2016 Annual Report

BOARD OF DIRECTORS Barry Queen, Chairman David Ball Danny Boyle Jim Brown John Clarke Victor Cosentino Queen’s Enterprises - Paola, KS Four B Corp Country Boy Markets Doc’s Food Stores County Fair Cosentino’s Kansas City, KS Harrah, OK Bixby, OK Food Store Prairie Village, KS Mitchell, SD Don Woods, Jr., Vice-Chairman Kim Eskew Alan Larsen Jay Lawrence Alan McKeever Chuck Murfin Woods Supermarkets - Bolivar, MO Harp's Foods Houchens Industries Lawrence Brothers McKeever’s Ozark Supermarkets Springdale, AR Bowling Green, KY Sweetwater, TX Independence, MO Ozark, MO James Neumann Dave Nicholas Pat Raybould Jeff Reasor Randy Stepherson Erick Taylor Dale Trahan Valu Market, Inc. Nicholas B&R Stores Reasor’s Superlo Foods RPCS, Inc. Dale Trahan Louisville, KY Supermarkets Lincoln, NE Tahlequah, OK Memphis, TN Springfield, MO Enterprises Boonville, MO Rayne, LA DEAR SHAREHOLDERS March 22, 2017 Dear Shareholders, combined efforts and Your Board of Directors and management are a common purpose. pleased to present the audited results for our fiscal Beyond just our year 2016. Consolidated company sales reached operating results, another record of $9.18 billion, up 2.78%. Total year- AWG and VMC members also benefited from end patronage after retainage was $201.7 million, meaningful cost of goods reductions. In 2016, another record, which was 2.78% of qualifying sales. our merchant team worked closely with our Total distribution including patronage, allowances vendor partners to establish and build upon and interest back to members was $546.5 million, relationships that would further leverage an increase of $2.1 million even after reflecting an our collective membership’s scale of over increase in the amount of promotional allowances $20 billion in retail sales. These improved that converted to EDLP programs. Additionally, AWG and new vendor arrangements have an stock trading value increased 4.4 percent to $2,000 annualized cost of goods impact over $30.9 per share. million, span multiple product categories AWG achieved these strong financial results and include both national brand and store despite record product price deflation and significant brand products. changes in our membership base. Cooperative net In summary, 2016 was a year of change sales were $7.67 billion, up 1.21% from the prior and growth. These changes affected AWG year, running counter to year-over-year product and member companies alike. We are very price deflation of 2.5% and overcoming the loss of thankful for the new members formerly with a significant member which initiated self-supply. AFM and new business in our Great Lakes These positive sales results are due primarily to the and Nebraska Divisions. The confidence to fourth quarter supply initiation to approximately undertake that unification project came from 800 new members’ stores in conjunction with the you, our members, and your support of our Affiliated Foods Midwest (AFM) unification. To all of cooperative model. It has worked well for 90 those new members, thank you! years and we are very excited about all we will This year marks the end of our 90th anniversary accomplish together in the coming decades. of our cooperative. Due to the support and continued AWG is proud of our heritage and will continue growth of our member stores and their collective to strive to serve you well as a primary resource in business, AWG has achieved a compounded annual the ongoing retail battle, while seeking additional sales growth rate of 8.69% and compounded annual ways to lower costs and provide new sources of patronage growth rate of 11.81% for the past 50 growth, revenue and ongoing success. years. These results position your company as the Sincerely, top performing grocery wholesaler in the U.S. This is David Smith a strong testimonial to the vision set by a handful of President/CEO independent grocers who founded our company and way of doing business in 1926. These visionaries Barry Queen knew that they could achieve so much more through Chairman of the Board 1 2012 2013 2014 2015 2016 FIVE-YEAR TREND Founded in 1926, Associated and hold 15 shares of "Class A" port team provided operational Wholesale Grocers, Inc. (AWG) was stock to be supplied on a coopera- and administrative support to all established to provide its family tive basis. eleven distribution centers, located owned retail member stores the The remaining two facilities were in Springfield, Missouri; Oklahoma essential building blocks needed operated by our wholly-owned City, Oklahoma; Ft. Worth, Texas; to establish strategic positions in subsidiary, Valu Merchandisers Southaven, Mississippi; Memphis, their unique retail marketplaces. Company, which primarily provid- Tennessee; Pearl River, Louisiana; This Annual Report marks 90 years ed wholesale supply of health and Goodlettsville, Tennessee; Ft. Scott, of providing products, support ser- beauty care, general merchandise, Kansas; Norfolk, Nebraska; Kenosha, vices and financial returns to our pharmaceutical supplies, and spe- Wisconsin and Kansas City, Kansas. member retailers. The collective cialty, natural, organic and inter- AWG achieved sales on a con- strength of our cooperative model national foods to our cooperative solidated basis, after eliminations, has provided ongoing opportuni- as well as non-member retailers. of $9.18 billion. Within the co- ties for our members to develop Additionally, AWG operated whol- operative, net sales were $7.67 and grow unique and sustainable ly-owned subsidiaries including billion. Operating income was businesses that have survived, as Always Fresh, Inc., a military chan- $188.7 million, with net income of well as thrived, in an ever-changing nel distribution company, providing $189.9 million. retail environment. products to commissaries and base Total patronage returned to Operating eleven distribution exchanges on a non-member basis shareholders was $201.7 million, centers during the 2016 fiscal year, , Media Solutions Corporation, a distributed on a 60/40 basis (the AWG delivered grocery and related digital marketing services compa- payout consisting of 60% cash products to active retailers through- ny, Retail Accounting Services, Inc., and 40% certificates). As a percent out the midwestern, southwestern an accounting and payroll services to qualifying sales, the patronage and southeastern United States. company, and Super Market Devel- payout was 2.78%, and AWG stock Nine of the eleven facilities are opers, Inc., AWG's commercial real trading value increased by 4.4 per- full-line divisions, dedicated to pro- estate and development service cent to $2,000 per share. Total viding service to AWG cooperative arm for cooperative members. members’ investment and equity members in various retail locations. Headquartered in Kansas City, ended the year valued at $544.3 Members are required to purchase Kansas, the AWG corporate sup- million. CONSOLIDATED RESULTS (thousands) 2012 2013 2014 2015 2016 Net Sales $ 7,852,006 $ 8,380,214 $ 8,934,239 $ 8,935,915 $ 9,183,802 Operating Income 176,513 201,406 231,622 202,620 188,709 Net Income 175,949 192,490 226,920 198,919 189,907 Weeks 52 52 52 52 53 COOPERATIVE OPERATIONS (before eliminations)* Net Sales $ 6,713,047 $ 7,148,757 $ 7,685,985 $ 7,579,129 $ 7,671,138 Distribution to Members Interest 1,522 227 223 406 553 Promotional Allowances 311,201 338,828 351,820 350,155 344,219 Year-End Patronage 172,872 182,576 194,675 193,815 201,731 Total Distribution to Members $ 485,595 $ 521,631 $ 546,718 $ 544,376 $ 546,503 Members’ Investments $ 9,308 $ 10,846 $ 9,411 $ 22,105 $ 36,162 Members’ Equity 386,850 422,979 439,632 455,610 508,172 Total Members’ Investments & Equity $ 396,158 $ 433,825 $ 449,043 $ 477,715 $ 544,334 *Includes the accounts of members/subsidiaries. 2 $9.18 NET SALES BILLION $8.93 $8.94 Consolidated BILLION (after eliminations) BILLION $8.38 BILLION $7.85 BILLION 2012 2013 2014 2015 2016 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS $205.0 Patronage Dollars $201.7 6.0% Total Gross Profit (Millions) (Co-op only, includes cash discount) $195.0 5.9% *As percent of total net sales 5.90% $185.0 $194.7 $193.8 5.8% 5.83% $175.0 $182.6 5.71% $172.9 5.7% 5.76% $165.0 5.69% 5.6% $155.0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Co-op Patronage (Percentage to qualifying sales) 3.5% Selling, General & Administrative Expense 2.90% 3.4% (Co-op only) 2.81% 3.32% *As percent of total net sales 2.77% 2.79% 2.78% 2.80% 2.76% 3.3% 3.25% 3.22% 3.13% 2.70% 3.2% 3.12% 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 3 AWG WELCOMES AFM OVER 3,800 MEMBER STORES IN 36 STATES As mentioned in the Letter I could not be more proud to serve and CEO of AFM stated, "Before to Shareholders, 2016 this great group of new members.” our members voted to unify, they was a special year for Then on October 23, 2016, learned how they would benefit Associated Wholesale Grocers, AWG and AFM combined the from a lower cost of goods and Inc. (AWG) due to the successful two cooperatives’ distribution an expanded array of services. unification with Affiliated Foods businesses, converted to a common Our boards knew that unifying Midwest Cooperative, Inc. (AFM). operating platform, and shared a the cooperatives would produce This project became a reality at common purpose. This unification substantial financial rewards for the Annual Shareholders Meeting was made possible by the support the retailer-members and would of AFM on September 10, 2016, and approval of AWG’s Board of produce long-term growth.” Arter where AFM shareholders approved Directors, AFM’s Board of Directors, also noted that many AFM members the transaction by a vote of 410 a virtually unanimous vote of have told him "AWG’s retailers to 2 and executed agreements to AFM’s shareholders, and the hard are just like us." Following the become part of their new co-op.

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