CPG Industry Trends & Drivers
2003 – 2008
February 3, 2003
www.hoytnet.com
8912 East Pinnacle Peak Road • Scottsdale, AZ 85255
Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com
Today
 Key Trends
 Implications For Retailers
 How Retailers Differentiate Themselves
 Typical Performance Scorecards
 What Suppliers Need To Do
 What Separates The “Great” Suppliers From The Average
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LabattCPGFinale.ppt
Welcome to Our Mini Workshop On CPG
Industry Trends
 This is your meeting – feel free to interrupt at any time with questions
 If you have a question, don’t be shy – it’s probably the same question
everyone else has too
 Take the best and leave the rest
 Feel free to disagree with anything we say – but if you do, you must
speak-up
 Feel free to get up and move around
 The benefits you derive from this workshop will directly reflect the
time and effort you put into it:
• Proactive participation will bring happiness and deep inner
satisfaction
• Use us! – we are here to answer your questions and clarify points
to the best of our ability
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LabattCPGFinale.ppt
Evolution of CPG Marketing: From
“Consumer Pull” to “Trade Push”
1945 - Present
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History of CPG Brand Marketing From 1945 to Present Is A History
Of Unwitting Power Transference From Manufacturers To Retailers
Period
1945 - 1975
1975 - 1985
1985 - 1995
1995 - 2000
2000 + Beyond
Trend
Characteristics
Mass Marketing
Regional Marketing
Account-Specific
Marketing
 Efficient media
 Very few trade allowances
 Definitely “consumer pull”
 Manufacturers in control
 Cable TV
 Scanners introduced
 Off-invoice/slotting becomes prevalent
 Forward buying and diverting
 Fragmented media
 Erosion of brand loyalty
 “Partnering”
 Store Brands
Category
Marketing
 Consolidation
 Trade spending explodes
 Category, not brand
 Now “trade push”
 Retailers gain control
ASM/
Co-Marketing
 Consumer becomes “self-loyal”
 Retailer becomes marketer
 All of the ground rules change
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Milestones in Trade Control Progression
Slotting
(1968-69)
Nixon Price
Freeze
(1973-75)
UPC Codes/
Scanners
Introduced
(1978)
Mass Merch.
Becomes
Competitors
(1980-82)
Trade Wrests
Information
Control
(1988)
Consolidation/
Mega-Retailers
(1999-2000)
1960
2000
Off-Invoice
(1970-71)
Introduction of
Cable TV
(1975)
Fragmentation
of Media
(1979)
6
Category
Management
(1985)
Wal-Mart Sets
The Strategy
For Everyone
(1992)
LabattCPGFinale.ppt
Present Day Core Issues
Retailers
Manufacturers
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Outlet Saturation
1950’s
Today
 No Fast Food
120K Convenience Stores
 No Mass Merchandisers
32K Supermarkets
 No Clubs
6K Mass Merchandisers
 No Supercenters
20K Drug Stores
 Independents Dominated
Drug
1K Club Stores
6K Dollar Stores
 A&P Dominated Food
 Most CPG-type Products
Sold Through
Supermarkets
McDonalds
Burger King
Wendy’s
Jack-in-The-Box
 Most Meals Prepared and
Eaten at Home
45% of Food Dollars
Spent Away From Home
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LabattCPGFinale.ppt
SKU Proliferation
SKU Growth: 1945 - 1995
60,000
50,000
40,000
30,000
20,000
10,000
0
1945-1964
1965-1980
1981-1995
1995+
Source: Insight Out of Chaos, 2001
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LabattCPGFinale.ppt
Mass Availability Of Same Items In Different
Channels
% Buyers In
Grocery
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%
Mass
62.0%
58.0%
21.8%
30.0%
22.8%
42.9%
50.3%
25.1%
45.0%
44.7%
Super
Centers
18.0%
16.6%
8.1%
11.3%
7.2%
12.1%
16.5%
6.6%
11.6%
16.9%
Clubs
12.6%
10.4%
11.9%
15.5%
12.7%
11.4%
10.4%
10.0%
10.3%
9.2%
Drug
C-Stores
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
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Price-Based Competition
Channel Pricing Index on Selected Consumables
(Scottsdale, AZ, 8/7/2002)
Formula 409
Pine Sol
Pledge
Lysol Disinfecting Spray
Windex
Arrowhead Water
Tea Bags
Maxwell House Coffee
Sweet ‘n Low
Equal
Hershey’s Kisses
M&M’s
Bath Tissue – 36-48 Roll
Bath Tissue – 12-24 Roll
Napkins
Towels (roll)
Food
Drug
Super Center
Club
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
117
100
100
120
70
100
80
121
86
78
94
100
N/A
108
99
114
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.
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Category Hijacking
Dry Grocery Sales Trends In Drug Chains vs. Food Stores
Food
‘95 to ‘99
Snacks - Health Bars & Sticks
Spaghetti - Canned
Water - Bottled
Cereal – Ready-to-Eat
Ravioli – Canned
Soup - Canned
Snacks – Potato Chips
Coffee - Ground
Soft Drinks - Carbonated
Dry Dinners - Pasta
Jelly
Dog Food - Dry Type
Cat Food - Dry Type
Granola & Yogurt Bars
387%
6%
77%
-8%
35%
13%
16%
-16%
30%
21%
-2%
24%
16%
-9%
Drug
‘95 to ‘99
681%
183%
160%
159%
128%
119%
68%
60%
59%
58%
50%
48%
41%
29%
Source: AC Nielsen
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Store Disloyalty
In 2000:
 100% of U.S. HH shopped Supermarkets 1.7x’s per week and spent
an average of $32.00 per trip.
 94% of HH shopped Mass Merchandisers every other week and spent
about $36.00 per trip.
 86% of HHs shopped a Drug chain a little more than 1x per month
and spent an average of $18.00 per trip.
 52% shopped a Convenience store about 1x per month and spent
about $8.00 per trip.
 49% shopped a Club about once every 6 weeks and spent $82.00/trip.
 47% shopped a Dollar Store once every 5 weeks and spent about
$10.00 per trip.
 And now – the internet!
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LabattCPGFinale.ppt
Trip Loss In Core Channels
Shopper Trips By Channel (1996 – 2001)
(Avg. # Trips/Channel/Year)
100
90
80
70
60
50
40
30
20
10
0
95
75
Total Trips
Down 2 Billion
Trips in Five
Years
29
Drug
180
167
11
13
23
16 15
Grocery
1996
2001
8 10
Clubs
Discount
13 15
6
C&G
Dollar
Stores
Supercenter
Source: AC Nielsen Homescan
14
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For Most Food Is Now A “Low Involvement”
Purchase…
Food As A % of Personal Consumption $
30
25
20
15
10
5
0
1960
1970
Food
1980
Food at Home
1990
2000
Purchased Meals & Beverages
BLS, 2002
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On Top Of This, We Have…
Time-Pressured, Fickle Consumers
Shopper’s Decision Time
Percent of Total Shoppers
More than 15
seconds
5 seconds or less
25%
42%
33%
6-15 seconds
Source: Price Knowledge and Search of Supermarket Shoppers – P Dickson and A. Sawyer
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LabattCPGFinale.ppt
Splintering Population Along Ethnic Lines
Projected Population Growth by Segment, 2000 - 2050
2000
Pop. Segment
2050
MM
%
MM
%
194
70.5
213
50.7
110
Hispanic
32
11.6
98
23.3
306
Black
35
12.7
59
14.0
168
Asian/So. Pacific
11
4.0
38
9.0
345
3
1.2
12
2.8
400
257
100.0
420
100.0
152
White non-Hispanic
Other
Totals
Index vs. 2000
Source: U.S.B.L.S., 2000. 2050 numbers are BLS estimates
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Splintering Along Lifestyle Lines
Growth of 55+ Population Between 2000 and 2020
(As a % of total pop.)
120
100
80
60
30% of
total pop.
22% of
total pop.
97.5MM
60.5MM
+61% vs. 2000
40
20
0
2000 (275M Base)
2020 (325MM Base)
+18% vs. 2000
Source: U.S. Census Bureau
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LabattCPGFinale.ppt
Splintering Along Economic Lines
2000 Distribution of Total U.S. Income By Population Fifths
Quintile
I
20%
49.6%
20%
23.0%
III
20%
14.8%
IV
20%
8.9%
20%
$65.7K
Middle
Class
$42.4K
$25.3K
12.5%
40%
V
$141.6K
72.6%
40%
II
Mean Income
% Distribution of Income
3.6%
$10.2K
Source: U.S. Census Bureau, 2000; Dept of Commerce
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LabattCPGFinale.ppt
No Relief In Sight
Mean Income Trends By Population Fifths, 1967 - 2000
(2000 Dollars - Per Household $K)
Top 20%
$160.0
$141.6 79.5%
$140.0
$120.0
$100.0
$80.0
$60.0
$78.9
$45.5
$40.0 $31.1
$19.5
$20.0
$7.1
$0.0
$65.7
44.4%
$42.4
36.3%
$25.3
$10.2
1967
29.7%
43.7%
2000
Source: US Census, Bureau of Labor Statistics, 2000. All data adjusted for inflation.
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LabattCPGFinale.ppt
Consumer Dissatisfaction With The “Shopping
Experience”
Is Shopping Fun? (10 = Highest)
2000 Ranking
1999
2001
1. Wholesale Clubs
7.17 (C-)
7.04 (D)
2. Mass Merchandisers
6.49 (D-)
6.69 (D)
3. Specialty Food Stores
6.90 (D)
6.76 (D)
4. Supermarkets
6.30 (D-)
6.27 (D-)
5. Chain Drug Stores
6.05 (D-)
5.93 (F)
6. Fast Food Restaurants
6.02 (D-)
5.76 (F)
7. Convenience Stores
5.12 (F)
5.14 (F)
Source:
Progressive Grocer: 67th and 68th Annual Report of the Grocery
Industry, April, 2000 and 2001
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LabattCPGFinale.ppt
Sideways Or Inconsistent Retailer Margin
Performance
CPG Retailer Gross And Net Margin Performance: FY2000 vs. FY1990
Retailers
Grocery
Gross Margin
1990
2000
%∆
25.4
28.4
Net Profits
1990
2000
%∆
12% 1.3
1.9
Drug
28.8
24.3
-16% 2.6
.6
Wal-Mart
22.8
23.0
1% 4.0
3.3
Target
27.7
31.5
14% 2.8
3.4
Costco
11.0
12.6
15% 1.6
1.2
Walgreens
29.1
28.2
-3% 2.9
3.6
Safeway
26.7
31.9
19% .3
3.4
 September, 2002 – Kroger shares hit 52 week low
 October, 2002 – Safeway downgraded because of increasing competitive threat from
Wal-Mart
 2002 – Shares of Kroger, Safeway and Albertson’s have dropped 34% since May 31 vs a
loss of 17% in the S&P 500
Source: Value Line, 1991 and 2001
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Net For Retailers:
 Consumers are becoming more “self-loyal” than store loyal:
• For example, 83% of shoppers surveyed in 2001 think all
supermarkets are alike
 Driven by:
• Price pressures
• Time pressures
• Ethnic or lifestyle preferences
• General indifference to or even dissatisfaction with shopping
experience
 Exacerbated by “choice confusion” due to:
• Outlet saturation
• SKU proliferation
 Food purchasing no longer a big deal
23
LabattCPGFinale.ppt
Retailer Response
 Foxhole mentality –
dig in and defend
 Claw profits from
every source
 With prices capped, leverage supplier resources to the hilt
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The Retailer’s Biggest Bullets:
 Supplier trade
promotion funds/slotting
fees
 Financial margin or
“float” (vendor financed
inventories)
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LabattCPGFinale.ppt
Use of Trade Promotion $ To Increase Gross
Margins
How It Works
Retail:
Cost:
Profit:
Allowance:
Total:
Retailer Invests 50%
of Allowance In Promotion:
Balance:
Margin
$2.35 (capped)
1.39 (fixed)
$0.96
$0.24
$1.20
($0.12)
$1.08
40.9%
51.1%
46.0%
 This is the heart of the retailer’s blast-furnace appetite for supplier
trade promotion dollars and the single biggest source of conflict
between suppliers and retailer today:
• Supplier = spend less/get more
• Retailer = get more/spend less
• Retailer = Controls distribution; controls shelf
26
LabattCPGFinale.ppt
Surveys Show that Obtaining Manufacturers’ Allowances
Consistently Ranks at the Top of Supermarket Priority Lists
Supermarket Priorities
Rank
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Obtaining Manufacturer Allowances
Media Advertising
Store Brand Program
Store Circulars
In-Store Promotions
Co-Marketing Programs with Manufacturers
Sponsoring Community Events
In-Store Advertising Media
Consumer Market Research
Promotion Evaluation/Follow-Up
Micromarketing
Frequent Shopper Card Program
Rating
4.4
4.3
4.1
4.1
3.9
3.6
3.5
3.4
3.3
3.2
2.9
2.9
1 = Not Important, 5 = Very Important
Source: Supermarket News Brand Marketing
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LabattCPGFinale.ppt
The History Of Trade Promotion Expenditures Since 1978 Shows
That Retailers Have Been Remarkably Successful In Achieving This
Objective
% CPG Manufacturer A&P Spending Trends:
1978-2001
1978
1985
1995
2001
% vs ‘78
Trade Promotion
33%
38%
51%
61%
+85%
Consumer Promotion
27%
27%
24%
15%
-44%
Advertising
40%
35%
25%
24%
-41%
100%
100%
100%
100%
N/A
% A&P/Total Sales
13%
N/A
22%
27%
107%
% Trade/Total Sales
5%
N/A
13%
16%
220%
Totals
Source: Carol Wright, Accenture, Cannondale, Donnelly, 1980 - 2002
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LabattCPGFinale.ppt
In Fact, The Whole Trade Promotion Thing Has Escalated To The Point
Where It Is Now Equivalent to The Roach Motel Syndrome: Once In, Can’t
Get Out
THE ROACH MOTEL
Advertising/
Feature Fees
Consignment/
Scan-Based Invoicing
Investment in CatMan
Services and CrossFunctional Selling
Teams
Supplier-Provided
Labor
Slotting Fees
Temporary Price
Reductions
Retailer-Sponsored
Local Events &
Charities
Fixture and
POS Fees
29
LabattCPGFinale.ppt
The Other Major Objective of Every MegaRetailer Is 100% Vendor Financed Inventories
This is known as selling it before one has to pay for it or
“making money on the float”:
 Supplier Terms:
2%/30, net 60
 Order Turnaround Time (from order to sale):
18 days
 “Float”:
12 days
 Size of Order:
$200K
 Overnight Interest At Prime:
6.25%
 Annual Return (365 Days):
$12,500
 Per Day
$34.24
 12 Days
$411.00
 Annual Turnover (365 ÷ 18)
20.3
 Total Annual Profit (20.3 Xs $411.00)
$8,343
30
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Beyond Trade Promotion Dollars And Vendor Financed Inventories,
Retailers Are Determined To Transfer As Many Costs Of Doing
Business As Possible To Suppliers
 Store labor (over 50% of most retailers’ operating expenses)
 Analytical support (Category Management analysis)
 Warehousing costs (slotting)
 Consignment (scan-based invoicing)
 Deductions without descriptions (triangulation/procrastination)
 Trial balloons – intimidate small suppliers first with some outrageous
demand and then work upwards, using the “cave-ins” as validators
31
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It Should Be Said That In Pursuing These Objectives, Today’s Major
Retailers Have A Very Different Definition of “Partnering” Than Do
Manufacturers (or The FMI):
“Partnering is when we are both making the same profit on
the bottom line. If I am making 2% and the supplier is
making 8%, we will finally become true partners when we are
both making 5%. Because I cannot take prices up, I intend to
get the other 3% from my suppliers.”
Retailer CEO
March, 2002
32
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Channel Trends
33
LabattCPGFinale.ppt
Food/Supermarkets
34
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Food – Industry Trends
 Channel Store Counts (from ACNielsen)
• > $4mm
23,400
• $2mm – $4mm
78,000
• Total <$2mm
31,200
• Supercenters:
1,500
 Supermarket ACV grew +3.0% in 2001 (vs. +4.8% in 2000)
 Projected five year sales growth (2001-2006) for supermarkets is
+2.4% vs. +16.8% for supercenters
 Supermarket net profit margin was 2.1% in 2001 (vs. 1.8% in 2000)
 Industry merger and acquisition was relatively quiet in 2001 (15
transactions in ’01; 16 in ’00; 25 in ’99)
Source: February 2002 Retail Forward Report
35
LabattCPGFinale.ppt
Food – Consumer Trends
 Shopper Mix: 70% Female, 30% Male
 % Household Penetration: 100% in Supermarkets vs 63% for
Supercenters (Supercenters up from 47% in 1998)
 Supermarket Frequency Down: 75 times per year (vs 85 in 1998),
Supercenters annual frequency is 18 (vs 14 in 1998)
 Weekly Shoppers: 55% in Supermarkets vs 20% in Supercenters
 Most supermarket shoppers (62%) do not bring any shopping aids
with them to the store. Only 26% bring a shopping list.
• The shopper relies heavily on in-store stimuli to help recall needed
grocery items. Marketing must therefore extend to inside the
outlet.
36
LabattCPGFinale.ppt
Food – Customer Trends
 Customer decision points continue to shift. Buying and other key
decisions are moving away from local control to HQ.
• This approach is being implemented by key large customers (e.g.
Kroger and Safeway)
 Wal-Mart:
• In terms of volume, Wal-Mart remains the biggest food retailer in
the U.S. Grocery/HBC. Sales generated through its various
formats reached nearly $71 billion in 2001, up from $61 billion in
2000
• By year end 2002, there will be 1,251 Wal-Mart supercenters in
operation (+187 units vs. 2001)
• Wal-Mart continues to test its Neighborhood Market Food and
Drug concept.
– By year end 2002, they expect to have 45-50 in operation
– Funded entirely from float = no out-of-pocket investment $
37
LabattCPGFinale.ppt
Grocery – Key Issues
 Labor sourcing, labor costs – costs now 53% of sales
 Loss of center store business to alternate formats
Sales Lost Over 9 Year Period
Total of 9 Categories: Detergent, Hair Care, Paper Towels,
Dentifrice, Diapers, Coffee, Bath, Fabric, Peanut Butter
52 Weeks Ending Fiscal Year
Grocery
Mass Merchants
Warehouse/Club
All Other Outlets
1989/1990
1998/1999
75.6%
13.1%
3.5%
7.8%
54.5%
26.9%
9.6%
9.0%
Source: Procter & Gamble and “Growing the Center Store” AC Nielsen
 Traditional focus on making money on the buy rather than on the sell =
consumer clueless
 Expensive to deal with – suppliers strategizing away from channel
 Have not developed an effective response to supercenter threat
38
LabattCPGFinale.ppt
The Biggest Threat: Supercenters Are Siphoning
Dollars Away From the Supermarket Channel.
Supermarket shoppers are daily converting to supercenters and
spending less and less in traditional supermarkets (30.5% down 1.2%)
Share/Share Chg of Supercenter Shopper $ by Channel
-0.6
A/O
30.9%
GROCERY $2MM+
30.5%
-1.2
+0.1
DOLLAR STORES
1.2%
+0.0
DRUG STORES
3.4%
CONV/GAS
1.0%
-0.2
WAREHOUSE
CLUBS
5.9%
+0.3
SUPERCENTERS
13.4%
+2.1
MASS MERCH
W/O SUPERS
13.7%
-0.5
Source: ACNielsen Cross Outlet*Facts 2000; Total US
39
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This is Starkly Illustrated Below in
Supermarket Trip Loss Between 1998 & 2001
Household Shopping Frequency
Trips per Household
75
78
Grocery
83
85
23
25
26
Mass Merch
28
'01
18
17
Supercenters*
15
14
Drug
15
15
15
15
Conv/Gas
15
14
13
13
'00
'99
'98
11
10
10
Dollar
9
10
10
Warehouse
9
9
0
10
20
30
40
50
60
70
80
90
Source: ACNielsen Homescan Panel
*Includes Kmart, Target & Wal-Mart Supercenters
40
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Food – Opportunities
78% of all U.S. households currently participate in at least one
Frequent Shopper Program
80%
66%
70%
70%
74%
78%
55%
60%
50%
40%
35%
30%
20%
10%
0%
1996
1997
1998
1999
2000
2001
ACNielsen 2001 Frequent Shopper Update
41
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Mass Merchandisers
42
LabattCPGFinale.ppt
Mass – Industry Trends
 Projected compound annual sales growth rate for the Mass Channel
including Supercenters for 2000 – 2005 is +8.4%
 Conventional Discount Stores projected growth rate for 2000 - 2005 is
+1.7%
 Mass retailers focus on adding supercenters at the expense of existing
conventional stores
 Continued store closings by regional players
43
LabattCPGFinale.ppt
Mass – Consumer Trends
 Shopper mix females 74%, males 26% which is the highest % female
shopper channel
 % household penetration in the Mass Merchandiser Channel is 97%
 Mass Merchandiser Channel is loosing household shopping frequency
from 28 trips per year in 1998 to 23 in 2001
 Average $ basket ring has increased from $36.34 in 1998 to $38.75 in
2001
 % of Weekly shoppers are 29%, +2% from 1999
 % of Monthly shoppers are 61%, +1 from 1999
44
LabattCPGFinale.ppt
Target & Wal-Mart, While Both Mass Merchandisers, Have Each Done An
Outstanding Job In Positioning Themselves Against Very Different
Consumer Segments
Target vs. Wal-Mart Shopper Demographics Indexed to Total US
Categories
Wal-Mart Super Center
Target
Income
$30 - $49
$50 - $74
$75+
109
100
74
102
117
129
Education
High School
College
Post
104
81
77
102
125
120
Home Value
$0 - $99M
$100M+
140
75
85
137
Age
18 – 34
35 – 54
55+
108
96
98
112
108
87
Source: Hoyt & Company/Scarborough Research 2000
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Drug Chains
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Drug – Industry Trends
 Projected compounded annual sales growth rate 2000 – 2005 +6.2%
 Consumer spending on prescription drugs is forecasted to grow at an
annual rate of +8.5% over the next 5 year
 Growth in pharmacy by continued competition from other retail
channels especially Supermarkets and Mass Merchandisers
 Front end sales, where competition is fiercest, have been stagnant
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Drug – Consumer Trends
 Shopper mix females 66%, males 34%
 % household penetration - 86% (same as in Y2000) and has remained
the same over the past few years
 Household shopping frequency – 15% (even vs. 2000) has remained
the same over the past few years
 Average $ basket ring has increased from $17.72 in 1999 to $19.38 in
2001
 Drug Stores continue to appeal most to a frequent shopper base that
skews slightly upscale and heavily older
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Drug Chains – Issues - Pricing
Beauty/HBC:
Walgreens
CVS
RiteAid
Kmart
Cover Girl Clean Makeup
$5.19
$5.39
$5.49
$3.49
Revlon Super Lustrous Lipstick
$8.75
$8.73
$8.75
$7.29
Maybelline Express Finish
$3.19
$3.89
$3.79
$3.29
Wal-Mart
Kmart
CVS
Eckerd
No Nonsense Regular Pantyhose
$1.87
$1.89
$2.39
$2.39
L’eggs Silken Mist Control Top
$3.24
$3.29
$3.99
$3.99
Private Label Brand Reinforced Toe
$2.97
$2.49
$1.99
$1.69
N/A
$4.79
$5.09
$5.09
$1.87
$1.89
$2.29
$2.29
General Merchandise: Hosiery
L’eggs Silky Tights
No Nonsense Sheer Toe Knee Highs
In 25 different price comparisons, the 4 largest drug chains had an
average price premium of 33% above the lowest price discounter.
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Drug Chains – Issues –
Shopper Base Demographics
% of Heavy Shoppers By Age of Female
Grocery
Conv/Gas
Drug
Discount
WHC
30
25
28
28
24
28
27
27
25
24
23
21
22
25
25
22
20
20
15
17
13
13
15
14
12
12
12 12
10
10
5
0
<35
45-54
35-44
50
65+
55-64
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Convenience & Petroleum Stores
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Convenience – Industry Trends
 Store count in 2000 was 119,800, forecast 123,000 in 2002
 Nominal sales 1995 to 2000 were +11.9% and projected to be only
+2.4% for 2000 to 2005
 Channel blurring is one of the largest challenges for Convenience
Retail
• 5% of all fuel purchases in 2001 were made at non-traditional fuel
outlets and that figure is projected to triple by 2005
 Overall In-store gross profit margin has declined steadily
• Avg. non-alcoholic beverage gross margin percentage in 2000 was
31.6%
• Opportunity for beer?
 Both in-store traffic and visit frequency declined in 2001
Source: Retail Forward Industry Outlook, December, 2001 / NACS 2001 State of the
Industry / NPD 2001 Annual Report
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Convenience – Consumer Trends
Consumer Trends:
 Shopper mix Females 48%, Males 52%
• Convenience Retail is the only channel Males dominate the percentage of
trips to the outlet
 The Convenience Retail channel has experienced a significant decline in
Household Penetration while other retail channels have remained flat or
grown slightly
• 2001 penetration at 45%, declined 7 points since 1998
 Household shopping frequency= 15 times per year (+1 versus 2000)
 Average basket ring $10.38, lowest of all Channels
 24% of visits are Pay at the Pump
• Pay at the Pump consumers reason for visit is gas only. Only about 7%
claimed to be thirsty
Sources: 2001 Household Panel Annual Review and 2002 CCNA
Consumer Segmentation Study
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Convenience –
Key Learnings & Implications Summary
 Convenience Retail is facing increased competition from other retail
channels
• Retailers rely on suppliers to develop innovative ways to maintain
relevancy for the channel
• Non-traditional gasoline retailers may utilize fuel as a loss leader
which will attract more fuel shoppers
 In store sales and traffic have declined:
• Puts increased pressure on retailers as in-store sales account for
1/3 of total outlet sales and 2/3 of the profit
Source: Convenience Store News March 2002
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Convenience Retail
Key Learnings & Implications Summary
 The consumer in this channel is more diverse than any other retail
channel
• Need for more flexible marketing programs that are relevant to
several consumer groups
 Customer consolidation levels in the Convenience Retail channel
remain at relatively low levels compared to other retail channels
• Ensure strategies and tactics are “executable” in local & regional
accounts of all sizes
• Focus on improving relationships and account coverage for “up &
down” the street customers
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Wholesale Clubs
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Definition – Wholesale Clubs
Wholesale Clubs Trade Class
 The Wholesale Club Trade Class includes membership club stores
distributing packaged and bulk foods, alcoholic beverages and general
merchandise. They are characterized by high volume on a restricted
line of popular merchandise in a no-frills environment. The average
club stocks approximately 4,000 SKUs, 40% of which are grocery
items. Examples: BJ’s, SAM’s Club, Costco
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Club – Industry Trends
 Current stores in Channel: 900 in 2001, 950 by 2002
 Third year of double-digit industry growth – +12% sales growth
 Adding more higher end merchandise to drive traffic and incremental
in-store sales
 Channel net profit margin 2.0% in 2000
 Projected compounded annual sales growth rate 2000 – 2005 +6.5%
 Channel is emerging as a alternative stock up shopping occasion to
supermarkets
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Club – Consumer Trends
 Shopper mix females 63%, males 37%
 % household penetration – 50% (+1 vs 2000)
 Household shopping frequency – 10 times per year (even vs 2000)
 Average $ basket ring $82.19 (-$0.78) highest of all channels
 Weekly shoppers in channel only 6% vs 54% in supermarkets
 Monthly shoppers in channel 20% vs 71% in supermarkets
 65% consumer shopping base, 35% business base
– BUT –
 Consumers account for only approximately 35% of sales
 Small businesses account for 65%
 The big orders are out the back door, not the front door
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Wholesale Club Group Members (Personal)
Shopper Demographics
Costco Member Demographics
1998 Survey
US Average
49 Years Old
42 Years Old
81% Are Married
59% Are Married
$68,400 Median Household Income
$35,700 Median Household Income
44% College Graduates
20% College Graduates
87% Own a Home
69% Own a Home
7.5 Length of Residence
2.9 Length of Residence
Source:
Costco 1998
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Wholesale Club Membership and Sales – 1999
Membership By Type: 1999
Wholesale
30%
9.4MM
Sales By Type: 1999
Group
35%
$20.4B
Group
70%
22.5MM
Wholesale
65%
$37.5B
 Group members drive membership fee revenues
 Wholesale members drive merchandise sales revenues
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Wholesale Business vs. Personal Sales, 2000
% Club Sales For Business vs. Personal Use: 2000
(Based 1999 Ratios Applied to 2000 Sales)
Total 2000 Sales = $57.9B
“Pure”
Business
44%
Wholesale
(Home Use)
21%
$12.1B
Wholesale Only
44%
$25.4B
“Pure”
Personal
56%
Group
35%
$20.4B
Source:
Corporate 10ks
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Wholesale Club – Issues
 Continued profitable expansion – Typical club store needs a per store
population base of 250 - 275M families to succeed:
• At 1,000 units nationally at end of 2001, Wall Street estimates that
Club maximum potential will be reached at 1,500 units in 3 years.
 Supercenter growth and one-stop shopping appeal to time pressured,
affluent two wage earner families – Clubs have lower prices but carry
only 4,000 - 6,000 items.
• Repeated surveys show that the affluent are now willing to trade
price for time savings.
• Supercenters are starting to carry wide assortment of club items
without membership fee.
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How Retailers Differentiate
Themselves
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Name that Channel:
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Surprised?
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Channel Financial Architectures Highlight
Why Finding a Consumer Niche is Critical:
Channel Financials, FY 2000 - ‘01
(% Net Sales)
Dollar
Stores
Drug
Stores
Supermarkets
Mass
Merch
Super
Centers
Clubs
Gross Margin
31.3
26.8
26.5
22.4
18.3
11.9
Operating Expense
22.7
21.0
21.6
18.7
N/A
8.5
Operating Margin
8.6
5.8
5.0
4.5
N/A
3.4
Net Profit Margin
5.3
3.5
2.1
2.7
1.1
2.0
Source: Zack’s, 5/2001. Supermarket numbers are composites
*Supercenter Financials refer to food products only
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The Differences in Financial Architectures are
Reflected in Pricing:
Retails Required To Meet Gross Margins at $1.50/Unit Cost
Diff vs.
Supermarket
Avg.
Trade Channel
Avg. Gross
Margin
Minimum Retail
Required
Dollar Stores
31.3%
$2.18
+$.14
+6.9%
Drug Chains
26.8%
$2.05
+$.01
+.05%
Supermarkets
26.5%
$2.04
–
–
Mass Merch
22.4%
$1.93
-$.11
-4.9%
Supercenters
18.3%
$1.84
-$.20
-9.8%
Clubs
11.2%
$1.69
-$.35
-17.2%
68
% +/- vs. $2.04
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When Applied To 2000 Average HH Food-At-Home Expenditures,
This Difference Can Start Adding Up To Big Savings For the Average
Family
Average Retail Margin Impact on 2000 Average F.A.H. Expenditures
Trade Channel
Avg. Gross
Margin
Difference vs.
Supermarkets
2000 Avg.
$/HH
Cost/Savings
+/- vs. $4,687
Dollar Stores
31.3%
+6.9%
$5,010
+$323
Drug Chains
26.8%
_.05%
$4,710
+$23
Supermarkets
26.5%
–
$4,687
–
Mass Merch
22.4%
-4.9%
$4,457
-$230
Supercenters
18.3%
-9.8%
$4,228
-$459
Clubs
11.2%
-17.2%
$3,880
-$807
2000 Food-At-Home Expenditures = $4,587 ($494B ÷ 105MM HH) U.S. Census 2000
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Current Retailer Objectives and Priorities
Supermarkets:
 Exploit competitive edge in perishables
 Combine full service with convenience – gasoline pumps, separate
convenience “store within a store” concept and self-scan checkouts
 Leverage heavy shopper base via technology – direct mail, FSPs
Drug Chains:
 Increase trip frequency by adding high penetration, frequent repurchase cycle elastic food items on 20/80 basis
 Become the outlet of choice for “total health solutions”
 Own the “55+” group while building a younger customer base
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Current Objectives and Priorities – More!
Convenience & Petroleum Stores
 Change image from “Cokes and Smokes” to 20/80
 Expand customer base from “young male/blue-collar” to white teens
and young adults
 Get known as “true” short-stop convenience outlet – meet needs of
“activity-rich/time-poor lifestyles”
Mass Merchandisers/Supercenters
 Continue conversion to one-stop shop supercenters
 Use entire grocery department as “loss-leader” traffic puller
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Performance Score Cards
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How Retailers Size Up Suppliers On a
Subliminal Basis
 Supplier’s overall (or potential) importance to retailer as a company
 Size and importance of category to overall store sales — whether
category is growing or declining
 Supplier’s strength in category
 Potential contribution to category growth/retailer knowledge base
 Supplier technological expertise and willingness to share
 Innovation, energy, attitude and responsiveness of supplier as a
company
 Supplier’s ability to execute at store level
 Whether supplier has size, strength and willingness to be objective
when developing total category marketing and merchandising
strategies as part of annual category business plan.
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Actual Scorecard For Evaluating Supplier
Category Management Expertise
Skill Area
Planning and
Strategy
Analysis
Criteria
Importance
• Does the manufacturer have strategic
planning skills?
• Does the manufacturer match its tactical
recommendations to the role and strategy of
the category?
• Does the manufacturer exhibit creativity in
the category plan?
• Can the manufacturer identify the market
drivers of the category and demonstrate
category expertise?
• Will the manufacturer use your POS data in
the way you intend?
• Does the manufacturer demonstrate
category expertise that includes being
aware of the role of private label within the
category?
74
Grade
5
5
4
5
5
4
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Score
Actual Scorecard For Evaluating Supplier
Category Management Expertise (cont’d)
Skill Area
Technology
Criteria
Importance
• Does the manufacturer have the necessary
technology to develop and execute a
category plan? (For example, category
analysis and plan-o-gram software.)
• Does the manufacturer have multifunctional
resources to provide a total systems’
approach? (For example, product supply,
financial operations and shelf management
systems that are all integrated.)
Consumer
Focus
• Does the manufacturer demonstrate
knowledge of what the consumer is doing in
the category? (For example, whether the
consumer is spending more or less money
in the category.)
• Does the manufacturer use:
•Diary panel
•Substitution data
•Switching and loyalty data
•Product consumption information?
• Does the manufacturer provide consumer
behavior research?
75
Grade
5
4
3
4
3
3
3
5
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Score
Actual Scorecard For Evaluating Supplier
Category Management Expertise (cont’d)
Skill Area
Criteria
Importance
Implementation
• Does the manufacturer provide resources to
5
Grade
help execute tactical plans that accomplish
the retailer’s goals for the category?
Relationship
• Does the retailer have a solid working
relationship with the manufacturer?
• If the category expert is taken out of the
process, what will happen to category
management at the manufacturer? (Is the
process personality-driven or culturedriven?)
Trust
• Do you feel comfortable sharing confidential
5
5
5
information with the manufacturer?
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Score
Actual Scorecard For Evaluating Supplier
Category Management Expertise (cont’d)
Skill Area
Commitment
Criteria
Importance
• Does the manufacturer have a long-term
Grade
4
commitment to category management from
top management down through its
organization?
• Has the manufacturer retrained its sales
5
force to acquire the new skills necessary for
category management, such as strategic
thinking, planning and working with
retailers in a more collaborative manner?
Total Score
87
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Score
SAM’s Vendor Scorecard (2000)
Action
Priority Score
Systems Required Marking on Packages
Product Ordered-Product Received (Bar Code)
Product Ordered-Product Received (UPC)
Delivery Quantity Matched Order
Accurate Information
Product Always Available
Timely Information
Good Responsive Communication
Proactive Order Status Communication
Consistent Practices
Clear Lines of Communication, Internal & External
Unit Load Integrity
Optimize Unit Load Cube
Fit the Footprint
Optimize Shelf Space
Standardized Transaction
Individual Package Performance
Systems Required Marketing on Case
Standardized Information
Optimize Transaction Cost
Minimize Total handling
Unloading Efficiency
Optimize Warehouse Turns
Optimize Numbers of Transactions
Put Up Design Matches Cons, PO Regulations
One Stop Shopping (Sales, Svc, Proc)
Full Vendor Brand Line Availability
5.0
5.0
5.0
5.0
5.0
4.8
4.7
4.7
4.3
4.3
4.3
4.0
3.8
3.8
3.7
3.5
3.5
3.3
3.3
3.3
3.3
3.2
3.2
3.2
2.8
2.7
1.3
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
Priority Score: 5.0 = Must have now (highest score)
3.0 = Must have to grow
1.0 - Important longer term
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What Suppliers Need To Do
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What Suppliers Need to Do – FOR
THEMSELVES!
 Establish and maintain above-buyer relationships!
 Add value to one’s brand beyond its distribution value by providing
“solutions” that resonate with consumers
 Grow one’s brand while growing the category at the same time
 Build “partnership equity” to solidify one’s position with mega-retailers
 Maintain profitability in the face of global sourcing and global buying
 Build brand equity via direct-to-consumer and through trade-toconsumer simultaneously (use retailers own promotion and advertising
vehicles)
 Capitalize on one-to-one marketing opportunities
 Leverage all technologies to the maximum – the web, wireless
communications and paperless transactions
 Determine which accounts are profitable vs marginal and act
accordingly
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What Suppliers Need to Do – FOR
RETAILERS!
 Focus on helping improve return on net assets (RONA) – not just
“profitable sales” or share growth
 Adjust terms or improve shipping efficiencies to effect 100% vendorfinanced inventories
 Help develop or participate in total store “themed” promotions requiring
cooperation and collaboration of a number of different manufacturers
 Provide marketing and analytical expertise to segment and market to
most profitable customers
 Become expert in store-specific marketing – defined as outlet-specific
distribution and assortment, local tie-ins and local promotions
 Develop Category Management presentations that provide consumer
solutions, not just “insights”
 Be willing to de-list one’s own brands on an outlet-specific basis for the
sake of overall category sales and/or profit growth on a chainwide basis
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What Supplier’s Need To Do:
Get The Right Mind-Set and Attitude
 Look at these challenges as opportunities rather than “problems” or
obstacles – After all, building partnership equity with 30 accounts is a
LOT easier than the 500 (or so) accounts one had to deal with in the
1970’s and 1980’s.
 Be prepared to withdraw support from or even de-list non-profitable
accounts – Anathema to traditional CPG marketers but nevertheless a
very real looming possibility in the current environment.
 Learn to think “category” and “solutions” in addition to “brand” –
Because your brand must provide value-added to the retailer’s overall
marketing mix beyond its distribution value and this comes from
ideas.
 Know that “service excellence” is now equally important as “brand
excellence” in how mega-retailers will evaluate your overall costbenefit to them as a supplier.
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Above All, Keep In Mind That The Name of The Game To Cut
Through The Clutter and Maximize ROI On Human and Financial
Resources These Days Is:
Targeting:
 Channels
 Accounts
 Stores
 Consumer Segments
 Individual Consumers
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How Suppliers Address The Issues
Trade Universe
Level I
10/50
• Best People
• Cross-Functional Selling Teams
• Focus on BOTH Supply and Demand Sides
Level II
20/80
• Supplier Employed and Trained Key
Account Managers
• Focus on Demand
Level III
All Other
• 3rd Party Sales Representation Plus
Overcalls
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What Separates The “Great”
Suppliers From The “Average”
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Answer
 Top quality people
 Top quality training
 An environment that rewards initiative and out-of-the-box thinking
 An organizational structure that brings all sales and marketing
resources to bear on the key issues – defined as:
• Integrated marketing and sales focus
• Marketing participation in key account planning
• Key account equity budgeting in annual brand planning process
• Sales teams that are empowered to spend over and above trade
promotion budgets
• Top-down commitment to excellence
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We want to thank Ronnie Tucker and
Duke Maines for inviting us and hope
that this has been both fun and helpful!
www.hoytnet.com
8912 East Pinnacle Peak Road • Scottsdale, AZ 85255
Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com