Global Trends in Innovation

Christine Cross

March, 2010 Disclaimer

¾ The information in this presentation is provided as a courtesy by Christine Cross Ltd (CXL) and conclusions are the results of the exercise of CXL’s best professional judgement.

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1 www.christinecross.com When the going gets tough Introduction

GDP Growth The worst recession of world economy since WW 5% II (-2.9%) will be followed by a very fragile 4% and slow recovery in 2010 3%

2% Expected USA GDP growth 1% 4.4%1.8%2.0% 2.9% 4.1%3.6% 4.2% 4.0% 2.1% 1.5% of around -2.9% in 2009 0% before a small recovery in 00 01 02 03 04 05 06 07 08 09 10 2010 (+1.1%) -1%

-2% -2.9% Expected EMU GDP -3% World growth to stay under USA USA GDP growth both in 2009 -4% Eurozone (-4.8%) and 2010 (-0.1%) -5%

-6% Sources: IHS Global Insight, Euler Hermes Calculation and Forecasts published end of March 2009 in the EH Economic outlook 2009 #2 (GDP 2007 weighting at current exchange rates)

2 www.christinecross.com What is needed today? Introduction

…for survival

DEBT / CASHFLOW

COST CONTROL

STOCKTURN

…your “bank” budget

3 www.christinecross.com What is needed today? Introduction

…for growth

INNOVATION

CUSTOMER METRICS

PROFITABLE SALES

…your “target” budget

4 www.christinecross.com What is needed today? Introduction

…for out performance $ $ € $ € $ € € $ INVEST IN PEOPLE $

SWEAT THE ASSETS

REMEMBER, MULTIPLES MATTER

…your “stretch” budget

5 www.christinecross.com Key characteristics of growth retailers Introduction

What characterises the winners in the last 18 months?

¾Contemporary formats ¾Format flex by geography ¾Supply chain infrastructure investment ¾Continuous reduction in CODB ¾IT simplicity in operations ¾Verticalisation in processes / operations

…and the ability to INNOVATE at low cost

6 www.christinecross.com Innovation will depend heavily on market status Introduction

independent

FRAGMENTATION

format economic proliferation growth

legislation cash & carry

small box saturation

CONSOLIDATION

chain stores

7 www.christinecross.com …and on format specific trends Introduction

¾Drugstores 1980s larger store formats 1990s extended range, including convenience food 2000s giving space back to customers 2010 format flex by neighbourhood / authoritative offers

¾Hypermarkets 1980s invention 20,000 sq m 50 : 50 2000s downsizing 2005s shop within shop Still contrasting approaches, e.g., Auteuil v Velizy v Mulhouse

¾ 1980s ranging by store size 1990s ranging by customer sociodemographic 2000 customer insight driven ranging

¾Cash & Carry Morphing with hypermarkets Non-trade model, e.g., Costco, Sams Club Trade model, e.g., Metro Added value service model, e.g., Booker

¾Electrical 1990s Big box, price, volume sales 2000s Theatre & service to differentiate from .com

8 www.christinecross.com Innovation is key to all Introduction

QuickTime™ and a Follow the decompressor customer = follow the money are needed to see this picture.

9 www.christinecross.com Agenda

1 Retail formats

2 Products

3 Other interesting “stuff”

10 www.christinecross.com Retail Formats 1

11 www.christinecross.com Shoppers Drug Mart - Canada 1

¾ No 8 in the global drugstore rankings, but dominant in its Canadian home market with some 1,300 stores of c800 sq m, and 6.5% market share.

¾ Has deliberately segmented its store offers by market and customer requirements - differentiating between health (including a format for medical centres), beauty & everyday convenience food products.

¾ Well-developed “Shoppers’ Optimum Loyalty Card” programme with over 9m customers enrolled.

12 www.christinecross.com Shoppers Drug Mart - Orleans, Canada 1

¾ Murale is their perfumerie / beauty store concept

¾ Five currently, the concept is still on test

13 www.christinecross.com Shoppers Drug Mart - Toronto, Canada 1

¾ All stores are in process of being refitted to represent:

Either health

and / or everyday needs

and / or beauty

14 www.christinecross.com Alliance Boots - UK 1

¾ A home-grown, vertically integrated UK business with domestic manufacturing. Boots is “on steroids” since its move into PE hands in 2006.

¾ No 6 in the global rankings, with 3,400 stores of c300 sq m Boots has become a chameleon well able to morph from one format to another based on local needs, bur focused firmly around health and beauty.

¾ The Boots loyalty card helps gather customer data, identify market gaps and track opportunities.

¾ Boots has been innovative in both format & product in the last three years & is not shy of its name.

15 www.christinecross.com Alliance Boots - Seahouses, UK 1

¾ Under PE (KKR) ownership, stores designed to serve segmented local needs from this…

16 www.christinecross.com Alliance Boots - Colchester, UK 1

¾ …To drive through pharmacy format

17 www.christinecross.com Alliance Boots - London, UK 1

¾ …To a full service store with: - one floor focused on beauty

-one on health

- one on everyday needs

18 www.christinecross.com AS Watson - Hong Kong 1

¾ AS Watson runs concessions in its stores for brands but, also, for other retailers

19 www.christinecross.com AS Watson - Wuhan, China 1

¾ From the traditional SE Asia drugstore, where they dominate the market

20 www.christinecross.com AS Watson - Krakow, Poland; Brighton, UK; Frankfurt, Germany 1

¾ …To bespoke businesses acquired through M&A that trade very differently in each market.

21 www.christinecross.com Walgreens 1

¾ The No 1 drugstore retailer globally, not renowned for innovative store design, but what might happen with their purchase of Duane Reade - who, themselves, have just produced a Shoppers Drug Mart look alike in New York City.

¾ Might they look like Shoppers Drug Mart in the future?

…but, what has been happening in other sectors?

22 www.christinecross.com Tengelmann – Neuried, Germany 1

¾Supermarkets ranging from 400 sq m to 1,500 sq m.

¾93% food / 7% non-food. Non-food offering may be further reduced.

¾Strong emphasis on fresh and convenience.

¾Impressive meat/cheese counters and wine department.

¾Innovative elements are largely limited to the retailer’s latest generation of stores.

¾Self-serve units

23 www.christinecross.com Tengelmann – Neuried, Germany 1

24 www.christinecross.com Délitraiteur (Louis Delhaize) – Belgium 1

¾Stores with sales area of 150 for ‘city’ concept and 250 sq m for others

¾Targets consumers with high disposable incomes and busy lives

¾Plans to rollout concept to and perhaps UK

25 www.christinecross.com Délitraiteur (Louis Delhaize) – Belgium 1

¾Store fittings made out of wood to accentuate premium positioning

¾Carries between 800 and 1,200 fresh lines, 1,500 to 2,000 ambient and 400 frozen

¾Organised by menu course, for example there is an area designated for desserts and for starters

26 www.christinecross.com Délitraiteur (Louis Delhaize) – Belgium 1

¾Sells fresh, premium products including regional specialities, ready meals, prepared vegetables, salads and bakery goods

¾Some food lines change depending on the time of the day with bakery items sold in the morning and prepared meals from midday until 10pm.

¾Premium private labels called “Daily Delices”

27 www.christinecross.com Délitraiteur (Louis Delhaize) – Belgium 1

¾Cooked food is sold in a Deli Takeaway section

¾Facilities for customers to eat on site

¾Sandwich bar caters for business meetings

28 www.christinecross.com Delhaize City (Delhaize) – Belgium 1

¾City centre stores with sales area of approx 500 sq m selling c7,000 products

¾Concept focusing on self- service and convenience

¾Targets middle-class customers

¾A key banner for expansion within Belgium

29 www.christinecross.com Delhaize City (Delhaize) – Belgium 1

¾Merchandising strategy focuses on deep range of fresh products, plus impulse ambient buys

¾Spacious layout

¾High incidence of cross- merchandising

¾100% self-service – fresh food prepared on site

30 www.christinecross.com Carrefour City (Carrefour) – Spain 1

¾ Convenience store concept launched at the end of 2007

¾ City centre stores for towns with limited space for new store openings

¾ Sales area of c350 sq m

¾ 4,000 products

¾ 90% food, 10% non- food

¾ Part of Carrefour’s worldwide single-brand strategy

31 www.christinecross.com Carrefour City (Carrefour) – Spain 1

¾Product range caters for ‘urban’ consumer

¾The illumination of each product category adds to the a feeling of spaciousness

¾Modern grey interior contrasts with bright red storefront

32 www.christinecross.com Carrefour City (Carrefour) – Spain 1

¾Fresh bread and fruit and vegetables given a prominent position at the entrance of the store

33 www.christinecross.com Le Marché de Casino – Toulouse, France 1

¾ Emphasis is on fresh and local produce

¾ 1/3 of produce locally sourced

¾ Market-style fruit and vegetable concept rolled out to Géant- Casino hypermarkets

¾ Interior decoration in style of bistro (inspired by !)

¾ Chilled fridge for fresher varieties of cheese

34 www.christinecross.com Le Marché de Casino – Toulouse, France 1

35 www.christinecross.com Le Marché de Casino (Casino) – France 1

¾Customers can fill their own bottles with wine

¾A range of convenience food on offer

36 36 www.christinecross.com ThreeSixty Dairy Farm – Hong Kong 1

¾One of the first organic/environmentally- led stores in Asia.

¾Premium store located in upmarket shopping centre in central Hong Kong.

¾First 2,100 sq m store opened in November 2006.

¾Not just a product focus on organic - but the store itself.

37 www.christinecross.com ThreeSixty Dairy Farm – Hong Kong 1

¾Most fixtures and fittings - from the floor and ceiling to tables and chairs are made from recycled materials.

¾Clearly filling a niche in the market which at the moment is underserved. Could be rolled out into other large cities.

¾But, does high proportion of imported foods contradict the store's message?

38 www.christinecross.com Other instore innovations 1

¾ In the Czech Republic, Delhaize offers shopping carts made from recycled material.

¾ In 2007, Waitrose began selling milk in eco-friendly bags in the UK.

¾ In France, Carrefour’s chain features checkout lanes dedicated to shoppers who use reusable bags. 39 www.christinecross.com From Waitrose – UK 1

¾First John Lewis / Waitrose Foodhall opened in October 2007

¾Sales area of 1,700 sq m

¾Targets local and visiting shoppers to Oxford Street

¾Cardiff opened Oct. 2009, rapid rollout now planned to all flagship stores

40 www.christinecross.com From Waitrose – UK 1

¾Concept influenced by Tokyo’s department stores, Swiss food emporiums, gastronomic Parisian boutiques & David Jones, Sydney

41 www.christinecross.com From Waitrose – UK 1

¾ Enhanced customer service.

¾ Specialised meat, fish and deli service counters, cheese room and wine section

¾ All product specialists receive gastronomic training

42 www.christinecross.com From Waitrose – UK 1

¾Used as a testing ground for innovative private label ranges

¾Private labels focus on premium and local specialities

43 www.christinecross.com Colruyt (Colruyt) – Belgium 1

¾Discount supermarket concept

¾Sales area of c1400 sq m

¾17,000 product lines

¾Targets all consumers

¾Predominantly brands

¾Plans to rollout concept in Netherlands and Luxembourg

44 www.christinecross.com Colruyt (Colruyt) – Belgium 1

¾Closed freezer units conserve energy.

¾Freezers are sold to customers after five years.

¾Colruyt chilled room for fresh produce.

45 www.christinecross.com Colruyt (Colruyt) – Belgium 1

¾Stock is stacked high to the ceiling. Ladders are available for customers to reach items on higher shelves.

¾Cashiers transfer items from one trolley to another – no conveyor belts are used – Colruyt says that this method is much faster than conventional POS methods

46 www.christinecross.com Smart Choice, Shenzhen, China 1

¾Mirrors Wal-Mart’s Value led concepts in other markets e.g., -Super Arhorros in Puerto Rica -Bodega Express in Mexico -Changomas Express in Argentina

¾300 sq m & 2,000 SKUs

¾The stores are tight!

47 www.christinecross.com Smart Choice, Shenzhen, China 1

48 www.christinecross.com Smart Choice, Shenzhen, China 1

49 www.christinecross.com Carrefour Auteuil 1

50 www.christinecross.com MPREIS, Austria 1

¾Supermarket chain W Austria + 6 outlets in Italy

¾130,000 customers per day visit this one outlet

51 www.christinecross.com CURRYS MEGASTORE (DSGi), UK 1

52 www.christinecross.com Best Buy - various 1

Puerto Rico, USA Westfield, UK

LA, USA Shanghai, China 53 www.christinecross.com Product Innovation 2

54 www.christinecross.com Product innovation 2

Follow the customer = follow the money

55 www.christinecross.com Product innovation 2

G T S G G ER N N N TY N I E I I EN O I R P L R M I T A P & -BE TU A N TU O L R L N R O R I I U E O EL U P T N V N C E TI E S W & A R A N & D

E R U U E & I S F R R P S A A H S E C T C N R I W P O R G 56 www.christinecross.com How to Grow a Category 2

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57 www.christinecross.com How to Grow a Category 2

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58 www.christinecross.com How to Grow a Category 2

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59 www.christinecross.com Product innovation 2

…and this is in a market being saturated with branded products

Male Facial Adult Moisturising +4.7% YOY 5% 11% -8.3% YOY

34% Adult Cleansing Hand & Body 50% +5.3% YOY +4.2% YOY

Total Skincare Market +2.99% YOY

Source: IRI

60 www.christinecross.com Product innovation 2

Functionality at a price point is pressurising FMCG “A” brands and allowing own brand to grow

Private Label Penetration: Front-end Retail Banner Sales 2008-2009f (%)

Note: Data for all merchandise except pharmacy. Source: Company reports/Planet Retail estimates

61 www.christinecross.com Product innovation 2

Brands must innovate to combat:

RANGE RATIONALISATION

e.g., 1 Slashing SKUs to drive margins

e.g., 2 Walgreens SKUs down from 22,000 to 18,000. For new fit out, average shelf height reduced from 2m to 1.7m

62 www.christinecross.com Product innovation 2

INCREASING SOPHISTICATION IN PREMIUM PRIVATE LABEL e.g., 1 Packaging

Sainsbury’s, UK

Boots, UK

Tesco, UK

63 www.christinecross.com Product innovation 2

e.g., 2 Professionalism of private label visual merchandising which erodes traditional “A” brand strongholds

Tesco, UK

Tesco, UK Boots concession Target, USA

64 www.christinecross.com Product innovation 2

e.g., 3

¾ Focus on ingredients.

¾ Catering for consumer concerns over traceability and origin.

¾ Developments in food retailing trickle down to beauty care.

Boots, UK Marks & Spencer, UK 65 www.christinecross.com Product innovation 2

e.g., 4 Tap into ethical customer concerns

¾ Retailers are continuing to investment in Fairtrade, organic/natural private label lines and new launches despite the economic downturn.

¾ Private labels offer ethical solutions at affordable prices.

dm’s ebelin eco- friendly beauty care, Germany

66 www.christinecross.com Product innovation 2

Organic beauty private labels go mainstream in France

Carrefour – Carrefour Agir Bio ¾ 5 products including face and body wash, deodorant and shampoo ¾ Launched in May 2008

Auchan – Auchan Bio ¾ 11 products including anti-aging creams, soap and body wash ¾ Launched in November 2008

Casino – Casino Bio ¾ 12 products including face and body washes and treatments ¾ Launched in November 2008

Monoprix – Monoprix Bio! ¾ 7 products including anti-aging cream, night cream and makeup removers ¾ Launched in January 2009

67 www.christinecross.com Product innovation 2

e.g., 5 Private labels establish & promote heritage

¾ Retailers are capitalising on genuine brand heritage where possible. ¾ Also launching products in line with nostalgia and retro consumer trends.

dm celebrates 20th anniversary of alverde in 2009

Boots launches Original Beauty Formula in 2009 with Victorian theme

68 www.christinecross.com Product innovation 2

e.g., 6 Retailers are capitalising on consumer trust in standards bodies, e.g., ¾ Using well-known organisations’ quality marks ¾ Using own in-house quality marks ¾ Consumer magazine testing

Consumer magazine testing result proudly displayed at dm

69 www.christinecross.com Product innovation 2

e.g., 6 Retailers are pushing private labels into fast growing market sectors

¾ Premium and special interest male grooming

dm’s Alverde naturals extended into male grooming in 2009 Boots No7 for Men launched 2008

70 www.christinecross.com Product innovation 2

Brands must underscore brand values in marketing messages

9 Ethical stance A Fairtrade stand is used to highlight the ethical stance of the product 9 Expertise L’Oreal products show the company’s expertise in the facial care market 9 Origin Origins emphasises the sustainable sourcing of its ingredients 9 Heritage The heritage of the L'Occitane brand is reinforced by the traditional packaging designs

71 www.christinecross.com Product innovation 2

Plus drive instore brand experience ¾ Demonstrate authority through range and display.

¾ Generate excitement in visual merchandising and interactivity.

Dedicated Nivea displays underscores brand authority at Rewe’s Selgros in Russia

Bath & Body Works uses colourful displays in the US to attract consumers

Clinique at Douglas in Switzerland go for the more demure approach but without foregoing excitement

72 www.christinecross.com Product innovation 2

THE NEW ECONOMY Retailers are investing in the development of their new Economy private labels

£1.15

Premium - £1.07

BRANDS

Discount - £0.26 £0.22

Standard - £0.11 Economy - £0.03

Based on prices of shampoo per 100ml on www.tesco.com, 73 November 2009. www.christinecross.com Product innovation 2

Brands are responding by supplying discounters

¾ The discount channel will be one of the fastest growing in 2009-2014

¾ Major discounters are increasing their share of branded products. Discounters look to brands to drive traffic.

Nivea at Rewe’s Penny

Colgate at in the USA L’Oreal at in Switzerland – note shelf ready packaging 74 www.christinecross.com Product innovation 2

…and selling brands through other channels, such as hotel groups

¾ Hotels can provide business and brand-building opportunities.

Bath & Body Works available in Holiday Inn rooms from 2009

Unilever’s Dove available in Express at Holiday Inn, UK

75 www.christinecross.com Some other interesting “stuff” 3

76 www.christinecross.com Sourcing 3

Four global merchandising centres established to slash supply chain costs by 15% ($12bn) in five years

Always think out of the box!

77 www.christinecross.com Technology & supply chain 3

Bloom, USA

¾ Personal Assistant Technology (PAT) trialled in Fort Mill, South Carolina. Touch screen tablet (supplied by Canadian Springbd) retail networks which includes:

- Store directory (wireless instore network linked)

- digital fliers of promos as the trolley approaches shelves

- link with personalised customer number for bespoke offers

- integral barcode scanner

¾ September, 2009, announced rollout to all stores

78 www.christinecross.com Technology & supply chain 5

Germany

¾ Introduced March, 2009, as an alliance between Shell & Toshiba. PFS stores equipped with electronic shelf-edge labels

¾ Stores open 24/7 & prices are changed four times through the day

¾ At night, prices are increased by 10% with no impact on sales volumes

79 www.christinecross.com Marketing Innovation 31

Albert Heijn– Netherlands

¾ Spring, 2009, Ahold launched AH puur & eerlijk as an umbrella label replacing five separate PL categories for organic, fair-trade, sustainable fishing, high-welfare meat & environmentally friendly products

¾ Gives more visibility on shelf & moves them from a niche to a faster moving category

¾ Has gained 43% LfL sales growth in 9 months

80 www.christinecross.com Marketing Innovation 41

Switzerland

¾ 14 April, 2009, Migros, whose own brand range is called “M”, replaced the “M” on all the town signs with an orange “M”

¾ This guerrilla marketing cost the company €5,000 in fines - but it was well worth it, viz., the press coverage!

81 www.christinecross.com “Follow the customer, follow the money”

www.christinecross.com

82 www.christinecross.com