Prepared by:January 2012

Evaluating Club Stores andCash-and-Carries as

Foodservice Supply Sources

Introduction

3

Background

• Well-established - and growing - channel

• Leaders’ emphasis on “foodservice” is growing

• Economic conditions have changed operator behavior

• Key questions emerging: Is the club store operator customer changing? Are the purchase habits changing? What does the future hold for club stores? What is the implication for foodservice suppliers?

Objectives of Study

• Update 2006 study findings: Growth was 9% in midst of economic

boom Restaurant Depot was emerging

with 40+ units Membership had reached

100 million Distributors did not see as

threat• Determine operator usage, behavior, needs• Examine foodservice future of the club store • Assess manufacturer implications

4

Data Sources

• Site visits and market basket study• Operator survey

Fielded in December 2011 332 club store users across segments

• Operator in-person interviews• Distributor management and

DSR discussions• Club store interviews• Technomic experts

5

Highlights

• Two types of club stores targeting operators: Foodservice-focused Consumer/small business-focused

– Foodservice products are a strategic focus for both types

– Different approaches and operator response

• Interest level and usage depends on operator type

• Distributor response depends on customer size/importance

6

Club Store “Foodservice” Business

• Need to re-think “foodservice” in club store channel

• Foodservice products sold outside of core, traditional operator segments Small business F&B purchases are considerable

• Distinctions made in sizing and customer profiles

7

Current State

9

Foodservice-Focused Club Stores

• Restaurant Depot Broad geographic coverage Serves foodservice industry; not general

public

• Smart & Final/Smart Foodservice Concentrated in Western U.S. Smart Cash&Carry is regional rival to RD

• GFS Marketplace Upper Midwest and Florida locations Heavy foodservice and small business focus

Consumer-Focused (or Dual-Focused)Club Stores

• Sam’s Club National coverage Large consumer base, but “built to serve small

business”

• Costco National coverage Few SKUs, controlled margins, “treasure hunt”

experience

• BJ’s Eastern stores from Maine to Florida Acquired in 2011 by Leonard Green,

a minority owner of RD

10

11

Foodservice Growth Factors

• Geographic expansion Particularly Restaurant Depot

• Increased foodservice emphasis, esp. by Sam’s Club• Market conditions favorable for clubs• Increased understanding of operator needs by more

“consumer-oriented” club stores Pack sizes Safety considerations Improved item continuity

12

Membership Base

• Membership renewal rates are strong (85%+) Business members – 87% to 92% depending on retailer

• Focused on converting members to higher value membership plans

• Membership at consumer clubs has 5-year CAGR of 6%

Club/Cash-n-CarryMembership

(Millions)% Business

MembershipCostco 64 16%Sam’s Club 58 39BJ’s 9 15

13

2012 CORE Club Store Customers

B&I Day care facilities Caterers

Recreation Small hotels/motels w/o F&B Nursing homes

Medical offices Legal offices Jobbers/re-sellers

Churches Auto dealerships Service companies

Small “Beyond Restaurant” Operators

Small Businesses (examples include)

• Too small for distributors to serve• See little need for ongoing distributor relationship• Prefer flexibility of club store buying• Usually highly price conscious• Interest in club stores as high as ever – or higher

14

2012 CORE Club Store Customers

Independent Restaurants

Small LSRs with AUVs under $500K

Heavy base of ethnic restaurants

Single unit FSRs with AUVs under $750K

• Can’t or won’t meet distributor minimums• Driven by convenience and “see/touch/smell”• Make impulse buys/willing to alter menus• Price sensitivity has driven club store interest to new heights• Availability of perishables, non-foods is driver

15

2012 OCCASIONAL Club Store Customers

Larger Independents/Small Chains

2 to 3 locally concentrated units

• Not a universal solution• Loss of buying power and logistics

complexity are concerns• Price stability a major plus

(commodity costs are troubling)• Decision makers like control• Club stores have role more than in past

16

2012 Club Store NON-Customers

Regional or Small Chains

• Delivery is a requirement• Item continuity is not “guaranteed”• Buying power is thought to be significantly reduced• Distributors are considered highly supportive• One-off, emergency sourcing is only interest

I used to shop frequently at Restaurant Depot until I got busier and my restaurant grew. I had to understand that my time is better spent developing my business rather than doing such time intensive work.

– Multi-Unit Operator ($1 million AUV)

More than 3 to 4 units

Operator Behavior and Perceptions

18

Appeal of Club Stores

• Industry conditions have further motivated independents to examine club stores No minimum orders Perceived price advantages Convenience (shop as needed)

• Small multi-unit operators re-examining alternatives Not just emergency source Specialty items Commodities Supplies/non-foods

19

Appeal of Club Stores

• Shopper can “see/touch/smell” Major plus for executive chefs Can examine all items, not just broadliner samples

• Quality goods Perception that item quality mirrors that of broadliners

• Package size Space constraints often cited by kitchen personnel

• Brand names and private label Choice exists for BOH/FOH Decisions can be made on category-by-category basis

20

Restaurant Depot: Unique Solution

• Double-digit sales growth

• “Passionate” base of customers Viewed as more comprehensive

sourcing solution than other club stores

• Operators cite many “pros”: Product selection/variety Quality/price relationship

• “Cons” exist but are not deterrent for small operators “Controlled chaos”

21

Appeal of Restaurant Depot

I don’t specifically tell my distributors that I am buying a lot of my food at

Restaurant Depot. But I talk to them a lot about pricing - all the time.

They will tell me that their quality is better, and offer to take me on a tour of their distribution centers. But I don’t need that. They figure out that I am going to Depot, especially when I’m no longer ordering certain things from them. They know what’s

going on. At the end of the day, it’s about the bottom line.

- Independent FSR ($500k to $750k in volume)

I shop at Restaurant Depot for the variety. They’ve got everything a restaurant needs. Whether you need dry goods, napkins, tomatoes, or a cocktail shaker, they have it. It’s a one-stop-shop for everything. It’s great not having to go to

multiple places.

- Independent Bar & Grill ($500 to $750k in volume)

Increased42%

Not Changed48% Decreased

10%

Operator Usage over Past 24 Months

% of Foodservice Customers

• Average member buys 20% of F&B and 16% of non-foods from club stores

22

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Reasons for Increased Use

Prices are better

There is a broader selection & variety of products

Ability to browse

Price is consistent

My overall business is better

Trust that I am getting reasonable pricing

Ability to order ahead and pick up

Added fuel surcharges from my primary distributor

36%

29%

23%

19%

19%

18%

18%

16%

• All aspects of cost (actual, consistency, trust, comparables) are relevant for the customer

24Alcoholic Beverages

Non-Alcoholic Beverages

Chemicals

Dairy

Fresh Proteins

Fresh Produce

Refrigerated & Frozen

Supplies

Canned & Dry

Disposables

5%

16%

19%

22%

24%

31%

33%

34%

36%

37%

Category Purchases

“Usually” or “Typically” Purchase

• Better price and product selection are most common purchase drivers, regardless of category

25

Operator Evaluation of Supply Alternatives

Operator Perceptions(Rating of Excellent or Good)

Primary Distributor Factor

Primary Club Store

Club vs. Primary Distributor

94% Convenience 87% -779 Competitive Prices 91 +1284 Selection of Product 80 -485 Has Brands I Need 77 -881 Knowledgeable Staff 55 -2683 Helpful Staff 67 -1685 Overall Service 75 -1090 Quality of Offerings 83 -782 Packaging 87 +579 Case Sizes 86 +7

26

Market Basket Price Comparison

Best Pricing*

SourceFood &

BeverageNon-

Foods

Restaurant Depot xMajor National Distributor

Major Club Stores x

*National broadliner pricing reflects delivered price to Tier 1 account.

• Major consumer-focused clubs have very similar pricing

Club Store Market Profile

28

Club Store Performance

$135

$95

1,7061,502

1,9251,740

$64

$44

Total Sales ($B) Total Units F&B SKUs F&B Sales ($B)

+7% +3% +2% +8%

29

U.S. Club Store Foodservice Sales

Foodservice $20-22

33%

Consumer $21-2334%

Small Business F&B $20-22

33%

*Percentages based on midpoints of ranges

• F&B = 47% of club store sales

Total F&B Sales = $64 billion

Private Label Emphasis

2006 2011

$5.3

$7.6

Private Label Food and Beverage Sales ($B)

+8%

• Private label equals 12% of club store F&B sales

30

Future Club Store Environment

32

• Increased emphasis on private label Restaurant Depot has 15 brands Sam’s Club has dedicated foodservice

private label – Bakers & Chefs brand:

» 2006 = 34 items, 2011 = 134 items

Costco focuses on Kirkland Signature– Develops co-branded private label

products» Turkey breast with Foster Farms » Soup with Campbell’s

Private Label Strategies

33

Distributor Response

• Acknowledge growing customer use• See clubs as bigger threat• Response different for large independents• COP not thought to be at risk• See most movement in:

Non-foods Commodities (e.g., flour, sugar, fryer oil) Specialty items (e.g., ethnic ingredients, specialty

cheeses)

34

Future Purchasing

If there was a more meaningful customer loyalty program (e.g., cash back)

There was an option to get special orders

They had a broader selection of items

The checkout process/time was improved

They maintained better item continuity

The prices were better for the items that I buy most of

They had a better selection of brands

63%

65%

67%

69%

71%

73%

83%

“I would purchase more from club stores if…”

• 38% of operators using club stores anticipate increasing shopping frequency; only 3% expect a decrease

$55$43

$29

$21

Future Growth Expectations

$170

$135

2015 2011

1,850

1,702

2015 2011

Total Sales ($B) Total Units F&B Sales ($B)

+6% +2% +7%

*Assumes 2.5% inflation

$84

$64

F/S

Other

2015 2011

35

Outlook and Implications

37

Preliminary Hypothesis

• Too many difficulties/complexities• As operator reaches certain size:

Distributor attentiveness increases Distributor prices decrease

• Support, guarantees, consistency are huge requirements

Club stores have become a more viable, complete sourcing solution for large, mainstream independents.

Conclusion: Not True Yet

Hypothesis

BUT...

38

Leveraging Club Stores

• Large independents and small multi-units will leverage club store pricing against distributors Price transparency has impact Club stores maintain margin caps

• Distributor profitability will be affected Will have to “sharpen pencil” and “over-service”

• Will utilize both sourcing alternatives

• Category by category decisions

39

Expansion Strategies

• 77% of club store customers travel fewer than 10 miles Convenience is a driver

• Restaurant Depot is highly successful with new openings Management sees widespread

expansion potential

• Independents will gravitate to new RD locations Base of small (under $500K)

operators is huge

• Costco will open more than 10 per year

40

Broadening Operator Appeal

• Channel will respond to the needs of the operator: Possibility for payment terms New checkout practices (including

loading support) New/expanded small business loan

programs Greater use of category experts on

floor Expanded selection of foodservice-

specific items

41

Small Business F&B Potential

• Small businesses have flocked to club stores• Converting from small distributors, OCS, grocery

stores, office supply, etc.• Trend will continue• Categories in most demand include:

Non-alcoholic beverages Coffee (along with sugar packets, cups, etc.) Pantry items Condiments Snack foods

42

Landscape Change

• National broadliners have taken note of: Restaurant Depot success GFS Marketplace value to Gordon Food Service

• Power distributors will evaluate model

• Likely to be at least one new foodservice-focused club entrant in next three years

• BJ’s acquisition by Leonard Green may lead to change Unit conversions?

Recommendations

44

Recommendations

• Design and develop distinct club store strategies targeted to three club store models

• Understand the club stores’ buying principles Lowest pricing is paramount to consideration Develop items with foodservice and consumer appeal Consider offering test programs to club stores Consider “in-and-out” or “treasure hunt” to get placement

Presence in channel is imperative to reach foodservice and small business

45

Recommendations

• Explore co-branding opportunities Understand private label priorities of retailers Stores are focusing on developing partnerships

– Co-branded items can improve quality perception from operator perspective

– Be prepared to open R&D/manufacturing process to potential partner» Cutting cost and retaining quality is expected

46

Recommendations

• Differentiate packaging Multiple requirements

– Ease of handling and storage » Including store exit (where advertising potential

also exists)– Safety assurances – Size requirements vary by retailer– Tell “story” on packaging

» Club stores want leading brands and/or brands with a “story”

47

Recommendations

• Develop educational merchandising/signage support Lack of customer service personnel in stores Lack of category/product support is leading complaint Club stores want manufacturer-driven assistance

• Take advantage of business-only hours Foodservice sample programs Menu/application/cost control advice Share consumer insights

– Independents may not know brand preferences

48

Recommendations

• Effectively target club store customer Know who they are Know why they are in club stores Know what they want

• Embark on aggressive campaign to educate club stores on… Operator needs Category importance Particularly non-foods

Appendix

50

Size and Growth of Channel

Club/Cash-N-CarryU.S. Sales

($B)Annual Growth

(Since 2006)Costco $ 62.5 8%Sam’s Club 49.5 5BJ’s 10.6 6Jetro/Restaurant Depot 6.0 18Smart & Final/Smart Foodservice 2.4 4GFS Marketplace/Other 3.5 4Total $134.5 7%

Source: 2011 Warehouse Club Industry Guide (HHC), Technomic , company reports

• Growth rates remain strong given club members’ need for value

51

Unit Growth in Channel

Club/Cash-n-Carry

U.S. Units (2011)

Annual Growth(Since 2006)

Costco 429 4%Sam’s Club 609 1BJ’s 189 3Jetro/Restaurant Depot 82 7Smart & Final/Smart Foodservice 250 1GFS Marketplace 147 3Total 1,706 3%

Source: 2011 Warehouse Club Industry Guide (HHC), Technomic , Company reports

• More than 200 units have opened since 2006

52

U.S. Club Store Foodservice Sales

Club StoreFoodservice Sales

($B)Costco $5-7 Sam’s Club 5-7BJ’s 0-1Jetro/Restaurant Depot 5-6Smart & Final 0-1GFS Marketplace/Other 3-5Total $20-22% of Total Club Store Sales 16%

Source: 2011 Warehouse Club Industry Guide (HHC), Technomic, J.M. Degen & Company