2016 Retail Year in Review A Look Back at Key Themes Across Channels Kantar Retail Research Team January 2017 Copyright © 2017 Kantar Retail. All Rights Reserved.

501 Boylston St., Suite 6101, Boston, MA 02116 T: +1 (617) 912 2828 [email protected]

No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photography, recording, or any information storage and retrieval system now known or to be invented, without the express written permission of Kantar Retail.

The printing of any copies for backup is also strictly prohibited.

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.

2 2016 in Review: Kantar Retail’s Top 5 Takeaways

A strong year cultivates greater systemic changes in the industry

1. Strong macroeconomic indicators: The macroeconomic environment was favorable to the retail industry for most of 2016. Dropping unemployment, rising wages, and less disruption than anticipated in the wake of the U.S. presidential election all contributed to broad-based dollar growth across channels. 2. Health and wellness takes center stage: Competition for share of shoppers’ well-being was a key storyline throughout the year. Whether in the form of healthier snacking options at discounters, a greater emphasis on fresh items at supercenters, or more visible sustainability at clubs, the health and wellness trend spanned multiple channels and retailers. 3. Private brands are the new “national” brand: Retailers across channels have continued to invest heavily in private brands across departments. From Amazon launching private label apparel and consumables lines to 7-Eleven expanding into a premium tier of “Select” products, retailers see private brands as a growth engine moving in to 2017. 4. Reconfiguring physical assets: As brick-and-mortar retailers looked to squeeze more profit out of their square footage, we saw a handful of common strategic moves. A number of large-scale mergers and acquisitions occurred as retailers sought greater synergy on a corporate level. Other retailers closed underproductive stores to better focus on top performers. Across channels, a greater infusion of digital into the physical box became more apparent in the form of click-and-collect deployment, technology integration into the store, and greater use of social media to better engage with shoppers. 5. Digital drives growth: Continuing a 2015 trend, digital was a key component for retailers in every channel. From the dramatic growth in online grocery to heavy investments in website design and focused, personalized digital communication from retailers to shoppers, digital priorities did not slow in 2016 and will continue to evolve and serve as a critical focus area for retailers in 2017.

Source: Kantar Retail analysis 3 Table of Contents

Macroeconomics………………………………………….. 5 Shopper Activity…………………………………………… 9 Mass………………………………………………………… 13 Club…………………………………………………………. 16 Discounter…………………………………………………. 20 Grocery…………………………………………………….. 24 Drug………………………………………………………… 28 Convenience……………………………………………..... 32 Digital……………………………………………………….. 35

4 1. Macroeconomics

5 Year in Review: Macroeconomics

Overall Retail ‒ Overall retail performance: Nominal growth improved, but was below the historical average. Inflation-adjusted growth was the strongest since 2005. Market Disruptions ‒ Market disruptions: Election uncertainty had very little effect on spending confidence. Global uncertainty stayed at arms length from U.S. households. Spending Intentions ‒ Shopper spending intentions: Total shoppers improved, with upper-income households the strongest. Lower-income households posted the largest incremental improvement. Employment and Income ‒ Employment and income: The unemployment rate reached its lowest level since late 2007. Income and wage growth remained modest. Job losses related to the Housing Market faltering energy sector were acute in some regions. ‒ Housing market: Home values were back to their prerecession level nationally. Homebuilding sustained a strong pace, while home sales faced headwinds due to Prices low inventories. ‒ Prices: Gas prices reached their lowest annual level since 2004. Food-at-home Monetary and Fiscal Policy prices posted their first annual decrease since 1967. Strong inflation in essential services siphoned off income that could have been used on core retail purchases. ‒ Monetary and fiscal policy: The Fed delayed a second rate increase until Retail Market Effect: Positive Mixed Negative December. Dormant inflation and Fed caution pushed rates to low levels.

Source: Kantar Retail analysis 6 Annual Retail Sales Trends

Online drove modestly improved top-line growth in 2016 Top Line: Annual Retail Sales Breakdown Top line: Latest Years & Forecast, Year-to-Year Growth 2015 2016E 2017F ‒ Top-line growth moved a notch higher in 2016. 16% ‒ Given steep deflation, top-line inflation-adjusted growth was the 16% strongest since 2005. 15% Brick-and-Mortar vs. Online: ‒ Online posted its strongest growth since 2011. ‒ Aggregate brick-and-mortar channel growth was the weakest since 4.1% 2.8% 2010. 4.0% 2.6% 3.8% 3.0% ‒ Declining growth in the combined mass channel was the biggest 2.7% 2.2% 2.7% drag on the consumables channels given food deflation and online competition; drugstores led; supermarkets slowed due to food Top-Line Major Apparel & price deflation. Retail Sales Online** Consumables Homegoods 2 ‒ Home centers and home furnishing specialty channels widely Measure* Channels¹ Specialists outpaced the apparel specialty channel. BRICK-AND-MORTAR CHANNELS3 * Top-line measure excludes auto dealers, fuel, and food service channels; includes auto parts stores ** Online sales are from quarterly retail eCommerce sales reported by the government 1 Includes drugstores, supermarkets, supercenters, discount department stores, warehouse clubs, and dollar stores 2 Includes traditional department stores 3 Channels include some online, catalog, and TV home-shopping sales in addition to brick-and-mortar stores

Source: U.S. Department of Commerce, Kantar Retail analysis 7 Year in Review: Category Trends

2014 2015 2016 (through October)

4.4% 4.9% 4.8% 4.5% ‒ Total spending was moderate. 3.5% 3.8% 3.7% 3.9% 2.9% 2.7% ‒ Grocery categories dampened Category 1.0% 1.3% consumables spending. Aggregates ‒ Homegoods led discretionary. Total Spending Grocery Home & softgoods (excl. Services ‒ Services outpaced goods. (incl. fuel, autos & Rx) & HBC autos) 11.0% 9.5% ‒ Pet spending surged. 7.3% 6.5% 6.0% 6.0% 5.8% ‒ Food services and travel gained 5.3% Leading 4.7% 5.0% 4.4% share of wallet. Categories 3.7% ‒ Sharp price increases partly drove Rx and health services. Pet supplies Food services Prescription Healthcare & hotels drugs services ‒ Food spending growth was buoyed by demand amid price deflation. 3.9% 4.5% 4.5% 3.2% 3.7% 3.9% Category 3.0% 2.4% ‒ HBC improved to above average. 1.8% 2.0% 1.1% 1.3% ‒ Apparel lagged most categories. Detail ‒ Home furnishings led most goods. Food & beverages Health & Clothing Home furnishings at home beauty care & footwear

Source: U.S. Department of Commerce, Kantar Retail analysis 8 2. Shopper Activity

9 Spending Intentions Were Largely Positive — and Largely Unchanged — in 2016

Slight softening in late summer reversed itself in October

Retail Spending Intentions in Coming Month, Compared With Same Period Last Year (three-month moving average) 2016

70% Spend about the same

60% 62%

50%

40% Spend much/somewhat less 30% 24% 20% Spend much/somewhat more 14% 10%

0%

Source: Kantar Retail ShopperScape®, January 2009-November 2016 10 Shoppers Have Pressed Pause on Retailer Rationalization

Shoppers’ “retailer set” held constant in 2016 vs. 2015

Average Number of Retailers Shopped in Past Four Weeks* (among all primary household shoppers)

Q1-Q3 Average Monthly Avg. # of Retailers Shopped 16.0

14.0

12.0 12.4 12.4 10.0 11.1 11.1 11.2 11.2 10.7 8.0 9.6 9.4 9.4

6.0

4.0

2.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0.0

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

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 Mar-16

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 Sep-16

May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14 May-15 May-16 * Inclusive of visits to stores and websites; averages are for Q1-Q3 of each year.

Source: Kantar Retail ShopperScape®, January 2007-September 2016 11 Over the Course of 2016, More Channels Saw More Green — That Is, Attracted More Shoppers vs. Last Year

Past Four-Week Shopping Incidence by Channel, Indexed to Same Prior-Year Period

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Mass retailers/supercenters 94 96 96 97 96 96 98 95 96 98 96 Small-format value retailers 96 98 95 99 98 98 100 93 101 101 96 F/D/M Drugstores 93 97 90 95 94 95 100 92 96 94 92 Channels Warehouse clubs 96 109 94 97 98 96 102 98 99 93 95 Supermarkets 91 96 93 95 94 96 100 94 95 94 92 Traditional department stores 100 110 107 111 99 99 106 103 107 100 94 Value department stores 100 109 102 95 104 102 105 100 104 106 96* Softgoods Upscale department stores 100 110 114 127 97 111 113 116 105 96 99 Channels Adult apparel specialty stores 99 108 104 103 102 102 105 102 101 99 102 Shoe retailers 97 103 105 108 109 103 110 96 106 102 90 Home improvement/ hardware retailers 97 106 101 100 93 98 109 99 102 101 96 Homegoods Home textiles/ home furnishings retailers 95 115 108 106 101 107 105 101 107 104 98 Channels Consumer electronics retailers 102 112 109 112 103 101 103 102 106 98 93 Office supply retailers 91 100 102 92 90 101 101 93 96 100 85 Online-only retailers 108 114 112 111 110 108 100 111 107 109 106 Sporting goods retailers 95 110 103 104 107 101 110 102 110 98 92 Leisure/Other Craft/hobby retailers 97 103 106 97 96 104 108 93 107 100 86 Channels Books/music specialty stores 103 113 113 105 107 109 106 100 104 102 90 Toy retailers 85 112 97 101 103 103 94 107 111 119 93 Auto supply retailers 103 101 90 102 95 97 102 88 98 108 89 * Read as: The percentage of shoppers who shopped a value department store in November 2016 is 4% less than (96-100) the percentage who shopped a value department store in November 2015. Yellow shading: Indices of 98 to 102 indicate similar levels of shopping vs. the same period a year ago. Green shading: Indices ≥ 103 indicate ≥ 3% more shoppers in the channel vs. the same period a year ago. Red shading: Indices ≤ 97 indicate ≤ 3% fewer shoppers in the channel vs. the same period a year ago.

Source: Kantar Retail ShopperScape®, January-November 2016 12 3. Mass

13 Year in Review: Walmart US

‒ Performance: Walmart’s sales growth showed a positive trend in 2016 as the retailer posted positive comps each quarter. Traffic was positive all year, and following three quarters of declines in ticket, ticket growth finally turned positive in Q2 and Q3. However, the retailer faces profit challenges as a result of its continued investments in growth initiatives (especially digital) and associate wage increases. ‒ Organizational changes/structure: Most impactful in 2016 was Walmart’s USD3.3 billion acquisition of online retailer Jet in August. Perhaps the most important factor in the purchase was the arrival of Jet founder Marc Lore, whom Walmart appointed to lead its eCommerce business. Neil Ashe, who had led Walmart’s global eCommerce since 2012, and Walmart.com President Fernando Madeira were set to depart the retailer at the end of 2016. ‒ Key initiatives: . Investment in stores to build baskets and drive comps: After closing 154 U.S. stores in January, Walmart continued its investment in the store experience, which included measures to boost in-stocks, new scheduling tools for associates, and new positions for associates dedicated to monitoring the experience. The retailer also remodeled approximately 400 stores in 2016 and plans to remodel 500 more in 2017. It plans to open just 35 Supercenters and only 20 Neighborhood Market stores in 2017. . Return to the productivity loop: Walmart began “incremental price investment” in 2016 following a pause as a result of its growth investments. . Elevating fresh, private brands: Walmart continued to enhance the fresh experience, remodeling fresh produce departments into the “fresh angle” layout throughout the Supercenters. It also affirmed plans to increase private label penetration with new products and new brands, including Great Value Organic, which launched in the spring. . Pivot toward a new digital direction: In addition to acquiring Jet — which brings online basket-building capabilities and its proprietary SmartCart pricing technology — Walmart expanded online grocery pickup to 100 markets and 600 stores. It also fully launched its pilot of ShippingPass, its two-day-shipping membership program.

Source: Kantar retail research, analysis, and store visits 14 Year in Review: Target

‒ Performance: Strong operational improvements moved Target forward with efficiency initiatives. However, a discretionary Signature categories focus and missteps with the grocery reassortment challenged Target’s transactions and traffic, with the retailer projecting a flat full-year comp. ‒ CVS picks up Rx and clinics: The sale, which was finalized in late 2015, automatically resulted in negative sales growth for 2016. However, the deal will get this specialty service off Target’s books and provide greater healthcare capabilities to guests. ‒ Leadership shifts: Target welcomed Chief Merchant Mark Tritton in June and Chief Supply Chain Logistics Officer Arthur Valdez in March. In the second half of the year, several executives departed, including Chief Marketer Jeff Jones, Chief Digital Officer Jason Goldberger, and SVP of Grocery Anne Dament. ‒ “Rebalancing” value: Target’s transaction decline following the April grocery assortment shift caused the retailer to pivot back to focusing on price, which reinforced the “Expect More” discretionary and “Pay Less” consumables divide. Promotions took on new urgency during the holiday. ‒ Order pickup: The back-to-school season was a successful holiday trial run for “order online, pick up in store” efforts, as Target leveraged its omnichannel capabilities to win a sale online and get another guest trip to the store. ‒ Private label emphasis: Target launched two new brands for kids: Cat & Jack clothing and Pillowfort homegoods. Tritton, who came from Nordstrom where he grew private label penetration 50%, is tasked with increasing private label as a source for profitability and differentiation across all departments, including grocery.

Source: Kantar retail research, analysis, and store visits 15 4. Club

16 Year in Review: Club

‒ Performance: Clubs continued their growth trajectory with 4.2% sales growth projected for the next five years in the U.S. Clubs still face macro headwinds such as deflation and foreign exchange globally. Amazon is growing competitive concern as club member overlap with Amazon increases. The channel remains bifurcated with Costco driving the majority of growth and Sam’s and BJ’s seeing more modest total sales increases. ‒ eCommerce crawls forward: Costco improved its digital capabilities with better site navigation and search, more online distribution centers, and more items sold online in general. Sam’s Club unveiled its new Scan & Go app and launched a site on China’s JD.com. BJ’s unveiled its new Pick Up & Pay service in response to member demand and revamped the visual appeal of its site. ‒ Health and wellness: All clubs continue to drive organic, natural, and sustainably sourced merchandise into the club. Costco specifically funded one of its fresh food suppliers to buy organic farmland in exchange for Costco having first rights to the food. Sustainability concerns are expanding beyond grocery and into general merchandise. ‒ Member segmentation: While Costco remains steadily focused on its core member base of wealthier shoppers with families, it is also doing more to sign up Millennials with a greater focus on wellness. Sam’s Club is concentrating its merchandising efforts on large families, neighboring families, new mothers, and social couples. On the business member front, Sam’s Club is focused on restaurants/foodservice, small offices, resellers, and care organizations. BJ’s has doubled down on “Smart, Savings Families” as its key member segment.

Source: Kantar Retail research, analysis, and club visits; company materials 17 Year in Review: Costco

‒ Performance: Filtering out the effects of fuel and foreign exchange, Costco delivered lower growth in 2016 than in past years in part due to deflation. Traffic growth fell from 4% at the start of the year to around 2% most recently, while ticket was roughly flat. Total sales growth for the past year, including fuel, averaged between 2% and 3% depending on the quarter. FY 2016 in total saw 2% growth. Overall, however, Costco is well-positioned for future growth. ‒ Organizational changes/structure: Dennis Hoover, Senior Vice President of the Bay Area, retired in January 2016. Costco continued to expand alongside Instacart for shoppers who wish to have their groceries delivered, while still supplying online wholesalers like Boxed.com. Costco started partnering with Ticketmaster to sell event tickets online. ‒ Credit card transition: On June 20, Costco stopped accepting its co-branded American Express credit card and started accepting a co-branded card with Citibank and Visa as well as all Visa credit cards. Despite initial worries in some media circles that membership would suffer, Costco signed up 1 million new members under the program, which offers better rewards than the old program. ‒ Business center ramp-up: Costco opened four new business centers during 2016, bringing its total to 14 with at least four more planned for 2017. These clubs tend to be larger than average and carry a more unique assortment with many business-specific items not present in the more traditional Costco clubs. Selling to businesses is one of Costco’s primary growth opportunities.

Source: Kantar Retail research, analysis, and club visits; company materials 18 Year in Review: Sam’s Club

‒ Performance: Sam’s 2016 performance was marked by uneven and slight improvement. Q3 FY 2017 comps, excluding fuel, and sales were up only 1% and 1.8%, respectively. Traffic growth remained negative even as ticket improved for several quarters. Sam’s struggles with declining business traffic even with improving Savings members’ traffic and Plus member penetration. ‒ Organizational changes/structure: Sam’s Club’s comprehensive merchandise review, which has involved significant buyer turnover, continued in 2016 under the leadership of Chief Merchant John Furner, who joined Sam’s Club in October 2015. David Galloreese joined Sam’s Club in October 2016 as Senior Vice President of People. Sam’s Club improved collaboration between its eCommerce and member/marketing teams to deliver more innovation for members. ‒ Club of the future: In 2016, Sam’s “Club of the Future” pilot in Bentonville, Ark., experimented with experiential innovations, such as a fresh meat and seafood counter staffed by culinary experts, a revamped Member’s Mark café, the Scan & Go mobile app, and a new club layout. The retailer has rolled out some of these innovations at its locations nationwide. ‒ Developing an aspiring shopper base: Sam’s Club is committed to developing a more premium member base with faster SKU rotation in club, a more impressive seasonal assortment, an increased number of health and wellness items, more treasure hunt items, and the ongoing winnowing of its private brands to just the Member’s Mark label.

Source: Kantar Retail research, analysis, and club visits, SamsClub.com 19 5. Discounter

20 Year in Review: Discounters

‒ Performance: As a channel, the discounters grew 6.8% year over year in 2016, adding approximately USD5.7 billion in volume. Much of the growth was driven by a rebounding economy, improving spending intentions among low- income shoppers, and strong value statements from leading retailers. However, deflation pressure late in the year had an adverse impact on many retailers’ third-quarter results. ‒ “Better for you” gets bigger: Retailers complemented their assortment of everyday consumables with a small but notable assortment of organic, healthier, and “better for you” items. Driven in large part by Aldi, the shift reflected greater accessibility to healthier foods for low-income shoppers as well as a further refinement of what “value” means. ‒ Aggressive store expansion: The discounter channel was unmatched in its store base expansion, growing the number of stores year over year by 5.6%. The top three retailers (Dollar General, Dollar Tree, and Aldi) collectively added over 1,700 stores to their combined footprint of 29,000 locations. ‒ Lidl readies its U.S. arrival: The German discounter spent much of 2016 preparing for a soft launch as early as 2017. Lidl kicked off construction of its third DC, began hiring store staff, and broke ground on its first location in South Carolina.

Source: Kantar Retail research, analysis, and store visits 21 Year in Review: Dollar General

‒ Performance: Dollar General’s fiscal 2016 got off to a strong start. Through the first three quarters, the retailer’s sales grew 5.9% to nearly USD16 billion. However, Q3 saw the retailer’s first decline in same-store sales in more than eight years when same-store sales declined 0.1%. ‒ Capital investment: Dollar General opened approximately 900 new stores in 2016 and remodeled another 875. More importantly, the retailer expanded its format portfolio, launching a test 6,000 square-foot urban store, announcing a c- store format (“DGX”), and converting 42 recently acquired Walmart Express stores. Two new DCs opened to support the growing store footprint. ‒ Category focus: Dollar General implemented new planograms that highlighted immediate-consumption coolers, HBA, party and stationery, and perishables as a way to drive both traffic and basket growth. Additionally, the retailer introduced a number of healthier, private label snack items and kicked off a fresh produce test as part of a larger focus on “better for you” items. ‒ New shopper focus: Dollar General unveiled a new shopper segment stemming from work to update its existing segmentation. Named “Tiffany,” this shopper is an African American female Millennial. She wants healthier food, relies on technology as a money-saving tool, and is more receptive to private label. The retailer has pinpointed this new segment as a key pillar to long-term growth.

Source: Kantar Retail research, analysis, and store visits; company materials; bizjournals.com 22 Year in Review: Lidl

‒ Stores: Despite Lidl’s public statements that stores will not open until 2018, its efforts on the ground seem to indicate an earlier opening date. Earlier in 2016, the retailer posted store-level job listings for supervisors and managers. In the process, the retailer highlighted 13 metro markets from Pennsylvania to Georgia where it ostensibly plans to open stores. ‒ Warehouses: Lidl has been busy building out an infrastructure that will support stores when they finally open. In 2016, the retailer had regional facilities in Alamance County, N.C.; Spotsylvania, Va.; and Cecil County, Md., in various stages of construction. Between the three facilities, Lidl should have several million square feet of warehouse capacity. ‒ Competitive response: Lidl found a large spot on the radars of many soon-to-be competitors in 2016. Key retailers with East Coast stores spent much of the year learning as much as possible about Lidl and its disruptive impacts in other markets. While Lidl’s exact impact on the market remains to be seen, what is clear is that some retailers are well-insulated against the threat while others are highly exposed.

Source: Kantar Retail research and analysis 23 6. Grocery

24 Year in Review: U.S. Supermarkets

‒ Consolidating and reorganizing: Supermarkets in 2016 focused on consolidating and reorganizing their businesses. Ahold and Delhaize finalized their merge after divesting 96 stores. Albertsons worked to turn around its business through a more decentralized operating structure. Finally, Whole Foods eliminated its co-CEO structure in an effort to streamline its business and improve operational efficiencies. ‒ Elevating health, wellness, and better for you: The year saw a surge in supermarkets enhancing their health and wellness positioning and offerings. These efforts included elevated services in pharmacy, nutrition, and beauty; improved produce departments and ugly produce programs; sustainable seafood programs; cage-free eggs; enhanced shopper education and signage to navigate complex diets (gluten free, healthy heart, etc.); increased organic/natural and “free from” private label assortments; and solution selling for healthy recipes. ‒ Expanding alternative grocery formats: Retailers continued to evolve the grocery box at a disciplined rate. Whole Foods launched its 365 small-box format on the West Coast while Ahold Delhaize opened its second bfresh store in Boston and second Hannaford prototype in New Hampshire. We expect further expansion of alternative grocery formats at a moderate pace as retailers refine these new store types and the operations behind them. ‒ Growing click-and-collect as a core online grocery fulfillment model: In 2016, click- and-collect emerged as supermarkets’ dominant fulfillment model. Kroger and Walmart are rapidly expanding this service across their stores, making it a mainstream capability. In 2017, we expect another wave of aggressive expansion from national and regional grocery players as they race to appeal to shoppers’ increasing demands for added convenience.

Source: Kantar Retail research, analysis, and store visits 25 Year in Review: Kroger

‒ Performance: Driven by a deflationary environment, Kroger had one of its weakest years in recent history. However, the company still managed to keep comp store sales positive in 2016. The retailer anticipates approximately 2% net growth by the end of FY 2017. ‒ Store experience: Kroger continued to enhance its in-store experience with an improved perimeter, additional food service and bar offers, and expanded general merchandise. Private label — particularly the Kroger Simple Truth line — and organics also became a key focus of the retailer’s future strategy. ‒ Store expansion: Very quietly, Kroger had an intensive store expansion in the back half of 2016, opening, relocating, or remodeling more stores in Q3 than it had in years. In late December, the retailer announced that it will be expanding the Pick ’n Save banner that has begun to turn around in the Wisconsin area. ‒ Online grocery: The expansion of ClickList across Kroger banners has been rapid. In his Q3 2016 remarks, CEO Rodney McMullen stated ClickList services were opening at a rate of more than one store per day, with more than 550 stores across banners nationally providing curbside pickup to shoppers. The retailer is also exploring other online grocery models to determine where there might be future opportunity.

Source: Kantar Retail research, analysis, and store visits 26 Year in Review: Regional Grocers

‒ Performance: Of the top 20 supermarket retailers that Kantar Retail expects to account for 92% of supermarket sales growth in the next five years, 12 are regional grocers such as H-E-B, Hy-Vee, and Market Basket. These retailers continue to reinvent themselves through price, experience, service, and assortment to better differentiate against larger, national players and encroaching competitors such as Aldi and Lidl. ‒ Store experience: To improve the store experience, grocery retailers focused on store remodels especially in their perimeter departments. Improvements included better produce, cheese, bakery, and meat and seafood departments, as well as enhanced food service to drive new revenue streams and expand shopping trips. In 2016, many regional players such as Price Chopper’s Market 32 and Wakefern’s ShopRite also switched to clean store merchandising strategies. ‒ Store expansion: Regional retailers continue to move into new territories, creating regional hot zones with heightened competition. Most notably, with Wegmans’ continued move south and Publix’s move north, regional counterparts such as Harris Teeter and Food Lion will need to step up their capabilities to better compete. ‒ Online grocery: Online grocery is no longer a fringe capability that only select retailers are implementing. In 2016, grocery players big and small increased their online grocery capabilities by partnering with third-party delivery networks such as Instacart, expanding click-and-collect services, and launching home delivery. Notably, after launching click-and- collect and home delivery in 2015, Hy-Vee began offering these services at all of its 240 stores in the Midwest.

Source: Kantar Retail research, analysis, and store visits 27 7. Drug

28 Year in Review: Drug

With expanded access, new partnerships, and innovations in health and wellness, retail drugstores saw heightened competition in 2016

‒ Performance: CVS and Walgreens attributed total growth to pharmacy. Front- store troubles still exist. – Pharmacy hypercompetition: Walgreens quietly accumulated PBMs with seven strategic partnerships. Its Q4 2016 U.S Military Tricare agreement caused CVS Health to lose 40 million prescriptions. ‒ Expanded access: Retailers expanded access to affordable retail health solutions with new partnerships and new digital innovations. The Walgreens Boots Alliance-Rite Aid merger was slated to close by Q1 2017. Pending FTC approval, Fred’s Pharmacy will buy 865 divested stores. ‒ Innovations in beauty: CVS store redesigns gave beauty sections a face-lift. Walgreens introduced the Beauty Enthusiast program to directly compete with the CVS ExtraCare Beauty Club. ‒ Destinations for health: Other actions by CVS and Walgreens included partnering with various U.S. organizations to showcase their health capabilities, compassion, and reach. CVS partnered with the American Cancer Society, YMCA, American Diabetes Association, and others. Walgreens’ partnerships included the National Association of Specialty Pharmacists and the United Nations.

Source: Kantar Retail research, analysis, and store visits 29 Year in Review: Walgreens Boots Alliance

Walgreens conquers 56% of PBM marketplace

‒ Merger moves along: The merger with Rite Aid was held up in September when the FTC said it would require the parties to divest more stores than expected. In December, Fred’s Pharmacy agreed to buy 865 divested stores, pending FTC approval. The merger is expected to close in early 2017. ‒ Year of strategic partnerships: Walgreens prepared vigilantly for pharmacy hypercompetition by forming new partnerships or expanding existing ones: . Prime Therapeutics: Walgreens as preferred pharmacy . Tricare: Preferred retail provider for military healthcare (replacing CVS) . OptumRx: Preferred pharmacy network . UnitedHealthcare: Walgreens-branded Medicare Part D program; preferred pharmacy . AmerisourceBergen: Increased ownership with drug wholesaler to 23.9% . Valeant Pharmaceuticals: Branded drugs offered for generic prices, exclusively at Walgreens . Express Scripts: Expands relationship, preferred provider for Diabetes Care Value Program ‒ Changes to senior management: . Alex Gourlay  Co-COO; will oversee Walgreens and Boots . Ornella Barra  Co-COO; also will supervise global brands, HR, other business services . Simon Roberts Former EVP of WBA and President of Boots; left company in July 2016 . Ken Murphy  EVP of WBA; Chief Commercial Officer, President of Global Brands, reports to Barra . Elizabeth Fagan  SVP and Managing Director of Boots . Kathleen Wilson-Thompson  EVP and Global Chief HR Officer; reports to Barra ‒ Shopper experience improvement: The Beauty Enthusiast program was introduced in October as part of Balance Rewards. A new circular design was unveiled over Labor Day weekend. A ship-to-store service launched in October. Drugstore.com and Beauty.com were discontinued.

Source: Kantar Retail research and analysis 30 Year in Review: CVS Health

CVS continues to uphold five-point strategy, must up its game

‒ Regroup and react: CVS was caught off-guard by Walgreens’ many 2016 strategic deals. To quell the predicted loss of 40 million prescriptions, CVS announced a reactionary CVS- OptumRx partnership in November. CVS will have to work in 2017 to activate against Walgreens’ strategy. ‒ Digital innovations: “Anytime, anywhere” access improved with CVS’ partnership with Curbside and the introduction of CVS Express Pickup in April 2016 (and expansion to 4,000 stores in September). Mobile app innovations were introduced, with the MinuteClinic wait time tool that allows patients to hold their place in line and CVS Pay August 2016, which integrates mobile payment, prescription pickup, and ExtraCare rewards into one bar-code scan. ‒ Expanding reach: The integration of CVS pharmacies into 1,667 Target stores and 79 clinics was completed ahead of schedule and expanded the CVS pharmacy footprint into five new states. In April 2016, CVS y Más entered the Los Angeles market with plans to open nine stores in addition to the 12 currently in Miami. ‒ Serious about wellness: CVS continues its wellness store remodels, with a focus on wellness, pharmacy, and beauty. In 2016, CVS worked to dedicate 25% of checkout space to better-for-you snack options. It also added 2,500 health and wellness SKUs overall. Private label innovation continued across categories with an eye toward function, ease, and price as a part of “Better health made easy.” Store brand penetration exceeded 22% in 2016. ‒ Front-end frustration: Front-store sales decreased 1% in Q3. The retailer plans to pay more attention to higher-margin products and increased personalization to improve here.

Source: Kantar Retail research and analysis 31 8. Convenience

32 Year in Review: Convenience Stores

‒ Performance: As a channel, convenience stores’ overall volume grew approximately 2.2% year over year, adding about USD1.4 billion. Though lower fuel prices may have depressed dollar growth, it also drove trips to the pump. A greater emphasis on food service and the rollout of loyalty apps drove in-store purchases. ‒ Mergers and acquisitions: Consolidation was a key theme in 2016. The biggest deals included Couche-Tard’s USD4.4 billion purchase of CST Brands, GPM Investments’ acquisition of Admiral Petroleum, and Delek U.S.’ sale of its Mapco Express business to COPEC SA. The consolidation wave is expected to carry into 2017. ‒ Food service gains traction: More retailers are investing in food service as a way to differentiate their offering beyond fuel and traditional product categories. The effort is meant to draw a greater share of Millennial shoppers as well. ‒ Mobile gets hot: More and more retailers placed bets on mobile as a key platform to engage with Millennial shoppers. Retailers such as Sheetz and QuickTrip have adopted mobile payment platforms. Others have deployed mobile-based loyalty apps.

Source: Kantar Retail research, analysis, and store visits 33 Year in Review: 7-Eleven (Seven & I)

‒ Performance: 7-Eleven’s 2016 sales were approximately USD14.3 billion, a year-over-year growth rate of 4.5%, or twice the channel’s overall growth rate. The retailer’s footprint grew approximately 2.5%, as it added 199 U.S. stores. ‒ Remodels: 7-Eleven kicked off a multiyear upgrade of its more than 50,000 stores. Key elements included a greater emphasis on private label, a refreshed logo and signage, enhanced merchandising, and a newer focus on travel services. ‒ Private label investment: 7-Eleven has begun a significant investment in its private label portfolio. The effort includes an update of existing brands, introduction of a new “Select” line, and greater shelf space devoted to private label.

Source: Kantar Retail research, analysis, and store visits; company materials; bizjournals.com 34 9. Digital

35 Year in Review: Digital Channel

‒ New eCommerce models redefine online shopping: The continued rise of subscription services and meal kits, third-party marketplaces, and new platforms — including voice and chat bots — are diversifying the breadth of options and expanding ways to drive shopping ease and convenience. ‒ Mobile-centric experiences: With more than 70% of primary household shoppers owning a smartphone, shopping behavior is quickly moving to the small screen. Startups including Boxed.com and Shipt feature mobile-first environments as more established pure-play retailers reinforced their capabilities. ‒ Rising pure-play retailers focused on price-value: Recent startups, including Hollar and Jet.com, focused on elevating the saving proposition with distinctive assortments and algorithms. ‒ Shoppable content moves mainstream: Amazon, Lowe’s, and Wayfair each introduced their own shows in 2016 to build excitement and guide product selection. ‒ Service integration for wider solutions: Wayfair, Build.com, and Amazon each expanded their home services marketplaces over the past 18 months. Greater product and service tie-ins are already being featured. ‒ Pure-play online grocery competing on convenience: More established online grocers, including Peapod and Fresh, expanded their own meal-kit solutions to compete with newer business models. At the same time, FreshDirect and others launched their own on-demand delivery to better rival the click-and-collect services that traditional grocers are rolling out.

Source: Kantar Retail analysis 36 Year in Review: Amazon

‒ Strong sales growth continues with profits: Amazon Web Services drove the majority of Amazon’s profits while sales growth was strong across segments. The retailer’s U.S. shopper reach started to vie for the No. 1 position. ‒ Investments focused on fulfillment and content: Spending on shipping escalated as Amazon invested in expanding its fulfillment network, widening same-day and two-hour delivery reach. For the first time, half of units sold were from third-party seller accounts; reach of Fulfillment by Amazon also grew. While investment on original content doubled, the retailer also developed and tested various shoppable shows. ‒ Prime engagement expanded: The retailer introduced new Prime benefits, monthly options, and content to broaden Prime’s appeal to older and younger audiences. Amazon also invested heavily in embedded shopping innovation, such as shows, Dash buttons, and Alexa- enabled devices, as well as curation to drive greater shopping convenience. ‒ Fashion and consumables still key growth departments: Amazon expanded Prime Now and Fresh to new markets, signaling its commitment to these channels. It also introduced two shows, “Fashion Fund” and “Style Code Live,” that reinforce its fashion offering. Several apparel and consumables private label lines launched to capture greater share in these categories and add value to Prime membership through exclusive products and offers. ‒ New format experimentation: Amazon built out its physical presence with new Amazon Books stores, college pickup locations, and pop-up shops to enable more product interaction and flexible fulfillment. Demonstrating that Amazon recognizes the value of brick-and-mortar in grocery, the retailer opened its first technology-enabled, checkout-free Amazon Go c-store.

Source: Kantar Retail analysis, retailer website 37 For further information please refer to www.kantarretailiq.com

Contact: Contact: Potatoes USA Contact: Mike Paglia Diana Sheehan Ross Johnson Director Director Global Marketing Director

T: +1 (617) 912 2855 T: +1 (617) 912 2819 T: +1 (303)369-7783 [email protected] [email protected] [email protected]

@kantarretail www.kantarretail.com

38