The US Fresh Produce Value Chain

DR. ROBERTA COOK Dept. of Ag and Resource Economics

University y of California Davis

May 2010

Top Grocery Trends in 2010

Restraint remains the new normal for consumers. Value is a top priority customers/commercial buyers y downward p pressure on margins. g Value is a top priority shoppers channel blurring, coupons, etc. Both contributing to store brand/private label growth. Grocery consolidation, and smaller formats growing. Assortment wars escalate SKU Rat! Better information management thru technology.

U.S. Fresh Fruit and Vegetable* Value Chain, 2008 Estimated Billions of Dollars
institutional wholesalers

$48.4
food service establishments

$10.1
imports

produce and generalline wholesalers

$63.1 farms f $21.2 shippers $5.6

exports integrated wholesaleretailers supermarkets and other th retail t il outlets tl t

$113.2 +
consumers

*Excludes nuts
Source: Estimated by Dr. Roberta Cook, UC Davis, based on numerous public sources, incl. USDA, DOC, Progressive Grocer, and PMA. Preliminary estimate. Not for publication.

farm & public markets

$1.7

Why We Are Here

Mutual dependency Streamlining the supply chain, improving vertical coordination, involves identifying mutually beneficial strategies and tactics
This includes identifying which activities add more value than cost Eliminating non-value-adding activities Decreasing operational inefficiencies often hidden and not important enough to attract attention in more favorable markets but with margin squeeze they count

Why We Are Here

Information technology, business intelligence will play a key role at all levels of the value chain going forward Those who embrace this may gain competitive advantages This includes a better understanding of consumers and the tactics that increase consumption without sacrificing return for the commercial buyer or seller Scale is increasingly important investment capabilities and competitive p wherewithal Scale can help achieve buying and selling advantages but can only be managed successfully with focused management, real-time data management systems and operational excellence

Why We Are Here

Fresh produce lags the food industry in the use of business intelligence to improve performance Fresh produce faces special challenges due to perishability, daily harvesting and shipping constantly influenced by the weather Regardless of the special challenges of produce, fresh produce is increasingly being asked to conform to the standards of the consumer packaged goods (CPG) industry The rapid growth in value-added fresh produce sold with UPC codes off of a list price (like CPG) has led the way for more rigorous data analysis at retail and focus on promotion and consumer marketing

Why We Are Here

Risk management strategies must go beyond geographic diversification at the production level; contract pricing tools Some commodity sectors are beginning to use some of the special marketing tools legally available to ag, such as information-sharing cooperatives to assist in risk management and information transparency Achieving and sustaining a competitive advantage pre-emption ti b by competitors tit a threat th t This is more easily said than done, so continuous improvement and innovation are key, and speed counts!

Why We Are Here

Suppliers and buyers (retail or foodservice) who partner together to identify mutually beneficial actions may gain a competitive advantage in their respective markets Successful partnerships are likely to be based on achieving logistical or operational efficiencies and/or consumer insights that get THE RIGHT PRODUCT TO THE RIGHT CONSUMER AT THE RIGHT TIME Vertical coordination can better match supply and demand (meaning a profitable market-clearing price for efficient growers) Getting a handle on meaningful consumer segments that can be effectively targeted is challenging but today smaller segments may be reached more cost-effectively with new media how to achieve this is a challenge

Why We Are Here

Despite rapid change, we are still largely operating in commodity markets so shippers are trying to differentiate themselves via products or services while still largely being price takers this is challenging can you show a positive ROI in the short run when investing in differentiation? Retailers are attempting to remain competitive amidst channel blurring (already in place in the pre-recession era) The Th recession i is i causing i some retailers t il to t abandon b d their th i goto-market strategies and attempt to morph into something on the fly by thinking short-term vs. long-term (Willard Bishop)

Why We Are Here

Wholesalers and distributors are pressed to add value to remain relevant Foodservice industry is no longer expanding as it was for decades Seed companies are striving to develop more outputspecific consumer traits, in some cases in conjunction with growers and shippers in order to capture more of th value the l chain; h i in i some cases developing d l i exclusive l i marketing relationships with retailers, supporting retailer differentiation

Why We Are Here

Growers typically market through shippers and have the least control over pricing, they receive the residual of the market price less marketing charges, pick, pack and harvest, palletization, in some cases cooling, and other handling charges and mandated-marketing or other institutional fees (e.g., CLGA, commission or marketing order charges) The shipper has incentives to continue shipping if at least covering variable costs costs, meaning that sometimes there is no return to the grower (production costs are not recouped) Can we better align incentive structures?

Why We Are Here

Improved strategies may lead to greater market transparency, vertical coordination, and efficiency Firms should f focus on understanding g consumers in order to develop strategies that stimulate demand in a way that distributes benefits to both suppliers and buyers, e.g., at the most basic level, win-win promos, category development holds great potential Effective positioning requires understanding the fundamentals of the rapidly evolving food and fresh produce distribution system!

Food Marketing Structure and Trends

Dollar Sales

2008 USA Food Sales: $1,157.6 Billion Retail SalesEquivalent, and Channel Shares, Quantity and Value

Quantity Sold
Foodservice
27.2% 72.8%

$564.4 Billion $

Foodservice
48.8% 51.2%

Retail

$593.2 Billion

Retail

Source: PlanetRetail for dollar sales and dollar share, 2008; Technomic, Inc. for share of quantity sold, 2006.

Fresh produce not getting its fair share of foodservice channels opportunity to shift demand!
Seasonality, perishability, price volatility, supplier size are obstacles. N Now is the th right i ht time tim for f all ll segments s m nts of f the th foodservice industry to increase fresh produce use, CSR propels action and consumer health and wellness trends support it. Growth in fast casual chains which emphasize fresh p potential p opportunity pp y represents The race to innovate is on as retail HMR offerings improve, and some retailers enter foodservice (e.g., Publix and Crispers) so substitutes are growing But the recession is a big challenge!

Unusual Salad Offerings: LSR Chains

Lots of innovation in fresh produce offerings in fast casual sector; low price points.

Panera Bread / St. Louis o Bread Co. o Fuji Apple Chicken* $5.69 all-natural citrus-herb chicken, field greens, Romaine lettuce, tomatoes, onions, pecans, Gorgonzola, and apple chips with white balsamic Fuji apple vinaigrette
Source: 2007: The Salad Category Report, Technomic Info. Services, 2007.

U.S. Grocery Industry New Product Introductions, 1993-2009 (and over 80% fail!)
40,000 35,000 , 30,000 25,000 20,000 15,000 10,000 5,000 0
15 5,006 12 2,893 13 3,266 12 2,503 16 6,863 11 1,131

Nonfood Food, Drink, Pet

5,709 17,755 5,070 6,306 6,828 15,097 21,310 13,279 6,912 4,673 6,881
9 9,814

24,6 627

21,039

7,145
9 9,417

12,498
14 4,421

10,404 12,764

1,775 14,472 11

22,964

18,244

15 5,978

17 7,828

17 7,342

17 7,093

19 97

19 99

20 01

Sources: Mintel International for 2008 and 2009; earlier years various Food Institute Reports.

Retailer vs. Manufacturer Driven System CPG Products

UK food marketing system model is retailerdriven New N products d are introduced i d d by b the h retailers, il the closest point of contact to consumers, often as private label Extensive resources are allocated to category development In contrast, the US system has traditionally been manufacturer-driven - re new product introductions and cat development

19 93

19 95

20 03

20 05

20 07

20 09

Private Label Share of CPG Spending in U.S. Grocery Channels Dollar Share Unit Share 1989 11.6 15.3 1993 13 9 13.9 18 2 18.2 1995 14.9 19.4 1997 15.7 20.1 2003 16.1 20.8 2004 16.2 20.6 2005 16.1 20.8 2006 15.9 21.3 2007 16.2 21.5 2008 16.9 21.6 Source: Various Private Label Magazines 2009 17 6 22 8

U.S. FOOD INDUSTRY MERGERS & ACQUISITIONS

1981-2008
724 652 599 556 813 753 734 641 529538 522 485 468 516 403 392413 378 368 351 323

666

645 658 588 583

415 365

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2008

Source: The Food Institutes: Food Industry Review, 2003 and 2008; and Food Business Mergers and Acquisitions, 2008

10

Market Shares of Top U.S. Grocery Chains, Share of U.S. Grocery Sales, 19292008
50 40

percent

30 20 10 0
1929 1948 1963 1975 1984 1994 1999 2005 2008
Source: USDA, ERS, and Cornell estimates, 2009.

Top 4 chains

Top 8 chains

Estimated Number of U.S. Wholesale and Retail Firms, and Grower-Shippers, 2008*
Item

Retail Chains (10 or more stores)

156 58 72 220 3 452 3,452 1,102 404

Retail Chains with 100 or more stores

Independent Retailers (<10 stores)** Wholesale grocers Total US Grower-Shippers

Grower-shippers in California Grower-shippers in Florida

Source: Bluebook online queries by Cook, March 18, 2009.

*May be over counting due to firms listed in multiple categories. **Gross undercounting as most independents dont buy direct and are not listed in the Blue Book

11

Top Grocery Retailers, Estimated Grocery-Equivalent Sales Only (not total firm sales) in U.S. Market, 2009

Est. Sales Company Wal-Mart Kroger Costco Safeway SuperValu p Target Publix Ahold

Est. Food in billion $ 320.8 80.5 61.6 40.6 39.4 66.7 25.5 23.3

Sales in billion $ 170.7 69.9 40.3 37.2 35.7 24.7* 23.1 21.2

Source: www.planetretail.net April 2010, Food Banner Sales only. *Incl. $13.8 B of SuperTarget

Top Grocery Retailers, Estimated Grocery-Equivalent Sales Only (not total firm sales), in U.S. Market, 2009, cont.

Est. Sales Company Delhaize Group p Aldi HE Butt Meijer Giant Eagle

Est. Food in billion $ 19.8 13.4 14.7 16.3 8 7 8.7 8.2 9.7

Sales in billion $ 15.8 12.5 13.0 11.4 8 0 8.0 7.8 7.3

Whole Foods Market Tengelmann

Source: www.planetretail.net April, 2009, Food Banner Sales only.

12

Walmart Grocery and Fruit and Vegetable U.S. Sales, by Format, 2009 (million $)
Banner Fruit & Veg. Fruit & Veg. Groceries Share

Supercenter Sam's Club Walmart

$11,707.5 132,914.1 2,304.6 0.0 256.0 3 2 3.2 4.6 24,716.9 10,826.4 2,158.2 27 9 27.9 24.8

8.8% 9.3% 0% 11.9% 11 5% 11.5% 18.5% 8.4%

Neighborhood Market Supermercado Marketside Total All Formats

14,275.9 170,668.2

Source: planetretail.net, April 2010.

2009 SuperValu Grocery Sales by Banner Type

Rank 1 2 3 4 5 6 7

million $

Albertsons 13,215 Save-A-Lot 4,410 Cub Foods 4,075 Jewel 3,301 Shaw's 3,019 , Acme 1,926 Shop.Food & Pharmacy 1,719

Rank million $ 8 Farm Fresh 1,446 9 Shop 'n Save 1,214 10 bigg's 11 Bristol Farms 12 Hornbacher's Hornbacher s Foods Total 862 348 147

35,682

Source: planetretail.net, April 2010.

13

2009 Safeway Grocery Sales by Banner Type Rank Million $

1 2 3 4 5 6

Safeway Vons Randalls Dominick's Genuardi's Genuardi s Family Markets Carrs Quality Centers

25,358 5,293 3,117 2,144 954 361 37,227

Total
Source: planetretail.net, April 2010.

Target: Grocery and Fruit and Vegetable U.S. Sales, by Format, 2009 (million $)
Banner Fruit & Veg. g Fruit & Veg. Groceries Share

SuperTarget Target Total All Formats

1,215.1 0.0 1,215.1

13,795.3 10,859.8 24,655.1

8.8% 0% 4.9%

Source: planetretail.net, April 2010.

14

Return on Asset Comparison, Top 4 US Grocery Retailers, 2008

ROA =
Profit/Sales X Sales/Assets

Wal-Mart
(Period ending 1/31/08)

7 8% 7.8% 5.3% 5.5% 2.8%

3 4% 3.4% 1.7% 2.2% 1.3%

2 3 2.3 3.1 2.5 2.1

Kroger
(Period ending 2/1/08)

Safeway y
(Period ending 1/3/09)

Supervalu
(Period ending 2/23/08)

Sources: Most recent company annual reports available in March 2009.

Problems Facing U.S. Retail Fresh Produce Depts., 2009

Rated on a Scale of 1-10 Where 10 = Extremely Serious

Competition from supermarkets Profits Shrink/spoilage Competition from Walmart Wholesale prices

4.71 4.36 4.28

Transportation costs Employee training Attracting more shoppers to produce dept Customer satisfaction levels

4.03 4.03

Quality of product 4.19 4.11 4.10

3.96

3.95

Source: Progressive Grocer Market Research, Oct. 2009.

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Competencies that build trust with advocates differ from competencies that motivate consumers to shift.
Source: IBM Institute for Business Value NRF Study, December 2008.

Ranking of competencies to build shopper advocacy Quality Store experience Convenience Product availability Assortment Price/promotion Customer service Multi-Channel

Reason why consumer shift Price/promotion Convenience Assortment Product availability Quality Q y Store experience Customer service Multi-Channel

How Merchandising Techniques Affect Product Movement

Technique Description Impact on sales -80%

Change in shelf Movement from top shelf to location with no price bottom shelf or facing change Change in number of Reduction of facings from 4 product facings with to 2 units no price or shelf location change Use of off-shelf (special) displays End-aisle display with special price compared to shelf location with same special price, no advertising

-45%

+420%

16

How Merchandising Techniques Affect Product Movement

Technique Use of shelf signs Description Use of a simple as advertised sign to point out advertised product on shelf compared to same product without a sign, no special price a) Product advertised in newspaper with special price combined with a simple shelf sign as advertised at XX b) Same as (a) above with addition of an end aisle display Impact on sales +124%

Combinations of various techniques

+194%

+629%

Retailer X Fresh Produce Department Shrink and Pitch History, Percent, 20002008
10 % 8 6 4 2 0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Company documents.

9.48

8.4

7 38 7.69 7.38

Shrink
7 56 7.56 6.13

Pitch

5.23 4.88

4.5

2.82

2.64

2.48

2.51

17

Estimated Ranges of Losses in the U.S. Fresh Produce Distribution System

Distribution Activity y Transportation Wholesaling Retailing System losses Percent Losses 2.80 5.00 2.50 5.03 2.74 6.58 9.04 16.61
Percentage losses are based on dollar values of losses in each phase of distribution as a % of the wholesale value of products entering the distribution system.

Source: Pierson, Thomas R., Allen, John R. and McLaughlin, Edward W., "Produce Losses in the U.S. Food Distribution System," MSU Agricultural Economics Report, 1983.

Total US Grocery Sales,* Store Numbers, and Market Share by Channel, 2008, and Projected Share, 2013

2008 Sales $Million

2008 No. of Stores

2008 % of Sales

2013 % of Sales

Traditional Nontraditional GRAND TOTAL

$463,605 $349,452 $958,786

40,277 51,008 151 053 151,053

48.4 36.4 15 2 15.2

43.4 41.0 15 6 15.6

Total C-Stores** $145,729 $145 729

242,338 100.0 100.0

*Grocery sales only (food and nonfood); excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines. ** Sales exclude gas. Source: Adjusted by Roberta Cook from The Future of Food Retailing, Willard Bishop, June 2009

18

US Grocery Sales, Store Numbers and Market Share of Total Grocery Sales, by Store Format, 2008, and Projected Share, 2013

Traditional Grocery Channel

2008 Sales $Million 2008 No. of Stores

2008 % of Sales

2013 % of Sales

Total Traditional Fresh Format Ltd Assortment Super Warehouse

$463,605 $7,983 $22 290 $22,290 $18,214

40,277 26,802 825 3 204 3,204 588 8,858

48.4 42.1 0.8 2 3 2.3 1.9 1.2

43.4 35.2 1.0 3 5 3.5 2.6 1.1

Conven. Supermkt $403,658

Other (small groc.) $11,460

Source: Adjusted by Roberta Cook from The Future of Food Retailing, Willard Bishop, June 2009

US Grocery Sales,* Store Numbers and Market Share of Total Grocery Sales, by Store Format, 2008, and Projected Share, 2013

Nontraditional Grocery Channel

2008 Sales $Million

2008 No. of Stores

2008 % of Sales

2013 % of Sales

Total Nontradl Supercenter Wholesale Club Dollar Store Drug Mass Military

$349,452 $152,176 $79,483 $16,911 $50 489 $50,489 $44,637 $5,757

51,008 3,240 1,295 21,554 21 003 21,003 3,754 172

36.4 15.9 8.3 1.8 5 3 5.3 4.7 0.6

41.0 21.6 8.5 1.8 5 6 5.6 2.9 0.6

*Grocery sales only (includes food and non-food); excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines. Source: Adjusted by Roberta Cook from The Future of Food Retailing, Willard Bishop, June 2009

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Sales and Store Numbers in Major US Grocery Channels, by Key Format, 2008, Excluding: Membership Clubs, C-Stores, Grocery Stores with Sales <$2M/Yr., and Dollar Stores Format
# of Stores % of Total Stores Sales, Million $ % of Total Sales

Total Supermarkets* Supercenters** Combined ltd assort and fresh/natural formats

34,659 27,390 3,240 4 029 4,029

100.0% 79.0% 9.4% 11 6% 11.6%

$604,321 100.0% $421,872 $152,176 $30 273 $30,273 69.8% 25.2% 5 0% 5.0%

*Conventional supermarkets and super warehouse formats. **Sales of supermarket-type items only (food and non-food grocery).
Source: Calculated by Roberta Cook based on data in The Future of Food Retailing, Willard Bishop, June 2009.

Size of Leading US Natural and Limited Assortment Supermarket Retailers

In 2009 Whole Foods operated 271 stores in the USA with $8.2 billion in sales (total $8.5 billion and 283 stores, incl UK and Canada); 17% of sales are fruits and veg Trader Joes sales are estimated at over $6.5 billion, with 310 stores in 2008 (privately held, owned by the Albrecht family of
Germany Aldi chain)

Specialty retailers represent only about 5% of US grocery store sales Conventional supermarket operators are still the primary customers for fresh produce suppliers, and most are changing their formats to emphasize freshness, including increased attention to produce departments and also organics

20

Private Label

Branded Grocery Product Unit Sales Growth Rates in U.S. Food, Drug and Mass Merchandisers (FDM, so including Walmart), 2009

Percent unit sales growth for last 6 (4-week) periods

1.1 -1.8 -0.5 -1.5 0.3

52 weeks ending 11/28/09 (versus prior year).

Source: Scantrack, a service of The Nielsen Company, Nielsen Economic Advisor, January 17, 2010.

21

Private Label Grocery Product Unit Sales Growth Rates in U.S. Food, Drug and Mass Merchandisers (FDM, so including Walmart), 2009

Percent unit sales growth h for f last l 6 (4-week) periods

4 9 4.9 4.1 3.6

4.6

4.8

52 weeks ending 11/28/09 (versus prior year).

2.8

Source: Scantrack, a service of The Nielsen Company, Nielsen Economic Advisor, January 17, 2010.

Private Label Fresh Produce Sales in US Supermarkets1, 2008

Private label fresh produce sales in supermarkets surpassed $2.3 billion and were ninth among the top 10 categories in the supermarket with the highest unit gains. Private label fresh produce units sold grew by 11.3 percent and represented 16.3% of fresh produce unit sales in U.S. supermarkets. Value-added fresh-cut items figure most prominently in fresh produce private label sales sales, accounting for $1.3 $1 3 billion in supermarket sales (Progressive Grocer). -------

1Supermarkets are grocery stores exceeding $2 million in annual sales, excluding membership clubs such as Costco, and mass merchandisers such as Walmart discount stores and supercenters. Sources: The Food Institute and Progressive Grocer

22

Private Label Fresh Produce Sales in US Supermarkets

Produce suppliers are benefiting from retailers consumer data, such as when they become private label suppliers for a chain. Example, when Kroger rolls out private label products it may di discontinue ti corresponding di b branded d d SKUs. SKU Vi Via th the D Dunnhumby h b data suppliers can target consumers who were purchasers of the discontinued items, sending them coupons for the similar new private label items. Some produce suppliers are also finding that they can reach out get product p feedback f from f m Krogers g shoppers pp and learn to g interesting lessons. Leading executives feel that this increased integration between shoppers and the retailer and the supplier will produce benefits for all, and that it is a big miss for competitors not engaged in these practices.

Example: Branded Importance to US Consumers of Fresh-Cut Fruit is Low (brand loyalty is also low for bulk fresh produce)
Prefer store brand 4% Prefer f brand/ will not pay more 13% Prefer brand/ pay y more will p 15%

No Preference 68%

Source: Fresh Summit 2007 Ripe for the Picking, Perishables Group, Oct. 2007.

Also, 74% of Fresh-Cut Veggie Consumers Have No Preference

23

Threats and Opportunities

Private labels are becoming more important to retailers both as a differentiation tool with innovative rather than just me-too products, and as a way to offer value (price relative to quality) to consumers. Value can be at the high end as well. Private labels can represent an opportunity to fresh produce suppliers by generating predictable demand for those items, on the other hand, margins are likely to be thin and you can lose control of the marketing.

Positioning for Success

24

Becoming Marketing-Driven
Becoming customer-centric. Putting the interests of your customers first. Understanding U d di that h you will ill get there h faster f if you work together. Next level is to become consumer-centric. Consumer-centrism will increasingly be achieved via supplier-customer ppli t m p partnerships. tn hip Suppliers and customers must choose strategic partners align with those who will succeed in the marketplace

Being Customer-Driven: Case of Taylor Fresh Foods

A key to the Taylor model is a customer-centric approach, originally focusing on foodservice accounts. For national accounts, Taylor assigns customer championsTaylor managers who are the face of the company with that customer and are supported by an account team team. Regardless of which plant supplies product to a customer at any given time, the points of contact remain the same for the customer. Bruce Taylor, Chairman and CEO says that customer champions are asked to represent the customers interests and, furthermore, that part of Taylors corporate culture is to hire people willing to put the customers interests ahead of their own personal interests. Bruce states that customers customers are not adversaries; rather, rather we learn from them and we are completely open with them about our costs; our philosophy is that we will get there faster if we work together. Products and processes are developed and you might say Taylored to meet the needs of specific accounts. This approach mitigates the risk of investing in new product and process development, but it doesnt eliminate it.

25

Being Customer-Driven: Case of Taylor Fresh Foods

According to Product Development Director Roscoe Bava, Taylors going the extra mile on product development from the beginning opened doors. The companys philosophy is that its better to try and fail than not to try at all. For example, according to Bava McDonalds came to us a few years ago wanting g to develop p a heart-of-lettuce f product that looked like it had been cut p by hand and not on a machine. After a lot of experimentation, we put in a 60-foot-long line that produced just what they wanted. The McDonalds product didnt last long on their menu but they were really impressed with the technology. Our competitors couldnt come close to it. Great emphasis is put on new product and process development as a central point of differentiation. This is buttressed by distribution and logistics advantages. The introduction of new, highly fresh products to retail channels, will likely result in new distribution models and close cooperation with customers to eliminate the time lag and extra shrink caused by slotting product into distribution centers.

Example: Kroger Strengths Leading specialist grocery retailer in the USA. Growing expertise in gasoline retailing. Relatively positive track record in the integration of acquired businesses (particularly compared to Safeway). Impressive multi-format portfolio of stores, ranging g g from supercenters p to traditional stores and convenience stores. Local trading names have protected regional brand equity.
Source: Kroger in USA Spotlight, Planet Retail, April 29, 2010

26

Kroger Strengths
Modern and sophisticated supply chain infrastructure backed up with the latest technologies such as voicepicking, real-time management systems, Internetbased inbound freight management and demand forecasting. Strong manufacturing business which has resulted in a comprehensive three-tier private label strategy including company company-wide wide brands and chain chain-specific specific brands. Extensive and well-targeted chain-specific loyalty programs.
Source: Kroger in USA Spotlight, Planet Retail, April 29, 2010

Kroger Weaknesses
Exclusively reliant on the competitive and Walmart dominated US retail sector. Labor relations track record is far from perfect. perfect Has missed out on some potential acquisitions. Absent from popular and rapidly-growing channels such as drugstores, dollar/discount stores and warehouse clubs. Pricing P i i needs d t to be b sharpened h d further. f th E-commerce activities lag those of key rivals Albertsons, Ahold and Safeway.
Source: Kroger in USA Spotlight, Planet Retail, April 29, 2010

27

Niche Market vs. Market Niche: Is there a difference? YES! Niche market:
Unique q w / narrow demand so customers have uniform views; Insensitive to price changes so wide range for prices & markup; Local market saturates very quickly when growers learn about sales opportunities.
Source: Ed Estes, NC State

Broad demand where customers have lots of close substitute choices; Sensitive to price changes so price is very important to buyer; Has price limits so really driven by cost & overall supply situation.

Market niche:

Niche Market and Market Niche Examples

Niche market:
organic produce a few yrs. ago medicinal herbs elephant garlic microgreens Specialty outlets Demand dominates but often f there h is easy market k saturation.

Market niche:

Broad demand where customers have lots of close substitute choices; Greenhouse tomatoes Yellow/orange peppers Sweet onions Seedless watermelon Mainstream grocery Supply availability & comparative price dominate buy decision.

Source: Ed Estes, NC State

28

Marketing Margins and Some Pricing B i Basics

WHAT

DOLLAR SPENT for FOOD PAID FOR the USA

in 2006

in

19

Gross Farm Value 19

Marketing bill 81

Source: Howard Elitzak ERS/USDA

29

Selected U.S. Fresh Vegetables, 1980-2008, Farm Share of Retail Price Percent
50 40 30 20 10 0
19 90 19 92 20 00 20 02 20 04 19 80 19 88 19 82 19 84 19 86 19 94 19 96 19 98 20 06 20 08

Broccoli Lettuce Tomatoes Potatoes

Source: USDA/ERS, May 2008 Vegetable Yearbook

18.7% average farm share for fresh veg., 2008.

Selected U.S. Fresh Fruits, 1980-2008, Farm Share of Retail Price Percent
60 50 40 30 20 10 0
94 04 86 82 88 92 96 00 80 84 02 06 90 98 20 19 19 19 19 19 19 19 19 20 20 19 19 20 20 08

Strawberries Grapefruits Lemons

Source: USDA/ERS, October 2008 Fruit and Nut Yearbook

15.8% average farm share for fresh fruit, 2008.

30

Where does $1.00 in retail fresh produce sales go?

C.O.G.

10% 10%

10% 45%

Labor Shrink Misc. Exp

15%

15%

Misc MD Net Profit

Source: Bruce Peterson, President, Peterson Insights, 2009

Retail Produce Department Indicators

Contributes about 10-12% of total store sales and about 17% of net store profit Pre-tax profit margins in the produce dept. are around 10% - 12% Buyers are generally not held accountable for net margins/profit as the expense side is typically viewed as beyond their control. Buyers focus on gross margin!
Source: Bruce Peterson

31

Retail Produce Department Pricing

Its takes a 7% change in a retail price for a consumer to sense there has been movement. It takes a 10% change in retail pricing for a consumer to think about a behavior change. It takes a 15% change in retail pricing for a consumer to act and change behavior. So if f the f.o.b. pr price ce declines decl nes buyers will w ll generally take it in margin and it wont negatively impact quantity sold.
Source: Bruce Peterson

Retail Pricing Strategies

Every Day Low Pricing (EDLP) or High-Low pricing are the two most common strategies. EDLP is generally used by new model retailers supercenters, club stores and generally margins are lower than for conventional supermarket chains. Costco margins never exceed 14%. EDLP operators emphasize contract vs. spot market buying but conventional retailers are also increasingly operating more on a partnership basis with key preferred suppliers with program focus. Successful grower-shippers are increasingly account-driven so they can respond to either EDLP or High-Low pricing retailers accordingly.

32

More on the Fresh Produce Value Chain

Estimated Number of U.S. Wholesale and Retail Firms, and Grower-Shippers, 2008*
Item

Retail Chains (10 or more stores)

156 58 72 220 3 452 3,452 1,102 404

Retail Chains with 100 or more stores

Independent Retailers (<10 stores)** Wholesale grocers Total US Grower-Shippers

Grower-shippers in California Grower-shippers in Florida

Source: Bluebook online queries by Cook, March 18, 2009.

*May be over counting due to firms listed in multiple categories. **Gross undercounting as most independents dont buy direct and are not listed in the Blue Book

33

Leading US Fresh Market Vegetable States in 2009: Geographic concentration of production (due to climate) limits local sourcing potential, yet it is growing in the summer/fall

Area Harvested Production Value % of % of % of State Total State Total State Total CA 44 CA 49 CA 52 FL 11 FL 9 FL 13 AZ 7 AZ 7 AZ 7 GA 6 GA 5 GA 5 NY 4 NY 4 NY 3
Source: NASS/USDA, Vegetables 2009 Summary, January 2010

Leading State Market Shares, Value of Production of Fresh Fruits

State CA WA FL OR MI NY Others Selected state fresh fruit value Total US fresh fruit value
Source: USDA/ERS, Gary Lucier.

Value ($1,000) $ 3,665,350 , , $ 2,021,237 $ 498,527 $ 101,578 $ 83,234 $ 249,583 $ 838 838,317 317 $ 7,458,226 $ 8,543,212

% 49% 27% 7% 1% 1% 3% 11% 100% (selected state value is 87% of total US value)

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US Fresh Produce Trade,* $Million, 1994-2008

12,000 10,000 8,000 6,000 4,000 2,000 0
1994 1996 1998 2000 2002 2004 2006 2008
*Fruit imports may include frozen.

10.6
Imports
5.6

Exports

Source: USDA/FATUS

Estimated fresh fruit and vegetable imports as a percent of U.S. disappearance, 2007
Item Fresh F h Veg., V incl. i l Melons M l & Potatoes P t t Vegetables & Melons Melons Vegetables, excl. Melons and Potatoes Potatoes Fresh Fruit, Fruit all Excluding Bananas Fresh Fruit & Veg., all Excluding Bananas
Source: Economic Research Service, USDA, Gary Lucier.

% 16.9 16 9 18.5 24.8 17.3 9.3 47.0 47 0 29.7 27.8 21.6

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36

Fruit, Vegetable and Nut Farm Structure

Number of fruit, berry and nut farms with sales over $50,000/yr.* - 28,824
- 4,711 4 711 farms selling >$1million account for 4% of total
fruit/berry/nut farms and contribute 67% of total value

Number of vegetable and melon farms with sales over $50,000/yr.* - 13,824
- 4,908 4 908 farms selling >$1million account for 7% of total veg/melon farms and contribute 84% of total value

*Total of 112,690 fruit, berry, nut farms and 69,100 total

vegetable and melon farms, of all sizes. Source: 2007 Census of Ag

Ca. Share of: the Number of U.S. Vegetable Farms, and Sales, by Key Size Category, 2007 Item F Farms with i h sales l > $50 K - # Total Sales ($millions) of farms with sales >$50K Farms with Sales of $1 Million or more - # Total Sales ($millions) of farms with sales of $1 Million or more
Source: 2007 Census of Agriculture

CA 1,914 $ 5,410 1,109 $ 5,212

% US 2.8% 36.8% 1.6% 35.5%

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Ca. Share of: the Number of U.S. Fruit and Nut Farms, and Sales, by Key Size Category, 2007

Item Farms with Sales >$50 K - #

CA 15 131 15,131

% US 13 4% 13.4% 57.5% 2.3% 42.3%

Total Sales ($millions) of farms $ 10,714 with sales >$50K Farms with Sales of $1 million or 2,647 more - # Total Sales ($millions) of farms $ 7,880 with sales of $1 million or more
Source: 2007 Census of Agriculture

How do growers market their crop? They dont unless they are growershippers, most growers do not have the structure to market, rather they rely on shippers, most of which are family-owned forwardi t integrated t d grower-shippers, hi most t of f which hi h market k t not t only l their th i own production but that of other growers For products that are shed packed (such as Ca. tree fruit) some growers may use one packer to pack the fruit and a packer-shipper to market it (not relevant for field-packed items) This means that when looking at the number of sellers facing buyers we should focus on grower-shippers or packer-shippers rather than the number of growers and we can see that concentration is increasing on the supply side, not just on the buying side

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HOWEVER, each of the grower-shippers is competing for growers and growers tend to focus on short-term returns and compare prices/box to their neighbors This makes it very difficult for shippers to invest in marketing where short-term returns may not be that apparent Marketing is often viewed as just taking cents/carton off of the bottom line rather than adding value The reality is that investing in marketing must be done judiciously, strategically, with a medium-term plan and that competitive positioning is a key element of the go-to-market strategy scarce resources must be effectively targeted!

Conclusions
Emergence of mega-retailers over last decade has led to supplier concern over countervailing power More commodity groups are utilizing information sharing cooperatives as a tool for managing flow to market and maintaining firmer f.o.b. prices but difficult to manage firm rivalry among members Closer Cl alignment li (vertical ( i l coordination) di i ) of f buyers b and sellers in supply chain still has a lot of room to unfold gains should be huge

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Growth & Opportunity

John Rand Senior Analyst/Management Ventures, Inc.:
The US retail landscape is undergoing fundamental change, moving from the bigger I am, the faster I grow to the faster I am, the bigger I grow. E.g., Trader Joes, Whole Foods, HEB. What is significant is being excellent at something. If a retailer t il is i really ll good d at t something thi that th t matters to consumers, it will grow. By itself, being big doesnt guarantee growth. We are moving from economies of scale to economies of skill.

Supplemental Information

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US Grocery Store Format Characteristics, 2008 Traditional Grocery Channel

Total Store Area Average Total SKUs Average Groc. & Weekly Consum. Sales $ % Sales

Total Traditional Trad. Supermkt Fresh Format Ltd Assortment Super Warehouse Other (small groc.) 52,100 32,400 15 000 15,000 43,100 9,000 45,500 30,000 1 400 1,400 36,000 3,000

$221,345 100 $289,631 100 $185,991 100 $133 799 100 $133,799 $595,467 100 $24,880 100

Source: The Future of Food Retailing, Willard Bishop, June 2009

US Grocery Store Format Characteristics, 2008 Nontraditional Grocery Channel

Total Store Area Average Total SKUs Average Weekly Sales $ $* Groc. & Consum. % Sales

Total Nontraditional $132,035 Wholesale Club 130,500 5,100 $1,180,329 59% Supercenter 184,100 100,000 $903,311 60% Dollar 7,400 5,400 $15,095 66% D Drug 12 300 25,000 12,300 25 000 $46 229 34% $46,229 Mass 66,400 95,000 $228,639 23% Military 29,400 15,000 $643,610 100%
*Grocery sales only (includes food and non-food); excludes electronics, prescription drugs, toys, jewelry, sporting goods, gas, clothing, footwear, knickknacks, and hardlines. Source: The Future of Food Retailing, Willard Bishop, June 2009

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U.S. Fresh Produce Retail Sales by Segment, 2008 Random-weight vegetables Random-weight fruits Packaged salads Fresh-cut fruit Store brand fresh-cut produce Floral Refrigerated dressings Premium juices Other items 2.8% 2.7% 1.9% 1.7% 1.6% 3.9%

31.9% 29.8% 11.0%

Specialty produce 4.8% Packaged fresh-cut produce 4.0% Organic produce 3.9%

Source: Progressive Grocer Market Research, Oct. 2009.

Average Perimeter Department Performance for U.S. Supermarkets - Produce, 2009

Average Days of Supply Average Turns Gross Margin # SKUs Square Foot Facing* Weekly Sales Adj. j. Gross Profit** f Share of Perimeter Weekly Sales Share of Perimeter Adj. Gross Profit 7 55 42% 2,249 1,222 $59,448 $24,938 $ , 33.8% 29.4%
Notes: * Square Foot Facing is shelf width times shelf height. ** Adjusted Gross Profit includes trade spending cash discounts, off invoice, bill backs, scan backs, display allowances, slotting, etc.

Source: Willard Bishop Total Store SuperStudyTM, September 2009.

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Average Perimeter Department Performance for U.S. Supermarkets Produce vs. Deli/Food Service, 2009
Produce Average Days of Supply 7 Average Turns T 55 Gross Margin 42% # SKUs 2,249 Square Foot Facing* 1,222 Weekly Sales $59,448 Adj. d G Gross Profit** P f ** $24 938 $24,938 Share of Perimeter Weekly Sales 33.8% Share of Perimeter Adj. Gross Profit 29.4% Deli/Food 15 24 47.2% 2,284 612 $34,635 $16 341 $16,341 19.7% 15.1%
Notes: * Sq.Ft. Facing is shelf width x height. ** Adj. Gross Profit includes trade spending cash discounts off discounts, invoice, bill backs, scan backs, display allowances, slotting, etc.

Source: Willard Bishop Total Store SuperStudyTM, September 2009.

Sales of U.S. Food, Drug and Mass Merchandisers (FDM, incl. Walmart), % Dollar Sales Growth Rates by Key Dept. 2009
5.4

Percent Dollar Growth (FDM with WM)

4.9 4.1 Total 3 5 3.4 3.5 Fresh Meat 2.9 1.4 1.2 0.3 Packaged Meat Alcoholic Beverages Frozen Dry Grocery Nonfood Deli Fresh Produce HBA Dairy -5.7 -5.8 Gen Merchandise

1.3

Source:Scantrack, a service of The Nielsen Company, Nielsen Economic Advisor, January 17, 2010. 52 weeks ending 11/28/09 (versus prior year).

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Sales of U.S. Food Drug and Mass Merchandisers (FDM incl. Walmart), % Unit Sales Growth Rates by Key Department, 2009
7.0 4 5 4.5 2.9 2.1 1.8

Percent Dollar Growth (FDM with WM)

Total Fresh Meat Fresh Produce 1.0 0.9 Dairy Packaged Meat Alcoholic Beverages -0.5 2.6 -2.8 -2.6 2 8 Deli Frozen Dry Grocery Nonfood -8.2 HBA Gen Merchandise

-0.3

Source: Scantrack, a service of The Nielsen Company, Nielsen Economic Advisor, January 17, 2010. 52 weeks ending 11/28/09 (versus prior year).

Leading U.S. Supercenter Operator Total* Sales and Units, 2008

sales ($ millions) % share units

Wal-Mart l M $2 5 91 $235,913 Super Target $21,427 Meijer $15,483 Fred Meyer $9,015 Super Kmart K ** $2 775 $2,775 Biggs $1,196 TOTAL $285,809
Source: compiled by Roberta Cook from www.PlanetRetail.net

82.5 82 5 7.5 5.4 3.2 1 0 1.0 0.4 100.0

2,621 2 621 239 190 128 55 11 3,233

*Total sales, not just grocery sales. **2006

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Q3 2009 Selected Fast Casual/Family Dining/QSR Same-Store Sales Growth Rates

Same-Store Sales Trends % Change vs. Prior Year 2009 2008 2007 -1.6% +0.8% +2.5%

Source: Company Reports - NRN (Nov 9, 2009); Latest quarter, except last four weeks for McDonalds, Carls Jr, and Hardees.

Q3 2009 Same-Store Sales Growth Rates for Selected U.S. Full-service Restaurant Chains
Same-Store Sales Trends % Change vs. Prior Year 2009 2008 2007 -8.5% -4.6% +1.0%

Source: Nielsen Economic Advisor Company Reports - NRN (Nov 16, 2009); Latest Quarter.

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