U.S. Supermarket Trends

1
U.S. Supermarket Trends
www.hoytnet.com
8912 East Pinnacle Peak Road Scottsdale, AZ
85255 Phone [phone] Fax [phone]
E-Mail chrishoyt_at_hoytnet.com
nancyswift_at_hoytnet.com
2
Today

• Consumer Trends
• Trade Trends
• Winning Business Models Success Principles

3
Consumer Trends Population Lifestyle Changes
That Affect CPG Food Purchasing Decisions
4
Key Trends

• Value Shopping Has become a national obsession
• Time Pressures Have changed what we eat, how we
  eat and where we eat it
• Population Fragmentation Is dictating the need
  to learn how to market to different ethnic and
  age groups

5
Value Shopping Root Causes
2001 Distribution of Total U.S. Income By
Population Fifths
Quintile
Mean Income
Distribution of Income
I II III IV V
20 20 20 20 20
50.2 23.0 14.6 8.7 3.5
146.0 66.8 42.6 25.5 10.1
73.2
40
Middle Class
12.2
40
Total U.S. Mean
58.2
Source U.S. Census Bureau, 2003 Dept of
Commerce
6
Value Shopping No Change In Sight
Mean Income Trends By Population Fifths,
1970-2001(2001 Dollars Per Household)
(81) Top 20
To p 20
(50)
TOTAL US MEAN (62)
2nd 20
(34)
3rd 20
(28)
4th 20
5th 20
(38)
Source US Census, Bureau of Labor Statistics,
2003. All data adjusted for inflation.
7
Time Pressures Root Causes

• 75 of families now have two wage-earner incomes.
• 65 of married women with children under six are
  in the workforce.
• 70 of working women say that the number of
  things they have to do in a day is a big cause of
  stress.
• 58 of consumers say convenience is a key
  determinant of what they eat and where they eat
  it.
• 40 of the population say they have no idea of
  what they are having for dinner at 400 pm.

8
Time Pressures Impact On Family Meal
Preparation and Eating Habits

• The average time spent in meal preparation these
  days is less than 20 minutes per day down from
  2.5 hours in 1960.

Time Spent Preparing Meals
2.5 Hours
1 Hour
20 Minutes
Source National Eating Trends Data
9
For Most, Food is Now a Low Involvement Purchase
Food as a of Personal Consumption ,1960-2000
10
Net On Time Pressures

• Quick, easy and convenient now drives the
  strategy
• Must not only include with it product
  assortments but store operations how fast the
  customer can get out the door
• Retailers must think of themselves as
  facilitators, not just conduits for products

11
Population Fragmentation Will Dictate The Need To
Market Discreetly To Very Different Population
Segments

• Chief among these are
• Young Singles
• Hispanics
• Seniors

12
Young Singles Have Emerged As A Force In Their
Own Right
2000 vs. 1970 Changing Household Size in the U.S.
105
81
69
63
40
24
Total HH (Millions)
Family HH ( of total HH)
Married HH w/child ( of total HH)

• Between 1970 and 2000
• The average size of U.S. households shrank from
  3.14 to 2.62 persons
• Households with 5 or more persons disintegrated
  from 21 to 10 (52 drop)
• At the same time, one person households
  (singles/divorced/widowed) catapulted from 17 to
  31 (82 increase)

Source US Census, Bureau of Labor Statistics,
2003. All data adjusted for inflation.
13
The Hispanic Population Is Currently The Fastest
Growing Segment of the American Public and Is
Expected To Double By 2050
Projected Population Growth by Segment, 2000 -
2050
2000
2050
MM
Pop. Segment

MM

Index vs. 2000
194 32 35 11 3 257
White non-Hispanic Hispanic Black Asian/So.
Pacific Other Totals
70.5 11.6 12.7 4.0 1.2 100.0
213 98 59 38 12 420
50.7 23.3 14.0 9.0 2.8 100.0
110 306 168 345 400 152
14
Seniors Will Comprise the Largest Single Segment
Of The U.S. Population By 2020
Growth of 55 Population Between 2000 and
2020(As a of total pop.)
30 of total pop. 97.5MM
22 of total pop. 60.5MM
61 vs. 2000
18 vs. 2000
Source U.S. Census Bureau
15
Net on Population Fragmentation

• Retailers must change their all things to all
  people and build it and they will come
  approaches and instead become experts at
  targeting specific consumer segments
• Mining ones own data and developing close
  relationships with ones heavy users is already
  the peremptory starting point
• Being willing to target and settle for a
  smaller piece of the pie is currently proving to
  be a winning formula

16
Translation to Real World Positioning Pick Your
Ground and Plant Your Flag
Income146.0

• Aging Affluent
• Favor retailers who cater to taste/ lifestyles
• Variety more important than price
• Prefer smaller stores/personal service
• Not a deal shopper
• Courtesy and experience are key

• Time Calibrators
• One-stop shopping
• Fast service is everything
• Full variety is key
• Premium quality
• Blind to deals

66.8
Hours0
Hours120
40
42.6
80

• Price Calibrators
• Completely disloyal
• Commodity vs. quality
• Cherry-picking an art
• Service, decor unimportant
• A continually moving target

• Up Comers
• Value-channel stock-up shopper
• Use supermarkets for weekly variety fill-in
• Fast service
• Key P.L. shopper
• Growing families, growing income soon to be
  affluent

25.5
10.1Income
17
These Trends Are Easy To Spot Just By Looking At
The Current Fastest Growers
Top 10 Fastest Growing CPG Categories In 2001
2001 Dollar Growth
2001 Dollar Sales (MM)
2001 Dollar Growth
Bottled Water Deli-Self Serve Butter Yogurt Frozen
Novelties Refrigerated Entrees Unbreaded Frozen
Shrimp Refrigerated shakes/drinks Health bars and
sticks Diet Carb Beverages-Rem
19.8 10.7 23.9 11.0 10.5 22.7 36.9 91.9 40
.5 10.1
2,282.2 3,446.1 1,276.5 2,289.3 1,941.2 865.
0 489.2 188.2 285.9 881.6
377.2 333.1 246.2 226.0 184.5 160.0 129.2
90.1 82.4 80.9
Source AC Nielsen Strategic Planner Food,
Drug Mass excluding Wal-Mart. 52 Weeks ending
12/29/2001
18
Trade TrendsThe Sea Change in U.S. Retailing
and the Key Trade Factors that are Driving It
19
The U.S. Food Retailing Landscape in 2003
20
Outlet Saturation

• 1950s
• No Fast Food
• No Mass Merchandisers
• No Clubs
• No Supercenters
• Independents Dominated Drug
• AP Dominated Food
• Most CPG-type Products Sold Through Supermarkets
• Most Meals Prepared and Eaten at Home

• Today
• 120K Convenience Stores
• 32K Supermarkets
• 6K Mass Merchandisers
• 20K Drug Stores
• 1K Club Stores
• 6K Dollar Stores
• McDonaldsBurger KingWendysJack-in-The-Box
• 45 of Food DollarsSpent Away From Home

21
SKU Proliferation
SKU Growth 1945 - 2000
New Food Items 1980 2,689 2000 16,390
Source Insight Out of Chaos, 2001
22
Mass Availability Of Same Items In Different
Channels

• Buyers In

SuperCenters
Grocery
Mass
Clubs
Drug
C-Stores
Non-Choc. Candy Chocolate Candy Artificial
Sweeteners Ground Coffee Dried Fruit Snacks HH
Cleaners Toilet Tissue Paper Towels Liquid
Soap Soft Drinks
79.4 83.6 80.2 90.2 83.2 78.6 86.4 77.8 55
.4 97.5
62.0 58.0 21.8 30.0 22.8 42.9 50.3 25.1 45
.0 44.7
18.0 16.6 8.1 11.3 7.2 12.1 16.5 6.6 11.6
16.9
12.6 10.4 11.9 15.5 12.7 11.4 10.4 10.0 10
.3 9.2
43.5 5.1 5.2 7.7 4.2 14.7 19.8 9.5 9.9 24
.1
9.5 1.5 0.4 1.0 0.8 0.8 1.6 0.6 0.2 20.4
Source Scarborough Research, 1999-2000
23
Price-Based Competition

• Channel Pricing Index on Selected
  Consumables(Scottsdale, AZ, 8/7/2002)

Food
Supercenters
Clubs
Formula 409 Pine Sol Pledge Lysol Disinfecting
Spray Windex Arrowhead Water Tea Bags Maxwell
House Coffee Sweet n Low Equal Hersheys
Kisses MMs Bath Tissue 36-48 Roll Bath Tissue
12-24 Roll Napkins Towels (roll)
100 100 100 100 100 100 100 100 100 100 100 100 10
0 100 100 100
61 92 68 66 59 92 49 71 92 72 66 65 54 73 60 77
53 58 57 54 37 65 45 N/A 43 48 67 54 41 57 39 73
Source Hoyt Company Store Checks w/o
8/7/2002. Largest sizes carried indexed to Food
on a per unit (oz/sheet/count) basis.
24
Other Trade Trend Tidbits

• The most successful new product introductions
  are those that save time or improve
  appearance or health
• RFID radio frequency identification tags on
  the launching pad and inevitable
• Irradiated Meats starting slowly but also
  inevitable
• Consolidation has slowed as supermarkets
  struggle to defend against the Wal-Mart
  juggernaut and try to absorb what they have
  already bought
• Everyone installing on-premise eat-in facilities
• HEB with Good to Go
• Walgreens Welcome Home Café

25
Value Retailers

• Supercenters, Clubs and Dollar Stores

26
Wal-Marts Expansion into Food

• The most significant factor in food retailing
  since the advent of self service in 1916
• Invents nothing but perfects everything
• Does nothing different but tries to do everything
  better
• Disdains emotion but rewards pragmatism,
  commitment and discipline
• Between 1980 and 2001 Wal-Mart grew 35xs
  faster than the market

1980 2001 Multiple vs. 1980
Total US Retail Sales 957B 3,500B 3.6 X
Wal-Mart (US only) 1.2B 150B 125 X
Walmart vs. Total US 35 X

27
Wal-Marts Expansion into Food

• Wal-Mart is now the nations 1 food provider
  with 2002 food sales of approximately 80B (vs.
  50B for 2)
• Objective is 30 share of every business it
  enters
• This week, USA Today reported one analysts
  forecast that supermarkets share of the grocery
  business will drop to 34 by 2010 from its
  current 53 with the bulk lost to Wal-Mart

28
The Heart of the Wal-Mart Competitive Advantage
Low Operating Costs

• Wal-Mart vs. Leading Supermarket Financials 2002

Wal-Mart Kroger Albertsons Safeway
Sales 81B 53B 36B 32B
Gross Margin 22.2 27.0 29.2 31.1
Operating Costs 16.6 22.1 24.1 25.9
Operating Profits 5.2 4.9 5.1 5.2
Net Income 3.3 2.2 1.4 (2.5)
Source Company SEC filings, Kroger
Albertsons through 3 quarters, Wal-Mart
Safeway reflect full FY2002
29
What Wal-Mart Has Done to Achieve its Growth . .
. Beyond Price

• Multi-format Discount, Supercenters, Club,
  Neighborhood Stores and on-line to address
  consumer purchase occasions
• Maintains and USES a massive database to
  understand its consumers and their shopping
  behavior
• Assorts stores based on demographics
• Allows regional variances in products offered
• Retail-tainment Fun place to Shop
• Bonds with suppliers to improve efficiency/lower
  prices
• Works to become part of the local community
• Offers parking lots for local fundraisers (HS car
  washes, etc)
• Charitable donations to local causes

30
Other Winning Formats Club Stores

• 2001 combined food sales of approximately 38.5B
• B Stores
• SAMs 18.4 498
• Costco 17.7 363
• BJs 2.4 130
• Business Model Membership fees contribute as
  much as 80 of operating profits enabling cost
  10 retails
• Demographic Target Small businesses and
  affluent consumers
• Positioning High quality national brands and
  private labels at 10-30 discounts to average
  market prices
• Average Transaction Size 80 - 85
• Penetration grew from 49 to 55 between 1996 and
  2001 trip frequency grew from 8 to 10

31
Club Service Offerings Customer Retention and
Margin Enhancement
Club Membership Services 2000

• Costco Wholesale
• Consumer Group 45
• Business 35
• Exec. Consumer, Business 100
• Executive Membership
• 2 Cash Back
• Business Credit Card Processing
• Business Equipment Leasing
• Business Health Care
• Business Line of Credit
• Business Payroll Processing
• All Members
• Auto Buying
• Business, Personal Checks Forms
• Long Distance
• Mortgage

• BJs Wholesale
• Consumer Group 40
• Business 35
• Premier Benefits
• Auto Buying
• Business Credit Card Processing
• Business Payroll
• Business, Personal Checks Forms
• Car Rentals
• Embroidered Apparel Service
• Export
• Extended Warranty
• Healthcare Network
• Long Distance
• Pre-paid Phone Cards
• Real Estate

• SAMs Club
• Consumer Group 35
• Business 35
• Elite Consumer, Business 100
• Elite Membership
• Roadside Assistance
• Home Services
• Internet Banking
• Insurance
• Savings Guide
• Prescription Drug Program
• All Members
• Auto Buying
• Travel Program
• Boat Recreational Buying
• Long Distance

Source WCF, 2000
32
Other Winning Formats Dollar Stores

• 15B channel dominated by Dollar General, Family
  Dollar and Dollar Tree
• Top 100 Rank Sales Prev Year Stores Per
  Year
• Dollar General 39 5.3B 17.0 5,540 10.8
• Family Dollar 53 3.7B 17.0 4,141 12.3
• Dollar Tree 90 2.0B 17.0 1,975 14.2
• Business Model Quality closeouts, liquidation
  merchandise priced at 30-40 below market
  averages
• Demographic Target 30 - 50K, retirees and
  those on fixed incomes
• Positioning A new market beneath the standard
  discount market
• Average transaction size 9.00 (with most items
  priced around an even 1.00)

33
Dollar Stores (contd)

• Big sellers
• Greeting cards for 1.00 (vs. 2.00 - 2.95
  elsewhere)
• Soaps and detergents
• Gift bags
• Wraps
• Hair care
• Videos
• Wine (in states where legal)
• Now beginning to focus on food Dollar General
  just added coolers in 1,400 stores to stock
  refrigerated and frozen.
• While targeted at the economically disadvantaged,
  Dollar Stores are now starting to attract the
  affluent as everyone is looking for a bargain
  these days.

34
Impact on U.S. Supermarkets
35
Trip Loss to Other Channels
Shopper Trips By Channel (1996 2001)(Avg.
Trips/Channel/Year)
Traditional Formats
Value and/or Convenience Formats
Total Trips
Down 2 Billion Trips in Five Years
180 167
Source AC Nielsen Homescan
36
Daily Conversions to Supercenters

• Share/Share Chg of Supercenter Shopper by
  Channel

-0.6
-1.2
0.1
0.0
-0.2
0.3
-0.5
2.1
Source ACNielsen Cross OutletFacts 2000
Total US
37
Huge Share Losses in Traditional Categories
Sales Lost Over 9 Year Period Total of 9
Categories Detergents, Hair Care, Paper
Towels,Dentifrice, Diapers, Coffee, Bath Tissue,
Fabric Softener, Peanut Butter
Channel Share Trends, 1999 vs. 1989
1989/1990
1998/1999
Grocery Mass Merchants Warehouse/Clubs All Other
Outlets
75.6 13.1 3.5 7.8
54.5 26.9 9.7 9.0
52 weeks ending in fiscal year Source Procter
Gamble and Growing The Center Store AC Nielsen
38
Success Principles
39
Value Retailers Success Ingredients Common
Characteristics

• Business models that automatically
  differentiate
• No deviation from original business model
• Focus on a specific consumer group
• Fluid merchandising that maximizes quick
  rotation change quick in-and-out, frequent
  surprises
• Below-market acquisition costs, low operating
  expenses below-market pricing consistency
• Leverage supplier dollars to keep prices low
  vs. enhance profitability
• Willingness to settle for part of the pie
  none attempt to be all things to all people all
  of the time

40
Four Supermarkets Who Buck the Trends

• H. E. Butt (San Antonio, TX) 295 stores,
  8.7B
• Publix (Lakeland, FL) 697 stores, 4.8B
• Wegmans (Rochester, NY) 79 stores, 3.1B
• Stew Leonards (Norwalk, CT) 3 stores 200MM

41
What These Four Companies Have in Common

• Long-term thinking All follow a strategy and
  resist reacting to daily threats
• Customer Focus Base assortment
  merchandising decisions on what their customers
  want, not on what their competitors are doing or
  on the latest hot deal
• Strong Community Ties All participate in
  contribute to local community events which they
  aggressively leverage in in-store merchandising
  and advertising activities
• Market-Leading Innovation On-premise
  restaurants, take-out food, non-food merchandise
  surprises, self-scanning self-checkouts and
  traffic directors
• Well-trained Courteous Employees The
  customer is always king
• Store as a Brand Customers know what to
  expect and can trust the experience on every
  visit

42
Moral of story

• Its not just price its a combination of
  factors, carefully blended and balanced to
  satisfy a particular consumer need or aspiration.
  Each retailer has to search within its own
  strengths to find the right formula. There are no
  easy answers.

43
We Appreciate The Time and Attention You Have
Given Us Today

• Specifically, we want to thank Alan Nissalke and
  the American Logistics Association for inviting
  us and trust that this has been both fun and
  helpful.

www.hoytnet.com
8912 East Pinnacle Peak Road Scottsdale, AZ
85255 Phone [phone] Fax [phone]
E-Mail chrishoyt_at_hoytnet.com
nancyswift_at_hoytnet.com
44
Top 15 Quick, Easy, Convenient Categories Based
on Category Dollar Growth
Sales ( MM)
Growth vs. YA
Growth(MM)
Supermarket Share
SNACKS CATEGORY DELI-SELF SERVE Potato
Chips Sliced lunchmeat ref pkgd Precut salad
mix/greens Refrigerated Entrees Shredded
cheese Fzn unbreaded shrimp BAKED GOODS
FZN Frozen entrees-Italian 1 food Health bars
sticks Frozen poultry Ready-To-Serve
Entrees Snack crackers Creamers-liquid
8564.99 3446.09 2548.96 2479.26 1853.69 864.99 17
24.31 479.24 1434.07 1215.91 285.88 883.42 135.81
496.64 517.58
7.2 10.7 7.3 7.4 9.6 22.7 8.3 36.9 8.9 9.
5 40.5 8.5 90.7 13.7 13.0
575.3 333.1 173.4 170.8 162.4 160.0 132.1 129.2 1
17.2 105.5 82.4 69.2 64.6 59.8 59.5
62.5 80.4 69.5 77.4 85.2 81.3 82.7 77.0 78
.6 78.2 44.5 62.0 74.8 61.2 84.5
Source Progressive Grocer Annual Consumer
Expenditures Study, 9/02
45
Top 15 Ethnic CategoriesBased on Category Dollar
Growth
Sales ( MM)
Growth vs. YA
Growth(MM)
Supermarket Share
Dry-mix Mexican tortillas Frozen
entrees-Mexican-1 food Frozen entrees-Oriental-1
food RTS -Oriental 2 foods Canned Veg-tomatoes
Fruit drinks canned Juice/drinks Tequila Sauc
es-Misc SS Olives-black Peppers Dry-mix
Mexican shells Cooking sauce RTS - Mexican
specialties Frozen entrees-Oriental-2 food
803.92 461.23 437.94 234.64 332.95 120.28 343.17
370.83 93.34 222.36 175.33 169.21 137.22 76.93 20.
76
10.4 19.4 10.3 15.2 9.8 32 9.0 8.2 25.1 7
.5 9.4 7.3 9 12.5 66
75.7 74.9 40.9 31.0 29.7 29.2 28.3 28.1 18.7 15.5
15.1 11.5 11.3 8.5 8.3
83.8 68.8 76.2 83.3 79.4 71.7 68.1 29.6 71
.2 81.4 76.3 84.8 78.2 80.3 84.1
46
Top 15 Health CategoriesBased on Category Dollar
Growth
Sales ( MM)
Growth vs. YA
Growth(MM)
Supermarket Share
BOTTLED WATER CATEGORY YOGURT CATEGORY Yogurt Di
et Carbonated Bev Hot Cereal Yogurt
shakes/drinks Sugar substitutes Water
purifiers/filters Refrigerated veg juice Insect
repellents Dietetic Choc Candy Wasp hornet
killers Nectars Refrigerated pineapple
juice Flying insect spray Roach traps motels
2282.17 2280.34 2185.06 881.56 834.38 95.28 237.1
9 55.62 10.62 36.79 15.25 17.71 24.74 10.28 12.99
2.27
19.8 11.0 9.7 10.1 7.1 51.2 11.3 10.3 80.3
11.4 24.5 20.3 8.5 22.0 12.3 123.8
377.2 226.0 193.2 80.9 55.3 32.3 24.1 5.2 4.7 3.8
3.0 3.0 1.9 1.9 1.4 1.3
59.4 83.2 83.4 79.6 79.2 77.3 57.5 14.0 59
.2 24.3 27.7 30.9 93.0 96.1 38.6 na
47
Top 15 Personal Indulgence CategoriesBased on
Category Dollar Growth
Sales ( MM)
Growth vs. YA
Growth(MM)
Supermarket Share
Butter FROZEN NOVELTIES Fresh cakes Packaged
sausage - dinner Shakes drinks/Refrigerated So
ur cream Cream-refrigerated Flavored milk -
refrigerated Specialty/imported cheese Fresh
rolls Natural cheese Fresh bakery Natural
swiss cheese Charcoal Frozen desserts
1276.46 1941.18 1370.04 1152.09 188.23 622.70 426
.95 452.13 408.78 643.73 388.68 133.31 164.36 373.
15 238.12
23.9 10.5 7.6 9.0 91.9 10.9 14.5 12.9 14.3
7.2 10.5 33.4 23.9 8.4 11.8
246.2 184.5 96.8 95.1 90.1 61.2 54.1 51.7 51.1 43
.2 36.9 33.4 31.7 28.9 25.1
81.4 81.7 61.7 80.1 84.0 85.3 83.7 80.0 77
.8 77.3 81.0 73.8 75.2 56.6 84.0