Walmart Neighborhood Market: Assessing Its Prospects in a Changing Landscape

Page Title 8.80 Walmart Neighborhood Market: Assessing Its Prospects in a Changing Landscape

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Laura Kennedy, Director Leon Nicholas, SVP and Knowledge Officer

March 2016

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Disclaimers The analyses and conclusions presented in this seminar represent the opinions of Kantar Retail. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion.

This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.

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Content start 6.08 ‒ Add or delete points as needed by inserting or Replace w/ Shopper deleting rows topical image or ‒ Align with the image reach out to ‒ Reach out to creative for creative assistance if needed

Assortment

Prototype

Competition: Spotlight on Publix

Conclusion and Supplier To-Dos

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Content start 6.08 “I am really excited about what we can do with Neighborhood Markets. But we have got to fix some of these basic things and then we can get into them.” –Greg Foran, October 2015

Sales (USD millions) Stores

Closed 102 12,000 square foot NMKTs, 24 “traditional”

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Content start 6.08 Judith McKenna “Ignore [Neighborhood Chief Operating Officer, Markets] at our peril” – Walmart US Judith McKenna, June 2015

As COO, now also oversees all Walmart associates in addition to leading small format strategy and the Development Team Previously EVP strategy and Julie Murphy international dev. for WMT EVP, Neighborhood International (M&A, real estate, Markets, Walmart US format development)

Before, COO and CFO of Previously EVP and ASDA; as COO, oversaw President, Walmart West; logistics, eCommerce, financial divisional SVP; and various services store operations positions Replaced Mike Moore in May 2015—Moore now Lower content limit 7.03 Source: Company reports, Kantar Retail research and analysis oversees Supercenters Bottom margin 7.86

Content start 6.08 Steve Bratspies Chief Merchant

Julie Murphy Lea Jepson EVP, Neighborhood Markets, Senior Director, Merchandising, Walmart US Small Formats

15-20+ reports, Marc Lieberman Brian Hooper David Norman and growing VP, Small VP, Real Estate SVP, Ops West Jesica Duarte Formats Small Formats VP, Neighborhood Market Larry Mahoney Glenda Fleming Regional VPs Development SVP, Logistics SVP, Ops East PLUS: Market managers for each district exclusively focused on NMKTs Regional VPs

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© Kantar Retail 2016 Page Title 8.80 Retooling Neighborhood Market 7 “There are opportunities for us to significantly update and improve things like space allocations; adjacencies; ambience; navigation; and flow in both of our Content start 6.08 formats. We’re working on this now” –Greg Foran, April 2015

Fresh

Fill-in Pickup Fuel Trips

Pharmacy Lower content limit 7.03 Source: Kantar Retail research and analysis

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Shopper

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Content start 6.08 Percent Shopped Walmart during Past Four Weeks, by Format

80%

70% 68% 62% Walmart/Walmart Supercenter 60% 60% 50% Amazon.com 40%

30% 28% Neighborhood Market* 20% 17% Walmart.com 10% 9% 10% 3%

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Sep-07 Nov-07 Sep-08 Nov-08 Sep-09 Nov-09 Sep-10 Nov-10 Sep-11 Nov-11 Sep-12 Nov-12 Sep-13 Nov-13 Sep-14 Nov-14 Sep-15 Nov-15

May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15

Lower content limit 7.03 Analysis for Neighborhood Market is limited to states in which Neighborhood Market had a presence as of January 2016 ® Bottom margin 7.86 Source: Kantar Retail ShopperScape , January 2007- January 2016

Shopper Profile: Past 4-Week Shoppers Content start 6.08 Walmart SC Walmart NMKT ‒ Compared to Supercenter <$25k 27% 26% shoppers, Neighborhood Market $25k-$49.9k 27% 27% shoppers… $50k-$74.9k 18% 19% Annual HH Income $75k-$99.9k 11% 12% . Live in denser market areas $100k+ 17% 17% . Are younger Mean income $58,180 $58,720 Rural 17% 9% . More likely to be Hispanic, Small Town 21% 13% African American Locale* Large Town 13% 15% Suburban 36% 43% Urban/City 13% 21% Yes 28% 29% Kids in HH No 73% 71% Gen Y 20% 25% Gen X 31% 32% Generation Boomers 38% 34% Seniors 11% 9% Mean age 49.3 46.8 White Non-Hispanic 68% 59% Race/Ethnicity Black Non-Hispanic 14% 17% Hispanic 13% 17% Lower content limit 7.03 Analysis limited to states in which Neighborhood Market was present as of January 2016 Note: highlighting indicates significant difference between column percentages (95% confidence level) Bottom margin 7.86 Source: Kantar Retail ShopperScape®, January-December 2015

Content start 6.08 Cross-Shopping Between Walmart Banners (among past four week shoppers of retailers)

NMKT shopped SC SC shopped NMKT 2011-2015 % Change: -12% 2011-2015 % Change: +136%

73% 75% 67% 65% 64%

10% 7% 8% 4% 5%

2011 2012 2013 2014 2015

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© Kantar Retail 2016 Page Title 8.80 For Shoppers, NKMT Beats Supercenter on Efficiency 12 But lacks on some key convenience measures How Shoppers Describe the Shopping Experience at Walmart, by Format Content start 6.08 (among past four-week shoppers of each retailer)

Describes experience Describes experience at NMKT at Supercenter Knowing that I'm paying a low price 59% 68% Feeling like I got a "good deal" 57% 64% Legend Ability to get in and out quickly 53% 36% Fast checkout 52% 45% Green= Store is clean and looks nice 49% 35% NMKT is Specific items I want being in-stock 46% 63% better Availability of high-quality fresh foods (e.g., meat, produce) 41% 51% Availability of my favorite national brand products 39% 43% Orange= Can get everything I need across a variety of categories 37% 31% WMSC is Availability of high-quality private label brands 30% 29% better Store associates are available and helpful if I need them 28% 23% Good variety of pre-prepared "to-go" foods available 25% 26% Fun and pleasant shopping experience 25% 24% Offers unique products I can't find elsewhere 16% 15% Ability to use the retailer's app on my smartphone while in the store to 14% 12% make the shopping trip easier Offers "meal solutions" to help me figure out what to buy/cook 13% 13% Wide variety of organic products available 11% 13% Opportunities to engage with products in the store (e.g., through 4% 12% sampling stations, interactive displays, etc.) Lower content limit 7.03

Source: Kantar Retail ShopperScape®, May 2015 Bottom margin 7.86

© Kantar Retail 2016 Page Title 8.80 For Shoppers, NKMT Beats Supercenter on Efficiency 13 But lacks on some key convenience measures How Shoppers Describe the Shopping Experience at Walmart, by Format Content start 6.08 (among past four-week shoppers of each retailer)

Source: Kantar Retail ShopperScape®, May 2015 Bottom margin 7.86

© Kantar Retail 2016 Page Title 8.80 Overall, Big Gaps Between Expectations and NMKT’s 14 Delivery of Fresh, Service, Variety Ideal Shopping Experience vs. Experience at Neighborhood Market Content start 6.08 (among past four-week Neighborhood Market shoppers) Extremely/somewhat Describes experience PPT Diff important when shopping at NMKT (Actual – Ideal) Knowing that I'm paying a low price 86% 59% -27.1 Availability of high-quality fresh foods 85% 41% -43.9 Feeling like I got a "good deal" 83% 57% -25.8 Fast checkout 81% 52% -29.5 Store is clean and looks nice 81% 49% -32.6 Can get everything I need across a variety of categories 81% 37% -44.0 Specific items I want being in-stock 80% 46% -33.5 Ability to get in and out quickly 78% 53% -25.5 Availability of my favorite national brand products 70% 39% -31.1 Store associates are available and helpful if I need them 68% 28% -40.0 Fun and pleasant shopping experience 64% 25% -39.1 Availability of high-quality private label brands 52% 30% -22.3 Offers unique products I can't find elsewhere 42% 16% -25.4 Good variety of pre-prepared "to-go" foods available 38% 25% -12.9 Wide variety of organic products available 34% 11% -22.5 Opportunities to engage with products in the store (e.g., 28% 4% through sampling stations, interactive displays, etc.) -23.6 Offers "meal solutions" to help me figure out what to buy/cook 26% 13% -12.5 Ability to use the retailer's app on my smartphone while in the 20% 14% store to make the shopping trip easier -6.6 Lower content limit 7.03 Source: Kantar Retail ShopperScape®, May 2015

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Assortment

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Content start 6.08 Fresh

Fill-in Pickup Fuel Trips

Pharmacy

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Mustard Neighborhood Market Supercenter Assortment: % Private Label 22% 23%

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Paper Towels Neighborhood Market Supercenter Assortment: % Private Label 28% 28%

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Mouthwash Neighborhood Market Supercenter Assortment: % Private Label 20% 14%

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Best

Basic

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Creating excitement, solutions Shelf guidance for types of beer, suggested food pairings for wine Lower content limit 7.03

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Moving fresh through the store Lower content limit 7.03

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Prototype

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Drinks To Go Including self- station checkouts

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“We’ve seen fresh penetration expand in this store [prototype] relative to its peers.” –Greg Foran, November 2015

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Source: Kantar Retail store visits Bottom margin 7.86

© Kantar Retail 2016 Page Title 8.80 Meat Moves Up Front, Produce Artfully Displayed 27 Fresh “We’re encouraged by our newest prototype, which features better sightlines and displays.” Content start 6.08 –Greg Foran, November 2015

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Content start 6.08 “All Neighborhood Markets… will open up with a bakery and a deli because we absolutely believe that’s important in the future” –Judith McKenna, April 2015

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Content start 6.08 • Curbside grocery pickup now available in 20 markets, across Walmart formats; adding another 20 in 2016 • Features drive-up kiosks for calling up an order and parking spaces where orders can be loaded

Marketing in-store reminds shoppers of online grocery option

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Competition: Spotlight on Publix

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NMKT

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Content start 6.08 Top Grocery Retailers Also Shopped by Neighborhood Market Shoppers, by Region

West Central Northeast Walmart/WMSC 59% Walmart/WMSC 83% Walmart/WMSC 64% Costco 46% Sam’s Club 35% Food Lion 30% Safeway 33% ALDI 32% ALDI 27% Trader Joe’s 32% Hy-Vee 20% Sam’s Club 21% Albertsons 28% Kroger 15% Kroger 20% WinCo Foods 23% Whole Foods 13% Trader Joe’s 17%

Southwest Southeast Walmart/WMSC 75% Walmart/WMSC 74% Kroger 31% Publix 61% Albertsons 30% Winn-Dixie 39% Sam’s Club 28% Sam’s Club 25% Sprouts 22% ALDI 20% H-E-B 21% Costco 15%

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© Kantar Retail 2016 Page Title 8.80 Where Can NMKT Learn from Competitors? 34 Keeping in mind NMKT’s points of focus “When we are up against Content start 6.08 someone who is really good at running supermarkets, frankly Fresh our fresh offering has not been on par with what it takes to win.” –Greg Foran, October 2015

Fill-in Pickup Fuel Trips

Pharmacy

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Source: Kantar Retail research and analysis Bottom margin 7.86

Content start 6.08 Among the Neighborhood Markets in the six states Charlotte Publix has a presence…

Atlanta

40% are within 2 miles of a Publix

Jacksonville

Lakeland (rest of Florida) Miami 53% are within 5 miles

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Index Segment Product Brand NMKT Publix (Publix-NMKT) Raspberries - - $2.78 $4.49 162 Content start 6.08 Bread 100% Whole Wheat (Whole Grain) Arnold $2.98 $4.29 144 ‒ March 2015, Tampa, FL Chicken breast Perfect Portions Fresh Perdue $6.98 $8.99 129 Hot dogs Bun-sized premium beef franks Oscar Mayer $3.98 $4.99 125 Tomatoes Cherry Campari $2.48 $2.99 121 ‒ Basket of 12 fresh items, 16 Apples Granny Smith - $1.67 $1.99 119 Bananas - - $0.59 $0.69 117 grocery items, 12 HBA items Cheese Provolone Land O' Lakes $3.98 $4.39 110 Butter Salted - 4 sticks Land O' Lakes $3.96 $4.29 108 Bacon Black label original Hormel $4.78 $4.99 104 Orange Juice Homestyle, Some Pulp Tropicana $3.98 $3.99 100 Grapes Green - $2.98 $1.99 67

‒ Neighborhood Market was Glass Cleaner Regular Windex $2.83 $3.99 141 French Vanilla, Cardboard cartoon, tub - black less expensive in all three Ice Cream label Breyers $3.94 $5.49 139 Cereal Corn Flakes Kellogg's $2.98 $3.99 134 sub-baskets Canned Tuna Chunk Light, packed in water, can Starkist $0.75 $0.99 132 Pasta (dry) Angel Hair Barilla $1.38 $1.69 122 Diapers Little Snugglers - size 2 Huggies $8.97 $10.49 117 . Biggest differential in fresh Soap Pads Steel Wool pads - Lemon S.O.S. $1.88 $2.19 116 Foil Heavy Duty Aluminum Foil Reynold's $5.92 $6.79 115 . Only three items cheaper at Soda Cans - fridge pack Coca-Cola Classic $4.48 $4.99 111 Soup Chicken Noodle Campbell's $0.88 $0.97 110 Publix overall Infant Formula Sensitive, for Fussiness and Gas, with Iron Similac $24.98 $26.99 108 Dog Food Adult Complete Nutrition Pedigree $12.97 $13.99 108 Ketchup Plain, Squeeze bottle - inverted Heinz $2.22 $2.39 108 ‒ No Rollbacks, 3 sale items at Wipes Disinfecting Wipes, Fresh Scent Clorox $4.63 $4.79 103 Laundry Soap 64 loads Tide $11.97 $11.99 100 Publix plastic jar - strained Peas "All Natural", 2nd Baby Food foods Gerber $1.08 $1.07 99 March 2015 Results Hand Soap Crisp Cucumber and Melon Softsoap $0.98 $1.79 183 Index Vitamins Gummy Vites, Complete - natural flavor Lil Critters $3.98 $5.49 138 (Publix- Floss Satin Complete - mint Oral B $2.27 $2.99 132 Hair Coloring Colorsilk - Beautiful Revlon $2.97 $3.79 128 NMKT Publix NMKT) Razors Women's - Hydro Silk, 3 Razors, 5 blades Schick $9.97 $12.49 125 Antiobiotic Fresh basket $ 42.44 $ 50.08 118 Ointment Plus Pain Relief antibiotic cream, tube Neosporin $4.44 $5.39 121 Mouthwash Cool Mint Listerine $5.97 $6.99 117 Grocery $ 91.86 $ 102.80 112 Diaper Cream Rapid Relief Diaper Rash Cream - Blue tube Desitin $5.27 $5.89 112 HBA $ 58.49 $ 67.64 116 Painkiller Ibuprofen, 200 Mg Advil $5.94 $6.29 106 Head and Total $150.35 $170.44 113 Shampoo Dandruff Shampoo - Classic Clean Shoulders $7.26 $7.49 103 Lower content limit 7.03 Eye Makeup Remover Oil-Free, blue bottle (liquid) Neutrogena $6.47 $6.49 100 Source: Kantar Retail store visits Shaving Gel Extra Moisture Gel, with Vit. E Edge $2.97 $2.55 86 Bottom margin 7.86 Total $150.35 $170.44 113

Content start 6.08 Retailer Merch Ladders

NMkt Publix NMkt Publix NMkt Publix % Private 26% 18% 9% 13% 11% 13% Lower content limit 7.03 Label

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Content start 6.08 ‒ Perishables, fresh continue to elevate . Investment on the rise as shoppers demand it

‒ Driving differentiation with departments . Greater importance on categories and merchandising placement

‒ Keying on digital, not just eCommerce . Online grocery will become a more important factor

‒ The wild card: Lidl . Where price and assortment will be center stage

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Conclusion and Supplier To-Dos

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Content start 6.08 Some attention to local connection, distinguishing the store… …Marketing largely remains parallel with the Supercenter Selection emphasizes local ties

“Available at your local Lower content limit 7.03 Ad is the same as at the Supercenter and Supercenter Source: Kantar Retail store visits Neighborhood Market” Bottom margin 7.86

Content start 6.08 ‒ Add or delete points as Resources: needed by inserting or Replace w/ deleting rows topical image or • Evaluate your team size and structure, including roles in category ‒ Align with the image reach out to 1 management, supply chain, analytics, and marketing. ‒ Reach out to creative for creative • Capitalize on expertise already in your company around BIC assistance if needed supermarkets and other small formats (e.g., drug). • Include these teams in joint business planning.

Differentiation: • Build merchandising skills outside the pallet, selling off the shelf. 2 • Dedicate resources to assortment and endcap planning for this format. • Craft solutions at Neighborhood Market that are different from the Supercenter, especially focused on to-go and fill-in trip missions.

Prototype-driven growth: • Target merchandising that orients around fresh and perishables. 3 • Develop an online grocery and broader assortment Pickup strategy to build baskets and send the convenience message. • Link solutions with services to highlight the convenience message.

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© Kantar Retail 2016 Page Title 8.80 Kantar Retail Walmart & Sam's Club Workshop Content start 6.08 Apr 5-6, 2016 Bentonville, AR At this two-day workshop, our Walmart and Sam’s Club experts will dig into the retailers’ efforts to significantly evolve their propositions for a rapidly changing and demanding shopper base, and will deliver implications for suppliers’ business planning and growth opportunities.

You’ll walk away from this Workshop with: ‒ Forecasts for Walmart’s store expansion and sales growth heading into the end of the decade ‒ Insights into where Walmart is investing to drive relevance and what the retailer will demand from suppliers as investments continue to pressure profits ‒ Understanding of the extent, purpose, and plausibility of Sam’s current member and merchandise evolution through 2020

Featuring Kantar Retail Experts: Laura Kennedy, Director Sara Al-Tukhaim, Director Lower content limit 7.03 David Marcotte, SVP Tim Campbell, Jr. Analyst

Bottom margin 7.86 Leon Nicholas, SVP & Knowledge Officer

Content start 6.08 For further information please refer to KantarRetailiQ.com

Contact: Laura Kennedy Leon Nicholas Director SVP and Knowledge Officer

T: +1 (617) 912 2851 T: +1 (617) 912 2871

[email protected] [email protected] @LauraWK_KR @leonnicholas7

@kantarretail

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