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CPG Industry Trends

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October, 2002 Safeway downgraded because of increasing competitive threat from ... 2002 Shares of Kroger, Safeway and Albertson's have dropped 34% since May 31 ... – PowerPoint PPT presentation

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Title: CPG Industry Trends


1
CPG Industry Trends Drivers2003 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_at_hoytnet.com
nancyswift_at_hoytnet.com
2
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

3
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, dont be shy its
    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

4
Evolution of CPG Marketing From Consumer Pull
to Trade Push 1945 - Present
5
History of CPG Brand Marketing From 1945 to
Present Is A History Of Unwitting Power
Transference From Manufacturers To Retailers
Period
Trend
Characteristics
  • Efficient media
  • Very few trade allowances
  • Definitely consumer pull
  • Manufacturers in control

1945 - 1975
Mass Marketing
  • Cable TV
  • Scanners introduced
  • Off-invoice/slotting becomes prevalent
  • Forward buying and diverting

1975 - 1985
Regional Marketing
  • Fragmented media
  • Erosion of brand loyalty
  • Partnering
  • Store Brands

Account-SpecificMarketing
1985 - 1995
  • Consolidation
  • Trade spending explodes
  • Category, not brand
  • Now trade push
  • Retailers gain control

CategoryMarketing
1995 - 2000
  • Consumer becomes self-loyal
  • Retailer becomes marketer
  • All of the ground rules change

ASM/Co-Marketing
2000 Beyond
6
Milestones in Trade Control Progression
UPC Codes/Scanners Introduced(1978)
Mass Merch.Becomes Competitors (1980-82)
Trade WrestsInformationControl(1988)
Nixon PriceFreeze(1973-75)
Consolidation/Mega-Retailers(1999-2000)
Slotting(1968-69)
1960
2000
Off-Invoice (1970-71)
Introduction of Cable TV (1975)
Fragmentationof Media(1979)
Category Management (1985)
Wal-Mart SetsThe Strategy For Everyone (1992)
7
Present Day Core Issues
  • Retailers
  • Manufacturers

8
Outlet Saturation
  • 1950s
  • No Fast Food
  • No Mass Merchandisers
  • No Clubs
  • No Supercenters
  • Independents Dominated Drug
  • AP Dominated Food
  • Most CPG-type Products Sold Through Supermarkets
  • Most Meals Prepared and Eaten at Home
  • Today
  • 120K Convenience Stores
  • 32K Supermarkets
  • 6K Mass Merchandisers
  • 20K Drug Stores
  • 1K Club Stores
  • 6K Dollar Stores
  • McDonaldsBurger KingWendysJack-in-The-Box
  • 45 of Food DollarsSpent Away From Home

9
SKU Proliferation
SKU Growth 1945 - 1995
Source Insight Out of Chaos, 2001
10
Mass Availability Of Same Items In Different
Channels
  • Buyers In

SuperCenters
Grocery
Mass
Clubs
Drug
C-Stores
Non-Choc. Candy Chocolate Candy Artificial
Sweeteners Ground Coffee Dried Fruit Snacks HH
Cleaners Toilet Tissue Paper Towels Liquid
Soap Soft Drinks
79.4 83.6 80.2 90.2 83.2 78.6 86.4 77.8 55
.4 97.5
62.0 58.0 21.8 30.0 22.8 42.9 50.3 25.1 45
.0 44.7
18.0 16.6 8.1 11.3 7.2 12.1 16.5 6.6 11.6
16.9
12.6 10.4 11.9 15.5 12.7 11.4 10.4 10.0 10
.3 9.2
43.5 5.1 5.2 7.7 4.2 14.7 19.8 9.5 9.9 24
.1
9.5 1.5 0.4 1.0 0.8 0.8 1.6 0.6 0.2 20.4
Source Scarborough Research, 1999-2000
11
Price-Based Competition
  • Channel Pricing Index on Selected
    Consumables(Scottsdale, AZ, 8/7/2002)

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 Hersheys
Kisses MMs Bath Tissue 36-48 Roll Bath Tissue
12-24 Roll Napkins Towels (roll)
100 100 100 100 100 100 100 100 100 100 100 100 10
0 100 100 100
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.
12
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
13
Store Disloyalty
  • In 2000
  • 100 of U.S. HH shopped Supermarkets 1.7xs 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!

14
Trip Loss In Core Channels
  • Shopper Trips By Channel (1996 2001)(Avg.
    Trips/Channel/Year)

Total Trips
Down 2 Billion Trips in Five Years
180 167
Source AC Nielsen Homescan
15
For Most Food Is Now A Low Involvement Purchase
Food As A of Personal Consumption
BLS, 2002
16
On Top Of This, We Have Time-Pressured, Fickle
Consumers
  • Shoppers Decision TimePercent of Total Shoppers

More than 15 seconds
5 seconds or less
6-15 seconds
Source Price Knowledge and Search of
Supermarket Shoppers P Dickson and A. Sawyer
17
Splintering Population Along Ethnic Lines
  • Projected Population Growth by Segment, 2000 -
    2050

2000
2050
MM
Pop. Segment

MM

Index vs. 2000
194 32 35 11 3 257
White non-Hispanic Hispanic Black Asian/So.
Pacific Other Totals
70.5 11.6 12.7 4.0 1.2 100.0
213 98 59 38 12 420
50.7 23.3 14.0 9.0 2.8 100.0
110 306 168 345 400 152
Source U.S.B.L.S., 2000. 2050 numbers are BLS
estimates
18
Splintering Along Lifestyle Lines
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
19
Splintering Along Economic Lines
  • 2000 Distribution of Total U.S. Income By
    Population Fifths

Quintile
Distribution of Income
Mean 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
20
No Relief In Sight
  • Mean Income Trends By Population Fifths, 1967 -
    2000(2000 Dollars - Per Household K)

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.
21
Consumer Dissatisfaction With The Shopping
Experience
Is Shopping Fun? (10 Highest)
1999
2001
2000 Ranking
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
22
Sideways Or Inconsistent Retailer Margin
Performance
  • CPG Retailer Gross And Net Margin Performance
    FY2000 vs. FY1990

Gross Margin
Net Profits
1990
2000
?
1990
2000
?
Retailers
Grocery Drug Wal-Mart Target Costco Walgreens Safe
way
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
  • 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 Albertsons
    have dropped 34 since May 31 vs a loss of 17 in
    the SP 500

Source Value Line, 1991 and 2001
23
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

24
Retailer Response
  • With prices capped, leverage supplier resources
    to the hilt

25
The Retailers Biggest Bullets
  • Supplier trade promotion funds/slotting fees
  • Financial margin or float (vendor financed
    inventories)

26
Use of Trade Promotion To Increase Gross Margins
How It Works Margin Retail 2.35 (capped) Cost
1.39 (fixed) Profit 0.96 40.9 Allowance 0.2
4 Total 1.20 51.1 Retailer Invests 50 of
Allowance In Promotion (0.12) Balance 1.08 46
.0
  • This is the heart of the retailers 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

27
Surveys Show that Obtaining Manufacturers
Allowances Consistently Ranks at the Top of
Supermarket Priority Lists
Supermarket Priorities
Rank
Rating
1. Obtaining Manufacturer Allowances 4.4 2. Medi
a Advertising 4.3 3. Store Brand
Program 4.1 4. Store Circulars 4.1 5. In-Store
Promotions 3.9 6. Co-Marketing Programs with
Manufacturers 3.6 7. Sponsoring Community
Events 3.5 8. In-Store Advertising
Media 3.4 9. Consumer Market Research 3.3 10. Pr
omotion Evaluation/Follow-Up 3.2 11. Micromarketi
ng 2.9 12. Frequent Shopper Card Program 2.9
1 Not Important, 5 Very Important
Source Supermarket News Brand Marketing
28
The History Of Trade Promotion Expenditures Since
1978 Shows That Retailers Have Been Remarkably
Successful In Achieving This Objective
  • CPG Manufacturer AP Spending Trends 1978-2001

1978
1985
1995
2001
vs 78
Trade Promotion Consumer Promotion Advertising
Totals AP/Total Sales Trade/Total Sales
38 27 35 100 N/A N/A
51 24 25 100 22 13
85 -44 -41 N/A 107 220
33 27 40 100 13 5
61 15 24 100 27 16
Source Carol Wright, Accenture, Cannondale,
Donnelly, 1980 - 2002
29
In Fact, The Whole Trade Promotion Thing Has
Escalated To The Point Where It Is Now Equivalent
to The Roach Motel Syndrome Once In, Cant Get
Out
THE ROACH MOTEL
Investment in CatMan Services and
Cross-Functional Selling Teams
Advertising/Feature Fees
Supplier-Provided Labor
Temporary Price Reductions
Consignment/Scan-Based Invoicing
Slotting Fees
Retailer-Sponsored Local Events Charities
Fixture and POS Fees
30
The Other Major Objective of Every Mega-Retailer
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

31
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

32
It Should Be Said That In Pursuing These
Objectives, Todays 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

33
Channel Trends
34
Food/Supermarkets
35
Food Industry Trends
  • Channel Store Counts (from ACNielsen)
  • 4mm 23,400
  • 2mm 4mm 78,000
  • Total
  • 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
36
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.

37
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

38
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 PeriodTotal of 9
Categories Detergent, Hair Care, Paper Towels,
Dentifrice, Diapers, Coffee, Bath, Fabric, Peanut
Butter
52 Weeks Ending Fiscal Year
1989/1990
1998/1999
75.6 13.1 3.5 7.8
Grocery Mass Merchants Warehouse/Club All Other
Outlets
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

39
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
-1.2
0.1
0.0
-0.2
0.3
-0.5
2.1
Source ACNielsen Cross OutletFacts 2000
Total US
40
This is Starkly Illustrated Below in Supermarket
Trip Loss Between 1998 2001
  • Household Shopping FrequencyTrips per Household

Source ACNielsen Homescan Panel Includes Kmart,
Target Wal-Mart Supercenters
41
Food Opportunities
  • 78 of all U.S. households currently participate
    in at least one Frequent Shopper Program

ACNielsen 2001 Frequent Shopper Update
42
Mass Merchandisers
43
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

44
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

45
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 - 49 109 102 50 - 74 100 117 75 74
129 Education High School 104 102 College 81 125
Post 77 120 Home Value 0 - 99M 140 85 100M 75
137 Age 18 34 108 112 35 54 96 108 55 98 87
Source Hoyt Company/Scarborough Research 2000
46
Drug Chains
47
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

48
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

49
Drug Chains Issues - Pricing
Beauty/HBC
Walgreens
CVS
RiteAid
Kmart
5.19 8.75 3.19
Cover Girl Clean Makeup Revlon Super Lustrous
Lipstick Maybelline Express Finish
5.39 8.73 3.89
5.49 8.75 3.79
3.49 7.29 3.29
General Merchandise Hosiery
Wal-Mart
Kmart
CVS
Eckerd
1.87 3.24 2.97 N/A 1.87
No Nonsense Regular Pantyhose Leggs Silken Mist
Control Top Private Label Brand Reinforced
Toe Leggs Silky Tights No Nonsense Sheer Toe
Knee Highs
1.89 3.29 2.49 4.79 1.89
2.39 3.99 1.99 5.09 2.29
2.39 3.99 1.69 5.09 2.29
In 25 different price comparisons, the 4 largest
drug chains had an average price premium of 33
above the lowest price discounter.
50
Drug Chains Issues Shopper Base Demographics
  • of Heavy Shoppers By Age of Female

51
Convenience Petroleum Stores
52
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
53
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
54
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
55
Convenience RetailKey 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

56
Wholesale Clubs
57
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 BJs,
    SAMs Club, Costco

58
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

59
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

60
Wholesale Club Group Members (Personal) Shopper
Demographics
Costco Member Demographics
  • 1998 Survey
  • 49 Years Old
  • 81 Are Married
  • 68,400 Median Household Income
  • 44 College Graduates
  • 87 Own a Home
  • 7.5 Length of Residence
  • US Average
  • 42 Years Old
  • 59 Are Married
  • 35,700 Median Household Income
  • 20 College Graduates
  • 69 Own a Home
  • 2.9 Length of Residence

Source Costco 1998
61
Wholesale Club Membership and Sales 1999
Membership By Type 1999
Sales By Type 1999
Wholesale 30 9.4MM
Group 35 20.4B
Group 70 22.5MM
Wholesale 65 37.5B
  • Group members drive membership fee revenues
  • Wholesale members drive merchandise sales revenues

62
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
Pure Personal 56
Wholesale Only 44 25.4B
Group 35 20.4B
Source Corporate 10ks
63
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.

64
How Retailers Differentiate Themselves
65
Name that Channel
66
Surprised?
67
Channel Financial Architectures Highlight Why
Finding a Consumer Niche is Critical
  • Channel Financials, FY 2000 - 01( Net Sales)

DollarStores
DrugStores
Super-markets
Mass Merch
Super Centers
Clubs
Gross Margin Operating Expense Operating
Margin Net Profit Margin
31.3 22.7 8.6 5.3
26.8 21.0 5.8 3.5
26.5 21.6 5.0 2.1
22.4 18.7 4.5 2.7
18.3 N/A N/A 1.1
11.9 8.5 3.4 2.0
Source Zacks, 5/2001. Supermarket numbers are
composites Supercenter Financials refer to food
products only
68
The Differences in Financial Architectures are
Reflected in Pricing
  • Retails Required To Meet Gross Margins at
    1.50/Unit Cost

Diff vs. Supermarket Avg.
Avg. GrossMargin
Minimum RetailRequired
/- vs. 2.04
Trade Channel
Dollar Stores Drug Chains Supermarkets Mass
Merch Supercenters Clubs
31.3 26.8 26.5 22.4 18.3 11.2
2.18 2.05 2.04 1.93 1.84 1.69
.14 .01 -.11 -.20 -.35
6.9 .05 -4.9 -9.8 -17.2
69
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

Avg. GrossMargin
Difference vs.Supermarkets
2000 Avg./HH
Cost/Savings/- vs. 4,687
Trade Channel
Dollar Stores Drug Chains Supermarkets Mass
Merch Supercenters Clubs
31.3 26.8 26.5 22.4 18.3 11.2
6.9 _.05 -4.9 -9.8 -17.2
5,010 4,710 4,687 4,457 4,228 3,880
323 23 -230 -459 -807
2000 Food-At-Home Expenditures 4,587 (494B
105MM HH) U.S. Census 2000
70
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 re-purchase 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

71
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

72
Performance Score Cards
73
How Retailers Size Up Suppliers On a Subliminal
Basis
  • Suppliers overall (or potential) importance to
    retailer as a company
  • Size and importance of category to overall store
    sales whether category is growing or declining
  • Suppliers 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
  • Suppliers 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.

74
Actual Scorecard For Evaluating Supplier Category
Management Expertise
Skill Area
Criteria
Importance
Grade
Score
Planning and Strategy
  • 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?

5 5 4 5
Analysis
  • 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?

5 4
75
Actual Scorecard For Evaluating Supplier Category
Management Expertise (contd)
Skill Area
Criteria
Importance
Grade
Score
Technology
  • 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.)

5 4
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?

3 4 3 3 3 5
76
Actual Scorecard For Evaluating Supplier Category
Management Expertise (contd)
Skill Area
Criteria
Importance
Grade
Score
Implementation
  • Does the manufacturer provide resources to help
    execute tactical plans that accomplish the
    retailers goals for the category?

5
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 culture-driven?)

5 5
Trust
  • Do you feel comfortable sharing confidential
    information with the manufacturer?

5
77
Actual Scorecard For Evaluating Supplier Category
Management Expertise (contd)
Skill Area
Criteria
Importance
Grade
Score
Commitment
  • Does the manufacturer have a long-term commitment
    to category management from top management down
    through its organization?
  • Has the manufacturer retrained its sales force to
    acquire the new skills necessary for category
    management, such as strategic thinking, planning
    and working with retailers in a more
    collaborative manner?

4 5
Total Score
87
78
SAMs Vendor Scorecard (2000)
Priority Score
Rank
Action
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
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
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
Priority Score 5.0 Must have now (highest
score) 3.0 Must have to grow 1.0 - Important
longer term
79
What Suppliers Need To Do
80
What Suppliers Need to Do FOR THEMSELVES!
  • Establish and maintain above-buyer relationships!
  • Add value to ones brand beyond its distribution
    value by providing solutions that resonate with
    consumers
  • Grow ones brand while growing the category at
    the same time
  • Build partnership equity to solidify ones
    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-to-consumer 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

81
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 vendor-financed 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 ones own brands on an
    outlet-specific basis for the sake of overall
    category sales and/or profit growth on a
    chainwide basis

82
What Suppliers Need To DoGet 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 1970s and 1980s.
  • 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 retailers 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
    cost-benefit to them as a supplier.

83
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

84
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

85
What Separates The Great Suppliers From The
Average
86
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

87
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_at_hoytnet.com
nancyswift_at_hoytnet.com
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