Maintaining Relevancy: Trends Impacting Today’s World and Beyond

Neil Stern, Senior Partner McMillanDoolittle U.S. Consumer Confidence has Risen to 14-Year Highs

Consumer Confidence 2009-2017

100.7 October 2017

2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: University of Michigan Consumer Sentiment Survey 2 Unemployment Rates in U.S. at a 17-Year Low

Unemployment Rate 2007-2017 11%

10%

9%

8%

7%

6% 17-Year Low

5% Unemployment Rate Rate Unemployment

4% 4.10% December 2017 3%

2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Bureau of Labor Statistics – U1 Table 3 Since 2010, Retail has Grown at a CAGR of 3.7% and Sales in 2017 Exceeded $4.5 Trillion Retail Trade and Food Services Sales (billions)

$4,568

$4,383 $4,255 $4,195 $4,042 $3,940 $3,785

$3,542

2010 2011 2012 2013 2014 2015 2016 2017

Source: U.S. Census Bureau, Retail Trade and Food Services excluding Auto, 2010-2017 Not Seasonally Adjusted 4 Everything Must Be Great! Right? Retailmageddon! Why? Retail is Being Disrupted by a Number of Large Changes

Demographics Societal Technology

&

8 Demographics Are Changing The Face of the Consumer is Changing

Percentage of the U.S. Population 80%

2017 60% 2020

2040

40% 2060

20%

0% White Hispanic Asian Black

Source: U.S. Census 2014 Population Projections, Pew Research, Politico 10 Boomers Hold Spending Power: Millennials are Coming

% of U.S. % from Ethnic Generational Group Age Spending Power Population Minority Groups

22 and younger 26% 47% $250 Billion

20s & 30s 22% 42% $1.7 Trillion

40s 14% 38% $1.25 Trillion

Baby 50-70 26% 27% $2.1 Trillion Boomers

Sourrce: Technomic, 2015 11 SOCIETAL Societal Changes

12 U.S. Prosperity is Unequal The Income Distribution Gap Between “Have Nots” and “Haves” is Widening

75% 74% 73% 72% 32% 30% 70% 28% 27% 26% 25% 68%

1973 1983 1993 2003 2013 2025E 1973 1983 1993 2003 2013 2025E Source: Kantar Retail 13 Changing Labor Model And Wage Pressures

Retailers are investing more in employees through training and education and increased wages to attract and keep better talent. Or….looking at automation and efficiencies 14 Technology Think About This…

Average person spent Total Minutes (Billions) Spent on Mobile 2 hrs 51 min Source: comScore Mobile Metrix, U.S., Age 18+, Dec 2013 – Dec 2016 per day on mobile 1,10 0 1,00 0 90

(Billions) 0 80 In 2018, the Average 0 Person will Spend Minutes 70 0

Total Total 3 hrs 23 min 60 0 per day 50 0

Dec- Jun- Dec- Jun- Dec- Jun- Dec- 2013 2014 2014 2015 2015 2016 2016

Source: ComScore, eMarketer 16 Millennials Identify Social Media and Video Streaming as “Must Have” Online Services

“Must Have” Online Services Millennials % Choices

Social Networking Mobile App 53% Scubscription Streaming Video Service 48% Video Sharing Service 47% GPS-Enabled Map Service 41% Subscription Streaming Music Service 31% Private Texting Service 19% Health/Fitness App 18% Grocery Delivery 17% Mobile App for Coffee Pick-up 16% Voice-Activated Assistant 13% Meal Kit Delivery 11% None of the Above 11%

Source: Mintel March 2017 17 Communications Happen Differently Now…

18 Ecommerce Grabbing Larger Share of Retail Sales

E-commerce Retail Sales $500 12.00%

$450 10.00% $400

$350 8.00% $300

$250 6.00%

$200 Sales (billions) Sales 4.00% $150

$100 2.00% $50

$- 0.00% Automotive excluding Sales Retail Total of Percent 2015 2016 2017 Sales (billions) Percent of Total Retail Sales

Source: U.S. Census, Estimated Quarterly U.S. Retail Sales, U.S. Census Bureau, Retail Trade and Food Services excluding Auto, 2010-2017 Not Seasonally Adjusted 19 Online is Grabbing Bigger Share: 20% Theory

Online % of Retail Sales 35%

30%

25%

20%

15%

10%

5%

0% Books and Apparel & footwear Toys & sporting Electronics & Drugs, health & Furniture & home Food & alcohol magazines / music goods appliances / beauty care furnishings / videos computer & office products 2016 2021*

Source Statista, eMarketer, Kantar Retail 20 E-commerce Penetration Varies Greatly By Demographics

More Women Than Men Millennials Budget More for Online

44% 47% Millennials Gen X 39%

49% Baby Boomers 31% 22% Seniors Online Skews Urban Larger Household Incomes 38% 34% 34%

$100K + 57%

$50K-$99K 52%

<$50K 47%

Urban Suburban Rural

Source: Big Commerce, Deloitte 21 And the Biggest Disruptor…. Changing (And Will Change) the Retail World

2017E Global Retail Sales ($BN)

Walmart $511.4

Amazon $138.0

Costco $120.9 Amazon is the fastest company to ever reach $100 billion in sales. Schwarz Group $116.0

Kroger $115.4 About 54% of U.S. households are Prime Members, up from 18% in 2013 $102.0

Aldi $98.4

Home Depot $97.7

Walgreens Boots Alliance $97.2

Tesco $89.5

Source: Kantar Retail, Cowen 23 “Prime Members Have Spending Power, Attracting the “Right” Households”

Average HHI of Shoppers by Retailer 2015 - US Avg. HHI $56,516 $69,900 $66,800 $61,000 $62,900 $56,000 Average HHI of Amazon Prime members was 24% higher than average HHI in the US

Walmart Walmart.com Amazon Target Amazon Prime 24 And has Surpassed Google in Share of Search The majority of consumers now start their online shopping search on Amazon vs. search engines like Google Share of Searches 2016

Amazon 52%

Search 26% Engine Amazon’s share of searches has grown steading from 2014-2016 comprising 52% in 2016 while Search Engine searches Retailer 12% Websit have been on the decline, now making up e only 26%. 2015 was the first year Amazon surpassed search engines. Other 5% In 2016, Retailer’s websites captured 12% of searches from search engines Ebay 4%

25 And the Biggest Deal Yet… The Price Drops Heard Round the World

27 And much more to come…one hour delivery Including the “Grocery Store of the Future”- Amazon Go promises “No Lines. No Checkout. No Seriously”

• Video recognition technology tracks items as they are removed from the shelf and places them into the customers “virtual shopping cart” o Distinguishes between items taken from the shelf and placed back on the shelf and those eventually purchased • Machine learning analyzes data from customer/product interactions to continuously improve product offering • Payment happens automatically as customer leaves the store • Opened to the public on January 22nd, 2018

29 Amazon Go Technology…and Offer 1.5 Billion Fewer Trips Since 2012 – The Amazon Effect?

Number of Retailer Trips (billions)

17.6 1.5 billion Fewer Trips

16.9

16.5

16.1 15.8

2012 2013 2014 2015 2016

Source: Nielsen Homescan Panel, All Outlets, Total Trips, calendar year 2012-2016 31 Grocery and foodservice are also undergoing major changes At Over $1.2 Trillion, Food is the Largest U.S. Retail Category Market Share is Shifting Away from Traditional Grocery

90% Traditional Grocery Retailers -40% market share between 1988-2006

While the pace of change has slowed, 50% Traditional Grocery 48% 46% Retailers lost market share at a CAGR of - 1.0% 2006-2015

1988 2006 2009 2015 34 E-commerce, Club, Dollar, Supercenters & Pet are the Big Winners

CAGR 2010-2016

E-Commerce 8.5 Club 4.9 Dollar 4.8 Supercenters 4.6 Pet 4.1 Drug 2.7 Conv/Gas 2.1 1.5 Liquor 1.2 Discount Dept 0.4 Sporting Goods 0.3 HHI -0.1 Department -0.4 Auto -0.5 Home, Bed, Bath -0.5 Office -0.5 Apparel -0.8 Electronics -0.9 Books -1.1 Toy -1.7 Mass Merch -3.0

Source: Nielsen TDLinx & Nielsen Analytics 35 Younger Shoppers are Making Fewer Grocery Store Visits Distribution of Trips, Total U.S. Grocery 22

20

18

16

14

12

10 Under 35 35-44 45-54 55-64 65+

2006 2015 Source: Nielsen Homescan Acct Shopper – 52 WKQ3 2015, 52WK Q4 2005-2014 36 Grocery Retail Space at Record High

The amount of retail space selling groceries per capita has hit a record as supermarkets have expanded while club retailers, mass merchants and dollar stores have also increased their food offerings

37 Source: WSJ Food Deflation Grocery Heading in the Right Direction

38 U.S. On Track to Post Longest Stretch of Falling Food Prices in Over 50 Years

39 Food Deflation – Grocery is Looking Up

40 Restaurant Sales Now Exceed Grocery Sales In late 2014, restaurant spending overtook grocery spending in the U.S., and the spread has continued grow. Grocery and Food/Bar sales in the US 2011-2016 (Million USD)

$658,017

$625,430 Grocery $547,527

$495,334

Restaurant

2011 2012 2013 2014 2015 2016

Source: Nielsen Homescan Acct Shopper – 52 WKQ3 2015, 52WK Q4 2006-2014 Source: Nielsen Homescan Acct Shopper – 52 WKQ3 2015, 52WK Q4 2006-2014 41 Change is a Constant in the Industry…

42

Where’s the Growth?

ANTICIPATED COMPOUND ANNUAL SALES GROWTH RATE VS. INFLATION: 2016-2020 eCommerce (Food & Consumables) 23.1% Fresh Format 8.6% Limited Assortment 7.0% Dollar 4.8% Super Warehouse 3.3% Wholesale Club 3.0% Supercenter 2.9% Other (Small) Grocery 2.6% Convenience (without Gas) 1.9% Convenience (with Gas) 1.4% Military 0.9% Food Inflation Compound Annual Rate: 1.5% Traditional Supermarkets 0.4% Drug 0.4% Mass -1.4% Key Format & Channel Innovations Influencing the Industry Today

Fresh & Natural Ethnic Meal Solutions

Convenience Discount Omnichannel

45 Fresh & Natural

Consumers crave “better for you” products resulting in an increased demand for healthy products.

46 Consumers are Shifting Purchases: Smaller Brands Since 2011, More than $18 Billion in Industry Sales Have Shifted from Large to Smaller Companies

Sales as a Share of Total CPG - Industry Sales (%) 2011-2015

60% Company Growth in Sales Size Market Share Growth 50% (P.P) (%) Overall - +2.5 40% XS +1.1 +5.6 30% S +1.0 +4.4 20%

10% M +0.6 +3.2

0% L -2.7 +1.3 Extra Small Small Midsize Large 2011 2014 2015 1 Share Point was worth $6.7 billion in 2015

Source: IRI, Mulo C, BCG, IRI Analysis 47 Street Market: Transformation of Traditional Fresh Market

48 Cru: Locally Sourced Assortment and “Smart Assistant”

49 Arcimbo: Fresh Food + Drive Thru

50 Fresh & Organic Visible Across the Store

51 Whole Foods takes local to a new level

52 What’s Next for Local?

53 Whole Foods: Antibiotic free, made in-house, grass fed

54 55 56 Ethnic

America is increasingly diverse with significant growth among Hispanics; Ethnic formats cater to multicultural consumers (many of which are young adults)

57 Ethnic Tastes & Demography Driving Growth

58 Ethnic supermarkets forecast to grow faster…

Ethnic Industry Sales Annual Sales Growth % ($ bn.) 3.5%

$42 $43 $40 $41 3.0% $39 CAGR 2.6% $37 $38 $35 $36 2.5%

2.0%

1.5% CAGR 0.9% 1.0%

0.5%

0.0% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2014 2015 2016 2017 2018 2019 2020 2021 2022 Ethnic Supermarkets All Supermarkets

Source: IBIS 59 Offering Sizeable Sections of Hispanic Goods

60 Asian Supermarkets Growing As Well

61 Meal Solutions

Foodservice & Meal Solutions formats deliver convenience, portion control, health & wellness, lifestyle and dietary support, and quality to consumers.

62 Gamechanger: Fast Casual

“Upgrading food quality without upgrading the price.”

Pioneers including Chipotle and Panera carved out a niche and altered consumer expectations around fast, good quality food.

Consumer (particularly Millennial) expectations for higher quality food in a staggering economy has driven demand for better quick service options, which have proliferated the competitive landscape. Customization and unique experiences are key for satisfying the needs of customers in this space. Successful chains offer fresh options, greater food quality, and finer ingredients at a fair price.

63 Chipotle was instrumental in creating demand for the category

64 Restaurants and Bars are Growing, but Fast Casual is Expanding Faster than Other Restaurant/Bar Categories

Foodservice Channel Breakout Percent to 2017 Growth Restaurant Categories Total Percent All Other Foodservice Limited-Service Restaurants 48% 4.4% Noncommercial 1% 13% Fast Food/Quick Service 39% 3.2% Fast Casual 9% 10.1% Travel & Leisure Full-Service Restaurants 44% 2.6% 11% Midscale 8% 1.9%

Retailers and Casual Dining 32% 2.5% Convenience Stores Fine Dining 5% 4.6% 8% Total Restaurants and Bars Bars and Taverns 8% 2.5% 67%

Limited-Service Restaurants (LSR)- offers counter service where patrons generally order or select items and pay before eating. Food and drink may be consumed on-premise, taken out or delivered to customers.

Full-Service Restaurants (FSR)- offers table service and wait staff. Patrons pay after eating in these restaurants. Most offer a relatively broad menu of meals and snacks for immediate consumption primarily on-premise, although some may also offer takeout and catering services.

Source: Technomic, National Restaurant Association 65 Meal Kits market size to grow to $3B – $5B by 2022

MEAL KITS PROJECTED SIZE $MM, 2015 – 2022, Total US

$5,333 Stretch

$2,767

$3,334 Conservative $1,044 $1,979

$723 $913

2015 (Est.) 2017 (Proj.) 2020 (Proj.) 2022 (Proj.)

Source; IRI - 2017 Top Trends in Fresh Foods 66 Game Changer: Food Halls are Becoming Widespread

• About 35 to 40 food halls in the U.S., seeing growth up to as many as 200 across the country in just three years • No other retail category has generated aggressive expansion like this over the past few years as food-related retail • In the first nine months of 2016, food hall growth increased by 37.1% year over year with 18 more projects completed before the year ended

Cushman & Wakefield 67 Mercado de San Miguel Ponce City Market: Atlanta Eataly: Education, Eating, Entertainment = Engagement

70

72 73

Convenience

The rise of increasingly time-strapped consumers, demanding “digisumers” and city-dwellers have all played into a demand for convenience. Retailers are increasingly shifting from the /supermarket culture toward smaller formats to meet the needs of an increasingly urban population.

75 to Go

76 MyWay SmallFresh Store Eats Market -

78 Starbucks Mercato” What if they become good at food? SmallMoby Store Mart, • Fresh Eats Market—Kroger • 7-11 Korea • Moby Mart (China) • DGX

80 Discount

Discount formats have been on the rise following the great recession; Cash- strapped and savvy consumer ‘have nots’ are increasingly focused on value

81 , The Retail Elephant in the Room

Number of Aldi Stores Corporate HQ 2500

Area with Stores

Start of 2018 End of 2018 2022

Source: Aldi, Fortune 82 Welcome to California: The New Aldi…

83 Upgrading Look and Feel…And Reach

84 Here to Make a Splash—But May Be Sinking

85 Omnichannel

Technology increasingly puts the customer in control: Arms them with choice, access, information to enable customized offers, seamless checkouts and more

86 Digital Engagement Happens at Every Step of Shopper Journey

PLANNING NAVIGATING PURCHASING USING ACTIVATING pre-store planning in-store in-aisle product usage context

Source: IRI 2017 87 Solving The Last Mile of Grocery Ecommerce

88 Walmart Prototype

Walmart Automated Pick-up Centers Hema, China

“We believe the future of New Retail will be a harmonious integration of online and offline, and Hema is a prime example of this evolution that's taking place. Hema is a showcase of the new business opportunities that emerge from online- offline integration” -Daniel Zhang, CEO

92 Instacart Partial Retailer Network

West Northeast Midwest

Plans to serve 80% of American households by 2018 South

Currently In • Over 180 Retailers National • Over 50 Markets

Source: Instacart, Medium 93 How Sustainable Are These Business Models?

94 Online is Starting to Disrupt Grocery – Food is a Laggard $100 Billion By 2020??

Online “Arrived” in Other Categories Long Before; While rest headed to 20%, Grocery on 4x pace to 7% Combined Goods Categories (Ex-Auto, Food & Drug) vs. Food, Drug & HBC Online Impact of Food, Drugs, & HBC

95 How to Stay Relevant?

96 Disney : “The Heart and Soul for a Company is Creativity and Innovation” Bob Iger How can you integrate new & engaging products and categories to create more excitement? How can you elevate the brand experience to engage customers? How can you bring newness and customization to the store? How can you leverage technology to streamline the process? How can you Innovate to the Next Level? Make Our Own Story First, think. Second, dream. Third, believe. And finally, dare.

Walt Disney THANK YOU! Neil Stern Sr. Partner McMillanDoolittle, LLP The Retail Experts 350 W. Hubbard St., Ste. 240 | Chicago, IL 60654 T 312.784.2512 | M 312.953.3624 [email protected] www.mcmillandoolittle.com