US Grocery Supply Chain

November 2019

Research for Research partner

1 Background & Research Methodology

Notes for the Analysis

Survey Results:

I. The Importance of Fresh Table of II. Demand Forecasting Contents III. Auto Replenishment IV. Distribution Center Forecasting

V. Willingness to Invest in New Systems

VI. Competitive Environment

VII. Survey Participant Classification

VIII. Appendix: Comparison of Current State of Retail And Supply Chain Planning Systems

2 RELEX Solutions needed to quantify grocers’ supply chain challenges, opportunities, and current approaches. For example: How important is AI/machine learning to current planning. Is it on grocers’ horizon if they’re not currently using it?

Background Results will inform RELEX strategies for marketing and communications with current and potential customers. Additionally, content will be used in direct communications with retailers through the leading grocery industry publication, Progressive Grocer.

EnsembleIQ conducted an online survey with grocers who met the following criteria:

• $250M+ in revenue • Individuals in supply chain and inventory management roles • Manager, Director, VP/Sr. VP, C-Level/President Research • Work at or report into corporate office (not store level) Methodology A total of 54 grocers participated, representing large grocers including, but not limited to: Alberton’s Price Chopper Houchens Industries Stater Bros Market Basket The Save Mart Companies Woodman’s Markets

3 • Grocers operating online only skipped questions that are not applicable to their business model. Additionally, language varied on some questions for online-only grocers. Question language is noted on applicable pages in this report. For further detail, please refer to the full questionnaire document.

• The first wave of this survey was conducted one year ago (2018). Though results for 2018 are not included in this report, it’s notable that in some Notes for instances, survey results in 2019 vary quite a bit from 2018, likely due to a number of factors: the Analysis 1. 2019 only included grocers, while 2018 included some chains as well

2. Varying representation of grocer and participant characteristics:

• 2019 included more C-Levels/Presidents and Managers, while 2018 included more Directors and VPs/Sr. VPs

• 2019 included more participating companies with revenue between $250 million - $1 billion, while 2018 included a much higher number of companies with revenue over $10 billion.

4 The Importance of Fresh

5 It goes without saying that fresh products are important to the grocery business.

fresh products are very important fresh products are just as important as other product categories

60% 40%

6 Q2. How important are fresh products to your business? (n=54) But 2/3 of grocers are losing over 1.5% of their annual revenue to expired and spoiled fresh products.

46% 22% 22% 9%

<1.0% 1.0% - 1.4% 1.5% - 1.9% 2.0% - 2.4%

7 Q3. In relation to your total revenue, what is the cost of expired and spoiled fresh products? (n=54) Demand Forecasting

8 Grocers with both online and brick and mortar presence most often pick orders from distribution centers, dedicated fulfilment centers, or dark stores, but half pick in store as well.

Participating Grocers

Online Only 4% 88% Brick and Mortar 37% 50%

orders are picked from orders are picked Combined 60% distribution centers, in stores dedicated fulfillment centers, or dark stores

9 Q4. Which of the following describes your business? (n=54) Q5. Where are items picked for order fulfillment? (n=32) Store-Product-Day is a slightly more popular approach to forecasting sales.

store-product-day store-product-week

52% 46%

10 Q6. On what level do you forecast store sales? (among grocers that are not online only, n=52) And in particular, combined store-product-day is most commonly used among brick and mortar + online grocers who pick orders in store. store-product-day store-product-week

Total n=52 52% 46%

separate forecasts for in- separate forecasts for in- among combined 13% store sales and online 19% store sales and online brick and mortar + orders picked in the store orders picked in the store online who pick online orders in store combined forecasts for in- combined forecasts for in- n=16* 50% store sales and online 19% store sales and online orders picked in the store orders picked in the store

*small base size, interpret with caution 11 Q6. On what level do you forecast store sales? (among grocers that are not online only, n=52) However, store-product-week is most commonly used among combined brick and mortar + online grocers who do not pick orders in store. store-product-day store-product-week

Total n=52 52% 46%

among combined brick and mortar + online who do not 38% 63% pick online orders in store n=16*

among brick and mortar only grocers 55% 40% n=20*

*small base size, interpret with caution 12 Q6. On what level do you forecast store sales? (among grocers that are not online only, n=52) About 6 in 10 grocers are confident in forecasting sales of fresh products, but perceptions of efficiency and accuracy are low overall, particularly for promotions.

Efficiency/Accuracy in Forecasting (Top 3 Box)

59% 56% 56% 54% 52% 44%

Fresh products Holidays Seasonal New products Local events* Promotions products

Mean 7.70 7.61 7.39 7.46 7.35 7.02

13 Q7. Please rate how efficient and accurate your forecasting is for each of the following. (*’local events’ among grocers that are not online only, n=52; n=54 for all other forecasting scenarios) While ERP systems/add-on …And a majority of grocers have modules are the most popular been using their system for system for demand forecasting, a several years. variety of systems are being used...

Type of System/Vendor – Demand Forecasting When System Implemented – Demand Forecasting

Best-of-breed Developed system in-house 41% 24% 26% 33%

17% Spreadsheets/ Part or add-on module 9% No system to the ERP system 17% 33% <1 year 1-3 years 4-7 years >7 years

14 Q17. What is the current state of your retail and supply chain planning systems?: Demand Forecasting – Type/Vendor & When Implemented (n=54) Only about 6 in 10 grocers are satisfied with their system and about 8 in 10 have plans to develop or improve their system.

Overall Satisfaction with Demand Plans for Improvement – Forecasting System (Top 3 Box) Demand Forecasting System

Upgrade current 37% system 59% Minor development 33% Investigate replacement system 11%

No plans 19% Mean= 7.63

15 Q17. What is the current state of your retail and supply chain planning systems?: Demand Forecasting – Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (n=54) Specifically, grocers want their forecasting system to…

Automatically consider all relevant factors, Automatically estimate the effect of 70% such as price change, promotion type, 44% cannibalization for non-promoted products product category and in-store display / and product category, when forecasting promotional uplift * 44% Take advantage of machine learning Automatically consider weekday-related 63% variation in demand at the store-product level / product level * Take advantage of weather data and weather 35% forecasts Automatically estimate the effect of stock- 50% outs on demand through calculating lost sales 2% None of the above

*Question text varied for online only stores versus all others 16 Q8. Regarding forecasting, what would you like your current system to do that it doesn’t do at present? (n=54) Auto-Replenishment

17 Most retailers claim to have implemented automatic store / distribution center replenishment

Have implemented automatic 93% store / distribution center* replenishment based on…

re-order points or min-max limits for 39% most of their product range

re-order points or min-max limits for 30% some product categories Only 7% have not implemented automatic store / distribution center* replenishment and place orders manually. forecasts for some product 17% categories

forecasts for most product 7% categories *Question text varied for online only stores versus all others 18 Q9. What is the state of your [store/distribution center] replenishment? (n=54) …and those grocers are most confident with replenishment of new and fresh products. Still, there is quite a bit of opportunity for them to increase efficiency and accuracy of auto-replenishment overall.

Efficiency/Accuracy in Automatic Replenishment (Top 3 Box)

64% 64% 58% 56% 56%

New products Fresh products Center-store / Seasonal products Promotions Ambient products*

Mean 7.76 7.82 7.52 7.82 7.34

*Question text varied for online only stores versus all others 19 Q10. Please rate how efficient and accurate your automatic [store/distribution center] replenishment is for each of the following. (among those who have implemented automatic store replenishment, n=50) In-house solutions are the most …And many systems are popular type of system used for very old automatic store replenishment...

Type of System/Vendor – When System Implemented – Automatic Store Replenishment Automatic Store Replenishment

Developed Spread in-house sheets/ 40% 33% 31% No 27% system 19% Best-of- Part or add-on 10% breed module to the system ERP system 17% 23% <1 year 1-3 years 4-7 years >7 years

20 Q17. What is the current state of your retail and supply chain planning systems?: Automatic Store Replenishment – Type/Vendor & When Implemented (among grocers that are not online only, n-52) Only about 6 in 10 grocers are satisfied with their automatic store replenishment system, and 85% have plans to develop, upgrade, or investigate replacement solutions.

Overall Satisfaction with Automatic Store Plans for Improvement – Replenishment System (Top 3 Box) Automatic Store Replenishment System

Investigate replacement system 31%

Minor development 29% 60% Upgrade current 25% system

No plans 15% Mean= 7.38

21 Q17. What is the current state of your retail and supply chain planning systems?: Automatic Store Replenishment –– Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (among grocers that are not online only, n-52) Specifically, grocers want their automatic store replenishment system to…

Drive orders through all levels of the supply Automate store replenishment of ingredients 49% chain based on store inventory needs 45% used in products manufactured on-site in stores considering the products’ bills-of-material

Automatically consider planogram data in 47% replenishment planning to account for visual Level out incoming deliveries to stores for more minimums and shelf capacity 45% efficient in-store goods handling

Get timely and accurate alerts of upcoming Dynamically adjust safety stock levels in 45% issues, such as forecasted out-of-stocks or 33% accordance with weekday-level variation in risk of spoilage in stores demand to maximize on-shelf availability and minimize spoilage of fresh goods Have the system automatically select the 45% most appropriate batch size, such as case Use the same replenishment system for center- pack or pallet size, per product and store 31% store and fresh products based on demand

4% None of the above

22 Q11. Regarding automatic store replenishment, what would you like your current system to do that it doesn’t do at present? (among those who have implemented automatic store replenishment and are not online only grocers, n=49) Distribution Center Forecasting

23 Distribution center forecasts are most often based on planned or projected store orders, but are also frequently based on historical outbound deliveries from the DC or store demand forecasts.

historical data on planned or projected store demand outbound deliveries store orders forecasts from the DC

40% 31% 29%

24 Q12. What are your distribution center forecasts mainly based on? (among grocers that are not online only, n=52) Distribution center inventory …and tend to be relatively newer management systems vary... systems.

Type of System/Vendor – DC Inventory Management When System Implemented - DC Inventory Management

Best-of-breed Developed 44% system in-house 22% 28% 26% 22%

Spreadsheets/ Part or add-on module 7% No system to the ERP system 24% 26% <1 year 1-3 years 4-7 years >7 years

25 Q17. What is the current state of your retail and supply chain planning systems?: Distribution Center Inventory Management – Type/Vendor & When Implemented (n=54) Only 46% of grocers are satisfied with their system and 80% have plans to develop or improve their system.

Overall Satisfaction with DC Inventory Plans for Improvement – DC Inventory Management System (Top 3 Box) Management System

Minor development 28%

Upgrade current % 26% 46 system Investigate replacement system 26%

No plans 20% Mean= 7.20

26 Q17. What is the current state of your retail and supply chain planning systems?: Distribution Center Inventory Management – Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (n=54) Specifically, grocers want their distribution center inventory management system to…

Automatically consider the effect of planned Automatically consider supplier-related order 57% changes in the stores’ replenishment 46% restrictions, such as full truck load orders, schedules or assortments on the DC minimum order values or agreed minimum forecasts* number of pallets, when calculating order suggestions 48% Automatically consider batch-level expiration dates and forecasted spoilage for fresh Automatically produce multiple order proposals products when calculating order suggestions 46% within a day when needed, based on near real- time inventory management Calculate out-of-stocks in stores and at DCs 48% caused by supplier availability or delivery Automate replenishment of ingredients used in issues 44% manufactured products (e.g. sandwiches) considering the products’ bills-of-material*

4% None of the above

27 Q13. Regarding distribution center inventory management, what would you like your current system to do that it doesn’t do at present? (n=54; except where * notes question was not asked among only grocers, n=52) Space & Assortment Planning

28 Store assortments are most commonly based on store size and customer demographics.

Store Assortments are Based On…

58% 58% 48% 42% 40% 38%

Store size Customer Store format Store location Other clustering Stores can offer demographics of stores some local products

29 Q14. What are your store assortments based on? (among grocers that are not online only, n=52) And while few are ‘highly compliant’, a majority are at least 75% compliant with planograms.

Planogram Compliance

69% About 1 in 3 grocers would like their system to monitor planogram compliance 23%

4% 4%

> 90% 75 – 90% < 75% We do not use planograms

30 Q15. What is the level of planogram compliance in your stores (i.e. to which extent are planograms implemented in your stores)? (among grocers that are not online only, n=52) ERP systems/add-on modules …And many grocers have been are the most popular system for using their system for several assortment management... years.

Type of System/Vendor - Assortment Management When System Implemented – Assortment Management

Spreads heets/ Developed No in-house Best- system 37% 28% 31% of- 13% breed system 20% 19% Part or add-on module 11% to the ERP system 41% <1 year 1-3 years 4-7 years >7 years

31 Q17. What is the current state of your retail and supply chain planning systems?: Assortment Management – Type/Vendor & When Implemented (n=54) A majority of grocers are satisfied with their assortment management system and about 60% have no plans or only minor development plans for modification.

Overall Satisfaction with Assortment Plans for Improvement – Assortment Planning Planning (Top 3 Box)

Minor development 39%

Upgrade current 22% 72% system Investigate replacement system 17%

No plans 22% Mean= 7.93

32 Q17. What is the current state of your retail and supply chain planning systems?: Assortment Management – Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (n=54) ERP systems/add-on modules …And several of grocers have are the most popular system for been using their system for many planogramming... years.

Type of System/Vendor - Planogramming When System Implemented - Planogramming

Best-of-breed Developed system in-house 27% 23% 37% 27% 23% 13% Part or add-on module Spreadsheets to the ERP system / No system 17% 33% <1 year 1-3 years 4-7 years >7 years

33 Q17. What is the current state of your retail and supply chain planning systems?: Planogramming – Type/Vendor & When Implemented (among grocers that are not online only, n-52) Just over half of grocers are satisfied with their planogramming system and 38% are planning an upgrade to their current system.

Overall Satisfaction with Plans for Improvement – Planogramming System Planogramming System (Top 3 Box)

Upgrade current 38% system

Investigate replacement 21% system 52% Minor development 15%

No plans 25%

Mean= 7.52

34 Q17. What is the current state of your retail and supply chain planning systems?: Planogramming – Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (among grocers that are not online only, n-52) A variety of systems are used for …And most grocers have been Macro Space / Floor Planning... using their system between 1-7 years.

Type of System/Vendor – When System Implemented - Macro Space / Floor Planning Macro Space / Floor Planning

Developed Spreadsheets in-house / No system 40% 38% 17% 31%

13% Best-of-breed Part or add-on 8% system module to the ERP 27% system 25% <1 year 1-3 years 4-7 years >7 years

35 Q17. What is the current state of your retail and supply chain planning systems?: Macro space / floor planning – Type/Vendor & When Implemented (among grocers that are not online only, n-52) About 6 in 10 grocers are satisfied with their macro space / floor planning system and a majority are planning either minor development or an upgrade to their current system.

Overall Satisfaction with Macro Space / Plans for Improvement – Macro Space / Floor Planning System (Top 3 Box) Floor Planning System

Minor development 35%

Upgrade current system 31% % 60 Investigate replacement system 12%

No plans 23%

Mean= 7.63

36 Q17. What is the current state of your retail and supply chain planning systems?: Macro Space / Floor Planning – Overall satisfaction (1 to 10) Top 3 Box & Plans for 2019-2020 (among grocers that are not online only, n-52) Specifically, grocers want their space and assortment planning system to…

Recommend localized store-specific Planogram all fixture types (including 54% assortments 42% promotional displays and customized fixtures)

Automatically produce localized planograms Use forecasts rather than past sales as the basis 52% based on store-specific sales data or 35% for planogramming forecasts and store fixtures

Get store-level recommendations concerning Monitor and report planogram compliance in the 50% how much space to allocate to the different 35% stores product categories

Cluster stores per product category based on 48% local shopping patterns to optimize local None of the above assortments 6%

37 Q16. Regarding space and assortment planning, what would you like your current system to do that it doesn’t do at present? (among grocers that are not online only, n=52) Willingness to Invest in New Systems

38 Despite overwhelming desire for features of new retail and supply chain planning systems, complexity of current systems and budget issues are major barriers to investing.

Factors that Would Prevent Investment

59% 56% 52% 46% 39%

Investment tied up in in- Budget issues Complexity of the Other higher priorities Investment tied up in house developed project exist in the business major ERP systems legacy systems which which are not flexible are complicated to improve

39 Q18. What are the main things that would stop you from investing in new retail and supply chain planning systems? (n=54) Competitive Environment

40 The primary ways grocers are addressing the ‘ threat’ is focusing on improving operational efficiency while increasing urgency and tech budgets.

54% 52% 48% 46% 44% 41% 39%

Increasing Increasing Increasing Implementing Leveraging Helpless Stay focused focus on urgency and tech budget an online external because of on our operational budgets for channel (if not partners (tech Amazon's strengths, no efficiency new initiatives already vendors, massive big changes available) suppliers, CPG resources firms, etc.)

41 Q19. What best describes your company's reaction to the threat of Amazon in grocery? (n=54) Focus on technology and the threat of Amazon are big challenges in the grocery landscape, but also open up new opportunities. Fresh and convenient continue to play a role for the shopper while omnichannel is becoming more and more essential to the grocery channel as well.

46% 43% 43% 43% 39% 39% 39% 37% 35% 35% 31%

Technology isAmazon takesFaster pace of New More Grocery has Shoppers are Omnichannel Fresh and Opportunities More global more away market change than opportunities competitive always been more in is essential food-to-go for growth are retailers are essential than share ever before for growth are than ever competitive, charge than are harder to find entering the ever before opening up no change ever before increasingly market important These two data points demonstrate the polarity of perspective in the grocery industry

42 Q20. What is your assessment of the current competitive environment in grocery? (n=54) Survey Participant Classification

43 Job Profiles

JOB LEVEL FUNCTIONS OF INFLUENCE

C-level / President Manager 100% 46% / Owner 19% 26% SUPPLY CHAIN/INVENTORY MARKETING/SALES MANAGEMENT

Director VP / Sr. VP 35% 20% 44% 44%

STORE OPERATIONS ECOMMERCE

44 S1. What is your level within your organization? (n=54) S2. Over which of the following functions do you have influence or decision-making responsibility? (n=54) Company Revenue and Business Type

6% >$10 billion Online 9% $5 billion - $10 billion only 4%

28% $1 billion - $5 billion Brick and mortar only Combined 37% brick and 43% $500 million - $1 billion mortar and online 59%

15% $250 million - $500 million

45 Q1. What was your company’s revenue for the last completed 12-month period? (n=54) Q4. Which of the following describes your business? (n=54) Appendix Slides: Comparison of Current State of Retail And Supply Chain Planning Systems

46 Comparison of Type of System Used by Purpose

Spreadsheets/ Best-of-breed Developed Part or add-on module to the No system system in-house ERP system

Assortment management 13% 19% 28% 41%

Automatic store replenishment* 19% 17% 40% 23%

Macro space/floor planning* 17% 27% 31% 25%

Demand forecasting 17% 24% 26% 33%

Planogramming* 17% 27% 23% 33%

Distribution center inventory 24% 22% 28% 26% management

47 Q17. What is the current state of your retail and supply chain planning systems? *among grocers that are not online only, n-52; all else among total, n=54 Comparison of System Implementation Timing by Purpose

<1 year 1-3 years 4-7 years >7 years

Assortment management 11% 31% 37% 20%

Automatic store replenishment* 10% 33% 27% 31%

Macro space/floor planning* 8% 40% 38% 13%

Demand forecasting 9% 33% 41% 17%

Planogramming* 13% 27% 37% 23%

Distribution center inventory 7% 44% 26% 22% management

48 Q17. What is the current state of your retail and supply chain planning systems? – When implemented *among grocers that are not online only, n-52; all else among total, n=54 Comparison of Satisfaction with System by Purpose

Mean Assortment management 72% 7.93

Automatic store replenishment* 60% 7.38

Macro space/floor planning* 60% 7.63

Demand forecasting 59% 7.78

Planogramming* 52% 7.52

Distribution center inventory 46% management 7.20

49 Q17. What is the current state of your retail and supply chain planning systems? – Overall satisfaction (1 to 10), Top 3 Box *among grocers that are not online only, n-52; all else among total, n=54 Comparison of Plans to Modify System by Purpose

Minor Upgrade Investigate No plans current replacement development system systems

Assortment management 22% 39% 22% 17%

Automatic store replenishment* 15% 29% 25% 31%

Macro space/floor planning* 23% 35% 31% 12%

Demand forecasting 19% 33% 37% 11%

Planogramming* 25% 15% 38% 21%

Distribution center inventory 20% 28% 26% 26% management

50 Q17. What is the current state of your retail and supply chain planning systems? – Plans for 2019-2020 *among grocers that are not online only, n-52; all else among total, n=54 Corporate Headquarters New Jersey, U.S. Toronto, Canada Montreal, Canada 8550 W. Bryn Mawr Ave. Ste. 200, One Gateway Center 11-43, 20 Eglinton Ave. West, Suite 1800 1425, Boulevard René-lévesque Ouest Chicago, Il 60631 Raymond Plaza West, 16th Floor Toronto, On M4R 1K8 Local 202, Montréal (Québec), H3g 1t7 Newark, NJ 07102

Phone : +1 773-992-4450 Phone : +1 201-855-7600 Toll Free : +1 877-687-7321 Phone : +1 514-446-9580 Fax : +1 773-992-4455 Fax : +1 201-855-7373 Fax : +1 888-889-9522 51