ALIGNING WITH A CHANNEL IN FLUX Presented by

ALIGNING WITH A CHANNEL IN FLUX Presented by: Sara Al. Tukhaim Principal Analyst Warehouse Club Webinar March 2013

Agenda • Internal Alignment & Opportunities –Club Peer Benchmarking Survey Highlights • Warehouse Club Spotlight –Sam’s vs. Walmart’s “Battle of the Bulk” • Channel Trends & Innovations –What’s New in Club? © Copyright 2013 Kantar Retail 2

Internal Alignment & Opportunities: Club Peer Benchmarking Survey Highlights © Copyright 2013 Kantar Retail

Overview: Online Survey, 94 Completes What is your company’s approximate annual global sales volume? (US Dollars) 25% 18% 13% 11% 7% 4% $1 <$ 10 0 $5 0 00 0 <$ mi m 50 llio illi n 0 on to mil <$ lion $1 1 bi to ll $5 <$ ion to 5 b $1 <$ illio 1 n 0 to 0 b $2 <$ illio 2 n 0 to 0 b <$ illio 50 n b >$ illio 50 n bi llio n 4% Club Product Departments (Please select all that apply) 57% Edible Dry Grocery 34% Health and Beauty Care (HBC) 28% Frozen 21% Dairy 18% General Merchandise 16% Behind the Counter OTC 16% Deli 15% Pharmacy 12% Non Edible Dry Grocery 12% Baby/toddler 12% Meats 12% Non-Alcoholic Beverages (NAB) 12% Pet 7% Stationery 5% Beer/Wine/Spirits 5% Consumer Electronics 5% Produce 2% Toy Total 61 Note: Total = 94 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 4

Growing Importance Attributed to Club How has club importance to your company changed over the last year? Less Important No Change More Important 62% 50% 49% 31% 29% 12% 5% 4% Costco Sam's Club BJ's Wholesale Note: Total = 94 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 5

Clubs Rank 3 rd, Just Below Mass, Grocery Please rank the following channels in order of importance to your company's current business volume. Mass 6. 1 Grocery 5. 7 Warehouse Club 4. 7 Chain Drug 4. 1 3. 9 Value Discounters Convenience Category Specialists Most Important =7 3. 6 2. 3 Least Important =1 Note: Total = 94 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 6

Generally Positive Satisfaction with Club How satisfied are you with the success of your [Club] business within your company today? Costco Sam's Club 56% BJ's Wholesale 53% 26% 24% 19% 6% 5% Extremely satisfied Somewhat unsatisfied 5% 4% Not at all Satisfied Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 7

Club Team Structures Are Not Alike Where are your company's [Club] team resources primarily located? Near the customer's headquarters At your company's headquarters Regional offices Office in the home 78% More than half (56%) of Sam’s Club teams report into Walmart (N=27) 41% 36% 26% 18% 29% 21% 18% 11% Costco Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Sam's Club Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) 18% 7% BJ's Wholesale © Copyright 2013 Kantar Retail 8

More Resources Devoted to Sam’s Club How many DEDICATED resources are on your [Club] team? Costco Sam's Club BJ's Wholesale 70% 60% 50% 40% 30% 20% 10% 0% 0 1 -2 3 -5 6 -10 11 -20 21 -30 More than 30 Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 9

Apart from Sales, Club Team Roles Vary Of the staff dedicated to your company's [Club] team, which of the following roles are represented? (Select all that apply) Sales/Customer Management Supply Chain Category Management BJ's Wholesale Marketing Sam's Club Costco Consumer/Shopper Insights Finance Data Management/IT 0% 20% 40% 60% 80% 100% 120% Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 10

Where Are Club Resources Gaining? Compared to last year, have you noticed any shifts in the following internal resources devoted to [Club Retailer]? % Reporting an Increase Costco Sam's Club BJ's Wholesale 59% 56% 44% 41% 41% 48% 44% 35% 29% 31% 29% 24% 23% 21% 18% 12% Senior Funding/Financial management buyresources in Product development New capabilities Team head count New positions Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 11

Products Most Customized for Costco What % of your club business at each of the following retailers is from a unique item that is NOT sold to other retailers? Costco Sam's Club BJ's Wholesale For which club is your company MOST successful at providing unique (customized) product? 35% BJ's 11% 30% 25% 20% Sam's Club 33% 15% Costco 56% 10% 5% 0% 10 11 % -2 0 21 % -3 0 31 % -4 0 41 % -5 0 51 % -6 0 61 % -8 81 0% -1 00 % % 6 - 15 0% Note: Total = 61 Note: Costco = 51, Sam’s Club = 51, BJ’s Wholesale = 48 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 12

Club Receptivity to Key Initiatives Widely Varies Which club has been most receptive to your involvement in each of the following activities? Application of Consumer Insights data Co-branding Gen Y appeals Health & Wellness alignment Improved pack sustainability Improved product sourcing In-club research Incorporation of mobile codes on packs/pallets Involvement in Facebook Involvement in non-retailer blogs Involvement in Pinterest Involvement in Twitter New member acquisition New product launch(es) Participation in retailer’s mobile apps Price increases Private label production Product/Pack customization Retrieval of Consumer Insights data Small business appeals Costco Sam's Club 16% 48% 21% 44% 33% 43% 16% 11% 5% 3% 0% 0% 36% 34% 7% 11% 52% 61% 13% 7% 44% 10% 11% 28% 38% 16% 44% 33% 20% 26% 15% 21% 25% 33% 16% 11% 23% 46% 62% BJ's Wholesale 21% 0% 11% 8% 5% 3% 15% 7% 7% 2% 3% 3% 15% 16% 0% 3% 2% 21% 3% Note: Total = 61 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 13

At Costco, Growing IRC, Demo Involvement How has your participation in the following Costco initiatives and programs changed this year compared to the previous year? More Involved Less Involved IRC/Instant Savings in Costco MVM Demos Endcap MVM Coupon, Excluding IRC/Instant Savings Stand-Alone Instant Savings (Excluding MVM) Social Media Involvement Sustainability Messaging Member Insights Cross-Merchandising Promo with Other National Brands The Costco Connection General price reduction (beyond a promo) Emails (i. e. , to Costco members from Costco) Vendor Managed Inventory Prospective Member Insights Costco Online (e. g. , promotional banner, feature) Cross-Merchandising Promo with Kirkland Signature Road Show Costco Fence (Cart Rail) Program 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Note: Costco = 39 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 14

Also Where Most Satisfaction with ROI Lies In terms of return on investment, how satisfied have you been with your participation in these efforts? Somewhat/Very satisfied Not at all/Not too satisfied 77% IRC/Instant Savings in MVM Coupon, Exc. Instant Savings 69% Vendor Managed Inventory 13% Road Show 31% Member Insights 31% Costco Fence Program Stand-Alone Instant Savings (Exc. MVM) General price reduction (beyond a promo) 21% Demos 33% Endcap(s) 31% The Costco Connection 51% Demos 38% Endcap(s) General price reduction (beyond a promo) 5% Social Media Involvement 5% Costco Online 5% 28% 21% Member Insights 13% Social Media Involvement 13% Cross-Promotion with Costco Service(s) IRC/Instant Savings in Costco MVM 10% 5% 3% Note: Costco = 39 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 15

Strong Continued Growth from KS How has the number of [Club] private label brand items changed over the past year in your category (ies)? Costco 44% Sam's Club 53% 48% 33% 29% 28% BJ's Wholesale 13% 7% 6% Increased a lot 3% Somewhat increased Stayed the same Somewhat decreased 0% Decreased a lot 67% of Costco suppliers report the presence of Kirkland Signature in their category has very/somewhat negatively impacted performance; 56% of Sam’s Club vendors report the same for its private brands. Note: Costco = 39, Sam's Club = 27, BJ's Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 16

KS, Brand Development Top Concerns In your dealings with Costco, what are your main concerns in working with them today? (Select all that apply) 67% Expansion of Kirkland Signature Development of our brand within Costco 49% 46% Customization of SKUs for Costco 41% Localization/Regionalization of Costco offers Internal buy-in/support for our Costco business 31% Effectiveness of MVM coupons 28% Costco’s push toward Instant Savings 28% Price constraints brought on by inflation 23% Sharing of member insights 23% Attracting/retaining Gen Y members 18% Threat of online competition, including Amazon 15% Logistical pressures from international expansion New member growth Overall membership retention 10% 3% 0% Note: Costco = 39 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 17

At Sam’s, Growing IRC, Insights Involvement How has you participation in the following Sam’s Club initiatives and programs changed this year compared to the previous year? Sam’s Instant Savings (formerly e. Values) Member insights Demos Sam’s Club Online Emails (i. e. , to members from Sam’s Club) Healthy Living Made Simple Magazine Endcap(s) Simply Delicious Meals Prospective member insights Business member appeals Joint Business Planning (JBP) General price reduction (beyond a promo) Cross-Promo with Sam’s Club Service(s) Cross-Merch Promo with National Brands Cross-Merch Promo with private brand(s) Social media involvement Mobile Texts (e. g. , alerts/offers) Sustainability Messaging Road shows Cart Rail/WOW wall program Online Samples Free Online Delivery More Involved Less Involved 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Note: Sam’s Club = 27 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 18

Suppliers Most Satisfied with Demo ROI In terms of return on investment, how satisfied have you been with your participation in these efforts? Somewhat/Very satisfied Not at all/Not too satisfied 59% Demos 56% Member insights Sam’s Instant Savings (formerly e. Values) 52% Emails (i. e. , to members from Sam’s Club) Prospective member insights Joint Business Planning 33% 30% Endcap(s) 26% Demos 26% Simply Delicious Meals 26% 41% Cart Rail/WOW wall program 26% 41% Joint Business Planning 48% Endcap(s) Sam’s Club Online Sam’s Instant Savings (formerly e. Values) Healthy Living Made Simple Magazine 41% 37% Business member appeals 30% Cross-Merch Promo with Other National Brands 30% General price reduction (beyond a promo) Cross-Merch Promo with Other National Brands Business member appeals 19% 19% 15% Note: Sam’s Club = 27 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 19

Sam’s/Walmart Overlap the Top Concern In your dealings with Sam’s Club, what are your main concerns in working with them today? (Select all that apply) Overlapping SKUs between Sam’s and Walmart Development of our brand within Sam’s Club Overlapping shoppers between Sam’s and Walmart Expansion of Sam’s Club’s private brand(s) Sharing of member insights Customization of SKUs for Sam’s Club Push toward Instant Savings (formerly e. Values) Attracting/retaining Gen Y members Expansion of Instant Savings to all members Overall membership retention New member growth Shifting focus toward small businesses Price constraints brought on by inflation Localization/Regionalization of Sam's offers Growing competitiveness with Costco Internal buy-in/support for Sam’s business Threat of online competition, including Amazon 78% 44% 41% 41% 37% 33% 30% 26% 26% 22% 11% Note: Sam’s Club = 27 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 20

At BJ’s, Growing Involvement in Insights How has your participation in the following BJ’s initiatives and programs changed this year compared to the previous year? Prospective member insights Member insights General price reduction (beyond a promo) BJ’s Wholesale Online Social media involvement Emails (i. e. , to members from BJ’s) BJ’s Big Brand Mailer (BBM) Demos (e. g. , in-club sampling) BJ’s Member Journal More Involved Sustainability Messaging Less Involved Cart Rail program Business member appeals Endcap(s) Cross-Merch Promo with other National Brands Road shows Cross-Promo with BJ’s service(s) Online Samples Free Online Delivery 0% 5% 10% 15% 20% 25% Note: BJ’s Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 21

Suppliers Most Satisfied with BBM, Journal In terms of return on investment, how satisfied have you been with your participation in these efforts? Somewhat/Very satisfied Not at all/Not too satisfied BJ’s Big Brand Mailer (BBM) BJ’s Member Journal 47% Demos 65% Endcap(s) 47% 18% Demos 29% General price reduction (beyond a promo) 18% Cart Rail program 29% Social media involvement 18% Endcap(s) 24% Prospective member insights 18% General price reduction (beyond a promo) 24% Member insights 18% BJ’s Wholesale Online 24% BJ’s Wholesale Online Emails (i. e. , to members from BJ’s) Prospective member insights Member insights 24% Cross-Merch Promo with BJ’s private brand(s) BJ’s Big Brand Mailer (BBM) 24% BJ’s Member Journal 24% 12% 12% Note: BJ’s Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 22

Customization of SKUs a Key Concern In your dealings with BJ’s Wholesale, what are your main concerns in working with them today? (Select all that apply) Customization of SKUs for BJ’s 47% Shift to premium (organic, natural) messaging 35% Development of our brand within BJ’s 35% Internal buy-in/support for our BJ’s business 29% Expansion of BJ’s private brand(s) 29% BJ’s competition with supermarkets/grocers 24% Sharing of member insights 24% Threat of online competition, including Amazon 18% New member growth 12% Price constraints brought on by inflation 12% Overall membership retention 6% Attracting/retaining Gen Y members 6% Localization/Regionalization of BJ’s offers 6% Note: BJ’s Wholesale = 17 Source: Kantar Retail 2013 Annual Club Peer Benchmarking Survey (March 2013) © Copyright 2013 Kantar Retail 23

Key Takeaways & Implications • Suppliers are attributing growing importance to club. As the role of club grows in CPGs, the competition and retailer expectations are also likely to grow. • Clubs vary in their receptivity to initiatives. Costco stands out in customization, Sam’s in business appeals, insights, and BJ’s in price increases – supporting the need for differentiated strategies. • Suppliers are notably increasing involvement in key efforts. Namely, IRCs, demos, and endcaps at Costco; Instant Savings, insights and demos as Sam’s; and insights, reductions at BJ’s – Pointing to evolving retailer strategies. • Efforts with better perceived ROI also vary by retailer. Expect the biggest bang for your buck with IRC/MVMs, demos at Costco; demos, insights and Instant Savings at Sam’s; and BBM, Journal at BJ’s – Enhance these further with digital. • Top concerns with club reveal several shared challenges. Costco suppliers point to KS and brand development as the top concerns, whereas Walmart suppliers contend most with overlap in Walmart SKUs and BJ’s with customization – in lieu of these concerns, don’t neglect Gen Y, member growth and Amazon. Source: Kantar Retail research and analysis © Copyright 2013 Kantar Retail 24

Warehouse Club Spotlight: Sam’s vs. Walmart’s “Battle of the Bulk” © Copyright 2013 Kantar

Walmart Emphasizing More Bulk Value Sizes “Value size” Bonus (“$25 Coupon Book”) EDLP on Bulk “New bonus size”, “ 10% More Free” “Everyday Low Price” Source: Kantar Retail research and analysis; store visits (January 2013) “Party Size!” © Copyright 2013 Kantar Retail 26

Sam’s Shoppers Overlap Strongly with Walmart Shopped Retailer in the Past 4 Weeks 100% 82% 90% 80% 70% 60% 50% 100% Sam's Club 40% 30% Walmart 22% 20% 10% 0% Walmart Sam's Club Note: Walmart excludes Neighborhood Market; Walmart=31, 608, Sam's Club=8, 409 Source: Kantar Retail Shopper. Scape® (2012) © Copyright 2013 Kantar Retail 27

Key Question: To What Extent is Walmart Really Encroaching on Sam’s Club? • When: Kantar Retail pricing study conducted January 2013 • Where: Co-located Sam’s and Walmart stores in New Hampshire • What: Basket of 16 national brand edible/non-edible grocery, HBC • How: Identified largest pack size at Walmart for analysis; analyzed by price per unit, pack size Source: Kantar Retail research and analysis; store visits (January 2013) © Copyright 2013 Kantar Retail 28

Price Per Unit Results Sam’s Club’s Basket Narrowly Outpaces Walmart’s Note: Price per unit for paper towels and toilet paper calculated per 50 sheets; Tostitos chips were part of Sam's Club's Choose Any Two offer, therefore the total $5. 98 price is divided by two to provide an accurate reflection for one item (see Figure 2 for all items by size) **12 "Big" rolls at Walmart versus 12 "Super" rolls at Sam's Club ***27 rolls at Walmart versus 36 rolls at Sam's Club (1000 sheets per roll) Source: Kantar Retail research and analysis (data collected January 2013) © Copyright 2013 Kantar Retail 29

Pack Size Results Bulk Pack Sizes Markedly Bigger at Sam’s Club *Sam's Club versus Walmart **12 "Big" rolls at Walmart versus 12 "Super" rolls at Sam's Club ***27 rolls at Walmart versus 36 rolls at Sam's Club (1000 sheets per roll) Source: Kantar Retail research and analysis (data collected January 2013) © Copyright 2013 Kantar Retail 30

Key Takeaways & Implications Communicate Internally Define Your Appeal Watch for Erosion Source: Kantar Retail research and analysis • Recognize Walmart could impact member growth • Coordinate internally as to how your offer differentiates beyond size • Be prepared to articulate your packs’ business member proposition • Anticipate more direct comparisons to Costco and its business appeals • Monitor lower income shopper penetration in your category at Walmart • Leverage this to support why appeals at Sam’s, Walmart must be differentiated © Copyright 2013 Kantar Retail 31

Channel Trends & Innovations: What’s New in Club? © Copyright 2013 Kantar Retail 32

What’s on Our Radar? DIGITAL STRATEGIES THE CLUB EXPERIENCE BUSINESS APPEALS What’s New? PRIVATE BRANDS HEALTH & WELLNESS Source: Kantar Retail research and analysis, club visits MEMBER ATTRACTION SOLUTIONS & SEASONAL © Copyright 2013 Kantar Retail 33

Costco Ramps Up Digital Strategy Earn Kicks on Shopkick Friday Finds in CA Digitized Costco Connection Free UK Pick-Up Shopping List in Canada Source: Kantar Retail research and analysis, club visits UK Delivery Included © Copyright 2013 Kantar Retail 34

Sam’s Club & BJ’s Get More Involved, Integrated Aligning Across Platforms Looking to Drive Traffic Focusing on Engagement Promoting Coupons Source: Kantar Retail research and analysis, club visits © Copyright 2013 Kantar Retail 35

Business Appeals Also on the Rise Targeting Promos to Small Businesses Incorporating H&W Spanning Categories Messaging “Business News” to Members Source: Kantar Retail research and analysis, club visits © Copyright 2013 Kantar Retail 36

New Member Promotions Take Shape Offers new members products valued at more than USD 50 Let’s members gift memberships on FB through e. Gift Social Source: Kantar Retail research and analysis, club visits © Copyright 2013 Kantar Retail 37

Sam’s Club Experiments with Living Social Source: Kantar Retail research and analysis, club visits

Solutions Focus is Strong, Growing Crossing Categories to Drive Solutions Educating to Appeal, Drive

Sam’s, BJ’s Look to Penetrate at Home BJ’s turns to the kitchen BJ’s targets new parents Sam’s continuing to leverage meals Source: Kantar Retail research and analysis, club visits © Copyright 2013 Kantar Retail 40

BJ’s Gets More Solution-Savvy on Pinterest TO Source: Kantar Retail research and analysis, club

Clubs Also Kick Up the Seasonal Solutions Source: Kantar Retail research and analysis, club

Health and Wellness Top of Mind “Made in USA” “Costco Health Solutions” PBM Source: Kantar Retail research and analysis, club visits “ 35 Calories Per Cup” “Free Screening” “Locally Grown”, “Certified” “ 100% Natural” © Copyright 2013 Kantar Retail 43

Sam’s Club Infusing H&W Across the Box Mobile Rx Refills Healthy Living Made Simple Calendar Item Introductions Integration of Fresh Source: Kantar Retail research and analysis, club visits H&W Services in Consumables © Copyright 2013 Kantar Retail 44

BJ’s Integrating H&W into More Categories Fresh in Pet Natural in HBC Cold &

Private Brands Continue to Develop Focus on Size: “ 42% larger than leading brand wipes” Entering New Categories: “Products available behind the counter” Source: Kantar Retail research and analysis, club visits © Copyright 2013 Kantar Retail 46

Sam’s Club Touting Simply Right Focusing on Educating Members Supporting a Bigger Cause Source:

Still All Comes Down to Experience Source: Kantar Retail research and analysis, club visits

Key Takeaways & Implications • Digital Strategies: Integrate online with the box; leverage digital to engage, target key audiences and drive more interactive solutions, platforms • Business Appeals: Call out value-adds specific to businesses, and look across categories to drive more innovative and complete business solutions • Member Attraction: Identify opportunities to better align with club efforts to attract and retain members; consider appealing shoppers at key life stages • Solutions & Seasonal: Look beyond your categories and brand to drive solutions and align with member lifestyles; consider packaging as a product itself • Health & Wellness: Focus on sourcing, services and savings (in terms of both value and healthcare); Fresh provides ripe opportunities for collaboration • Private Brands: Anticipate ongoing private brand development and look for opportunities to align or differentiate where necessary • The Club Experience: Strive to add to the club experience and drive awareness of your SKUs through events, unique item development and continual innovation Source: Kantar Retail research and analysis © Copyright 2013 Kantar Retail 50

Learn more about the leading warehouse club Join us as we explore the key directions that drive Costco’s current strategy, and review the fresh opportunities and challenges for Costco and the club channel. • Explore Costco’s economic and competitive dynamics; • Obtain key updates on Costco, including its international, digital, and merchandising strategies; • Understand Costco’s performance and strategy within the context of the fundamental club model, six rights of merchandising, and its organizational structure and leadership; and • Align with the needs Costco’s evolving shoppers and their shifting demographics and preferences. © Copyright 2013 Kantar Retail 51

Sara Al. Tukhaim Principal Analyst Sara. Al. Tukhaim@Kantar. Retail. com 501 Boylston Street Suite 6101 Boston, MA 02116 T + 617 912 2859 F +1 630 245 5647 www. Kantar. Retailiq. com © Copyright 2013 Kantar Retail