Relationship of Packaging to Unsaleables

1. Relationship of Packaging to Unsaleables Presented by: Paul Weitzel Managing Partner - Willard Bishop & Mike Stuckey Director of Marketing, Food Packaging - MWV

2. Topics • New Insights on the Real Cost-to-Serve the Grocery Store • Implications for Packaging • Research into Unsaleables

3. Grocery Store Realities • For a Typical Food/Drug Grocery Store: • There are more than 200 categories in the store • 1 in 4 categories lose money today • There are 40,000 SKUs in the center store • 57% of center store SKUs lose money = 23,000 SKUs • Many SKUs sit on the shelf • 56% of SKUs sell less than one unit per week • 95% of center store demand is covered by 46% of the SKUs Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

4. Retailer ABCs to Shelf Average Grocery ABC Per-Unit Sold (Through Retailer Warehouse) Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

5. Retailer ABCs to Shelf Average HBC ABC Per-Unit Sold (Through Retailer Warehouse) Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

6. Retailer Profit After ABCs to Shelf • Supermarket True Profit If Unit Sold * Includes promotional monies, slotting RDAs, etc. Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

7. Retailer Profit After Unsaleables • Retailer Profit After Unsaleables * Includes promotional monies, slotting RDAs, etc. Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

8. Product Gets tothe Store Many Ways • Typical Grocery Store Gets More than 80 Deliveries a Week: • 65+ DSD Deliveries a Week • 10+ Warehouse Deliveries a Week • 5+ Distributor and Other (UPS) Deliveries

9. Product Is Also Handled Many Ways • In the Backroom… • Backrooms can look like parking lots and receivers serve as traffic cops • Daily Delivery Storage • Promotional Volume Storage • New Item Storage • Surplus DSD Inventory Storage • Lockup Storage • Seasonal Storage • Cases are often ripped open and verified

11. Product Is Also Handled Many Ways • In the Backroom… • Backrooms can look like parking lots and receivers serve as traffic cops • Daily Delivery Storage • Promotional Volume Storage • New Item Storage • Surplus DSD Inventory Storage • Lockup Storage • Seasonal Storage • Cases are often ripped open and verified • We have to deal with cold, heat, pallet jacks, lifts, elevators, and obstacles that test packaging design and strength

17. Product Is Also Handled Many Ways • On the Sales Floor… • Product is often double and even triple handled • Night stocking crew often can’t complete their work, lack of time creates excess damage • Packout rules are often violated, lack of >1.25 packout creates excess handling and increases damage • When we stock, we have to deal with… • Flat shelves, dividers, pegs, gravity, spring-loaded pushers, rear load, doors, pallets, cases, trays, and other obstacles • Increasing interest to reduce labor costs • Front-facing fixtures gaining attention • Increasing interest in retail-ready and one-touch merchandising

26. Packaging Plays an Important Role in Reducing Costs Share of Unsaleables(By Type) Source: The Impact of Sales & Procurement on Reverse Logistics Management, GMA/FMI 2010

27. Looking Ahead • What are the Implications for Packaging? • ABCs show there is no room for waste, we have to continue to tackle this $2.5B industry opportunity • Need to improve packaging materials • Need to reconsider case pack size changes • Increasing pressure to reduce inventory • Leverage to grow in alternative channels Unsaleables Trend Discontinued Out-of-Code Source: The Impact of Sales & Procurement on Reverse Logistics Management, GMA/FMI 2010

28. Average Grocery Store Inventories Dollars on Shelf Avg. Inventory $ in Food/Drug Supermarket Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

29. Average Grocery Store Days-of-Supply Avg. Days-of-Supply Across Food/Drug Supermarket Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

30. Average Grocery Store Days-of-Supply High DOS Grocery Categories in Typical Food/Drug Supermarket Typical Grocery POGs are Developed Based on 7 DOS Source: Willard Bishop Total Store Grocery SuperStudy™ 2009, 2010

31. Looking Ahead • What are the Implications for Packaging? • Need to plan for increasing use of front-facing fixtures • Increasing pressure to reduce labor costs • Eliminates afternoon pulls but, often increase damage • Need to plan for more retail-ready handling • Full pallets, half pallets, shippers, trays, etc. • Increasing use of shopper insights will drive more shelf changes and packaging will need to keep pace

32. Damaged Packaging Research

33. Unsaleables Background • Unsaleable products cost the food industry $15 billion annually • Average unsaleables rate is .8% of gross sales for food manufacturers and 1.2% of gross sales for food retailers • While these costs are significant, they are only part of the story • Substantial resources associated with managing, handling, transporting and reclaiming these products • Reproducing the wasted food has a major environmental and economic impact • Product packaging is a major component of unsaleable products • Increasing use of “eco-friendly” CRB packaging • Certain packaging configurations simply cannot withstand the stress of the supply chain, resulting in increased damage rates • Given the financial implications to manufacturers and retailers, MWV regularly conducts research to understand how material selection affects product damage Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

34. Research Process • Three different testing methods employed • GENCO’s Damage Research Team • Physical testing of products at Michigan State University • Perception Research Services Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

35. Paperboard Packaging 101 • Three different testing methods employed • Physical testing of products at Michigan State University • GENCO’s Damage Research Team • Perception Research Services Source: GMA, FMI and Deloitte Consulting LLP 2008 Unsaleables Study Results

36. Performance materials Solid Bleached Sulfate (SBS) • Bleached paperboard for use in packaging and printing applications • Aseptic board for non-refrigerated food and beverage packaging • Specialty paperboard for food and healthcare applications • Premium coated liner and bleached display liner for corrugated boxes • Uncoated board for use in foodservice and office products

37. Performance materials Coated Unbleached Kraft (CUK) • Used in beverage multi-packs, food folding cartons, and filter frames • Superior wet tear strength substrate for beverage packaging • High strength folding cartonboard with a smooth printing surface engineered for demanding markets such as frozen foods

38. Performance materials Coated Recycled Board (CRB) • Lowest cost per ton of any substrate • Mostly used for dry foods (cereal, crackers, cookies, etc.) and applications that don’t require high strength requirements. Occasionally used in frozen food applications. • Perception of sustainability since made with 100% recycled content

39. Study Scope Purpose: Document the percentage and types of damage of various substrate materials at Gulf Coast retail store outlets CNK, CRB, SBS, SUS 100 retail stores across multiple chains Gulf Coast United States 28,000+ packages inspected

40. Study Findings

41. Damage Rate By Material Type 100% of the units on the shelf were inspected

42. In-Store Damage Research • GENCO Supply Chain Solutions is a third party logistics company • Leader in Damage Research & Prevention • MWV commissioned a study in June of 2009 to assess damage frequency • Examined over 28,000 frozen food packages in 100 retail stores Product packaged in CRB is 4x more likely to suffer damage than Custom Kote

43. Freeze-Thaw Compression Strength • MWV commissioned the research with Michigan State University in 2005 • Compression strength is the ability of a carton to hold its shape and form • For food manufacturers, this translates into how well the paperboard used withstands freeze-thaw moisture Peak Force (lbs) Custom Kote retains 46% of its original strength; CRB retains only 27%

44. Consumer Behavior • MWV commissioned a study with Perception Research Services • Independent research firm that utilizes a variety of techniques to understand shopper’s perception of damaged products • Findings • 75% of shoppers will push a damaged package aside • If a slightly damaged package is the last one on the shelf, 45% will leave the brand and 29% will buy another brand • If a highly damaged package is the last one on the shelf, 55% will leave the brand and 36% will buy another brand • For competitive shoppers, “Brand you trust” perception drops from 73% to 41% with even slight damage • 25% of the most brand-loyal shoppers question the safety of the product when the package is only slightly damaged • 72% viewed the retailer displaying damaged packaging as offering lower value products than their competitors Damaged packaging diminishes brand and retailer trust

45. Research Summary • Michigan State study revealed that MWV's Custom Kote has a significant compression strength advantage over competitive products in a freeze thaw environment • Genco Unsaleables Study found that Custom Kote is 4x less likely to be damaged than products packaged in CRB • Perception Research Consumer Behavior study confirmed that damaged products have a quantifiable impact on the shopper and their perception of the brand and the retailer MWV’s Custom Kote is the benchmark packaging material to help protect against the lost sales and diminished trust associated with damaged packaging