Presented by: GROCERY WEBINAR: CHARTING THE TIPPING POINTS John Rand Senior Vice President September...

Presented by:

GROCERY WEBINAR: CHARTING THE TIPPING POINTS

John RandSenior Vice President

September 12, 2013

Alida DestrempeAnalyst

© Copyright 2013 Kantar Retail

AGENDA

• The Growth of Kroger

• The Shrinking of Safeway

• The Physical vs. Digital World

2


Kroger Will Be a $100B Company This Year

How?

•Expanding its footprint (new stores, new banners)

•Building on new opportunities, expanding capabilities.

•Keeping existing stores productive & profitable.

•…plus a few more reasons

Source: Kantar Retail analysis 3


Kroger Store Growth has Been Steady

• Slight store growth spurt during 2003-2004 as a result of its supermarket format expanding its footprint in existing operating areas.

• Post-recession, Kroger had kept building growth minimal

Source: Kantar Retail analysis; company reports 4


Spending: Past & Outlook


$1,778

$2,126 $2,149 $2,150

$1,919 $1,898

$2,064

$1,700$1,900 $2,000 $1,900 $1,964

$1,764

$2,000

$2,400

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2006 2007 2008 2009 2010 2011 2012

Capex Actual Capex Guidance

2013

US

D m

illi

on

$1,778

$2,126 $2,149 $2,150

$1,919 $1,898

$2,064

$1,700$1,900 $2,000 $1,900 $1,964

$1,764

$2,000

$2,400

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2006 2007 2008 2009 2010 2011 2012

Capex Actual Capex Guidance

Capital Spend Allocation


A Shift in Kroger’s Capex Spend

Source: Kantar Retail analysis; Kroger 2013 Fact Book 6

Supermarket Support = technology & logisticsOther Retail = c-stores & jewelryOther = Mfg, lease buyouts, other

Clues to Future Investment?Major supermarkets shrinking since ‘10

Minor supermarkets relatively stable

C-stores stableReal Estate

Development Growing

Sh

are

of

ca

pe

x s

pe

nd


Where are the Growth Opportunities for Kroger?Small and Discounter Formats Seem Promising

Source: Kantar Retail analysis; company website 7

SmallerLarger

“Small Stores” Discount Format Price Impact Warehouse


As Kroger Grows, Choices are LimitedHarris Teeter was a Great Option

Source: Kantar Retail analysis; Kroger 2013 Fact Book 8

Why?•Acquisition that is beneficial for all parties involved.•Will help strengthen both Harris Teeter & Kroger’s brand•Enables both to quickly become larger •Helps both maintain their leading positions while merging / blending capabilities.

New States for Kroger: DE, FL, MD

Expansion Opportunities: NC, VA, SC, TN, GA, DC.


Kroger is Familiar with AcquisitionCorporate History Full But Its Been A While

Source: Kantar Retail analysis; kroger.com

1883-1925 1928-1955 1959-1970 1978-1990 1991-20032004-

Present

Sales growth

•1883: first store•1902: $1.7 million in sales

•1952: $1 billion in

sales

•1980: $10 billion in sales

•2005: $60 billion in sales

Acquisition/store growth

•1929: 5,575 stores

•1983: Dillon•1984: Tom

Thumb•1985: M&M

Super Markets

•1999: Purchases Fred Meyer

for $13 billion

Innovation•1930: Kroger

Food Foundation

•1972: experimental

scanner checkout system

•2004: dunnhumby

USA

Executive changes

•1930: Albert Morrill named Pres. & CEO

•1942: Charles

Robertson named head

•1964: Jacob Davis named Pres. & CEO

•1970: Herring named Pres. &

CEO

•1978: Everingham

named Pres. & CEO

•2003: David Dillon named

CEO

9


Acquisition Creates Complexity

Source: Kantar Retail analysis; kroger.com 10


Yet Creates New OpportunitiesA Good Kick to Move Out of Pilot Stage


VS.

Kroger’s digital initiatives have been in pilot mode for some time, though it is encouraging that the retailer brought on a

number of new hires to support its digital efforts.

• In-store kiosks

• Checkout scan systems

• In-store handheld scanners

• King Sooper’s HomeShop grocery delivery

•Testing grocery pick-up

VS.


Blurring the Line Between Online & Store

12

Harris Teeter has one of the stronger models

Source: Kantar Retail analysis; retailer websites & store visits


Still Won’t Lose Sight on its Existing StoresSales Per Square Foot



Remodels Part of the EquationHistorically, Kroger has relied more on its existing stores

Source: Kantar Retail analysis; Kroger Investor Site and Store Visits 14

Local initiatives, entrance of new categories, better solution sets, use of digital, etc.


Strategic Merchandising Efforts Get Involved!!

Source: Kantar Retail analysis; store visits 15

Mixing in GM

Solution

Brand Names Leveraged


Implications for Suppliers: • Kroger’s scale has other consequences for suppliers:

– Leverage its bargaining power

– Increasing demands

– Cost to serve will go up

• Growth through New Formats

– Different format = different strategies (possibly different shopper)

– Pressure on suppliers to cut/change t assortment

• Harris Teeter Merger will Create New Opportunities, but New Challenges

– Transition of private label, pricing, shopper analytics

– Differences between Kroger and Harris Teeter shoppers.

– Digital will be a major part of merger

• Growth from Existing Stores

– New strategies underway… get involved!



Shrinking of Safeway

17


First: Understanding Safeway’s Financial Focus

• Safeway remains a financially driven company–Robert Edwards also has a strong financial background. He joined Safeway from Maxtor Corporation, where he served as EVP and CFO. Edwards also held executive leadership positions at Imation Corporation and Santa Fe Pacific Corporation.

Robert Edwards seems to be following Steve Burd



Signs Safeway was Ready to Sell


• Heightened competition in the market may have a dampening effect on Safeway’s store performance.

• As years progressed, the attention toward non-core markets (non West Coast) took a back seat.

• Safeway has always been a financially driven company.

• Stock price trending downward.

• The selling of assets allow any retailer to lower its overall operating costs (on a total company basis) and help Safeway’s bottom line.

• Cash position was on a downward trend, selling of assets may help improve this metric.

Safeway’s Stock Price

Safeway’s Operating Cash Flow


The Aftermath: Opportunities for Growth Yet the transition phase will be challenging


The Challenges

The opportunities

Though we are starting to see Safeway investing in it stores (through recent remodels), the

retailer continues to value shareholder opinions more than

operations.

Safeway may continue to struggle to widen its focus in the US, where

markets further from California are still struggling to compete amidst growing

competition.

Cash to Invest Narrow Focus

The U.S. operations will be even more dominant now that its Canada operations are no

longer in the picture.

Safeway generated a fair amount of cash from the sale of its Canada

operations (as well as Genuardi’s) which it can invest back in its stores.


Narrow Focus May Be Good… We Are Starting to See Safeway Make Improvements


We can’t predict the future, but Safeway is shedding light on strategies that seem promising for its remaining US operations:

• Remodels, or “Lifestyle Enhancements”

• Aiming to fix center store issues

• Personalization

• Health & Wellness provider (coincides with private label)

• The “other” non-core grocery businesses


Lifestyle EnhancementsDubbed “Next Gen Retail”


Center Store

Project

Center Store

Project

Living HealthyLiving

Healthy

Everyday EssentialsEveryday Essentials

Meals & Ingredients

Baby next to Pet

“Often families with babies generally have pets.”

– Robert A GordonSafeway VP & General Counsel


May Help Solve an Industry Problem

23 Source: Kantar Retail ShopperScape®, February 2013

*Read as: Among suburban shoppers, 12% said they mainly shop the center store of the supermarket.Note: Arrows indicate significant difference between suburban and urban shoppers 90% confidence level)

• Making “wow” merchandising• Guiding,

directing, leading the shopper down

the aisle


This is “MY” Trip Personalizing the Experience

24

The shopper’s expectation of tailored price, promotion, and product.

Source: Kantar Retail analysis; Safeway.com


My SimpleNutrition Will Challenge SuppliersPush Shoppers Elsewhere

Source: Kantar Retail analysis; Safeway.com & Company Reports 25

Substitute items can be Safeway brands, as Safeway’s top branded

items fall in the “nutrition” bucket.

Developments:

•Plans on expanding Open Nature into 11 new categories in 2013. The retailer recently rolled out new items in cereal, meat, crackers, and dip.

•Continues to re-invent O Organics. More specifically, Safeway either revamped items in the dairy, baby, and produce categories in 2012 and will continue to do so in 2013.

•Made changes to Eating Right’s branding and packaging to better reach and speak to specific shopper groups.


How Many People Affected?•In 2014, about 14 million people gain coverage—about 4% of population. About half covered via government (e.g., Medicaid)

•By 2022, about 30 million gain coverage—nearly 9% of population. More than one-third covered by government programs.

How Many People Affected?•In 2014, about 14 million people gain coverage—about 4% of population. About half covered via government (e.g., Medicaid)

•By 2022, about 30 million gain coverage—nearly 9% of population. More than one-third covered by government programs.

Health Care Reform: Key FactsImpact will be most felt in 2014

Sources: National Health Expenditure Projections, Centers for Medicare & Medicaid Services, U.S. Congressional Budget Office, and Kantar Retail 26

What is Profile of Newly Insured?•Tend to be healthier, younger and lower income than average population.

•About 57% are between 18 and 44 years old compared with 37% of overall population

•About 63% have annual household income of less than $50,000, compared with 43% of overall population.

What is Profile of Newly Insured?•Tend to be healthier, younger and lower income than average population.

•About 57% are between 18 and 44 years old compared with 37% of overall population

•About 63% have annual household income of less than $50,000, compared with 43% of overall population.

How Will Their Needs Differ?•Their spending is expected to skew toward prescription drugs, physician/clinical services.

How Will Their Needs Differ?•Their spending is expected to skew toward prescription drugs, physician/clinical services.

What is Overall Growth Impact?•Growth impact will be most evident in 2014, when there is biggest single-year addition of newly insured.

•Expected to add 2.1 percentage points to growth in U.S. health care spending in 2014

•In longer term, the newly insured will add marginally to growth in health spending, which primarily will be fed by an aging population and demand that improves amid a recovering economy.

What is Overall Growth Impact?•Growth impact will be most evident in 2014, when there is biggest single-year addition of newly insured.

•Expected to add 2.1 percentage points to growth in U.S. health care spending in 2014

•In longer term, the newly insured will add marginally to growth in health spending, which primarily will be fed by an aging population and demand that improves amid a recovering economy.

What is Category Growth Impact?•Growth in prescription drug spending that is 4 to 5 percentage points higher in 2014 than without health care reform.

•Growth in physician, clinical services that is at least 3 points higher in 2014 than without health care reform.

What is Category Growth Impact?•Growth in prescription drug spending that is 4 to 5 percentage points higher in 2014 than without health care reform.

•Growth in physician, clinical services that is at least 3 points higher in 2014 than without health care reform.


Health & Wellness Store Within-A-Store Concept

27Source: Kantar Retail analysis; store visits & Flickr.com

Tying in pharmacyTying in pharmacy

Display signage that

ties to overall H&W

message

Display signage that

ties to overall H&W

message

Self-service station

Self-service station

Shelf /marketing signage lighting Shelf /marketing signage lighting

Extending Pharmacy Business Across the

Store

Extending Pharmacy Business Across the

Store


Can Safeway Capture A Share of This?• Safeway did remarkably well in capturing Rx during the Walgreen’s /

Express Script stand-off last year

• Shoppers can discover the convenience of having Safeway prepare their ‘scripts while they shopped for grocery – and Safeway can gain a lot of traffic and basket

• Safeway has shown a lot of interest in health-care related programs in the past



PharmacyThree Key Directions


Competition Investment Resources

Competition Investment Resources

Technology Staffing Availability

Technology Staffing Availability

Portability Information Empowerment

Portability Information Empowerment


Alternative Revenue Growth EnginesBlackhawk, fuel growth continue to accelerate

Source: Kantar Retail analysis, company reports 30

Both are playing a larger role at the store levelBoth are playing a larger role at the store level

The expansion of its fuel program from 23% to 93% (343 stations to 2200) will help Safeway

build top line sales and enhance its value proposition. Safeway’s partner fuel rollout is on

track and in most of its U.S. divisions. The launch of Texas should be complete in the early

part of the fourth quarter.

Gift cards are being tied to more promotions.

Safeway’s newly remodeled stores

now feature gift card centers as a focal

point.


For Now… Wait & SeeSupplier Implications

31

• Safeway’s past and present behavior are closely tied to its financially driven mindset

–Remodels vs. store expansion (focused on “premium stores”)

–Alternative revenue sources ( Fuel, Blackhawk, Property Development Centers (PDC))

– Private label penetration; higher-than-industry-average margins

• Know your item’s role in the new developments and enhancements of the Lifestyle format

• Help build basket size, increase trip frequency, and drive overall traffic as Safeway redesigns its center store strategy

• Assess your opportunities to participate in alterative resource programs: leverage gift card promotions, fuel promotions, etc.

• Align your brand to the Safeway “healthy living” brand it wants to create

• Know your item’s role in the new developments and enhancements of the Lifestyle format

• Help build basket size, increase trip frequency, and drive overall traffic as Safeway redesigns its center store strategy

• Assess your opportunities to participate in alterative resource programs: leverage gift card promotions, fuel promotions, etc.

• Align your brand to the Safeway “healthy living” brand it wants to create


The Physical vs. Digital World

32


Grocery Shoppers Leverage Digital Along PathFrom Digital shoppers to eCommerce purchasers, multiple planning activities

33

Create Demand

Navigate Store/Site

Select & Buy

Choose Channel

User Satisfaction

Advocate Community

Source: Kantar Retail analysis

Choose Trusted Source


Off the Path: Impact of the Digital Shift

34

Much more digital activity in pre-trip planning for grocery

Trusted Source

(Zero-MOT)

FMOT SMOTMedia/ Awarene

ss

Source: Kantar Retail research and analysis

Shoppers more actively creating value

© Copyright 2013 Kantar RetailSource: Kantar Retail ShopperScape® June/Dec 2010, Sept 2011, March 2012, Sept /Dec 2012, March 2013

Smartphone Ownership(among primary household shoppers)

Digital Divide Difference between Gen Y and Boomer

Smartphone Ownership Incidence

June 2010: +18 pptDec 2010: +24 pptSept 2011: +32 ppt

March 2012: +34 pptSept 2012: +35 pptDec 2012: +31 ppt

March 2013: +38 ppt

35

All Primary Household Shoppers, March 2013:

Mobile is Now MandatoryAbout Half of U.S. Shoppers Have Smartphones(highest among youngest shopper cohorts)


Mobile Creates New Promotional (& Pricing) Opportunities

Source: Kantar Retail ShopperScape®, November 2012 36

87% have accessed account via Web site on a computer

19% have accessed account via smartphone app

3% have accessed account via iPad app

Program has improved Safeway’s price perception

Program has improved Safeway’s price perception


Promotion and Pricing Can Improve with Mobile

Source: Kantar Retail analysis; mysupermarket.com 37

Scours promotional offers to find better value across the same item:

-different pack configurations -find comparable substitutes between

private label and branded items

Scours promotional offers to find better value across the same item:

-different pack configurations -find comparable substitutes between

private label and branded items


“Omni Transparent Pricing”


• Preferential pricing for specific retailers or channels is on the cusp of being unsustainable

• Diverting style behavior will absorb your entire price strategy by diverting your whole price list

– Implies a level of internal communication and alignment between customer teams and channels that rarely exists today

• Shoppers with smartphones can see retail pricing everywhere all the time

• Retailers also have smartphones – and more


Taking Promotions to Digital Space

39

…Still Room for Improvement vs. Competitors

Source: Kantar Retail analysis; company reports & Kroger.com

“We’ve seen a gradual interest by our customers in connecting with this, both in traditional ways that continue to be strong, but also in digital ways. The

more we improve, the more we see those customers engaged.”

- David B. DillonChairman, CEO Kroger

“We’ve seen a gradual interest by our customers in connecting with this, both in traditional ways that continue to be strong, but also in digital ways. The

more we improve, the more we see those customers engaged.”

- David B. DillonChairman, CEO Kroger

Remember: Kroger was one of the first large US grocers to embrace ecoupons…

How Far Kroger Has Come:

Today: Kroger has recently updated its website and rolled out a second version of its mobile app.

Access coupons via website, social networks, and mobile.

© Copyright 2013 Kantar RetailSource: Kantar Retail analysis

Online•Unlimited space•Timeless• Accessible…

In-store•Experiential•Immediate•Involving…

“We don't want to be the leader in simply e-commerce, we want to be the leader in multi-channel commerce. We want to develop new ways for the customer to shop...”

-Former Walmart.com CEO Raul Vasquez, Oct. ‘09

Opportunity to build your category’s integration of communication tech for an

enhanced shopping experience

The Store Experience - New Directions

40

Leveraging Each Medium to Reach Customers


Bridging the Gap Between Online & StoreA Cohesive Marketing Message Improves Experience

Source: Kantar Retail analysis; Pinterest.com & Store Visits 41

Making General Merchandise Important -Solution Selling:• Connecting to young shoppers through the use of popular social platforms. •Enhancing the shopping experience.• Providing solutions for dorm room ideas through clever merchandising displays.


Average #

of

activities

that are

appealing:

2.4

Strong Desire to Use Retailer Apps While Grocery Shopping

42

None of these:46%

Would Ideally Like to Be Able to Use Primary Grocery Store's Smartphone App While Shopping in Store to …

(among shoppers with a smartphone)

Source: Kantar Retail ShopperScape®, May 2013

And Opportunities in Store


From Home to Store

43

Leveraging Digital During the Shopping Experience

Source: Kantar Retail analysis; retailer websites

Simplifying the Grocery Trip:

• In-store navigation•Scan products to add

coupon/promo• Scan to purchase


But There are Risks…Kinks in the System



Gen X Participation More Retail Oriented

45

NOTE: Asterisk indicates significant difference between columns (95% confidence level); i.e., Gen X shoppers are significantly more likely than Gen Y shoppers to have purchased a product online in the past six months.

Source: Kantar Retail ShopperScape®, January 2013

Differences in Digital Activity Between Gen Y and Gen X Shoppers(digital activity during the past 6 months)


Line Between Online & Store Blurring

46

Regional Retailers Put the Two Together

Source: Kantar Retail analysis; retailer websites & store visits

3

Store

Fulfillment of online orders through picking from the

shelves of existing stores

Shopper Picks Up

Fulfilment2

1 Website

Pick up in-store at dedicated kiosk

Drive

Fulfillment from dedicated warehouse

Pick up at warehouse from dedicated pick up points

© Copyright 2013 Kantar Retail 47Source: Kantar Retail analysis

Amazon-led Market- Item-based- Mail-based delivery- Non-grocery categories

Grocery-led Market- Basket-based

- Van delivery- Driven by grocers

“Mixed” Market- Item based

- “Self-service”- Driven by hyper

retailers

Globally, Despite Starting with Different ModelsAll models are moving towards Click & Collect innovation


What Types of Drive Models are There?

The drive format can be rolled-out in two different ways:

48

Standalone Drive: e.g. Chronodrive, Casinoexpress

Attached to a store: e.g. Leclercdrive, Auchandrive, Intermarché, Tesco

Sub-types:

• Next to a store: same location, but specific supply system for a limited assortment.

• Store Picking: the assortment is usually larger, the same assortment as the hypermarket or supermarket alongside.

Drive store Drive store

Store

Example of store picking

Source: olivierdauvers.fr


In US, Peapod is Testing the Drive Model,

Peapod to open 3 suburban sites for grocery pick-upSeptember 10, 2012 | Chicago Tribune

Peapod, the Internet-based grocery retailer, will open three locations in the Chicago area this year where customers can pick up their orders rather than waiting for home delivery.

“Customers who live within a 10-mile radius of the three locations will be allowed to choose to pick up their orders in 1 hour time slots, 7 days a week”

Chicago area: Palatine, Schaumburg & Deerfield

49

Pick-up fees:•Free at first,

eventually $2.95 per order

•Compares with $6.95+ for home

delivery

Pick-up fees:•Free at first,

eventually $2.95 per order

•Compares with $6.95+ for home

delivery

Source: Kantar Retail analysis


Online Grocery… Is HereCompetitive dynamics will accelerate response

Source: US Dept. of Commerce, Kantar Retail analysis, photo cred: splendidmarket

Online Share of Food, Drugs, HBA

26% CAGR


Multichannel is the Future…

–While retailers have been “talking” multichannel, actions are only just beginning to catch up• Culture still revolves around the Store• Significant investment in infrastructure required – time & $• Leading retailers like Walgreens are making great strides

–For grocery, Europe offers interesting precidence• Granted geographic density differences will lead to different solutions

due to profitability, concepts like Auchan Drive could be the future (starting to see it with Peapod)

–Be flexible, willing to test & learn to grow partnership• Technology evolving in half-lives; experimentation mindset key• Leverage the best of each channel to meet the shopper’s needs

51Source: Kantar Retail analysis


501 Boylston StreetSuite 6101Boston, MA02116

F +1 630 245 5647

www.KantarRetailiq.com

585 S. Front StreetSuite 50Columbus, Ohio43215

F +1 630 245 5647

www.KantarRetailiq.com

John Rand

Senior Vice President

[email protected]

P +1 617 912 2860

Alida Destrempe

Analyst

[email protected]

P +1 614 355 4030

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