CPG & Grocery trend report. Clicks, bricks & broccoli

1 CPG & GROCERY TREND REPORT 2017 United States: Q1 2017 Preface

There are no more valuable ecommerce carts than those devoted to the fact that it is the last frontier of ecommerce. Online grocery is the only grocery. Unlike every other category, grocery has no true seasonality of area expected to grow in CPG sales over the next few years. Brands in this purchase. The items bought may vary between holidays like the Fourth of category need to adapt their marketing practices, honed through decades July and Christmas, but, chances are, shoppers will place that liter of cola of experience, to engage with their customers online in a new way in order in their carts each week no matter what time of year it is. Online grocery is to make it into those all-important persistent carts of their dreams. finally starting to take off in the U.S. thanks to a desire for simpler lives and

2 CPG & GROCERY TREND REPORT 2017 Key findings

Nearly half (46%) of Baby Care purchases are made on impulse.

40% of eGrocery purchases are made on mobile phones.

43% of eGrocery shoppers searched online for a coupon (the highest percentage of any promotional activity).

$132.23 was the average eGrocery cart value of Q3 2016.

3 CPG & GROCERY TREND REPORT 2017 1 Category trends.

4 CPG & GROCERY TREND REPORT 2017 membership fee. (They rescinded the onerous pricing from the explosion? Sales in 2016 were estimated Trends and challenges policy in 2016 and are back and running with a lower at $1.5 billion. Subscription services, like those persistent • Top rank persistence. Upstart brands like Green Mountain delivery fee again.) carts, are very important for brands and retailers, as busy Coffee and Tom’s of Maine have become category killers working moms like to “set it and forget it.” Brands should • Promotional activity and couponing. With the decrease due to the fact that, in search, when a product achieves be making connections with kit sellers like , in use of FSIs and the rapid emergence of online coupon top rank, it is difficult to knock it off that position. , Purple Carrot, Peach Dished, Chef’d, FreshRealm, sites, will marketers achieve the same reach? Green Chef, and Daily Harvest. Alliances with • No end caps. There simply is no way to replicate what these services will help increase brand loyalty with busy • For pure play, no footprint. Bricks and clicks retailers like brands have had with end-aisle promotions that inspire Millennials, who will become the target demo over the Shop ‘n Shop have a distinct advantage over pure plays impulse purchasing. next few years. as they have a retail footprint to use as a collection point • No check-out displays. Same issue as above. How will and keep shipping costs and prices competitive. But Fresh • How to measure it. Brands are used to GRPs and Reach you sell gum and candy if they aren’t captive in the check- Direct, Boxed and Jet are more than standing up to the & Frequency tied to media mix models, but how will they out line? challenge, either through retail partnerships (Jet is owned measure effectiveness in a click-based world? Offline by Walmart) or through lockers for click-and-pick services “share of shelf” measurements are pivotal. This type of • Limited “shelf-space”. Mobile provides a limited field like has with Whole Foods analysis is in its formative stages for CPG online, but of vision – and, for the first time this season, it overtook expect the use of it to grow. desktop or laptop for shopping. Mobile makes up on • Consumer-directed shopping process rather than guided average around one third of all purchasing, and those traffic of supermarket. Supermarkets, which rose to • Amazon generics. The elephant in the room, Amazon numbers get even higher on the weekends. prominence in the post-war boom years of the suburbs, generics pose the biggest challenge to brands selling are an absolute science in terms of where products are online. But the important thing to note is that Amazon is • Persistent carts – good and bad. Shopping lists are even positioned and how they are promoted with signage, playing catchup in terms of ability to easily and cheaply more important online as consumers often shop from including shelf talkers. With online, a consumer goes to the distribute as it does not yet have a retail footprint. When archived lists, especially if they have a year’s worth of site and decides how to shop; there is no standard layout it was leaked in Business Insider in Q4 that Amazon had carts available. Why start from scratch at the holidays if with the frozen section at one end and fresh at the other. plans for 1,200 convenience centers, the ears of major you already have a list with canned pumpkin and baking eGrocery sites are continuously tweaking how they position grocery chains pricked up. To date, Amazon has generics chocolate on it? products and how they categorize them. As of yet, they for electronics like batteries (Amazon Basics), kitchen have not figured out how to replicate the carefully guided equipment (Pinzon Kitchen Gadgets), baby products • Fulfillment and delivery expense. Webvan tried to experience of a supermarket. (Baby Bear) and coffee (Happy Belly). revolutionize grocery in 2000 by taking on the Sisyphean task of building fulfillment houses. Amazon successfully • It’s raining meal kits. Capitalizing on the need for launched Amazon Pantry in 2014 and in convenience, but also the desire for fresh and homemade, 2007 (it’s been one long beta) but then tanked its business meal kit vendors have proliferated. What have sites like by increasing prices and introducing a $299 annual Fresh Direct and , and brands like Barilla, learned

5 CPG & GROCERY TREND REPORT 2017 The United States has a long way to go in eGrocery, but what promise!

Top markets in estimated ecommerce share of the FCMG market Online grocery varies radically in market penetration. South Korea, the land of Samsung and LG, with universal broadband South Korea 16.6% (and their self-ordering fridges), has the highest penetration by miles. They are followed distantly by the U.K. and France. Japan 7.2% Kantar Worldwide found that South Korea, where online sales account for 16.6% of the FMCG market, leads the way in digital United Kingdom 6.9% penetration of grocery sales. France 5.3% Fresh eGrocery is expect to grow in the U.S. from 8% penetration of online shoppers in 2016 to 26% in 2017, while Taiwan 5.2% staples will increase in penetration from 16% last year to 28% this year, according to Morgan Stanley (more than 25% of China 4.2% online shoppers will have purchased in this category).

Czech Republic 2.1%

Spain 1.7%

Netherlands 1.7%

United States 1.4%

6 CPG & GROCERY TREND REPORT 2017 The Millennial factor: Frequency of shopping online-only grocery retailers A generation that grew up online

30% gets serious about groceries

25% Marketers of consumer packaged goods are well aware of the pig in the python of demographics: Millennials. 20% As countless studies have shown, this is the generation that grew up online and they are larger in size than the 15% Boomers. When single, they are the ones who helped 10% and take off, and are now the primary purchasers of all those meal delivery services. 5% As they have children of their own – and as the majority 0% Total Millennials Gen X Boomers Mature of them who are moms work – convenience becomes (18-37) (38-51) (52-70) (71+) even more important to feed their families.

As research has shown, their decisions are not necessarily aligned with the choices their moms probably made 2015 Occasionally Fairly often Almost every time with Gerbers, Enfamil, BeachNut, Pampers and Huggies. 2016 Occasionally Fairly often Almost every time Walmart has scored with their Equate house brand and Costco has done the same with Kirkland.

Source: FMI Grocery Shopper Trends, 2016, C1: “When you need grocery type items, how often do you shop in person or online at each of the following? [Online-only stores].” 2016: n=2,061. 2015: n=2,265.

7 CPG & GROCERY TREND REPORT 2017 Shopper paradigm shift Working moms, stay at home dads

While the majority of moms do work outside the home and Primary shopper In the past 40 years Shared shopper paradigm One person does Households delegate the sheer number of single moms in the U.S. is massive, how • One-third more women it all or collaborate much labor sharing is going on in dual-income households? work outside the home Do men make grocery lists or just respond to their partners’ • 3x more men’s share brand loyalties? Statistics are showing that, yes, it is changing. in household cooking

The primary household shopper indeed could be a man. It’s not Source: FMI US Grocery Shopping Trends, 2016. “US Bureau of Labor Statistics, Women common yet, but will be. Millennials are very involved parents; in the Labor Force, May 2014. Percentage of Population in the Civilian Workforce, 1972. that’s how their parents were. According to the U.S. Bureau of Labor Statistics, in 2016, 85% of all U.S. adults said that they did 50% Shoppers focus on fresh & less-processed or more of the grocery shopping. Ninety percent of the women Product Claims said they were this person, while 79% of the men claimed the shoppers seek when purchasing same. Despite the overlap in numbers, it is clear that society has changed and, with a third more women working outside the home Low sodium 42% since 1972, men have tripled their reported share of contribution No trans fats 35% to household chores, including grocery shopping. Whole 38% High fiber Make sure that apple is organic 35% Low cholesterol 21% This once coastal movement has gone national due to food scares and an overall desire to live life with fewer chemicals. As reported Vitamin-enriched 15% for Holiday 2016 by Criteo, we are in the midst of a serious nostalgia Antioxidant-rich 13% cycle with Millennials and Gen Z desiring to do things that their great grandparents did: pickling, making their own baby food and Calcium-fortified 11% cooking Sunday dinners, for example. It is a part of how these Source: FMI U.S. Grocery Shopper Trends, A12: “What health claims do you look for on people parent and has huge repercussions for the food industry. the package when purchasing a food product? (Select all that apply).” 2016.

8 CPG & GROCERY TREND REPORT 2017 Arguably no stage of life involves more brand loyalty development than having a baby.

After the birth of a child, not only are people buying products they never would have before, they are buying them for multi-year durations.

The busy parent factor offer access to past carts by date, and have one People want control over what their family eats click re-ordering. It all makes sense. Do you and, with small kids, they just don’t go out as Marketers have typically focused on doctors’ really want to drive to a store with a small child, much. Full-time working moms and dads want offices and direct mail to reach expecting buy the toilet paper, get it into the SUV, drive it the time with their kids, not in a grocery line. parents. They know that getting that first diaper home and then unload it, all while disrupting a on the baby out of the hospital (or the first bottle crucial nap schedule? Due to the unique dynamics of online, upstart of formula) is crucial: it tends to lock them into at brands like Keurig, Kind and Annie’s Homegrown least two years of purchasing before they move Millennials are the ones that are making the have managed to become category killers. onto the next stage of parent purchasing. leap into fresh groceries and they are on the These brands not only know how to use paid Among Millennials, two forms of grocery vanguard of the booming meal kit business. Of search effectively, they have been masters in shopping are emerging as their normal. Pantry course, grocery stores have long had roasted using social media to connect, engage and earn chickens and other -and-go meal items, but items that are typically bought over and over the trust of these first-time parents. again (staples) are shifting online with services they are now stocking more and many pre-cut like Jet, Boxed and Amazon Prime. All retailers and pre-measured items.

9 CPG & GROCERY TREND REPORT 2017 2 Searching habits.

10 CPG & GROCERY TREND REPORT 2017 % of influences on purchases

Criteo conducted a survey of 600 online shoppers 83 to determine their attitudes about online grocery Health Baby Care 76 shopping with some interesting results: & Beauty 59 63 55 • 43% of eGrocery shoppers and 41% of Health & Beauty 46 shoppers say they browse within a site 41 33 36 35 23 • An impressive 59% of Baby Care buyers compare within a site. 20 17 15 What keeps an eGrocery shopper on the same site?

• Selection is the most important factor, favored by 36% of Grocery buyers, 30% of Baby Care and 24% of HBA

In terms of purchase, price is the most important 83 factor, as it likely always has been, but other factors Home Grocery 80 do hold sway. Not surprising, ingredient labels are 64 more significant than in other categories. It does 54 56 55 make one pause when you consider how tiny the 43 42 type is on most products. 25 37 18 13 18 13

Price Description Ratings or reviews Images

Materials / Name Video ingredients

11 CPG & GROCERY TREND REPORT 2017 Source: Criteo Online Buying & Browsing Study, 2016 % of purchases made on impulse

In CPG in the U.S., the major choice that Grocery stores are basically boxes a consumer makes when cruising down a designed to incent impulse purchasing Baby Care Grocery Home Health & grocery aisle is store goods vs. branded with every aspect of the store carefully Beauty 46% 36% 35% for a few cents more. According to analyzed and optimized for buying 33% renowned CPG marketer Sergio Zyman efficiency. When you look at the figures (former CMO of Coke and the creator of for what online grocery shoppers say they Diet Coke), store brands never pop above do, over one-third of their purchasing is 20%, regardless of a premium generic with done on impulse, which is a lot of gum, When shopping online for this product, packaging. Consumers like and buy into soda and crackers. Once again, Baby which phrase best describes how you shop? (%) brand stories, and while Millennials may say Care is even more likely to be an impulse they are not brand loyal, they clearly are. purchase. Parents are stocking up on baby 72 70 67 essentials and are apt to try a low, out-of- 64 64 65 59 The emergent generation, the Zs, are pocket item their child might like. extraordinarily brand loyal and see 44 41 41 43 brands as an extension of their lifestyles. Brand loyalty is crucial in CPG as purchases 35 30 Marketing to teens, who are using less go on indefinitely throughout the life of 24 23 23 25 23 25 19 and less broadcast media, as they the customer. Brands need to make sure 17 15 12 9 develop their own brand preferences, shoppers choose their product over the no- becomes crucial with paid search on retail name brand for $0.20 more. As compared Clothing & Health & Electronics Baby Care Home Grocery Accessories Beauty sites, YouTube videos of product demos to other product categories, shoppers tend and the content of the ads themselves. to be loyal to various brands.

I typically have a specific product in mind and look specifically for that product

I tend to browse different products on the same website to compare products

I tend to visit multiple websites so i can compare products

I often put products in my shopping cart without purchasing them right away

12 CPG & GROCERY TREND REPORT 2017 Source: Criteo Online Buying & Browsing Study, 2016 % of online purchases made via a mobile device

Baby Care Health & Beauty Home Grocery Average 56% 44% 43% 40% 40%

Source: Criteo Online Buying & Browsing Study, 2016

.Mobile matters

Within the next two years, expect the major markets to get even more competitive in the realm of Click & Collect. Millennials can’t be tied to their laptops. Ordering on their phones and popping by the local store to sail by those in line as they pick up the week’s groceries will be a very common scenario. Smart retailers are not just setting up designated areas in-store for pick-up, they are reserving the best parking slots for these in-and-out customers.

Shoppers with children report that over half of their total purchases are made with mobile phones (56%), while groceries land slightly lower at 40%.

13 CPG & GROCERY TREND REPORT 2017 Grocery searches Health conscious shoppers have gone on a Q3 US top Grocery searches protein binge: protein, whey protein, protein Americans are clearly coffee-mad and Keurig is powder all make the list. coffee water bottles nuts water coconut oil killing it in the category, according to data from the cereal peanut butter Criteo Sponsored Products Retail Network. K Cups The top skincare brands to appear are Aveeno, are more searched for than water, and Keurig followed by Cetaphil. Cetaphil is often used itself makes the list. Coffee falls just behind K Cups for acne, while Aveeno has clearly gotten its K Cups in terms of searches. There may be an epidemic money’s worth from actress Jennifer Aniston’s product endorsements. Depends also makes of nut allergies among the young, but others sugar Keurig cashews likely favor nuts for their protein content and as a the list, likely reflecting the aging of the U.S. healthy snacking option. Cashews and mixed nuts population. Gatorade paper plates mixed nuts make the list along with peanut butter, that most In the Criteo survey of online shoppers, those American of staples. Coconut oil, recently favored who had made HBA purchases in eGrocery were Q3 US top Health & Beauty searches for its health properties, is the only oil to appear. probiotics most likely to have bought cosmetics, shampoo High in unsaturated fats, coconut oil has been a Depends and conditioner. The categories showing the most Waterpik trendy ingredient in many recent online recipes. protein growth in purchasing over the three years of the study are conditioner and razor blades. Sonicare whey protein bathroom scales Health & Beauty searches protein powder Oral care dominates the list with Sonicare, hand sanitizer aveeno Waterpick and electric toothbrushes from Cetaphil various brands proving that consumers want Nutrisystem sunscreen help in keeping their pearly whites, well, white. toothbrushes electric toothbrush

Source: Criteo Sponsored Products Retail Network Data, 2016

14 CPG & GROCERY TREND REPORT 2017 3 Buying habits.

15 CPG & GROCERY TREND REPORT 2017 Promotional activity: % of shoppers by activity Just what do those FSIs get put into? in the past 6 months 50% 43 41 39 Trade marketing is often more than 40% of brand marketing in a bricks 40% 39 32 grocery scenario. Trade spend is elastic and is related to sales volume. 28 But, it has its long standing issues, like complexity of implementation, non- 30% compliance and failure of the store to use the funds. For that matter, there 20% is no consensus on what exactly goes into those trade budgets. Without a 10% doubt, marketers need to, and are beginning to, shift some of their spend to paid search on retail sites. 0% Searched Used mobile Made a Used a Used mobile Purchased a The area of promotions is ripe for a renaissance as many traditional for an online to compare purchase due retailer’s app to create a product off a coupon prices to a discount shopping list retailer’s app tactics just don’t make as much sense anymore in a highly digital world. Newspapers have largely vanished and, along with them, true FSIs. In ex- Source: Criteo Online Buying & Browsing Study, 2016 urban areas, FSIs are mostly dropped on doorsteps. Millennials are not the sort to be clipping paper coupons, but they will hand their phones to a Carts laden with SKUs cashier to scan the code. Coupons sites compete fiercely for their attention. The grocery cart is probably the commerce leader in terms of number of In terms of consumer acceptance, paid search has been a part of Google items it contains. While grocery shoppers who buy an increasingly large since its inception and continues to hold great weight. Store apps are an portion of their groceries online and supplement with trips to the local store essential part of building customer loyalty through push notifications for or, in urban areas, the farmer’s market for produce and dairy, are increasing, promotions. What is clear is that mobility makes it work all that much better. it’s important to look at cart sizes in grocery compared to other categories. They might have low cost per item, but those carts add up and overflow.

It’s interesting to note that fresh foods encompass 15% of the total. The eGrocery business is still largely one of staples, but with things like meal kits and convenience, and home cooking showing no sign of waning, expect this bucket to grow.

(Graphic next page.)

16 CPG & GROCERY TREND REPORT 2017 Holiday carts the last two weeks of December 60 $200 52 / $170.60 42.4 / $164.80 $147.60 50 $139.00 $150 40

30 $100

20 $50 10

0 $0 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Date in December

Total items per order Average order value

US Grocery shopping by sub-category Q3 average item prices & cart values by category

$400 Grocery shoppers load their carts with many Chilled & frozen foods 2% Alcoholic beverages 1% lower-priced items, while Electronics shoppers buy fewer items that account for most of their cart Fresh foods 15% $300

$200 $302.96 $353.71 $132.23 $3.29 Non-alcoholic Pantry 56% $100 beverages 26% Electronics HealthBeauty & Toys & Gaming Office Supplies Apparel Baby Care Sporting Goods Grocery Home Goods

$0 Average

Source: Criteo Sponsored Products Retail Network Data, 2016 Average item price Average cart value

17 CPG & GROCERY TREND REPORT 2017 4 Measurement & evaluation trends.

18 CPG & GROCERY TREND REPORT 2017 ROAS and share of shelf around a lifestyle. Brands have moved on to multi- CPG campaign stats touch attribution, but even with that, the pace of In addition to distribution, attribution and change is just too great and the data often just too Across all campaigns there was +48% measurement overall pose the greatest challenge of complex to parse into anything meaningful. average change in share of category the shift of CPG sales to online. CPGs live in a world consideration and +43% average of mass consumer reach, not micro-targeted ones. A company like Criteo works with its retail partners change in share of category sales Television and GRPs still work relatively well for those to pool shopper data so that paid search ads bought over 40, but what do you do when one-quarter of based on response are extrapolated to actual sales. The lift varied by product category: Millennials do not have cable and 11% never have? For example, $10,000 spent to advertise Huggies equals 50,000 SKUs directly attributable to that buy. • Grocery, Electronic and Apparel & Most Gen Z kids grew up with iPads and online Accessories showed the highest lift in share streaming, and the idea of ever watching a TV show of consideration. It’s a simple approach to the hoary question of with ads is ludicrous and makes them squirm with attribution, but it’s relatively easy, it works, and, based • Baby Care, Apparel & Accessories and boredom. This does not bode well for traditional on the ever-increasing CPG client base of Criteo Health & Beauty showed the highest share of marketing tactics. sales lift. globally, it’s a mode of buying partners like. CPG marketers for some time have been in a not- Clicks cannot encompass what most CPGs care Within Grocery, the average share of so-quiet rebellion over media mix models that take about: share of shelf (what percentage of cookie sales lift was 39%. months to develop and are done using data that, sales does Oreos encompass?). Until recently, by the time the model is implemented, shows the • It was 65% in Baby & Toddler and 46% in this metric was tough to nail down for online, but Health & Beauty. audience may have moved on to the next best thing. a recent Criteo analysis of 180 campaigns on the The rapid growth of social media has upended universe of their online retail network revealed Share of consideration of Grocery traditional models and brands have realized the insights from exposure to paid search. grew 62%. power of communicating and creating engagement • Baby & Toddler grew by 48% and Health & Beauty by 39%.

19 CPG & GROCERY TREND REPORT 2017 2017: The year of eGrocery

The competition is heating up as marketers take advantage of Shoppers are very brand loyal and, with the reduced line The market is changing rapidly in respect to the Internet technological innovations that are transforming grocery sales. of product view posed by mobile screens, it’s even more of Things and voice activation, and this is the year that With the growth numbers as strong as they are, all Bricks & important that marketers stay top of mind in the midst of a Amazon’s Echo (and Dot, and Dash buttons) hit critical mass. Clicks need to optimize those clicks and implement Click & brutally competitive category where generics (especially Other platforms like Apple, Microsoft and Google will be Collect, Click & Ship and Click & Pick. Amazon’s) are just one click away. competing to connect with as many online grocery services as possible.

• Experience the incremental lift of Criteo Sponsored sort of performance marketing, the more likely they What should brands and Products. During the time period of this report, Criteo’s are to command the lead when voice-triggered ads for retailers in CPG do now? analytics team conducted 180 share shift campaign products on specific retailers appear. analyses comparing pre- and post-campaign product • Use Criteo Sponsored Products to drive awareness and sales by category and found that Criteo Sponsored Stop seeing Amazon and Google as a threat to major sales. Criteo’s Sponsored Products, which are relevant to Products on average increased share of consideration by retailing and recognize that these companies have the the purchaser and what they are shopping for, can help 48% and share of sales by 43%. funds to do the R&D necessary, and that a rising tide consumers find products in large cart size, multiple-SKU indeed floats all boats. They act as an incubator of ideas categories like CPG. • Ecommerce media requires an “always-on strategy. and innovations that can benefit all. Retailers and brands Ecommerce has fundamentally changed retail seasonality. own powerful relationships with consumers that, if • Cross sell for impulse purchasing. There’s a reason a Make sure your brand budget is able to cover not just cultivated, will transition to the voice-activated future. Make stack of bananas may be in the cereal aisle and a display traditional retail seasons like Holiday and Spring, but the sure you are the brand or retailer on the tip of their tongue of Oreos near the dairy section. Criteo’s Cross Sell Tools entire year. Criteo data shows that, especially with gift as more and more consumers begin to use these devices can help recreate that online. cards, Holiday extends well into January. for product ordering. That takes strong and creative marketing that only you control. • Use paid search to help increase organic rankings. In • Pay attention to Amazon and Google. Retailers should the “winner take all’ world of online grocery, where carts take a lesson from the Amazon playbook and amortize are persistent, brands are powerful and search favors their audiences through sponsored product ads. products that broke through earlier in the evolution of Native advertising will likely be the preferred ad format ecommerce – and once there, gain broader distribution – on AI devices and these ads will transition to voice the increased sales that result reinforce organic rankings. activation. The more experience brands have with this

20 CPG & GROCERY TREND REPORT 2017 About Criteo

Criteo (NASDAQ: CRTO) delivers personalized performance marketing at an extensive scale. Measuring return on post-click sales, Criteo makes ROI transparent and easy to measure. Criteo has over 2,200 employees in 30 offices across the Americas, EMEA and Asia-Pacific, serving 13,000 advertisers worldwide and with direct relationships with 17,500 publishers. For more information, please visit criteo.com.

Criteo ads reach over 1.2 billion unique Internet users (comScore, January 2016).

This and future whitepapers may be found at:

www.criteo.com/resources

21 CPG & GROCERY TREND REPORT 2017