Industry Primer – Consumer Goods Tuesday, October 4th, 2016 Presented by: Blake Klasios & Govind Sharma

McMaster Investment Council Agenda Consumer Goods Sector Overview Performance Porters 5 Forces Key Metrics and Terms Canadian Market Tuesday, October 4th, 2016 McMaster Investment Council

I Consumer Goods Sector

Consumer Goods – Differentiation Products that are purchased for final consumption by the average consumer and are the end result of production and manufacturing (ie. What a consumer will see on the store shelf) Durable Goods Non-Durable Goods Consumed over time (3+ years) Furniture, appliances, sports equipment, jewelry Consumed immediately (< 3 years) Food, Clothing, Motor Oil Services Tuesday, October 4th, 2016 McMaster Investment Council

Consumer Goods – Discretionary vs Staples Consumer Discretionary Consumer Staples Products that are non-essential to the lives of consumers Cyclical (Tend to slump when economy is doing poorly and do well when economy is growing) Include Restaurants, High-end apparel, Jewelry, Sports activities, Vacation Products that are essential to the lives of consumers Non-Cyclical (in demand regardless of what is happening in the economy) Include Food, Basic clothing, Shelter Tuesday, October 4th, 2016 McMaster Investment Council

II Performance

Performance – Benchmark Consumer Sectors vs S&P/TSX Tuesday, October 4th, 2016 McMaster Investment Council

Performance – Valuations Consumer Discretionary (CD) Canadian CD valuations have been more cyclical Impacted by valuations on Magna and Thompson Reuters, who are less consumer oriented CD industry P/E is ~17x Consumer Staples (CS) Canadian CS companies continue to acquire and expand globally Many CS companies are diversifying business into other markets (real estate) CS industry P/E is ~ 25x Tuesday, October 4th, 2016 McMaster Investment Council

III Porters Five Forces

Porters Five Forces – A look at Loblaws Threat of New Entrants Low threat of new entrants Entrants need invest a large sum of capital, have food contracts in place, and compete against extremely low prices set by rivals Power of Suppliers Moderate power held by suppliers Suppliers must pursue a cost leadership strategy when competing for food contracts Limited suppliers provide organic/multicultural products increasing the bargaining power in these spaces Power of Buyers Low power held by buyers Consumers face minimal choice and even less so based on region Availability of Substitutes Low availability of substitutes Alternatives to grocery stores are fast food companies and restaurants which are neither healthy nor economically feasible options Degree of Rivalry High degree of rivalry Competing against Metro, Sobeys, Walmart, & Costco Tuesday, October 4th, 2016 McMaster Investment Council

IV Key Metrics & Terms

Key Metrics – By Sub-Sector Retail Stores Restaurant/Fast Food Sales Floor Performance Metrics Sales per sqft, Avg sale per customer, cost per sq ft Same Store Sales Measure year-to-year change in sales in a fixed base of stores Production Efficiency Track manufacturing efficiency of items produced for sales Store Unit Growth Preferred single digit growth (3-5%) in units, also compared with competitor growth Geographic Growth Track revenue growth by geographic region to determine if market share is being gained or lost Company vs. Franchise Split the company based on franchise and restaurant income Grocery Same Store Sales Measure year-to-year change in sales in a fixed base of stores, a good company will have improving sales/sq foot growth Revenue Mix Look for growing revenue in all product lines with the most emphasis on store branded items (ex. Presidents Choice) Branding and Positioning Prices and margins will be determined by a companies brand power and ability to charge a premium Tuesday, October 4th, 2016 McMaster Investment Council

V Canadian Market

Canadian Market – Companies Consumer Discretionary Consumer Staples Tuesday, October 4th, 2016 McMaster Investment Council

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