assortment, shopper segments, and trip missions, which added complexity while expanding share. Some acquired businesses also operated service segments, including restaurants and banks.

21. 21 The Retail and Shopper Specialists yy Integration to scale remained a challenge, as formerly independent retailers had to cobble together separate systems and processes under Walmart. yy Brand scale was less feasibly leveraged, particularly for marketing, as Walmart determined that in-market success was more important than the global Walmart brand. Phase 4: Serving the Underserved (2009-2012) In this phase, which aligned with the Great Recession, Walmart began to look for growth in more rural, developing markets by offering fast, friendly, clean, and safe shopping environments. It introduced the global message of “Save Money. Live Better.” during this phase to resonate with lower-income shoppers across all markets. In an effort to reinforce this brand promise, Walmart offered shoppers even cheaper options by saturating local assortments with its existing private brands (such as Great Value). Small- box soft discount stores began to proliferate in some markets, located closer to shoppers’ neighborhoods, especially in Latin America. Beyond its retailing operations, Walmart also shifted its corporate social responsibility programs to focus on local market needs, including small business development, health and wellness, and elder care. However, these adjustments led to their own difficulties: yy Market risk and volatility was higher in developing countries, as political, economic, and social systems were more likely to be disrupted – even by governments themselves as they shifted policies and regulations. yy Market diversity, particularly with a wide range in what “underserved” meant for each market, again challenged Walmart’s ability to scale its operations – in this case, across markets. yy Middle-class development accelerated in Walmart’s markets, and newly middle-class shoppers required a different retailing approach than the lowest-income shoppers. yy Private brands were ironically viewed as riskier purchases for low-income shoppers who trusted familiar, but higher-priced, national brands. yy Supply-chain strain rose as Walmart was forced to rework its traditional distribution model to accommodate its small stores – many of which were in difficult-to-reach places – which hurt the retailer’s ability to scale and reinforce the productivity loop. Phase 5: Pushing for ROI and Flexibility (2013-2015) During this phase, Walmart demanded greater ROI from its investments by highlighting cash as a means of flexibility in investment. While the retailer did not exit any market during this phase, it did expect market-level executives to move toward a more self-sustaining model that clearly justified its capital investment. At this time, Walmart faced significant challenges to growth in some markets. New competitive models, including online, better middle-class retailing, and hard discount, countered Walmart’s brand proposition, even as its talent pool shrunk as other retailers stepped up recruiting top talent. Leaders unable to perform were swiftly replaced at the rate of four country CEOs annually. At the same time, Walmart increased emphasis on shared global resources, with every market transitioning to the Pangaea eCommerce platform. It also became more proactive in moving middle management across markets to enable cross-pollination of sourcing and management best practices. Key challenges during this phase included: yy Turnover and management migration among markets disrupted institutional knowledge retention as experienced veterans left. yy Competition rapidly improved in the key markets of China, Brazil, and Mexico. yy Geographic population shifts, as people moved from urban centers to suburban rings, placed more stress on retail real estate strategies. Phase 6: Operational Excellence (2016+) By 2016, the retailer was placing renewed emphasis on operational excellence, focusing on the core business, getting things done, and getting them done right. Investor anxiety about Walmart’s international strategy remains elevated, reinforcing the corporate push toward operational excellence and financial discipline. Executives are focused on store merchandising, labor training and standards, and eCommerce execution. While still a work in progress, changes in market-level senior positions have shifted leadership toward more operational- focused management that is narrowing its focus to the core retail business.

22. 22 Overall financial health has returned to some markets – particularly Mexico – reinforcing performance weakness in others. Demonstrating its continued willingness to shed unproductive parts of its business, Walmart spun off restaurants and banks and put several noncore businesses up for sale. The fact that Walmart is closing underperforming stores – both domestically and internationally – shows the retailer’s stronger performance focus. Walmart has also adjusted its private label strategy, relaunching it in several markets. In the past, Walmart used its private label brands to dominate assortments and reinforce price by offering items below national brand price points. Today, Walmart positions its private brands as part of a brand portfolio, as pragmatism about profitability trumps the global Walmart brand positioning. While many of the newer initiatives will simplify and streamline Walmart’s operations, they also raise the following issues: yy Noncore businesses, while adding complexity, were some of Walmart’s most profitable businesses. The loss of restaurants, apparel specialists, and department stores also diminishes Walmart’s talent for these categories within the remaining stores. yy Private brand pragmatism runs counter to Walmart’s push to unify its operational execution. Kantar Retail Point of View Even with all its complexities, risks, and exchange rate challenges, Walmart International will continue to represent a significant share of Walmart Inc.’s business and profitability. It is also clear that the international segment has the most potential for expansion into new markets and shopper bases. The recent softness in some markets has also proved to be surmountable, as demonstrated by the rapid turnaround of Walmart Mexico (Walmex) under Enrique Ostalé’s leadership. Ostalé, who was promoted to oversee all of Latin America in 2015, was also recently charged with overseeing the Africa and India business. Walmex has shown that in a market with exposure to a large range of negatives, it was able to take its existing assets and make a stronger company, in part by eliminating noncore businesses. However, as a publicly traded company in the United States, Walmart Inc. is affected by financial analysts’ impressions. This is problematic for creating a leaner, more effective company, because analysts see any closings as a sign of weakness. For example, Brazil has been a problematic market for all retailers over the last few years. However, after Walmart closed 60 stores there, analysts – citing the decades-old South Korea and Germany divestures – started discussing the possibility that Walmart would pull out of Brazil altogether. Such speculation weakens share price and reduces Walmart’s ability to reinvest. Analysts also speculate whether Walmart will exit China, Japan, and India. However, given the impact of public perceptions on future value, any near-term market exit is unlikely. Similarly, expanding into new markets is unlikely right now, though possible if a strong opportunity comes up in a growing market at a very good price. Sudden changes in the economic and legal requirements in countries such as India, Argentina, Vietnam, Venezuela, and Cuba are possible, which could make such an opening a reality. However, as of now, Walmart has not seen any of these scenarios emerge on the international market. 22

23. 23 The Retail and Shopper Specialists While the $150 billion international company that vendors call on today is unlikely to change greatly, some gradual shifts are expected. The retailer will continue to reinforce procurement and supply-chain standards. However, those standards will be reviewed from a collaborative and analytical perspective when Retail Link 2.0 rolls out. The movement toward more engaging private label, alongside market changes that make private label more appealing, will also need to be watched. In addition, in-store opportunities will likely increase as the retailer leans on vendors to invest in higher-quality merchandising concepts that fit a changing shopper and competitive landscape. However, other efforts are unlikely to change. A central international office on the corporate campus exists, but is limited to finding and expanding best practices. Global negotiation of vendor contracts has not been successful in the past, and – given the diversity of needs across markets – is unlikely to be revived. The true benefit of centralized efforts will be in understanding best- in-class practices emerging from individual markets and then contextualizing and disseminating them for wider use. Vendors should evaluate how their investments in key markets perform, and then transform them for greater application across other markets. Despite the gradual pace of change, for U.S.-based manufacturers, Walmart International still represents the quickest way into a range of markets because its processes and requirements are already well understood. Investing in international markets through Walmart represents a strong hedge against a weakening U.S. market that can be matched only by growth by Costco and Amazon – both of which have major shortcomings for mass market- driven consumer packaged goods. It is critical to remember that Walmart International’s total sales are still expected to be greater than the sales of either of these two retailers in 2016. To be primed for success with Walmart International, global businesses should fundamentally understand and address the following five challenges: yy Walmart’s productivity loop depends on scale. yy The Market Evolution Model defines the context of market behavior. Figure 4. Top Formal Trade Retailers for Walmart’s Largest International Markets Source: KantarRetailiQ.com yy Market volatility, government regulations, and social unrest impact business consistency. yy Corruption and lack of trust are endemic in some markets. yy Finding the right balance between a global brand and local effectiveness is a struggle. Walmart’s Productivity Loop Depends on Scale Walmart’s relentless push to drive the productivity loop propelled it to become the biggest retail player in its domestic market. It is this scale, which is taken for granted in the home market, that enables Walmart to leverage its processes to such advantage. Scale creates more opportunities to shave costs through efficiency and better pricing. And Walmart dominates vendor negotiations, at times literally shifting product specifications on a national scale and dictating what become industry standards. Despite its total sales volume, Walmart International does not have the same clout. In all its markets except one, Walmart is a secondary retailer (Figure 4). The exception is Mexico, where it is the market leader and where, other than in 2014, it has been able to drive consistently profitable growth. As a result, Walmart International is at an inherent disadvantage in most markets, as competitors have the advantages of scale for products and services. U.K. Mexico Canada Brazil China 1 Tesco Walmart Loblaw Casino Alibaba 2 Walmart Oxxo Sobeys Carrefour Suning 3 Sainsbury's Soriana Walmart Walmart Gome 4 Morrisons Coppel Costco Lojas Americanas China Resources Enterprise 5 John Lewis Liverpool Metro Maquina de Vendas Walmart

24. 24 Beyond these external impacts, many of Walmart’s heritage achievements are too costly or untenable to execute in some countries. Walmart honed its supply chain through decades of experience pushing a huge volume of inventory to big-box stores through a more vertically integrated logistics system. This supply chain cannot, and should not, be replicated in markets with multiple store sizes or a limited logistics infrastructure. For markets that have undergone multiple waves of retailer acquisitions, the lack of a unified infrastructure does not even allow Walmart to scale within its own market operations. As a result, Walmart has extensively focused on increasing integration and leveraging resources within markets and regions. Over the last few years, Walmart has seen the benefits, as the reorganized Central American countries now leverage the Mexican infrastructure for sourcing and logistics. Walmart Brazil will start reaping the efficiencies of unifying three independent systems. Looking ahead, Walmart undoubtedly will continue to find opportunities to integrate operations within and among its markets. For suppliers, this is a reason global sourcing cyclically rises in interest, though it has not become realistically actionable outside of Walmart’s private brands. The Market Evolution Model Defines the Context of Market Behavior When we examine the full collection of Walmart International’s markets, we see a wide range of macroeconomic conditions, consumer expectations, and retail sophistication that together forms a unique retail context. Kantar Retail’s Market Evolution Model (MEM) is a unified framework designed to compare retail landscapes across different markets, as well as understand the retail capabilities and strategies that best align to each stage (Figure 5). As a rule, Walmart International is most comfortable when aligning its markets to U.S. and U.K. levels of execution – even when a market is not ready to adopt it. Walmart International was sometimes unsuccessful when implementing change simply because the transplanted initiative did not make sense within the context of the new market. One basic challenge Walmart encounters is a fundamental difference between company and local culture, such as expectations about working norms and shopping behaviors. This has huge ramifications on how it runs stores and appeals to shoppers. It is worth noting that Walmart Chile benefited from a long transition period from public ownership to a fully-owned Walmart subsidiary, grounding the market operations in local knowledge and expectations – for example, something that continues to benefit Walmex. Another challenging area is Walmart’s relation to the formats in the competitive environment. For example, if the majority of commerce in a market is conducted through traditional trade, the regulations and rules imposed by the formal retail sector or the government can be onerous or unresponsive to shopper needs. In addition, while nearly every market has a hypermarket concept that is similar to the one in the U.S., other formats can develop significantly stronger growth depending on the market stage. Walmart’s U.K banner Asda is losing ground to the rapid expansion of hard discounters like Lidl, because they are better able to align to shoppers’ demands in the highly competitive current retail environment. Walmart has also needed to stretch its skill set when markets did not have services it needed or benefited from to operate successfully. Entering the Latin American market forced Walmart to bridge the gap between limited consumer credit availability and shoppers’ demand for flexibility beyond upfront cash by means of its own retail credit program. In these markets, retailers were expected to extend credit to help shoppers make purchases and evolve upward into a better lifestyle. As these markets mature and consumer credit becomes available, Walmart has shifted out of the direct credit business by transitioning to co-branded partnerships with financial institutions, leading to products like prepaid cards in the U.S. or a Walmart-branded credit card. Regarding site acquisition, Walmart has owned property management businesses to get its stores built in certain markets, though it is also exiting this business now in Chile.

25. 25 The Retail and Shopper Specialists Figure 5. Kantar Retail’s Market Evolution Model With Walmart Countries Note: FT = formal trade. Source: Kantar Retail analysis FT 20%-30% of market Top 5 FT retailers <30% of FT FT 50%-60% of market Top 5 FT retailers <60% of FT FT 40%-50% of market Top 5 FT retailers <50% of FT FT 30%-40% of market Top 5 FT retailers <40% of FT Pioneers Category specialists, hypermarkets, cash & carry, and local food chains Adjacent Nation, Primary Formats Discounters and c-stores = new growth formats; hypers and C&C largest growth formats Adjacent Nation, Pioneers, and Secondary Formats Traditional Trade now impacted Pure Secondary Formats, Multiformats Drug, supermarket, category specialists Exploration Concentration Penetration Maturation FT 60%-70% of market Top 5 FT retailers <70% of FT Multiformat Dominant High-capability drug, supermarkets, and category specialists. Regrowth of specialty chains, mom-and-pops with demographic focus Postmodern Central America Brazil Argentina Mexico Chile China Japan Canada India South Africa U.K. U.S.

26. 26 Market Volatility, Government Regulations, and Social Unrest Many markets Walmart has entered have a history of market instability that makes consistent operation of a retail business difficult. Factors include frequent changes in government regulation, periods of high inflation or stagnation, political instability, and social unrest. Currently, Brazil represents an extreme case, where government instability, unstable financial systems, health threats, and a host of other issues have created an incredibly volatile situation. Economic slowdowns are prevalent in other markets, with China’s spending contraction and overall slowing growth affecting not just its domestic situation, but also rippling out to other developing markets, such as South Africa. In more controlled circumstances, some governments impose greater restrictions on retail. Walmart had entered India with the expectation that the central and regional governments would relax the ban on foreign ownership of “self-service” (nonwholesale) retail. India’s political shift in 2013 shut the door on foreign ownership for the immediate future, leading to a different investment timeline for Walmart – which is now the only major foreign retailer remaining in India. Other governments, such as those in Japan and China, are more supportive of homegrown retailers, thus putting more pressure on Walmart. Corruption and Lack of Trust Walmart International requires its employees to follow the same ethical and legal requirements as their U.S. colleagues. However, bribery and corruption are a way of life in some of the countries in which it operates (Figure 6). The eruption of bribery and corruption scandals in Mexico and India highlight the difficulties of staying within U.S. guidelines while still being effective in market. Following the scandals, Walmart committed to reinforce its ethical standards through significant legal due diligence – at a hefty price. This increased scrutiny coincides with a significant slowdown in expansion in the affected markets. In some markets, shoppers’ lack of trust in product safety or authenticity is an unfortunate side effect of limited or poor government regulation and a higher social expectation of dishonesty. Within these markets, Walmart is expected to uphold and validate product reliability to win long-term shopper trust. Walmart China’s multiple food scandals forced the retailer to spend more to tighten the chain of custody for its products as well as to test food more regularly. In the future, Walmart will likely need to invest in milder forms of building shopper trust, such as authenticating country of origin, labor standards, or organic and GMO status. Finding Balance Between a Global Brand and Local Effectiveness Walmart International has struggled with balancing its global equity with local effectiveness since its origins. Many of these difficulties arise from factors raised by the MEM, including the ability to execute on EDLP. However, Walmart’s own marketing imperatives can get in the way of aligning to cultural and lifestyle preferences. Walmart International is generally more successful the more it tailors its brand manifestations (banner, format, advertising, and assortment) to local tastes. The tug is both philosophical – a desire to align to a holistic global Walmart brand identity – and pragmatic, with potentially fewer opportunities to leverage shared resources or build scale. From a branding perspective, Walmart International’s most prominent challenge is the sheer proliferation of banners, which weakens its ability to connect brand awareness across markets. But acquired banners have a history of trust with shoppers that Walmart does not want to lose. This consumer trust also trickles down to the private brands available from both a branding and sourcing perspective. Walmex has recently shifted away from its global private brands, such as Great Value, to reinforce the homegrown private brands, such as Bodega Aurrera’s “Aurrera.”

27. 27 The Retail and Shopper Specialists Figure 6. Corruption Perceptions Index, 2015 Source: Transparency.org/cpi2015 EDLP has significant functional challenges with respect to the MEM, such as shopper preference for highly promotional pricing or price undercuts from traditional trade, as seen in China and Brazil. EDLP is also problematic because it is a singular manifestation of Walmart’s core operating principle – the productivity loop. Walmart explicitly markets EDLP to shoppers as a brand promise and internalizes it as part of its corporate culture. A lack of faith in Walmart’s ability to offer the lowest basket price, or lack of relevance to the shopper, is a blow to confidence in Walmart as a retailer. This is not just a problem for Walmart International, since EDLP’s relevance is also waning in the U.S. Today’s postmodern market shoppers have easy digital access to pricing and eCommerce fulfillment, enabling them to easily cherry-pick deals from multiple retailers, just as they did in person during earlier market stages. Walmart market operations that have deviated from the EDLP stance in recent years (e.g., Mexico, Chile, and China) have fared better by shifting the message about value to align with prevailing market winds.

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29. 29 The Retail and Shopper Specialists Robbing Peter to Pay Paul? Cross-Shopping at Sam’s Club and Walmart Supercenter By: Timothy Campbell and Rachel McGuire Successfully selling to both Walmart Supercenter and Sam’s Club can be a tricky task. Supplier strategy at one account needs to be sufficiently differentiated and coordinated with the other to minimize conflicts of interests such as SKU duplication, sales cannibalization, or preferential pricing accusations from either Walmart or Sam’s Club. Trickier still is navigating the differences between their respective shoppers. Parsing the differences between these similar and overlapping groups to determine what sets the Sam’s Club’s shopper base apart from Walmart’s should inform supplier strategy. Relatively Large Shopper Overlap Between Sam’s Club and Walmart Supercenter A full 77% of all Sam’s Club shoppers also shop Walmart Supercenter, while 21% of Walmart Supercenter’s much larger shopper base also shops Sam’s Club (Figure 1). By comparison, only 59% of Costco shoppers and 68% of BJ’s shoppers shop any Walmart format (other than Sam’s Club) at all. Two reasons contribute to this overwhelming overlap between Sam’s Club and Walmart Supercenter. The first is geographic proximity: An estimated one-third of all Sam’s Club locations are co-located with Walmart Supercenter, which means many Sam’s Club members are already shopping next door to Walmart. Second, Sam’s Club is frequently perceived as the bulk value version of Walmart, and thus carries inherent appeals for the Walmart shopper. Sam’s-Only Shoppers Are Older and Higher-Income Than Their Walmart Counterparts Sam’s Club-only shoppers (i.e., those who shop Sam’s Club but not Walmart Supercenter) are more likely to be Seniors and less likely to be Gen Xers compared with those who shop both retailers and those who shop only Walmart Supercenter (Figure 2). Sam’s Club-only shoppers also skew higher income, with 30% indicating an annual household income of $100,000 or more. Conversely, only 14% of Sam’s Club-only shoppers have household incomes of less than $25,000 a year compared with 29% of Walmart-only shoppers. Sam’s Club’s non-Walmart-affiliated shoppers skew toward wealthier Haves (households with average income of $60,000 or higher) and Seniors compared with their Walmart-only counterparts. Though Sam’s Club leadership would like to form a Walmart Supercenter: 58% Sam’s Club: 16% Both: 12% Among the 58% of households that shop at Walmart Supercenter, 21% also shop at Sam’s Club. Among the 16% of households that shop at Sam’s Club, 77% also shop at Walmart Supercenter. Cross-Shopping: Percent Shopped in Past Four Weeks: Figure 1. Past Four-Week Shopping at Walmart Supercenter and Sam’s Club Source: Kantar Retail ShopperScape® , October 2014-September 2015

30. 30 differentiated product offering and strategy around Haves, the retailer has a long way to go if it wishes to further disentangle itself from the Have-Not (households with average income of less than $60,000) shopper appeal of Walmart. At the same time, as Walmart looks to increase its penetration and deepen its relationships with higher-income shoppers, this particular overlap with the Sam’s Club shopper base demands a nuanced approach from each retailer to differentially appeal to essentially the same shopper segment. Sam’s Goal to Attract Younger Shoppers Pits It Further Against Walmart Last year, Sam’s Club President and CEO Rosalind Brewer laid out a vision that geared Sam’s Club toward a differentiated product offer and strategy designed to win over both younger and more affluent shoppers. However, the demographic composition of Sam’s Club-only shoppers versus those it shares with Walmart Supercenter indicates that, while Sam’s Club attracts a high percentage of affluent households, attracting younger shoppers such as new mothers and social couples without children will mean battling Walmart Supercenter for those shoppers’ attention and wallets. Cross- Shoppers Shop Sam's Club but NOT WMSC Shop WMSC but NOT Sam's Club Sample Size 5,823 1,745 22,044 Age 18-24 4% 5% 5% 25-34 18% 16% 17% 35-44 18% 15% 18% 45-54 20% 20% 21% 55-64 18% 17% 19% 65+ 21% 26% 20% Annual HH Income <$25K 16% 14% 29% $25K-$49.9K 26% 21% 28% $50K-$74.9K 21% 21% 18% $75K-$99.9K 15% 15% 10% $100K+ 22% 30% 15% Kids in HH Children under 19 at home 32% 26% 27% No children under 19 at home 68% 74% 73% HH Size 1 member 17% 24% 27% 2 members 38% 36% 34% 3 members 17% 16% 16% 4+ members 28% 23% 24% Generation Generation Y (born 1982 to 2002) 19% 19% 20% Generation X (born 1965 to 1981) 31% 29% 30% Baby Boomers (born 1946 to 1964) 38% 37% 38% Seniors (born before 1946) 11% 16% 11% Home Ownership Own or are buying 73% 76% 61% Rent 20% 17% 31% Live with relatives (in their home) 6% 6% 7% Race/Ethnicity White non -Hispanic 68% 73% 72% Black non -Hispanic 15% 11% 12% Hispanic 12% 11% 12% Asian 2% 3% 2% Other 2% 2% 2% Figure 2. Demographic Profile of Past Four-Week Shoppers Note: Dark gray highlighting indicates significantly greater vs. Sam’s Club-Walmart Supercenter cross-shoppers; light gray indicates significantly lower vs. cross-shoppers (95% confidence level). Source: Kantar Retail ShopperScape® , October 2014-September 2015

31. 31 The Retail and Shopper Specialists Shopping at Walmart Siphons Routine Trips to Sam’s Club – With a Few Exceptions Among Walmart Supercenter shoppers who shop at Sam’s Club, about one-half (53%) say they shop Sam’s Club monthly, while over two-thirds (68%) of Sam’s Club-only shoppers say they shop the club monthly (Figure 3). This suggests that Sam’s Club members who do not also visit a Supercenter are much more likely to include the club in their regular shopping routine, while the Supercenter siphons some of those routine trips among cross-shoppers. Interestingly, cross-shoppers are more likely to make either weekly or less-than-monthly trips to Sam’s Club. There are a couple of likely reasons for this divergence away from a monthly trip, in favor of either more or less frequent trips. On one hand, some cross-shoppers who live near a co-located Walmart and Sam’s Club are probably more likely to also shop Sam’s during a regular trip to Walmart simply because it is conveniently located. That cross-shoppers are more likely to shop Sam’s Club weekly suggests that co-location drives more frequent traffic to the club. On the other hand, some shoppers who shop both retailers are probably more prone to using Walmart Supercenter as a regular stock-up destination rather than Sam’s Club, effectively siphoning trips away from the club, which is reflected in the one-third (36%) of cross- shoppers who visit Sam’s Club less frequently than once a month. For these shoppers, Walmart Supercenter may be perceived as more convenient or less expensive than Sam’s Club. Sam’s Shoppers Are More Likely to Fill In at Walmart While Supercenter Shoppers Are More Likely to Stock Up at Sam’s The types of trips that cross-shoppers make to Sam’s Club and Walmart Supercenter do indicate some differentiation in how shoppers think about the two retailers (Figures 4a and 4b). Compared with all trips made to Sam’s Club, those made by Supercenter shoppers are slightly more likely to be stock-up trips and less likely to be fill-in trips, 7% 11% 53% 26% Sam's Club-Only Shoppers Walmart Supercenter Shoppers Who Also Shop Sam's Club Weekly Monthly Less than monthly 36% 68% Figure 3. Shopping Frequency at Sam's Club Note: Arrows indicate a statistically significant difference between Sam’s Club-only shoppers and Walmart Supercenter shoppers who also shop at Sam’s Club (95% confidence level). Source: Kantar Retail ShopperScape® , August 2015 57% 19% 6% 6% 5% 5% 2% 60% 15% 7% 4% 7% 5% 2% Stock-up Fill-in Buy specific sale items Browsing Special occasion Immediate use Buy specific coupon items All Trips to Sam's Club Trips by Walmart Supercenter Shoppers Figure 4a. Primary Reason for Most Recent Trip to Sam’s Club (Most recent trip to buy food/groceries/ HBC products) Note: Arrows indicate significant difference between all trips to retailer and trips to retailer made by past four-week shoppers of Sam’s Club/WMSC (95% confidence level). Source: Kantar Retail ShopperScape® , November 2014; February, May, and August 2015 Figure 4b. Primary Reason for Most Recent Trip to Walmart Supercenter (Most recent trip to buy food/groceries/ HBC products) 40% 31% 11% 6% 5% 4% 4% 37% 32% 13% 5% 5% 4% 4% Stock-up Fill-in Immediate use Buy specific coupon items Special occasion Buy specific sale items Browsing All Trips to WMSC Trips by Sam's Club Shoppers

32. 32 suggesting that cross-shoppers are more likely to recognize the overall value proposition of the club as a stock-up alternative to Walmart Supercenter, while favoring the (relatively) more convenient Supercenter for smaller, quicker trips. This is also reflected in the types of trips that cross-shoppers make to Walmart Supercenter: Compared with all trips to Walmart Supercenter, Sam’s Club shoppers are more likely to go there for fill-in trips, and less likely to make a stock-up trip to the Supercenter. Sam’s-Only Shoppers More Likely to Be Business Members About one-quarter (26%) of Sam’s Club-only shoppers have a business membership, whereas only 20% of cross-shoppers are Sam’s Club business members (Figure 5). Sam’s Club is clearly a destination retailer for some small-business Sam's Club-Only Shoppers WMSC Shoppers Who Are Also Sam's Club Members Sample Size 130 659 Sam's Savings 39% 43% Sam's Business 26% 20% Sam's Plus 23% 21% Not sure 14% 17% members who would not otherwise shop a Walmart banner. Though the appeal to businesses represents a key point of difference for Sam’s Club, it is not something Sam’s Club has been able to leverage for growth, since business memberships have been declining at Sam’s Club in recent years. Walmart and Sam’s Cross-Shoppers Are More Likely to Stock Up and Shop Across the Box at Sam’s Shoppers of both Sam’s Club and Walmart Supercenter tend to be more aware of the stock- up value that Sam’s Club provides over Walmart Supercenter when compared with Sam’s Club-only shoppers. Cross-shoppers are more likely to have shopped and purchased from more categories during their most recent trip to a Sam’s Club than Sam’s Club-only shoppers. For instance, 57% of cross-shoppers shopped frozen foods at Sam’s while only 43% of Sam’s Club-only shoppers did so (Figure 6). This is consistent with the notion that cross-shoppers are relatively more likely to make stock-up trips at Sam’s Club and thus cover more of the box. Some of this difference is also probably due to Sam’s Club-only shoppers being more likely to be business members, who are less likely to shop categories that do not serve a functional need for their business. Figure 5. Type of Sam’s Club Membership(s) Currently Held Note: There are no statistically significant differences between Sam’s Club-only shoppers and Walmart Supercenter shoppers who also shop at Sam’s Club (95% confidence level). Source: Kantar Retail ShopperScape® , August 2015 Meanwhile, Walmart and Sam’s Cross-Shoppers Tend to Purchase Fewer Categories at Walmart For trips to Walmart Supercenter, the situation is more mixed (Figure 7). Cross-shoppers tend to shop more of the box, like they do at Sam’s Club, but they tend to purchase from fewer categories than Walmart Supercenter-only shoppers. The differences in departments shopped and purchased at Walmart Supercenter are less pronounced than at Sam’s Club. Cross-shoppers may be more liable to browse during weekly or biweekly trips to Walmart to compare, but then are more likely to actually complete a transaction at Sam’s Club. This may suggest that Sam’s Club shoppers are especially aware of the overall value they can receive by purchasing at Sam’s Club instead of Walmart Supercenter. This price perception, however, likely does not pervade the larger Walmart shopping base.

33. 33 The Retail and Shopper Specialists Shopped Department Purchased From Department Sam's Club-Only Shoppers Walmart Supercenter Shoppers Sam's Club- Only Shoppers Walmart Supercenter Shoppers Sample Size 120 587 120 587 Edible Grocery Fresh produce 48% 51% 39% 41% Meat/seafood 46% 53% 35% 41% Frozen foods 43% 57% 36% 45% Snack foods/candy/gum 42% 45% 35% 37% Boxed or canned food items 40% 43% 34% 34% Bread/bakery 37% 44% 28% 34% Milk 35% 34% 30% 27% Nonalcoholic beverages 21% 35% 18% 29% Deli items 20% 28% 12% 19% Beer, wine, and/or liquor 15% 20% 9% 11% HH Essentials Household cleaning/paper products 32% 44% 25% 35% Pet food and supplies 16% 22% 10% 15% Baby supplies (e.g., diapers, wipes, etc.) 4% 13% 1% 5% HBC Personal care products (e.g., shampoo, soap, razors, etc.) 26% 34% 19% 22% Nonprescription drugs/ vitamins/supplements 26% 29% 19% 19% General Merchandise Books/DVDs/video games 15% 20% 6% 5% Apparel 14% 24% 4% 8% Office supplies 14% 18% 8% 7% Electronics 11% 19% 2% 4% Furniture 8% 11% 1% 1% Jewelry 6% 11% 0% 2% Mobile services (e.g., wireless carrier kiosks) 5% 7% 1% 1% Auto center 4% 10% 0% 4% None of these 4% 6% 7% 7% Figure 6. Departments Shopped and Purchased on Most Recent Trip to Sam’s Club Note: Bolding/highlighting indicates Walmart Supercenter shoppers are significantly more likely than all Sam’s Club shoppers to have shopped/purchased from that department on their most recent trip to Sam’s Club (95% confidence level). Source: Kantar Retail ShopperScape® , August 2015

34. 34 Figure 7. Departments Shopped and Purchased on Most Recent Trip to Walmart Supercenter Shopped Department Purchased From Department WMSC-Only Shoppers Sam's Club Shoppers WMSC-Only Shoppers Sam's Club Shoppers Sample Size 1,601 450 1,601 450 Edible Grocery Fresh foods 42% 43% 37% 37% Frozen foods 36% 38% 32% 32% Dry/canned nonperishable food 34% 35% 30% 30% Carbonated beverages 27% 33% 23% 26% Noncarbonated beverages 25% 24% 22% 19% Candy/gum 19% 23% 15% 19% Alcoholic beverages 9% 11% 6% 7% Cigarettes/tobacco and tobacco supplies 3% 5% 2% 1% HH Essentials Household paper products 28% 27% 24% 22% Pet food and supplies 23% 20% 19% 15% Household cleaning products 22% 25% 18% 18% Baby food and supplies 7% 6% 4% 3% HBC Skin care/hair care/personal care 31% 35% 26% 27% Over-the-counter medication/vitamins/nutritional supplements 21% 21% 17% 14% Cosmetics/fragrances 10% 11% 7% 8% Prescription drugs 8% 8% 7% 6% General Merchandise Women's/Misses apparel 13% 15% 8% 7% Lawn & garden 13% 16% 8% 7% Men's/Young Men's apparel 9% 10% 5% 4% Home textiles 8% 6% 4% 2% Shoes 8% 7% 4% 2% DVDs/Blu-ray movies 8% 12% 3% 3% Electronics 8% 10% 3% 3% Housewares 8% 7% 3% 2% Office supplies 7% 9% 4% 4% Home furnishings 6% 6% 2% 1% Fabric and crafts 6% 7% 4% 2% Kid’s apparel 6% 9% 4% 3% Toys 6% 8% 3% 3% Small appliances 6% 7% 2% 1% Infants’ and toddlers’ clothing 5% 7% 3% 2% Seasonal (holiday items) 5% 7% 3% 3% Sporting goods 5% 6% 2% 1% Automotive supplies 5% 10% 3% 5% Hardware/paint 5% 7% 3% 4% Costume jewelry/accessories 4% 6% 2% 2% Computer/video games 4% 6% 1% 1% Note: Bolding/highlighting indicates Sam’s Club shoppers are significantly more likely than WMSC-only shoppers to have shopped/ purchased from that department on their most recent trip to Walmart Supercenter (95% confidence level). Source: Kantar Retail ShopperScape® , May 2015

35. 35 The Retail and Shopper Specialists Kantar Retail Point of View: Implications for Sam’s and Walmart Teams At Walmart, Focus on Distinctive Solutions in the Stock-Up As Walmart works to differentiate its formats – especially the Supercenter and Neighborhood Market – to serve different trip types, it will be crucial to distinguish how the stock-up trip differs at the Supercenter. The retailer is intensifying efforts to offer shoppers solutions that reach across the box and that are relevant to specific occasions. As exclusives continue to be the focus at Sam’s, look for opportunities to merchandise lifestyle-oriented solutions at Walmart to serve shoppers on that stock-up trip. At Sam's Club, Offer Relevant Products and Solutions for Small Business Being a resource for small businesses not only helps gain internal buy-in at Sam’s as it solidifies a core component of the club’s announced identity, but it also helps Sam’s bolster a member segment whose traffic and membership numbers have been flagging as of late. Items that drive traffic and transform the club into a destination retailer for small businesses can have positive effects for business with Sam’s Club across categories. Furthermore, more business members at Sam’s translates to incremental sales gains rather than the cannibalization of other club locations or sales of existing items at Sam’s Club or Walmart Supercenter. Coordinate Sam’s Club and Walmart Teams Internally Suppliers need to be organized internally so that Walmart and Sam’s Club teams are not in competition with each other, but instead coordinate communication that lessens the chance of one team causing problems in the buyer-vendor relationship at the other. Coordinate new product launches and pricing with both channels and retailers in mind and be able to provide clear reasoning that will satisfy buyers as to why lower pricing or item availability is present at either Sam’s Club or Walmart and not the other. Help Sam’s Club Target Key Member Segments In 2015, Sam’s Club listed its key member growth areas: new mothers, large households, higher-income households, social couples, as well as small businesses including food service, child and elder care centers, small offices, and convenience stores. Pursuing these shopper segments can help lessen the number of trips siphoned away from Sam’s Club by Walmart and Sam’s Club cross-shoppers while building a base more resilient to economic shocks. If Sam’s Club is to grow sales, suppliers need to help the club rely less on its traditional Boomer and Senior shopper base as these shoppers continue to age and spend less in retirement. Sam’s has identified Millennials, particularly deal-conscious and aspiring Have Millennials who are willing to spend more to save more, as the demographic it must win over the next 10 years. Elevate Exclusive Offering at Sam’s Club Given the high level of shopper overlap between Sam’s Club and Walmart Supercenter, it is especially important for Sam’s Club and Walmart to differentiate from each other so they do not provide the same offer for the same shoppers. Not only does an exclusive offering add unique appeal for shoppers, it also relaxes tensions between Walmart and Sam’s teams on both sides of the buyers’ tables. Low shelf price is not as important for non–like- for-like items, and it becomes easier to make buyers from both banners happy. Exclusives further elevate the value of Sam’s Club by eliminating comparability across retailers for shoppers, while making gross margin on the supplier side more flexible.

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37. 37 The Retail and Shopper Specialists Prime Now: Amazon’s Fast Reach Into the Grocery Basket By: Robin Sherk Executive Summary Since launching in December 2014, Prime Now has quickly expanded to serve shoppers’ immediate consumables and seasonal needs. As the program refines its assortment, it is becoming Amazon’s vehicle for immediate-need groceries and consumables. As Kantar Retail monitors Prime Now’s evolution, we see this platform as a key component of Amazon’s grocery proposition. This article highlights the opportunities and implications Prime Now will have for competitors and supplier partners. Prime Now is a delivery service that fulfills orders of at least USD15 in as little as 1 hour for a fee or 2 hours for free (with tips suggested). The service is available only to those with Amazon’s paid Prime membership. Since members must use a dedicated app to shop, Prime Now is a mobile-only shopping experience. Offering a relatively limited assortment of “tens of thousands” of items, the platform is targeted to meeting the on-demand needs of Amazon’s valuable Prime shoppers. Prime Now launched in December 2014 in parts of Manhattan during the holiday season. From the start, Prime Now featured a broad selection of general merchandise and consumables items, with attention to seasonal needs. Responding to member demand, the service started to emphasize more HBC, grocery, and seasonal items (Figure 1). In select markets, grocery products included refrigerated and frozen foods, such as milk and ice cream, as well as fresh produce sold directly from Amazon. Figure 1. Prime Now’s Home Page and a Produce Listing Detail Source: Prime Now mobile app (New York City), Kantar Retail analysis

38. 38 By the end of 2015, members increasingly relied on Prime Now as a grocery-delivery vehicle. Amazon reported that 2015’s top-selling items included bottled water, ice cream, toilet paper, yogurt, organic carrots, orange juice, and candy. In fact, 8 of the top 10 Prime Now items sold in 2015 were beverages; the only top-selling general merchandise item was the Fire TV Stick. As Prime Now advances, the grocery offer continues to widen to better serve local needs. This includes the addition of restaurant and local store deliveries as well as alcohol delivery in specific markets. Prime Now’s Reach A little more than a year after launching in Manhattan, Prime Now was available in 25 U.S. markets (Figure 2). It also expanded internationally with service in select cities in the U.K., Italy, and Japan. With a recent press release asserting that “many more” cities will follow, Amazon is rolling quickly with this on-demand delivery service, both domestically and abroad. As Prime Now expands, access to free 2-hour delivery will become the norm for Prime members in major markets across the country. This fast expansion reflects the platform’s popularity. According to Kantar Retail July 2015 ShopperScape® data, 14% of Prime members had tried Prime Now, even though it is not available nationally. This proportion is similar to the 16% who have used Subscribe & Save (a national program launched in 2007) and the 12% who have tried Prime Pantry (a national program launched in 2014). These shoppers cite Prime Now as a very important factor in their decision to renew Prime. Such a strong uptake suggests the service will become an integral part of many members’ consumables shopping routine, raising the competitive stakes with local chains and click-and- collect services. Figure 2. Prime Now’s U.S. Markets Source: Kantar Retail research and analysis

39. 39 The Retail and Shopper Specialists Kantar Retail Point of View Since launching Subscribe & Save nationally and Amazon Fresh in Seattle, Amazon has continued innovating to capture a larger share of shoppers’ consumables purchasing. New models such as Prime Pantry along with new devices and services (Amazon Dash and Dash Replenishment Services) aim to help drive share. However, given its evolution and speed of expansion, Prime Now may well become Amazon’s primary vehicle for on-demand grocery delivery. In the process, these various platforms are redefining how shoppers may shop for their fill-in and stock-up trip occasions. Specifically, Amazon is focused on easing the experience and elevating expectations for its core audience – Prime members. Prime Now is another example of a member-exclusive offer, which also includes the consumables services Pantry and Dash buttons and the Elements private label brand. Amazon is increasingly focused on driving loyalty and sales with its members, who are already 55% of Amazon’s U.S. shoppers, according to 2015 ShopperScape® data. For suppliers, this is another reminder to tailor shopper insights and marketing appeals to Amazon’s members. The Prime member demands both convenience and value, and does not expect to make trade-offs between the two. This is central to Prime Now’s proposition: no charge for immediacy. The delivery window can be faster or easier than making a trip to the store, and shoppers do not have to wait at home – Prime Now can deliver to places they will be in the next few hours. This challenges traditional assumptions about proximity and convenience, illustrating how in today’s retail environment, closer does not necessarily mean handier. In addition, for competing retailers with click-and-collect services, it will become increasingly important to articulate the click-and- collect convenience proposition in the context of Prime Now’s no-charge, on-demand delivery. While Prime Now has grown quickly, Amazon Fresh, the retailer’s more traditional grocery delivery pilot, stalled after expanding to New York City and Philadelphia. This reflects a shift in tactics for Amazon’s grocery fulfillment. Instead of relying on its own fleet of grocery delivery vans, Prime Now leverages Amazon Flex fulfillment, with temporary workers using their own vehicles. This less capital-intensive and more flexible structure has helped the service expand quickly, while presumably moderating margin pressures. Suppliers working with Amazon as it quickly rolls out Prime Now should consider: Articulating a multichannel Amazon strategy: As Amazon develops a variety of shopping “channels” across Pantry, Now, Dash Replenishment, and the core site, define where and how the items in your portfolio fit across these shopping options. Do not perform a simple item audit. Instead, seek to understand how different members use each service in their routines. Making mobile the fill-in medium: With Prime Now available only on mobile, ensure your item presentation is well-attuned for this medium, and consider how its constraints will influence the type of members Prime Now attracts. Given the limits of the small screen and Prime Now’s culled assortment, expect heightened importance of top brands and items in this context. Reconfiguring trip choices: As shoppers become accustomed to using these on-demand services, identify the channels and trip types they will take attention away from. Given Prime Now’s potential to upend convenience pitches based on proximity, explore opportunities to support these stores in refining their appeals. Marketing to the on-demand shopper: With the immediacy of Prime Now, ads suggesting impulse purchases – including everything from dinner solutions to party snack ideas – can be both consideration triggers and seamless purchase occasions for a same-day event. Assess how general merchandise categories such as film and music have adapted their appeals, capitalizing on this rising touchpoint. An example of this type of appeal is the November 2015 launch of “Call of Duty: Black Ops III,” when Prime Now delivered the game to avid gamers just after its midnight release.

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41. 41 The Retail and Shopper Specialists The Disrupters Disrupted? Jet Takes on Amazon and Walmart.com on Price By: Sara Al-Tukhaim, Timothy Campbell, and Nicole Santosuosso For a retailer that is not quite a year old, Jet is making waves in the retail industry with a unique and potentially disruptive business model that is evolving daily. To top it off, it maintains a lofty goal of reaching USD20 billion in sales by 2020. But does it have what it takes to get there in the fiercely competitive online environment driven by Amazon and Walmart.com? Kantar Retail undertook a comprehensive two- phased study to determine what threat, if any, Jet poses to these established retailers. To underscore the evolving nature of the Jet business model, this study analyzes the core value proposition during Jet’s first 11 weeks of operation. When it formally launched in July 2015, Jet promised its members 10% to 15% savings in exchange for a USD49.99 annual membership fee with a free 90-day trial. Executive Summary To evaluate the full value proposition to online shoppers, we conducted a two-part analysis: individual item net pricing followed by the interactions based on basket dynamics. The results validate two key Kantar Retail insights and hypotheses: yy Jet’s original pricing model was extremely disruptive to the marketplace. In a price- transparent environment, this model can have far-reaching implications on the market when pricing “strategy” is an outcome of algorithms and price crawlers. yy Price in and of itself is less relevant when value goes well beyond shelf, or net, price. Plus, Jet is not the only retailer that has nuances to its model that encourage shoppers to derive value from their purchasing. In comparing net pricing of more than 1,000 comparable items, Jet led pricing over Amazon and Walmart.com in every category we analyzed. yy Jet’s algorithms and unique model enabled it to offer prices 7% lower than the average. Jet discounting was most pronounced in baby, household goods, and other consumables categories. yy Walmart.com compared less favorably to both Jet and Amazon. In no category was Walmart.com less expensive than Jet.com. Compared with Amazon, Walmart.com tends to be cheaper on consumables, but loses in other categories. yy Jet’s approach to using Amazon as a baseline price from which to apply discounts is validated. Excluding Jet Smart Cart discounts, Jet and Amazon prices for 59% of comparable items are the same, suggesting that Jet matches Amazon before applying extra savings via Smart Cart. At a more granular basket level, Jet offered the cheapest cart across the majority of basket types and basket sizes analyzed. yy The larger the basket, the more Jet savings added up, creating incentives for members to grow their carts. Relative to Amazon and Walmart.com, Jet demonstrates the narrowest increase in ticket when the basket grows from one to four items. It also offers the lowest basket price up to eight items when using Jet’s Smart Cart savings items as a basis for comparison – validating that its platform is designed to encourage basket building. yy Overshadowing Amazon, Walmart.com was largely second to Jet. Walmart.com was more likely to come in second to Jet than Amazon; Amazon competed more closely with Jet in consumables only. yy Much of the hit to Amazon was due to third- party sellers and shipping fees. Amazon gets dinged in particular for extra shipping fees on select items, particularly since many items were not eligible for Prime and much of the comparable Jet assortment is based on third- party items.

42. 42 Methodology Kantar Retail sought to assess pricing across Jet, Amazon, and Walmart.com to gauge the disruptiveness of Jet’s unique business model. However, net price alone is insufficient to shed light on their true competitiveness from a shopper perspective. All three retailers offer additional layers of savings to drive basket and ticket that the majority of other pricing studies fail to take into account. To follow in an online shopper’s footsteps more accurately, Kantar Retail approached this study in two phases. Phase 1: Net Pricing Analysis of Comparable Items For the first phase of this study, Kantar Retail partnered with Content Analytics to compile pricing information on thousands of items listed on Jet, Amazon, and Walmart.com. Data was scraped from the three retailers’ sites on Aug. 18-19, 2015. At this initial research phase, Smart Cart savings are included in the net price for Jet to be comparable to item-level net price on Amazon and Walmart.com. yy Cross-category representation: Pricing information on Jet was pulled from listings of 6,719 products, 3.5% of which were out of stock on Jet and 19% of which were like-for-like with items sold across Amazon and Walmart.com. Categories represented include baby, electronics, grocery, personal care, household supplies, office supplies, pet supplies, home improvement, toys, and video games. (See Figure A1 in the Appendix for SKU counts by category.) yy Base price as a comparative benchmark: Unless otherwise noted, the pricing analysis indexes the price of each item on Jet, Amazon, and Walmart.com against the average of all three prices (referred to as the “base price”). Average price comparisons in total and for each category reflect the average of these indices, weighting each item equally (i.e., the percentage price differential of an inexpensive item is weighted the same as that of a very expensive item to prevent skewing). yy Geographic considerations: To understand the extent to which geography plays a role in price, Kantar Retail assessed pricing of Jet SKUs in three different zip codes representing San Francisco, Dallas, and Boston. Because no large regional differences in base price were found, all prices assume the shopper was in San Francisco. (See Figures A2-4 in the Appendix for pricing in different zip codes.) Phase 2: Multilevel Basket Analysis to Account for Business Model Nuances To analyze the multiple layers of savings and purchase incentives that Jet’s model provides beyond net price, Kantar Retail further compared several baskets and basket sizes of goods based on the criteria described here. All pricing and basket data was compiled on Sept. 29, 2015. Unlike most item-level net pricing studies, this second phase of research stands out by replicating actual shopping experiences and examining algorithm-driven basket synergies. yy Three basket types: We compared a mixed general merchandise and consumables basket; a consumables-only basket; and a “Jet as base” consumables-only basket, selecting only items eligible for Smart Cart savings on the day of selection. yy Three sizes of each basket: We compared a one-item, four-item, and eight-item basket. This methodology captures additional layers of savings accrued from building bigger baskets, just as online shoppers would. yy 14 total SKUs: We captured prices, any additional savings (e.g., Smart Cart savings, coupons, etc.), list and discounted prices, and any reported tax and shipping costs. To prevent discrepancies, carts built on each site used a shared shipping address.

43. 43 The Retail and Shopper Specialists Research Findings Phase 1: Jet Leads in Item-Level Net Price Across All Categories In comparing the individual prices at each retailer against the base price, Jet commands a pricing lead in every category (Figure 1). yy On average, Jet.com was about 7% less expensive than the average price and 10% cheaper than Amazon. Jet.com was especially competitive in the consumables categories. Amazon came closest to retaining competitiveness in tools and home improvement, followed by the computers & electronics category. yy Jet was similarly competitive when analyzing only first-party items available through Amazon. Jet tended to be only marginally less competitive here, yet became more competitive in the tools and home improvement category. In other categories, Jet was still less expensive, but the pricing differential was not as pronounced as when all comparable items were analyzed. yy Walmart.com compares less favorably to Jet and Amazon, since it is on average 4% more expensive than the base price. Walmart.com tends to be cheaper on consumables, but loses to Amazon in other categories. Grocery is the only area in which Walmart.com is cheaper than the base price, and there is no category where Walmart.com is less expensive than Jet. Jet and Walmart.com’s competitiveness to Amazon (or lack thereof) spreads broadly across the set of examined products (Figure 2). In fact, the vast majority (86%) of all comparable items are cheaper on Jet compared with Amazon. yy If Jet’s Smart Cart Savings are not included, 59% of Jet’s product pricing matches Amazon’s exactly. This is more evidence to validate the hypothesis that Jet is using Amazon as a price benchmark before applying discounts. It is also worth noting that the Jet shelf references Figure 1. Jet, Walmart.com, and Amazon Price Indices by Category Source: Kantar Retail/Content Analytics pricing study 101 99 107 105 102 105 107 102 105 102 98 98 95 93 93 92 91 91 85 93 101 103 98 102 105 103 102 107 110 104 80 90 100 110 120 Baby Total Walmart Jet Amazon SKUs Index 1,801 92 62 88 286 90 56 89 246 92 580 93 326 91 66 91 76 94 103 100 All Comparable SKUs Amazon First Party SKUs 1,304 47 218 39 71 508 122 42 35 222 Below Base Price Index Above Base Price Index 101 99 107 105 102 105 107 102 105 102 98 98 95 93 93 92 91 91 85 93 101 103 98 102 105 103 102 107 110 104 80 85 90 95 100 105 110 115 120 Computers & Electronics Tools & Home Improvement Grocery Health & Personal Care Toys & Video Games Pet Supplies Household Supplies Office Supplies Baby Total Walmart Jet Amazon

44. 44 Amazon’s price as validation to shoppers that it is delivering item-level savings, though how Jet points to the Amazon price evolved over the weeks from a direct input at the shelf to a link to the corresponding Amazon product page. yy Jet offers more items that are cheaper than Amazon in every category we analyzed. Amazon comes closer to beating Jet on a number of equal or cheaper items only in tools and home improvement, whereas Jet has lower pricing on “only” 51% of comparable products. While this does not take Amazon coupons into account, their impact is minimal. A corresponding analysis reveals that Amazon coupons were available for only a small percentage (1.6% or 70) of comparable products, the majority of which offered a USD1 discount, while a select few offered up to 10% to 15% off. yy Walmart.com, on the other hand, is less expensive than Amazon for 37% of products, weighed down by a lack of competitiveness in categories like toys and video games and pet supplies. Importantly, these trends do not appear to vary by geography. A detailed analysis of prices available in three different zip codes (Dallas, San Francisco, and Boston) finds that the net average pricing differential was minor. yy More than 75% of items were priced the same across all three regions. yy Of items with price differentials, there was a 7% to 10% variance in items. (See Appendix Figures A2-A4 for details.) yy This suggests that shoppers have yet to realize much proximity-based savings, though Jet says this is one area it is still developing. Proximity- based savings is baked into the Smart Cart savings and therefore the net price. If geography does not make a difference, how do Amazon’s basket-building platforms like Subscribe & Save and Amazon Pantry stand up to Jet’s pricing? Nearly 10% of the 3,986 items comparable to Jet and Amazon were Subscribe & Save-eligible. To achieve a better price than Jet, Amazon shoppers would have to add at least five items to their basket to realize the highest discount available – 15% – on Subscribe & Save. yy Before applying the Subscribe & Save discount, Jet is 10% cheaper across the board when comparing just the 384 items in consumables categories available through Amazon Subscribe & Save and Prime Pantry (Figure 3). yy Jet remains competitive against Amazon when the 5% item-level subscription discount is applied. However, the 95 index across all items narrows to 97 in the health and personal care category, which represents 54% of the Subscribe & Save-eligible items. yy If Amazon shoppers build a basket of five or more Subscribe & Save items to earn the 15% discount, the balance shifts and Amazon becomes 6% cheaper than Jet. 85.5% 97.9% 97.4% 90.8% 89.4% 87.7% 87.3% 81.0% 71.2% 51.4% 37.1% 78.7% 35.9% 35.3% 30.1% 63.9% 25.4% 61.9% 52.3% 37.1% Total Baby Household Supplies Office Supplies Toys & Video Games Health & Personal Care Pet Supplies Grocery Computers & Electronics Tools & Home Improvement Jet Walmart Figure 2. Percentage of Comparable Items Less Expensive Than Amazon Source: Kantar Retail/Content Analytics pricing study