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Managing The Partnership To A Strategic Level

Beverage Retailing Summit, 2002. Managing The Partnership To A Strategic Level. March 12, 2002 Amelia Island, Florida. www.hoytnet.com 8912 E. Pinnacle Peak Rd. #650 • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com.

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Managing The Partnership To A Strategic Level

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  1. Beverage Retailing Summit, 2002 Managing The Partnership To A Strategic Level March 12, 2002Amelia Island, Florida www.hoytnet.com 8912 E. Pinnacle Peak Rd. #650 • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

  2. Today: • Core issues facing both manufacturers and retailers • The opportunity for both to put new meaning into the partnership model • Implementation – where to start: • For retailers • For manufacturers

  3. “Problems vs. Opportunities” • There is a convergence of factors in the marketplace today that calls for both manufacturers and retailers to change the way they go to market. • Those who view this as an “opportunity” and move to change NOW will survive and thrive • Those who view this as a “problem” and spend a lot of time “thinking about it” will get passed-by • This talk is to review these factors and offer suggestions to both manufacturers and retailers on how to capitalize on the opportunities.

  4. Core Issues Retailers Manufacturers

  5. Today 120K Convenience Stores 32K Supermarkets 6K Mass Merchandisers 20K Drug Stores 1K Club Stores 6K Dollar Stores McDonaldsBurger KingWendy’sJack-in-The-Box 45% of Food DollarsSpent Away From Home 1950’s No Fast Food No Mass Merchandisers No Clubs No Supercenters Independents Dominated Drug A&P Dominated Food Most CPG-type Products Sold Through Supermarkets Most Meals Prepared and Eaten at Home Outlet Saturation

  6. SKU Proliferation • SKU Growth: 1945 - 1995 Source: Insight Out of Chaos, 2001

  7. % Buyers In Mass Availability Of Same Items In Different Channels • 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

  8. Channel Pricing Index on Selected Consumables(Scottsdale, AZ, 8/7/2001) Price-Based Competition • Food • Drug • Super Center • Club • 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) • 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 8/7/2001. • Largest sizes carried indexed to Food on a per unit (oz/sheet/count) basis.

  9. Category Hijacking • Dry Grocery Sales Trends In Drug Chains vs. Food Stores Food ‘95 to ‘99 Drug ‘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% 681% 183% 160% 159% 128% 119% 68% 60% 59% 58% 50% 48% 41% 29% Source: AC Nielsen

  10. 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 per trip. • 47% shopped a Dollar Store once every 5 weeks and spent about $10.00 per trip. • And now – the internet!

  11. Trip Loss In Core Channels • Shopper Trips By Channel (1996 – 2000)(Avg. # Trips/Channel/Year) Total Trips 180 177 Source: AC Nielsen Homescan

  12. For Most Food Is Now A “Low Involvement” Purchase… • Food As A % of Personal Consumption $ BLS, 2002

  13. And A Similar Pattern Applies To Beverages • Beverage Categories as a % of Personal Consumption Spending BLS, 2002

  14. Shopper’s Decision TimePercent of Total Shoppers On Top Of This, We Have… Time-Pressured, Fickle Consumers • More than 15 seconds • 5 seconds or less • 6-15 seconds Source: Price Knowledge and Search of Supermarket Shoppers – P Dickson and A. Sawyer

  15. Consumer Dissatisfaction With The “Shopping Experience” • Is Shopping Fun? (10 = Highest) 2000 Ranking 1999 2000 • Wholesale Clubs 7.17 (C-) 6.96 (D) • Mass Merchandisers 6.49 (D-) 6.83 (D) • Specialty Food Stores 6.90 (D) 6.76 (D) • Supermarkets 6.30 (D-) 6.46 (D-) • Chain Drug Stores 6.05 (D-) 6.08 (D-) • Fast Food Restaurants 6.02 (D-) 5.81 (F) • Convenience Stores 5.12 (F) 5.21 (F) Source: Progressive Grocer: 67th and 68th Annual Report of the Grocery Industry, April, 2000 and 2001

  16. CPG Retailer Gross And Net Margin Performance: FY2000 vs. FY1990 Sideways Or Inconsistent Retailer Margin Performance • Gross Margin • Net Profits • Retailers • 1990 • 2000 • % ∆ • 1990 • 2000 • % ∆ • Grocery • Drug • Wal-Mart • Target • Costco • Walgreens • Safeway • 25.4 • 28.8 • 22.8 • 27.7 • 11.0 • 29.1 • 26.7 • 28.4 • 24.3 • 23.0 • 31.5 • 12.6 • 28.2 • 31.9 • 12% • -16% • 1% • 14% • 15% • -3% • 19% • 1.3 • 2.6 • 4.0 • 2.8 • 1.6 • 2.9 • .3 • 1.9 • .6 • 3.3 • 3.4 • 1.2 • 3.6 • 3.4 • 48% • -76% • -18% • 21% • -25% • 24% • 280% Source: Value Line, 1991 and 2001

  17. Manufacturer Issues

  18. Media Fragmentation – Reaching The Consumer Cost Effectively • TV Timeline: • 1954 - TV Revenue @ $593MM surpasses radio revenue • 1960 – 90% of US homes have TV • 1972 – HBO debuts – first pay cable network • 1980 – CNN launches • 1986 – Fox Network debuts • 1988 – TNT debuts – TV’s 98% household penetration • Network Growth: 3 Network News Viewership (ABC, NBC, CBS) • 1971 = 3 networks 1980 = 75% • 2001 = 93 networks 2002 = 43% • Viewership: • 1983 – Last episode of M*A*S*H draws more than 125MM viewers • 1998 – Last episode of Seinfeld draws 76MM viewers • Cable/VCR Penetration – 2001: • Total TV households = 98M • Total cable TV households = 56MM • Household penetration of VCRs (1998) = 84.6%

  19. % CPG Manufacturer A&P Spending Trends: 1978-2001 Through-The-Roof Trade Promotion Spending • 1978 • 1985 • 1995 • 2001 • % vs ‘78 • Trade Promotion • Consumer Promotion • Advertising • Totals • % A&P/Total Sales • % Trade/Total Sales • 33% • 27% • 40% • 100% • 13% • 5% • 38% • 27% • 35% • 100% • N/A • N/A • 51% • 24% • 25% • 100% • 22% • 13% • 61% • 15% • 24% • 100% • 27% • 16% • +85% • -44% • -41% • N/A • 107% • 220% Source: Carol Wright, Accenture, Cannondale, Donnelly, 1980 - 2002

  20. Manufacturer Dissatisfaction With Results • Industry Issue Importance - 2001(% Rating Very/Extremely Important) Pt. Change vs. Year Ago Trade Promotion Inefficiency -5 -6 +2 +3 New Products -7 -4 Category Management +16 +2 Frequent Shopper Cards -11 -5 Technology -13 -7 Consolidation -7 -7 Private Label Growth -10 +9 Activity Based Management Source: Cannondale Associates, 2001

  21. Projected Population Growth by Segment, 2000 - 2050 Splintering Population Along Ethnic Lines • 2000 • 2050 • Pop. Segment • MM • % • MM • % • Index vs. 2000 • White non-Hispanic • Hispanic • Black • Asian/So. Pacific • Other • Totals • 194 • 32 • 35 • 11 • 3 • 257 • 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 Source: U.S.B.L.S., 2000. 2050 numbers are BLS estimates

  22. 2000 Distribution of Total U.S. Income By Population Fifths Splintering Along Economic Lines Quintile Mean Income % Distribution of Income I II III IV V 20% 20% 20% 20% 20% 49.6% 23.0% 14.8% 8.9% 3.6% $141.6K $65.7K $42.4K $25.3K $10.2K 72.6% 40% Middle Class 12.5% 40% Source: U.S. Census Bureau, 2000; Dept of Commerce

  23. Mean Income Trends By Population Fifths, 1967 - 2000(2000 Dollars - Per Household $K) No Relief In Sight Top 20% 79.5% Top 20% 44.4% 2nd 20% 36.3% 3rd 20% 29.7% 4th 20% 5th 20% 43.7% Source: US Census, Bureau of Labor Statistics, 2000. All data adjusted for inflation.

  24. Emerging Elderly • 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

  25. Net: • Consumers are becoming more “self-loyal” than store loyal or brand loyal • 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

  26. Sorting It Out… The opportunity for both manufacturers and retailers to put new meaning into the “partnership” model

  27. Consolidation Has Compressed The Entire CPG Marketplace To A Manageable Configuration of Approximately 30 Accounts # Leading Accounts/Channel Share Y2000Channel Vol ($M) Channel %Total HH Avg. AnnualTrip Freq. Grocery Discount Drug Club Supercenter Convenience/Gas Dollar Stores $494 $157 $131 $60 $31 $30 $12 $915 5/42% 3/65% 4/66% 3/100% 4/92% 7/100% 4/85% 30/57% 100% 94% 86% 49% 47% 52% 47% 100% 87 25 15 10 15 14 10 N/A Source: Progressive Grocer, Drug Store News, AC Nielsen, Discount Store News and Hoyt & Company Records 2001 - 2002

  28. Suppliers Have Responded By Creating Their Own World of Giants: • Over the past three years: • Unilever bought Best Foods • Philip Morris bought Nabisco • General Mills bought Pillsbury • Nestle bought Ralston Purina • Kellogg’s bought Keebler • ConAgra bought International Home Foods • Pepsi bought Quaker • P&G bought Clairol • Coke bought Odwalla • Cadbury bought Snapple • Smucker’s bought Jif and Crisco • Danone bought McKesson

  29. Moreover, Technology Has Made It Possible For Both Manufacturers and Retailers To Target Heavy Shoppers • Heavy Channel Shopper Importance Source: AC Nielsen

  30. The Key To Making This Work For Both Parties Is The Willingness To Break Down Traditional Thought Barriers • Retailers – Differentiate on a basis other than price and build store equity as “brands” • Manufacturers – Acknowledge retailers’ strategic potential in helping build brand equity via retailer-developed consumer communications vehicles and promotion devices • Focus resources to help achieve individual strategic objectives: • Retailers – store equity • Manufactures – brand equity • Some have begun but the majority has yet to catch on

  31. Traditional Retailer Mind-Set Changes Required • “Build it and they will come” • Deal-driven versus consumer-driven buying mentality • Push as many costs of doing business as possible onto the supplier community: • Category management analyses and recommendations • Promotion ideation and execution • “Get more/spend less” risk adverse approach • Financial objectives first, customers second: • Limiting selection because it does not meet category management criteria

  32. Traditional Manufacturer Mind-Set Changes Required • Direct-to-consumer advertising and promotion is the only way to build brand equity: • Now 40% of A&P versus 60% trade • Trade spend is now over 16% of net sales • Shotgun versus rifle • Brand-centric/geographic versus account-centric structure and process • “Our teams are already empowered”

  33. Why Sales Teams Are Not Empowered (Most, Not All): • ManufacturerTrade Promotion/Customer Development • Brand Groups$ • Manufacturer Account Team • Mega Retailer 1 2 3 4 No Contact

  34. Taking The Partnership To A Strategic Level – The Key Areas of Focus For The Next 10 Years • Retailer • Manufacturer • Objectives • Strategy • Implementation • Build store equity • Build share • Increase profitability • Build store “brand equity” via non-price based differentiation leveraged off core strengths • Tap key supplier marketing expertise • Build brand equity • Build share • Increase profitability • Build brand equity via BOTH direct-to-consumer and trade-to-consumer advertising and promotion vehicles • Make Brand Managers “TradeSmart” • Make KAMs “Consumer Smart” • Cross-pollinate at the point of sale

  35. Implementation What is “equity” from a retailer’s POV? How do I “empower” my account teams without blowing-up my organization?

  36. Equity: • The reason why shoppers will drive 100 miles RT from NYC to Norwalk every week to shop at Stew Leonard's • The reason why consumers will pay a 10-15% premium for a Coke or an Evian versus NBE private label • Sets one retailer apart from another on a basis other than price: • Once one builds equity in a store, price then becomes secondary • Is total corporate driven, not category driven • Can be continually leveraged in different ways to attract and hold new consumers while retaining current customers • Provides a strategic framework for all advertising and promotion activities • Your signature – your core reason for being

  37. Building Equity: • Define core strengths • Roll-up into a strategy that forces your competitors to react to you • Communicate via a three word position statement: • “Quality for value” • “The Time Savers” • “The Solution Providers” • “Fresher, Better, Faster” • Never deviate/react to competition – persistence and consistency through the dark days is everything • Focus entire organization on implementation: • Align standards with strategy • Change incentives • Reward execution excellence loudly and frequently

  38. Empowering Account Teams • Train brand management and agency executives to become “TradeSmart”: • Top 10 accounts (20/80) • ROI/equity potential of retailers’ communication vehicles and promotion devices • 1X per year personal account calls to get direct input • Add a new budget line to annual brand plan • “Co-Marketing” – Refers to “through-trade-to-consumer” equity-building advertising and promotion activities • Fund commensurate with potential return – do NOT siphon from current trade promotion allocations • Train KAMs/Team Leaders to become “ConsumerSmart”: • Also want these people to be able to identify equity opportunities and convince account to convert/invest trade promotion funds commensurate with opportunities

  39. Co-Marketing As A % of Total Advertising & Promotion Spending, 1997 - 2001 Is This Real? Advertising Direct to consumer dollars ConsumerPromotion Through Trade-to-Consumer $ Co-Marketing In-store promotion activities - feature, display, TPR Trade Promotion Total Customer $ 53% 56% 60% 60% 61% Source: Cannondale Associates, 2001 Trade Spending and Merchandising Industry Study

  40. Change Is Tough But The Bright Side Is The Progress We Have Made Over The Last 100 Years: • In 1900: • Life expectancy was 47 • Only 14% of homes had bathtubs • Only 8% had a telephone • There were only 8,000 cars and 144 miles of paved roads • Maximum speed limit was 10 mph • Average wage was 22¢ per hour and the average worker made between $200 and $400 per year • 95% of all births occurred at home • Sugar cost 4¢/lb, eggs were 14¢/dozen and coffee 15¢/lb • Marijuana, heroin and morphine were all available over the counter in corner drug stores

  41. Thank You… • If you want to help your Brand Managers become “TradeSmart” and your Sales Managers to become “ConsumerSmart”, please contact us or visit our website and we will tell you how to do this (and much more!) in 3 days at a cost that everyone can afford. www.hoytnet.com 8912 E. Pinnacle Peak Rd. #650 • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

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