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 Supermarkets Giant Food Publix Houchens Industries Ralphs King Soopers Stater Bros Market Basket The Save Mart Companies Meijer 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 convenience store 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.