Fresh Meat Category Management: A Delicate Balance. Presented by: Rick Dawrant Lucid Partners February 26, Copyright 2013 Lucid Partners, Inc.

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2 Topic Outline Category Management: A Delicate Balance Defining Category Management Challenges of Category Management in Fresh Meat Macro vs. Micro Data Elements Implementing Category Management in Fresh Meat Seeking a Delicate Balance Copyright 2013 Lucid Partners, Inc. 2

4 Defining Category Management The Original Category Management Framework: Manage categories as strategic business units CPG Driven, well funded by manufacturers Consumer insights sourced from manufacturers Center Store, vast amounts of data that include shopper card, point of sale and syndicated panel data Focus on the 5 P s: Price, Promotion, Product Mix, Product Placement, Procurement Template driven process Large scale meetings and working groups Rapid organizational changes by retailers to seize on the trend Copyright 2013 Lucid Partners, Inc. 4

5 Defining Category Management Despite early successes, there were growing pains Retailers could not stop for every category to evaluate and build plans Offsite meetings did not mesh with day to day operations Most templates were too cumbersome for most categories and personnel Quickly weeded out those manufacturers who were more interested in selling, rather than partnering Process evolved over time Swung to partnerships with key Category Captains Then swung part way back to multiple points of view through multiple vendors Data delivered to retailers in common themes, rather than a single format As the process evolved, so did opportunities for new ideas grew for creation of more sophisticated marketing strategies Copyright 2013 Lucid Partners, Inc. 5

7 Our Challenges Fresh Meat are well known Unique pre-defined product coding Fluctuating regular and markdown codes Consistent and established cost structure Ever changing market prices Greater flexibility in the management of inventories and ordering Product is on the clock, thus accelerating the speed at which sales windows close Sophisticated manufacturers to incorporate consumer insights Consumer fads and trends change at a more rapid rate in proteins Sophisticated (and sponsored) workforce to crunch numbers Time pressured staffs who are focused on efficient procurement No byproduct issue Products need to sell in a parallel velocity to eliminate shrink and margin loss Copyright 2013 Lucid Partners, Inc. 7

8 The Strengths of Fresh Meat Center of Plate High Category penetration High Household Penetration Utilize key items to establish price identify or certain quality image Rapid Turns On Sale and Key/Core Items Traffic Generator Right feature activity can become a competitive advantage Flexibility Opportunity buys and quick response can be used in a positive manner Copyright 2013 Lucid Partners, Inc. 8

9 How Must We Adapt The Process? Span across all proteins to understand the Big Picture Give the logic and insight to optimize everyday price points and feature activity Mitigate negative promotional interaction between competing items A process that empowers rapid decision making, thus evolving from selling to marketing Copyright 2013 Lucid Partners, Inc. 9

10 A Delicate Balance Cost of Analysis Time to Complete the Work Development of Insights Return on Investment Priorities of Retail Staff Ability to Implement How do we find a balance between what is POSSIBLE and what is PRACTICAL? Targeted Category Management Copyright 2013 Lucid Partners, Inc. 10

13 Syndicated Data Elements Data available from Syndicated suppliers Benefits of Syndicated Data Far more advanced than since mainstream introduction in late 90 s Great macro view of volumetric activity Used to benchmark trends, shares and relative pricing Suppliers and retailers alike can get topline updates with relative ease and regularity Ability to standardize the production of updates to enable tracking and decision making Copyright 2013 Lucid Partners, Inc. 13

14 Data Validation Compare Freshlook to Internal data Data validation removes questions about the validity of the findings and thus the reality of the insights generated. Beef Dollars (Freshlook) Beef Dollars (Internal) Copyright 2013 Lucid Partners, Inc. 14

direction to where opportunities exist. Share of Meat Category 30.0% 20.0% 21.

15 Market Performance Comparison of Freshlook Market Share Data on Key Proteins 60.0% Total Market Retailer 50.9% 50.0% 40.0% 47.6% Translate gap into opportunity dollars Gaps can be quantified based on estimated market share and provide specific direction to where opportunities exist. Share of Meat Category 30.0% 20.0% 21.3% Contrast that to potential topline and bottom line declines in other proteins 21.8% 22.5% 19.2% 10.0% 8.6% 8.1% 0.0% Beef Chicken Pork All Other Copyright 2013 Lucid Partners, Inc. 15

16 Syndicated Data Elements While extremely valuable, there are drawbacks to syndicated data Varying levels of aggregation in the numbers which can be difficult to make direct volume comparisons at lower levels Can use to establish gaps, but often closing gaps can is merely a shift in volume from one area of the portfolio to another In addition to syndicated data, the use of targeted data sourced directly from the retailer systems, will allow for more specific analytical work to be done. This takes a partnership Sourced directly from partnering retailer SKU level data containing: Sales, Causal, Costs and Profits Eliminates discussion of data validity Use of this detailed account data fuels Targeted Category Management Copyright 2013 Lucid Partners, Inc. 16

18 Targeted Category Management First and foremost, the process needs to begin with an end objective Need a specific goal in mind to drive the mission There are four key elements to Targeted Category Management Gain a strategic perspective through use of the Performance Matrix Target the analysis and resources by way of Key Item Identification Determine options related to Base (Regular) Price Analysis Create a more effective road map by understanding Promotional Dynamics Not a shortcut approach, but a focus on targeted analytical elements to allow for more efficient evaluation of the category Copyright 2013 Lucid Partners, Inc. 18

20 Gaining Strategic Perspective Utilizing Category Roles Traditional category role method used to define category segments and drive strategies and decision making Destination (Dominant Retailer for category or segment) Routine (Consistent consumer value) Occasional (Variety image enhancer) Convenience (Deliver destination ease to consumer) Destination - Signature Routine Occasional - Seasonal Convenience - Impulse The problem? Not every category can be a destination. Copyright 2013 Lucid Partners, Inc. 20

Gaining Strategic Perspective Utilizing the Performance Matrix The performance matrix is used illustrate 3D performance and is used as a way to segment the category and allow for strategies to be

21 Gaining Strategic Perspective Utilizing the Performance Matrix The performance matrix is used illustrate 3D performance and is used as a way to segment the category and allow for strategies to be developed to match goals Above Average Gross Margin Below Average Niche Items Low volume items Above average margins Low sales rates & HH penetration Select growth opportunities Under Review Low volume items Below average margins Segments/Items need direction Review tactics & distribution Profit Drivers Moderate volume Above average margins Profits subisidize category Hold/grow share & margin Course Correct Moderate volume items Below average margins May represent items in transition Reverse trend or manage profit Flagship Highest volume items Most profitable items Items comparison shopped Protect sales and market share Core Items Highest volume items Below average margins Price competitive, consumer staples Maintain share/grow margin Bottom 20% of Sales 51% - 80% of Sales Top 50% of Sales Sales Dollar Volume Results are shown in three dimensions Dollar Volume: cumulative share of category by segment Gross Margin: versus category average Margin Dollars: shown as size of bubble in relation to other segments Copyright 2013 Lucid Partners, Inc. 21

Performance Matrix Example Department Level Grocery Below Average Store Margin Above Bakery Seafood Floral Full Service Deli Meat Projected roles for each of the departments can be compared and

Produce Niche Selected growth & variety opportunities Review Review tactics and store distribution levels Grocery Profit Hold/grow market share and margin Opportunity Reverse trend or manage for

22 Performance Matrix Example Department Level Grocery Below Average Store Margin Above Bakery Seafood Floral Full Service Deli Meat Projected roles for each of the departments can be compared and contrasted to actual performance, then utilized to build a strategic plan across the store. Produce Niche Selected growth & variety opportunities Review Review tactics and store distribution levels Grocery Profit Hold/grow market share and margin Opportunity Reverse trend or manage for profit KEY Horizontal Axis = Cumulative Share of Category Vertical Axis = Margin Bubble Size = Margin Dollars Flagship Protect sales and market share Core Choose to maintain share or grow margin Bottom 20% Share of total sales 50%-80% Share of total sales Top 50% Share of total sales Copyright 2013 Lucid Partners, Inc. 22

23 Performance Matrix Example Fresh Meat Department Pork Niche Selected growth & variety opportunities Profit Hold/grow market share and margin Flagship Protect sales and market share Below Average Meat Department Margin Above Turkey (Ex Whole Bird) Sausage Lamb Veal Ham Chicken One benefit of the matrix is the ability to track performance over time Review Review tactics and store distribution levels Opportunity Reverse trend or manage for profit Beef (Including Ground Beef) Core Choose to maintain share or grow margin KEY Horizontal Axis = Cumulative Share of Category Vertical Axis = Margin Bubble Size = Margin Dollars Bottom 20% Share of total sales 50%-80% Share of total sales Top 50% Share of total sales Copyright 2013 Lucid Partners, Inc. 23

Performance Matrix Example Beef Primal - Chuck Below Average Meat Department Margin Above Branded Boneless Chuck Eye Steak Branded Boneless Chuck Roast Choice

Opportunity Core Review tactics and store distribution levels Reverse trend or manage for profit Choose to maintain share or grow margin Choice Boneless Chuck

various segments while maintaining department parameters of performance Bottom 20% Share of total sales Choice Boneless Arm Roast KEY Horizontal Axis =

24 Performance Matrix Example Beef Primal - Chuck Below Average Meat Department Margin Above Branded Boneless Chuck Eye Steak Branded Boneless Chuck Roast Choice Boneless Arm Steak Niche Profit Flagship Selected growth & variety opportunities Hold/grow market share and margin Protect sales and market share Review Opportunity Core Review tactics and store distribution levels Reverse trend or manage for profit Choose to maintain share or grow margin Choice Boneless Chuck Eye Steak Choice Chuck Tender Steak Choice Boneless Chuck Roast Choice Chuck Steak Another benefit of using the matrix is the ability to drill down into various segments while maintaining department parameters of performance Bottom 20% Share of total sales Choice Boneless Arm Roast KEY Horizontal Axis = Cumulative Share of Category Vertical Axis = Margin Bubble Size = Margin Dollars 50%-80% Share of total sales Copyright 2013 Lucid Partners, Inc. Top 50% Share of total sales 24

Performance Matrix Understanding the Benefits Use of the Performance Matrix is beneficial on several fronts: Snapshot illustrations of performance on multiple levels Allows for quick identification

store Performance NOT perception based KEY Horizontal Axis = Cumulative Share of Category Vertical Axis = Margin Bubble Size = Margin Dollars Niche Selected growth & variety opportunities Profit

25 Performance Matrix Understanding the Benefits Use of the Performance Matrix is beneficial on several fronts: Snapshot illustrations of performance on multiple levels Allows for quick identification of issues Easy to understand and convey concepts to others in management Creates a static basis for comparisons either across time or across segments, proteins, categories or departments within the store Performance NOT perception based KEY Horizontal Axis = Cumulative Share of Category Vertical Axis = Margin Bubble Size = Margin Dollars Niche Selected growth & variety opportunities Profit Hold/grow market share and margin Flagship Protect sales and market share Review Review tactics and store distribution levels Opportunity Reverse trend or manage for profit Core Choose to maintain share or grow margin Copyright 2013 Lucid Partners, Inc. 25

Target the Analysis Key Item Identification There is a common thread throughout most every category in the grocery store, be it center store or perishables A limited number of items do the vast

27 Target the Analysis Key Item Identification There is a common thread throughout most every category in the grocery store, be it center store or perishables A limited number of items do the vast majority of the volume The fresh meat category is no different A few select SKU s do the majority of the business Compounding the problem is that the number of total SKU s varies greatly 40% 35% 30% 25% 20% 15% 10% 5% 0% Identifying Key Items 37.2% Share of Meat Dollars 25.2% 17.4% % 80% 60% 40% 20% 0% Share of Total Department Sales Cumulative Share Copyright 2013 Lucid Partners, Inc. 27

28 Key Item Identification Understanding the Benefits Variety in the meat case is one of the critical components of success Allows for targeting of opportunities to appeal to consumers Identification of a top set of items is critical to effective analysis and management of the category With SKU counts that range from a few hundred to well over a thousand, it is nearly impossible to manage short and long term roles, strategies and tactics of each SKU on an individual basis By identifying a core set of items, management of the category and setting direction for those items becomes more of a possibility Copyright 2013 Lucid Partners, Inc. 28

Base Price Analysis Quantify and Predict the Impact of Change in Base Price Rate of sales in stores where observed 114 112 100 91 86 Projected sales rate index Projected rate of sales based on

31 Base Price Analysis Quantify and Predict the Impact of Change in Base Price Rate of sales in stores where observed Projected sales rate index Projected rate of sales based on statistical models used with account SKU level data Observed rate of sales can fluctuate greatly based on stores where the cut or item is in distribution $3.79 $3.89 $3.99 $4.09 $4.19 Observed Pounds Rate Base or Projected Pounds (No Ad Activity) Est Sales Index to Base Price Copyright 2013 Lucid Partners, Inc. 31

Base Price Analysis Compare and Contrast Items 106 110 100 88 83 102 100 100 97 95

19 Observed Pounds Rate Base or Projected Pounds (No Ad Activity) Velocity Index $9.

32 Base Price Analysis Compare and Contrast Items $4.79 $4.89 $4.99 $5.09 $5.19 Observed Pounds Rate Base or Projected Pounds (No Ad Activity) Velocity Index $9.79 $9.89 $9.99 $10.09 $10.19 Observed Pounds Rate Base or Projected Pounds (No Ad Activity) Velocity Index Copyright 2013 Lucid Partners, Inc. 32

33 Base Price Analysis Understanding the Benefits Identifying the optimum base or everyday price for key items in the category will allow for creation and implementation of price strategies Match strategy on these items with the overall price image of the department and of the store banner Adjustments will impact both the top and bottom line, so that are highly tactical in how they are implemented We have observed general patterns in the meat category around bands of items and their overall price elasticity Low and High priced items in the range tend to be more inelastic in terms of price to volume response on base price Mid priced items tend to be more elastic in their response Copyright 2013 Lucid Partners, Inc. 33

35 Promotional Dynamics Measuring the value and effectiveness of promotions Given the concentration in volume to a select number of SKU s, understanding the event by event financial results can help build a road map to more effective and efficient decision making Promotional effectiveness can be measured in two ways 1. Contribution to topline and bottom line sales 2. Incrementality to the segment, category or department The analysis can exist independently or can be blended to create a more holistic picture of promotional activity Copyright 2013 Lucid Partners, Inc. 35

36 Promotional Dynamics Mapping Average Weekly Event Financial Contribution $155,469 $155,218 Average Weekly Event Financials Assorted Bone In Chops Compare and contrast financial performance on top and bottom line Dollar Sales (Average Weekly) Profit Dollars (Average Weekly) Number of Weeks by Price Point Total dollar sales and profit dollars by item, divided by the number of merchandising weeks at the price point $25,763 $28,862 $82,647 $79,907 $18,624 $18,743 $28,224 $12, $1.89 $1.99 $2.29 $2.49 $3.13 (WAvg) Number of weeks during the past 52 weeks where the price point was observed Copyright 2013 Lucid Partners, Inc. 36

37 Promotional Dynamics Mapping Average Weekly Event Financial Contribution $279,954 Average Weekly Event Financials Branded Rump Roast Evaluate the topline sales number to the average loss in margin. Does the gain in sales meet a broader category objective for the week? What are the year ago comps? What is the role of the item in the ad week? Is this done in context of traffic generation? Dollar Sales (Average Weekly) Profit Dollars (Average Weekly) Number of Weeks by Price Point $114,690 $87,931 $2,036 $20,080 $27, $8,186 $7,802 $18,310 -$25,394 $2.19 $2.59 $2.99 $3.49 $4.21 (WAvg) Copyright 2013 Lucid Partners, Inc. 37

38 Promotional Dynamics Measuring True Event Incrementality With a focus on the key items as a whole, we create two item groupings: Key / Core items (limited items, with maximum sales contribution) All Other (remaining universe where sales to SKU count is disproportionate) With statistical modeling work we are able to quantify the interaction between products in these groups when on promotion This data helps us understand the promotional dynamics between items and provides us with insight as to the true effectiveness of a promotional event When an item is on promotion, is it adding volume to the segment, category or department? Defined as Incremental sales Is it stealing sales from other items within the product group? Defined as Cannibalized sales Copyright 2013 Lucid Partners, Inc. 38

39 Promotional Dynamics Measuring True Event Incrementality Cannibalized volume estimate that is measured represents volume sourced from items within the key item group. Incremental volume measured comes from items outside of that group and could also include sales to customers coming in the door as a result of the promotion. Key / Core Items Cannibalized volume comes from within other items in this group. 37.2% of Sales 62.8% of Sales Remaining Items Incremental volume is sourced from items outside of the top group or from external sources Copyright 2013 Lucid Partners, Inc. 39

40 Promotional Dynamics Measurement Illustration Because the Bacon category is closed loop, incremental volume is impulse or planned promotional buy Note the different cannibalization patterns on two key national brands vs. rest of category % of Volume Cannibalized or Incremental 120% 80% 85.6% Incremental 77.1% Brand driving incremental purchases to the category Cannibalized 40% 19.1% 30.2% 22.5% 9.9% 8.8% 9.4% 0% -40% -80% -14.4% -22.9% Brand stealing volume from existing items -80.9% -69.8% -77.5% -90.1% -91.2% -90.6% -120% Bar S Regional Brand 1 Regional Brand 2 Hormel Jimmy Dean Copyright 2013 Lucid Partners, Inc. Oscar Mayer Private Label Regional Brand 3 40

41 Promotional Dynamics Cross Product Measurement of Incrementality Detailed merchandising report Used to determine interaction of target item against primary competitive set of cuts/items. Allows for assessment of a promotion and/or price point at a broader segment level. Other data (store traffic, margins) are needed for a more complete picture of performance. 78% 84% Lean Ground Beef Average Event Lift Response Estimated Pounds Estimated Lift Pounds Estimated % Event Estimated Event Pounds Estimated Cannibalized Pounds % Cannibalized % Incremental Cannibalized Incremental 70%-77% 85%-89% 90%+ Everyday Target Price 2 $ $2.69 $3.79 $4.29 $ % 154,647 70, % 12.9% 61,331 9,086-1,957-27,354-32,020 $ % 172,377 91, % 36.7% 58,006 33,632-5,480-32,552-19,974 Observed Promotional Price Levels $ % 242, , % 46.8% 88,098 77,394-9,270-48,227-30,601 $ % 218, , % 60.3% 53,948 82,053-10,736-32,153-11,059 $ % 239, , % 51.7% 76,886 82,186-31,908-37,136-7,842 $ % 270, , % 57.7% 74, ,284-33,487-37,008-4,420 1 Average weekly baseline pounds is a total of the event weeks, divided by the number of events. Variations are due in part to seasonality. 2 Represents target price per pound for Family Pack Copyright 2013 Lucid Partners, Inc. 41

42 Promotional Dynamics Understanding the Benefits Understanding promotional performance is paramount to optimizing merchandising efforts, no two events or price points are alike In addition to volumetric and financial performance, it is important to look at the impact one item has on their competitive set Maximizing Incremental volume will have the potential to reach customers from outside the doors of the retailer Minimizing Cannibalized volume will help to mitigate negative sales and margin impact Copyright 2013 Lucid Partners, Inc. 42

44 Observed Results Action: Strategic Example Used Targeted Category Management to develop action plans for key items, adjusting promotional prices and setting planned targets for regular (base) prices Result: Retailer attributed 1.5% of sales and 2% of profitability year over year growth to the program and to the roadmap created to optimize price and promotions on key items Tactical Example Action: Changed promoted price on cut from $1.89 to $1.99 on planned promoted periods Result: With the migration of events to all $1.99, topline sales netted out as flat for the promotional periods Profitability for those events was up 12% vs. the events from the prior year Copyright 2013 Lucid Partners, Inc. 44

46 Category Management in Transition Category Roles OLD METHOD Perception based categories Large Scale Templates Size of binder was often related to the quality of the project Time consuming Off site meetings span the course of several days NEW METHOD Tactical Role Matrix Financial & Performance based Facilitating Snapshots Information & insight that enables better decision making Rapid Turnaround Data is on the clock, action can only result once insights are complete Evolution Copyright 2013 Lucid Partners, Inc. 46

47 Category Management Must Have s Must have access to data Can be sourced externally or internally Both sets of data have their advantages and disadvantages Must have a plan Need clear goals Solve a problem Understand and quantify a strategy or tactic goal Add data points for better decision making Must have quick turnaround Process cannot be bogged down Must have actionable findings Even small adjustments will add value Copyright 2013 Lucid Partners, Inc. 47