MACRO VS MICRO FULFILLMENT COMPARISON Contents

Home , Kroger, Walmart

AGREE KNOWLEDGE BASE

03 EXECUTIVE SUMMARY 08 WALMART LEANS INTO MICRO-FULFILLMENT

04 MACRO-FULFILLMENT 09 SUMMARY

05 KROGER & OCADO 10 ABOUT US

07 MICRO-FULFILLMENT

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 02 Executive Summary

MICRO-FULFILLMENT & MACRO-FULFILLMENT Multiple Avenues to Building a Better Mouse Trap

As grocery e-commerce sales continue to garner an increasingly meaningful percentage of the pie (online market share was 4% in the US/Canada pre-COVID and is expected to be in the 15-20% range by 20251), retailers are boldly innovating ways to improve profitability through cost effective fulfillment strategies. This has become especially meaningful as fulfillment costs represent one of the highest expense P&L line items for retailers2. Currently, two divergent philosophical approaches have emerged: micro and macro-fulfillment, which we discuss herein in the context of the grocery retailer space. These approaches each have unique merits and considerations, yet at times can support a still nascent hub & spoke automated fulfillment approach.

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 03 average SKUcountofapproximately 55k the facilitysize. OcadoGroup, a U.K.basedprovider ofautomationsolutionshasanaverage facilitysize inthe300k–400kSFrange, withan warehouse-type facilityseparatefrom thestore. Oneofthestrengths ofthismodelisthebreadth ofstockkeeping units(SKUs)offered given One methodthatgrocery retailers have adoptedistheCentralized Fulfillment Center(CFC), whichleverages onlineorder fulfillmentthrough a Macro-Fulfillment or through ahubandspoke model,whichdependsupontheorders beingtaken toafacilityspecializinginlast-miledelivery orpickup assistance oftheCFC’s technology offerings. Lastly, the retailer will distribute the order either by delivering the order directlycustomer to the economical routes across the fulfillment grids). Subsequent to thepickingprocess, individual employees will placeitemsinto totes,with the an onlineorder isdirected toaCFCwhere itisassembledby robots, helpingtoeliminateprocess inefficiencies(e.g.findingthemost via process whencompared automationparticularly tofulfillmentexecuted supermarket. insidetheconventional brickandmortar Typically, In additiontooffering awiderbreadth ofinventory, CFCsalsohave theaddedbenefitof reducing laborcostsandimproving order accuracy square footage WHERE ROBOTS PROCUREGOODSABOVE ATHREE-DIMENSIONALGRID IN MACRO FULFILLMENT, ORDERSAREDIRECTED TO ACENTRALIZEDFACILITY, 4 . 3 . Thiscompares toatraditionalsupermarket, whichhasroughly 15k–60kSKUsdependingonits 1 AGREE KNOWLEDGE BASE MACRO VS MICROFULFILLMENT COMPARISON 3 . 04

PHOTO: OCADO GROUP PLC, ORIGINALLY POSTED BY BLOOMBERG Kroger & Ocado

In May 2018, Kroger announced a partnership with Ocado Group to construct up to approximately 20 CFCs in the US during the first three years of the agreement; in turn Kroger agreed to pay fees related to exclusivity and consultancy, as well as a services agreement5. Kroger’s Ocado facility in Groveland, Florida measures 336k square feet and is equipped with 1,000 robots. It will employ roughly 400 employees by 2023. The facility reportedly cost approximately $55 million to construct1.

While this facility has an estimated potential to fulfill $400 - $500

million in annual sales1 (handling the equivalent of roughly 20 stores6), the economics of achieving profitability are dependent on the e-commerce adoption from each respective regional market3. Kroger expects its CFCs to realize “site breakeven” profitability by the end of year three and achieve similar operating margins relative ORDERS ARE EITHER DIRECTLY DELIVERED TO A CUSTOMER to a store by year four. Over time, CFCs are expected to have similar OR SENT TO A LAST-MILE DROP-OFF FACILITY3 if not higher operating margins relative to a store primarily through more favorably for 2-day delivery as opposed to same-day delivery. automation, optimized routing, and other avenues7. Of significant Notably, Kroger’s CFCs are estimated to service an approximate importance is the reduced reliance on physical labor which we will 90-mile radius, which may ultimately make it challenging to justify discuss momentarily. KROGER PHOTO: the cost associated with same-day delivery due in part to the While Ocado’s facilities offer incredible efficiencies from an time needed to deliver orders1. This dynamic may have influenced operations perspective, limitations from a transportation Kroger’s recent decision to hit the pause button on commencing standpoint may ultimately best position the Kroger/Ocado CFC additional unannounced CFCs; Kroger recently reduced its

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 05 commitment to construct 11 of the targeted 20 total facilities thus far7. Despite the apparent change in tone from management KROGER TARGETS DIGITAL in regards to the total CFC expansion in the near-term, Kroger REVENUE TO DOUBLE continues to target digital revenue (approximately 7.5% of total TO APPROXIMATELY net sales) to double to approximately $20B by the end of FY23 in addition to improvements in their respective profitability7. $20 Of significant importance, and divergent from Walmart, the country’s largest grocer, Kroger has a unionized workforce. To date, BILLION there has not been meaningful pushback from the major grocery BY THE END OF 2023. unions (i.e. The United Food and Commercial Workers International Union and the United Auto Workers). Likely, this is attributable to the low automation penetration currently achieved in the industry. Currently less than 1% of grocery stores are automated, while KROGER EMPLOYEES ORGANIZE ORDERS WITH THE ASSISTANCE OF OCADO TECHNOLOGY. approximately 10% of the North American grocery supply chain (e.g. distribution centers and warehouses) have incorporated some form of automation8. While part of the long-term value proposition PHOTO: WSJ PHOTO: of a CFC is predicated on automation, elimination of waste, etc. concerns from a labor union perspective could intensify in the years ahead if the adoption of CFCs and automation continue to increase.

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 06 Micro-Fulfillment

Another approach to solving for improved e-commerce profitability In addition to MFCs’ ability to expedite the time between customer is through the adoption of the micro-fulfillment center (MFC). order and fulfillment, they are also estimated to eliminate An MFC is typically either a compact warehouse, a dedicated approximately 75% of the costs related to the manual picking section of the store, or a store add-on that functions as an on-site sorting and fulfillment center. Standard MFC formats can vary in size from approximately 5k to 20k SF3. One of the principal tangible benefits of MFCs are that they leverage existing assets/supply chain infrastructure, while their smaller size enables operations in proximate distances to population densities.

MFCs tend to be a comparatively less capital- intensive means of serving customers considering the minimal upfront investment needed. A typical MFC costs a few million dollars and has a payback period of approximately 2 years.9 PHOTO: DEMATIC, ORIGINALLY POSTED BY SUPPLY CHAIN DIVE SUPPLY BY POSTED DEMATIC, ORIGINALLY PHOTO:

From a profitability perspective, the utilization of ORDERS ARE DIRECTED TO THE RETAILER, WHERE THEY ARE PICKED BY ROBOTS IN THE MFC MFCs can improve home delivery margins to roughly

-2% vs. -15% using manual picking (ex. fees) and can yield click- process3. MFC technology providers such as Fabric indicate that and-collect order margins of +2% vs. -5% for manual picking9. their solutions are 4x faster than the manual picking process and Over time, the inclusion of fees charged to customers could boost have order accuracy exceeding 90%9. click-and-collect order margins to approximately the +5% range vs. +2% currently achieved via MFCs9.

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 07 ORDERS ARE EITHER PICKED UP FROM THE STORE OR ARE DELIVERED TO THE CUSTOMER Walmart Leans into Micro-Fulfillment

With 5,342 stores throughout the U.S.10, one of Walmart’s comparative advantages relative to peers is the proximity of its store base to the SOURCE: MCDONALD’S SOURCE: vast majority of the US population, which makes the incorporation of MFCs a logical way to expedite orders and reduce costs. Walmart has worked with multiple technology partners, including Alert Innovation, Dematic and Fabric, which allow the company to create organic tests among MFC offerings in varying environments11. This includes both the addition of MFCs inside the store or supplemental to the existing structure. The benefit to the former being that MFC configurations can fit into spaces as small as Fabric’s 5k SF micro-centers12, as well as Dematic’s 10k SF configuration13.

Recently, Walmart has indicated that it will begin to add “automated pickup points” to stores, which will enable customers and delivery providers a quick point of access to pick up their order. Given that Walmart offers pickup from ~3,500 stores and same-day delivery from ~2,700 PHOTO: AP PHOTO/SUE OGROCKI; ORIGINALLY POSTED ON 6ABC ON POSTED ORIGINALLY OGROCKI; PHOTO/SUE AP PHOTO: stores, the addition of MFCs will likely be synergistic to the Company’s existing model due to the improvements in process efficiencies12.

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 08 Summary

While e-commerce grocery offerings ramp, retailers will continue to refine their model relative to the nexus of profitability and consumer demand. Larger operators such as Kroger and Walmart are uniquely positioned to innovate their current offering given 1) the requisite scale and sales volume are needed to justify the economics of CFCs (applicable to Kroger), 2) they hold the appropriate real estate footprint to execute on these strategies, 3) they maintain the balance sheet capacity to invest and experiment with multiple technologies and, 4) the appropriate real estate format to modify their existing premises to accommodate drive-thru, click & collect, delivery and other “out of store” offerings.

Retailers who are predominantly in a free-standing/net lease format have control over the entire premises, enabling greater dynamism in the current environment (see our prior whitepaper entitled “Why Net Lease is Superior in an Omni-Channel World” for a full discussion of this topic). As such, format and property type ROBOTICSANDAUTOMATIONNEWS.COM BY POSTED play a role in determining whether an MFC or CFC-driven approach makes sense in the context of the individual retailer’s model. The future of fulfillment is dynamic in a post-pandemic omni-channel ORIGINALLY world. Ultimately, a hybrid hub & spoke approach that incorporates DEMATIC, both macro as well as micro-fulfillment options may be the most PICKED ORDERS ARE ORGANIZED BY STORE EMPLOYEES

economical to serve customer demands. PHOTO:

SOURCES

1. MWPVL; “Grocery Retail and Distribution Investor Call”. Marc Wulfraat. 2. Jefferies Equity Research; “What We Learned from Chris Cavalline on Micro Fulfillment”, 4/7/2021. 3. Jefferies Equity Research; “Fulfillment Deep Dive: MFCs = Best Path to Profitability; WMT Top Grocery Play”, 10/10/2019. 4. https://smallbusiness.chron.com/sku-mean-grocery-business-75577.html 5. https://www.ocadogroup.com/sites/ocado-corp-v2/files/announcement-of-a-partnership-agreement- between-ocado-and-kroger.pdf 6. https://www.grocerydive.com/news/kroger-maps-its-new-digital-ecosystem/597693/ 7. Jefferies Equity Research; “Kroger: The Journey Continues”, 4/1/2021. 8. Jefferies Equity Research; “What We Learned from Ramesh Chikkala on Micro Fulfillment & Retail Real Estate”, 5/13/2021. 9. Truist Securities Equity Research; “REITs - MFCs set to fuel e-commerce”, 5/20/2021. 10. https://stock.walmart.com/investors/financial-information/unit-counts-and- square-footage/default.aspx 11. https://corporate.walmart.com/newsroom/2021/01/27/from-ground-breaking-to-breaking-ground-walmart-begins-to-scale-market-fulfillment-centers 12. https://www.grocerydive.com/news/walmart-will-add-automated-micro-fulfillment-to-dozens-of-stores/594059/ 13. https://www.dematic.com/en-us/solutions/solutions-by-system/microfulfillment/

AGREE KNOWLEDGE BASE MACRO VS MICRO FULFILLMENT COMPARISON 09 About Us

Creating Opportunity by Rethinking Retail In 1971, Richard Agree, our Executive Chairman of the Board of Directors, founded Agree Development Company, the predecessor to Agree Realty Corporation. Over its 23-year history, Agree developed over 40 community shopping centers primarily throughout the Midwestern and Southeastern United States.

With an Initial Public Offering of 2.5 million shares in 1994, Agree Realty Corporation commenced operations as a publicly traded Real Estate Investment Trust (REIT). Agree Realty is listed on the New York Stock Exchange under the ticker symbol “ADC”. Today, Agree Realty is a $6 billion industry leader in the acquisition and development of properties net leased to the foremost retailers in the United States. As of March 31, 2021, the Company owned and operated a portfolio of 1,213 properties, located in 46 states and containing approximately 24 million square feet of gross leasable space.

Disciplined and Focused Investment Strategy The Agree Team’s expertise and strategic execution seeks to maximize value for all stakeholders. Our innovative development and acquisition strategies, adaptive real estate technology, and extensive capabilities are relied upon by our industry-leading partners throughout the United States. Building upon the foundation of excellence established throughout the past half century, Agree Realty continues to be a thought leader, rethinking retail in an omni-channel world.

Contacts To learn more about Agree Realty Corporation, please visit www.agreerealty.com.

Joey Agree Danielle Spehar Nicole Witteveen President & Chief Executive Officer General Counsel Vice President, People & Culture 248.419.6312 248.419.6329 248.419.6334 [email protected] [email protected] [email protected]

Craig Erlich Simon Leopold Chief Operating Officer Chief Financial Officer 248.479.3593 248.419.6335 [email protected] [email protected]