TECHNOMIC INDUSTRY UPDATE. Good News and Not-So-Good News

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1 TECHNOMIC INDUSTRY UPDATE Good News and Not-So-Good News

2 Foodservice Distribution s Man of the Year

3 How s Business? Pretty Darn Good! Broadline benefitting from FSR uptick Cheap gas, low unemployment & optimism Independent restaurants (esp. urban) thriving Club/Cash & Carry trade-up lever

4 Total Restaurant Same Store Sales % Change vs. Prior Year 8% 4% '15 3.1% 0% -4% -8% Q1'07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Public Company Reports, Technomic 62 chains reporting for Q1, 68 for Q4

5 Total Restaurant Same Store Sales % Change vs. Prior Year (Excluding McDonald s) 8% 4% '15 4.4% 0% -4% -8% Q1'07 '08 '09 '10 '11 '12 '13 '14 '15 Sources: Technomic and Public Company Reports

6 LSR vs. FSR Same Store Sales % Change vs. Prior Year 8% 4% 0% LSR '15 3.2% FSR '15 3.0% -4% -8% Q1'07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Public Company Reports, Technomic

7 LSR Chains Same Store Sales % Change vs. Prior Year LSR Chain Q2 14 Q3 14 Q4 14 Q % 19.8% 16.1% 10.4% -0.2% 0.7% 2.7% -0.1% 4.2% 5.8% 9.3% 8.0% 0.4% 3.6% 4.2% 6.9% -2.0% 2.0% 6.0% 7.0% 6.0% 5.0% 5.0% 7.0%

8 LSR Chains Same Store Sales % Change vs. Prior Year LSR Chain Q2 14 Q3 14 Q4 14 Q % -3.3% -1.7% -2.6% 2.0% 3.0% 7.0% NA 3.1% 0.5% 1.6% 3.4% 5.4% 7.7% 11.1% 14.5% 1.8% 2.0% 1.4% 2.7% -4.0% -2.0% 0.0% -1.0%

9 FSR Chains Same Store Sales % Change vs. Prior Year FSR Chain Q2 14 Q3 14 Q4 14 Q % 5.7% 5.1% 6.0% 0.6% 1.7% 2.8% 2.9% -3.5% -1.3% 0.5% 2.2% 1.5% 2.1% 1.4% 4.2% 0.9% 4.8% 6.4% 5.0%

10 20% 15% Unemployment & U-6 Underemployment (Seasonally Adjusted) Underemployment Apr ' % 10% 5% Unemployment Apr '15 0% 5.4% Jan '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Bureau of Labor Statistics

11 Restaurant Sales Growth Real % Change vs. Prior Year (12-Month Moving Average) 12% 8% Apr '15 5.1% 4% 0% -4% -8% Jan '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: U.S. Census Bureau; Technomic

12 Retail Food Store Sales Real Change vs. Prior Year 8% 4% Apr '15 0.2% 0% -4% -8% Jan '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: U.S. Census Bureau

13 Gasoline Fuel Costs Dollars per Gallon $5.00 $4.00 $3.00 Apr '15 $2.55 $2.00 $1.00 Nov '08 $2.15 $0.00 Jan '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Source: Energy Information Administration

14 Consumer Confidence Index Jul ' Feb Apr ' Jan '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Base: 1985 = 100 Source: Conference Board

15 Prognosis Make hay while the sun shines Short term looks positive Longer-term, perhaps not so pretty GDP growth concerns Strong dollar depresses exports and growth Risk of deflation Primary challenge = Severe Labor Shortages Foodservice Wages = Menu Prices Competitive demand elasticity vs. Retail

16 ONLINE ONSLAUGHT Why and How E-Commerce will Transform the Foodservice Distribution Business

17 2014 Study Polling 748 Independent Operators 1,000 Consumers 42 Manufacturers 25 Distributors Focus on non-traditional sources

18 Operator Product Sourcing Source Regular (weekly) Periodic (monthly) Total (usage at least monthly) Broadline or full line distributors 91% 7% 98% Specialty distributors 40% 39% 79% Club stores/ cash-and-carry Manufacturer/ local supplier/ farmer direct 25% 38% 63% 19% 30% 49% Online distributors 4% 23% 27%

19 Specialty Distributor Sources Used Specialty Distributor Type Total Coffee/beverage 48% Produce 41% Meats 38% Seafood 33% Dairy 31% Paper/disposables 29% Janitorial/sanitation 21% Imported/specialty foods 17% Ethnic foods 10% Vending/office coffee service 4% Other* 8% Base: Operators purchasing from specialty distributors at least once per month * Includes chemicals, bakery, ice-cream

20 Club/Cash-and-Carry Sources Club/cash-and-carry sources Total Sam s Club 50% Costco 25% Restaurant Depot 22% GFS Marketplace 14% BJ s 10% Smart & Final 4% Other 13% Base: Operators using club/cash-and-carry sources at least once per month (63%)

21 Average Order Size Source Average order size Broadline distributors $2200 Specialty distributors $500 Cash-and-carry/clubs $410 Supplier/farmer direct $300 Online sources $350

22 Plans Related to Online Source Usage Source Increase Frequency* Begin Purchasing* Within the next year 27% 10% 1-3 years 14% 11% 3-5 years 0% 3% Within next 5 years 41% 24% Q: When do you think you will increase the frequency and amount of foodservice products you purchase (or start purchasing) through online distributors? *Base: Operators who use online sources less than monthly **Base: Nonusers of online sources

23 Receptivity to Amazon-type Broadliner 13% 87% Q: If my broadline distributor offered the product assortment, delivery service, and terms I m accustomed to at lower prices in exchange for ordering through a high-quality, price-transparent Amazon-type system/experience without the services of a DSR (as an order-taker), for what savings would I select the online option?

24 MANUFACTURER SURVEY RESULTS

25 Expected Growth of Online Sources In One Year In Three Years In Five Years 2% 2% 46% 68% 37% 49% 61% 29% 5% Grows significantly Grows somewhat Stays the same Q: Compared to today, how will operators purchasing through online sources change in 1, 3 and 5 years? Base: Foodservice manufacturers

26 Drivers of Online Sourcing Driver Top box Top 2 box No minimum orders/willingness to break cases for operators 62% 88% Ordering convenience for operators 54% 85% Greater variety offered by online sources than distributors 41% 81% Product price transparency to the operator 38% 77% Lower landed product costs to the operator 38% 73% Guaranteed delivery times/windows 35% 73% Credit card acceptance 31% 69% More manufacturers getting involved with online distribution sources 27% 77% Q: To what degree do you believe each of the following will drive significant growth if the online source distribution model over the next five years? Use a 1-4 scale, where 1 = will not drive significant growth at all, 4 = major driver of growth. Base: Foodservice manufacturers foreseeing significant growth for online purchasing in the next five years.

27 Benefits to Selling via Online Sources Benefit Top box Top 2 box Another means of reaching street operators 59% 88% Ability to introduce new products with or without distributors 51% 85% Ability to expand end user database and develop direct relationships with customers 51% 78% Limiting the control the distributor has on operators 49% 69% Reduction in sheltered income/trade spending 46% 73% Obtain incremental foodservice sales 39% 68% Better ability to build brand equity with existing and potential customers 32% 71% An effective way of competing against distributor brand/private label 29% 63% Easier way to service operators 27% 51% The ability of operators to get products at a lower price than through distributors 17% 34% Q: For manufacturers, how strong are each of the following potential benefits in participating in selling to foodservice operators through online sources? Us a 1-4 scales, 1=not a benefit, 4= strong benefit Base: Foodservice manufacturers.

28 Drawbacks to Selling via Online Sources Drawback Top box Top 2 box Distributor backlash 41% 63% Logistics too complex and/or expensive to warrant the effort 24% 61% Not an effective means of chains or contract accounts to source products 22% 43% Club store backlash 17% 39% Reduction of distributor/dsr advocacy for your products 12% 37% Reduction of street sales support provided by distributors 10% 46% Potential for an expanded competitive set within categories 10% 27% Question: For manufacturers how strong are each of the following potential drawbacks in selling to foodservice operators through online sources? Us a 1-4 scale, 1=not a drawback, 4= strong drawback. Base: Foodservice Manufacturers.

29 WHY AND HOW E-COMMERCE WILL TRANSFORM FOODSERVICE DISTRIBUTION

30 Ripe for Disruption When we speak of the digital disruption, most participants immediately think of Amazon and dismiss its prospects. There are various paths to disruption with different levels of impact, but all potentially hazardous to the otherwise good financial health of most distributors. Two types of disruptors: Fragmenters Category Killer

31 Fragmenters Distribution is a high fixed-cost business, so small gains or losses in key metrics can have a huge impact on earnings. Fragmenter offerings are most successful in perimeter categories. Fragmenters tend to steal high-margin SKUs, so the profit erosion is further magnified. Independent operator receptivity to purchasing proteins online presents an alarming opportunity. Fulfillment technology and logistics have advanced to where many items can travel by UPS or FedEx at costs rivalling those of traditional distributors while skipping the middleman altogether. The profit decrement of a lost case has significant implications for a broadline distributor.

32 The Golden Case The Positive Value of ONE MORE Street Case 40 $7.00 TGP $ Delivery Expense $64.00 Sales Expense $62.00 Warehouse Expense $30.00 General & Admin Exp. $27.00 Occupancy Expense $13.00 Total Expenses $ Operating Profit $84.00 The Negative Value of ONE LESS Street Case 39 $7.00 TGP $ Delivery Expense $63.96 Sales Expense $61.23 Warehouse Expense $29.64 General & Admin $26.91 Occupancy Expense $12.87 Total Expenses $ Operating Profit $78.39 ONE MORE CASE $7.00 Incremental Expenses $ case Operating Profit $89.46 Incremental Net Profit $5.46 ONE LESS CASE ($7.00) Expenses Saved $ Case Operating Profit $78.39 Loss of Operating Profit ($5.61) One more case per street order raises a distributor s bottom line by 6.5% One less case per street order reduces a distributor s bottom line by 6.7%.

33 Category Killers The greatest threat to traditional distributors will come from firms that look, sound, and operate much like themselves, but do so in a more efficient and transparent way. Offer independent operators double-digit savings without their having to sacrifice the convenience and safety of deliveries. A straightforward and economically attractive self-serve interface would attract enormous patronage from operators willing to trade some hand-holding for cash. Double-digit savings ($20-30k annually on average), achieved with very little, if any, functional trade-offs is something independent operators will almost certainly like.

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35 Foodservice Operator Purchases ($B) $355 $240 $290 $145 $170 $205 $95 $120 $ CAGR 3.5% 3.2% 4.0% Street Contract/chain

36 Online Distribution Sales ($B) Projected 20% CAGR $13.7 $5.4 Share* $ % 5.0% 10.5% *Of street market

37 Channel Volume Impact Where will the $11.5B growth in online come from? 75-80% Broadline ~5% 15-20% Specialty Club store/cnc.

38 Gross Margin Impact Online distribution will cause a significant margin reallocation and some shrinkage. Channel $B Online $2.0 Broadline -2.5 Specialty -0.5 Club store/cnc -0.1 Total $-1.1

39 Key Takeaways Broadline Distributors dominate ~$100B Street market However, that s changing (Cash & Carry, Specialty, Online, etc.) 3rd party online sources comprise 1% of FS Supply Chain Projected 20% growth expected to reach 4% share by 2024 But that s only IF a Category Killer does NOT emerge Esoteric categories already active in online channel Disposables, supplies, specialty and difficult to find SKUS High operator receptivity to online and disruption of traditional distribution models if they can save money.

40 Options for Distributors Design/launch online model Defend against the onslaught Do nothing (not recommended!)

41 Questions? Technomic contact: Barry Friends Senior Principal