Driving innovation through the private brand organization

1. Driving innovation through the private brand organization July 2011 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

3. US consumers still feel pressured • 38% • 42% • Are having a hard time making ends meet • Are living paycheck to paycheck • 57% • 45% • Are making significant lifeplan changes because of declining asset values • Are somewhat or very worried about losing a job

4. Shifting Consumer response to the downturn that has created a “new normal”… • Changing • HABITS • Cutting • Trading • BACK • DOWN • PENNY • pinching • CHANNELS

5. …and consumers say these behaviors will stick • Percent changing behavior • Percent intending to keep behavior • Behavior • Purchase high-end designer/luxury brands less • 45 • Shop at club stores more • 35 • Shop at mass merchants more • 50 • Shop at dollar stores more • 40 • Purchase private brand/store brand products more • 50 • Go out to eat less • 60

6. As a result, US private brand share has thepotential to reach 24 percent • High growth assumption • 2010 revised base • 2007 base • Projected private brand dollar share • Percent • Higher growth assumptions • Consumers increasingly embrace PL • Retailers like Walmart, Target, and Costco continue to grow PL • Additional retailers expand PL offering to differentiate and compete • Retailer consolidation continues 24% $40 B 19% • Flat growth assumptions • Market has reached the equilibrium level of PL share at current levels • Manufacturers provide a stronger value proposition for consumers and retailers that curbs PL attractiveness • Retail economics continue to make PL investment difficult • No external shocks occur • 04 • 06 • 08 • 10E • 12E • 14E • 16E

8. Organization is more than just structure – each element plays an important role in driving innovation Style Strategy Skills Sharedvalues Staff Systems Structure 7

9. r STRATEGY There is no ‘one size fits all’ answer - the right organization depends on what you are trying to achieve • Differentiate to drive trips, build baskets and cement loyalty • “The private • brand • journey” • Improve value perception to win the weekly grocery trip • Sophistication • Enhance profitability • Penetration

10. Several key capabilities are required - the importance of eac capability depends on what you are trying to achieve 3 Product development 4 Quality assurance 5 Category management 6 Project management 8 Packaging 9 Marketing and merchandising 10 Supplier selection and negotiation 11 Supplier development 12 Supply chain optimization 13 Inventory management 14 Performance management SKILLS Identify 1 Customer intelligence and trend identification 2 Product innovation Develop Market 7 Brand management Source Measure

11. SKILLS Tesco uses customer intelligence and trend identification to tailor ranges and products to different customer segments

12. SKILLS Their strong category management skills result in thoughtfully designed category architectures • Private brand • Best • Best • Tesco Strong Bitter • £3.98 4x440mL • Carlsberg Special Brew • £4.72 4x450mL • Good • Good • Tesco Value Lager • £0.92 4x440mL • Hofmeister Lager • £2.24 4x450mL • Better £1.78 4x500mL • Tesco Dutch • Export Lager

13. SKILLS To re-launch core-tier, ASDA leveraged existing and built several new capabilities, including product development • 1,000 reformations, and 500 new products, all tested and approved by customers • In-store signage and merchandising reinforce emphasis on customer input, with significant space dedicated to private brand items

14. SKILLS They also enhanced its customer insight capabilities to test products with consumers

15. Brand mgmt • Product develop-ment • Technical • QA STRUCTURE The right organization structure evolves as private brand becomes more sophisticated and developed • ILLUSTRATIVE • Increasing PB penetration and sophistication Merchan-dising • Private brands team • Private brands team Design Brand mgmt Private brands team • Brand mgmt • Product develop-ment • Technical • QA • Merchan-dising Marketing Product develop-ment • Vendor • Marketing • Marketing Technical QA • Current merchandising organization • When it is appropriate • Focused on building core range and enhancing profitability • Cross-category innovation (e.g., Tesco Finest) • Focus on rapidly expanding private brand tiers and ranges • Organization is fully aligned on the role of private brand – part of culture • Private brands at maturity

16. STRUCTURE These retailers have evolved their models over time • Increasing penetration and sophistication • Large dedicated team of ~350 employees focused on rapidly building out tiers and largely new items • Integrated into merchant organization • Small dedicated team for brand management and innovation • Large dedicated team with limited integration with merchants • Increased integration and collaboration with merchants (though not fully integrated like Tesco)

17. STRUCTURE: Although Tesco has integrated private brand into its merchandising organization, a central team still drives cross-category innovation Commercial and Trading Director Brand Management Category Director International Buying Office; sourcing hubs, sourcing support Category Director (s) Buying Product Development Technical Business/ Customer Planning

18. STRUCTURE Co-locating the Own Brand team with Merchants ensures alignment • Merchant-led category team structure • Examples • Space Planning/Analyst (shared) • Category Manager • Merch Planning Analyst (dedicated) • Own Brand Analyst (shared) • Supply Chain Analyst (shared) • Pricing and Promotions Analyst (shared) • Marketing Analyst (shared)

19. Winners • Others SYSTEMS – PROCESSES A ‘national brand-like’ top-to-top process could help set private brand strategies and drive innovation Types of collaboration efforts Percentage of respondents • Expanded Assortment • New merchandising • strategy • Differentiators • New promotional strategy • New pricing strategy • Exclusive products • New shopper marketing • programs • Availability improvements • Supply chain • improvements • Good hygiene • Exclusive packaging • CRM-based tactics

20. SYSTEMS – PROCESSES A competitor formulation breakdown process often create unprecedented transparency and identifies cost savings • DISGUISED PRODUCT EXAMPLE Fruit juice example Base 100 • Country origin 1 • Country origin 2 • Country origin 3 • 90 • Client product • Product A • Product B • Product C NOTE: Pictures are illustrative and not representative of actual products

21. 24 • $49 • 90 SYSTEMS - PROCESSES Fast follower apparel retailers clearly identify who they are following and have processes to track trends • $230

22. SYSTEMS - PROCESSES The same systematic approach can be applied in food Example: Indian food in the mass market • Privatebrand • development • Niche products in North America • Restaurants in urban markets • UK restaurants • UK C/L

23. r • NOT EXHAUSTIVE SYSTEMS - MEASUREMENT KPIs need to be tailored to the organization and where it is in the private brand journey Foundational metrics • Overall category profitability (rate and $) • Private brand profitability – overall and penny profit relative to national brand • Private brand SKU efficiency (i.e., sales per PL SKU) • Private brand penetration by category Growth and innovation metrics • Growth in private brand penetration, with targets assigned to category and private brand teams • Private brand market share and share of growth • Percentage of sales from new private brand items • Private brand brand value perception (from customer) • Number of private brand SKUs vs. competitors • Number of new items launched • Private brand health (quality, value, and innovation)

24. SHARED VALUES Finally, highly visible, senior-level commitment to private brand is required to deliver a differentiated program • Private brand penetration grew over 15 points during Leahy’s term as CEO • Private brand is embedded in several areas of the “steering wheel” that is used to measure performance and guide decision making

25. SHARED VALUES At Loblaw, both Dave Nichol and more recently Galen Weston have successfully championed private brand • Dave Nichol created a “control brand culture” when he launched and built out the PC and No Name brand. • In more recent years, Chairman Galen Weston has championed private brand and commitment remains strong

27. r Key questions to help you get started Strategy • How well has the organization defined its aspirations for private brand and is there alignment on these aspirations? Skills • What skills does your organization excel at today and how can you better leverage these to drive innovation and growth? • What are the key areas that you need to shore up to achieve your aspirations?

28. r Key questions to help you get started Systems/Processes • How well have you defined your sources of innovation? How systematic are your scans of these sources and how do these scans feed the pipeline? • Retailers: • What national brand processes could be effectively applied to private brand to drive innovation and growth? • Suppliers: • How could you change your interactions with your customers to drive growth?

29. r Key questions to help you get started Systems/Measure-ments • How do you define success today? • Are there simple changes to KPIs that could quickly create better alignment and focus on aspirations? Sharedvalues • How integral is private brand to your corporate strategy? • Do Senior leaders champion private brand? If not, what are the barriers?