Helping You Drive Profitable Growth - One Inch At A Time Prepared for January 10, 2009

How Salty Snacks Can Help Salty Snacks is one of the key categories that requires the proper balance to optimize sales and profits. Are You Balanced? DSD Snacks Warehouse Snacks Salty Snacks is one of the critical categories that helps retailers drive traffic and generate significant profit dollars. The key is to make sure neither side of the profit equation is out-of-balance.   Important for Increasing Traffic Important For Driving Efficient Sales and Profit We can help you strike the proper balance and increase true profit, one inch at a time.

How Salty Snacks Can Help Compared to supermarkets, c-stores are behind in applying Category Mgmt to the Salty Snacks category. Share of Salty Snack Sales C-stores sales mix is skewed much heavier to DSD. Supermarket mix is driven by category mgmt analyses. 6 inches of c-store shelf space = 9 feet of supermarket shelf space. We can’t afford to be wrong. 80% 62% DSD 38% DSD 20% WHSE WHSE Before I dig into some of the recent learning we have with using the C/scape model, I thought it would be interesting to look at the Salty Snack “balance” that is being achieved in the supermarket channel today. In supermarkets, warehouse-delivered snacks average 38% of sales which, in large part, is due to the extensive category management work that is addressing consumer needs. Category management in c-stores is still a relatively underutilized concept and the result is a significantly higher snack sales mix is SKU’d towards DSD brands. We can attribute this to the strong in-store execution by the DSD drivers. What this tells us is that we probably do not have the right balance today. Supermarkets* C-Stores** Result of In-depth Category Management Based on Who Is In The Store *282 Store Supermarket Study **Source: C/SCAPE Study

How Salty Snacks Can Help In fact, when you look at “true” profit* contribution based on C/SCAPE analyses, Warehouse-Delivered Snacks are the largest profit contributors. Drivers Avg. Weekly True Profit Per Store Shelf occupancy is the largest ABC. Occupancy represents all of the stores operating costs allocated to each SKU based on its “fair share.” Products that are over-spaced will result in very high ABCs. Pringles is the most profitable salty snack brand with the highest true profit contribution at $2.27 per store per week. True profit represents what a you make each week after the brands and SKUs cover their “fair share” of store-level costs, e.g., rent, taxes, utilities, labor, capital, etc.   This positive contribution is driven by the high gross margins and the relative small amount of shelf space. Contrast this to AO DSD and Frito losing money. They have the lowest gross profit margins and take up the greatest amount of space. Space is a large contributor to costs and each brand has to pay for the space they take up on the shelf. Source: Five Chain C/SCAPE Study *True Profit = Gross profit + terms and allowances - ABCs (fair share of store labor, capital and operating costs).

How Salty Snacks Can Help Why does Frito-Lay lose money? Your cost to carry their product is greater than their adjusted gross profit dollars. Profit & Loss Statement (Frito-Lay vs. Pringles) DSD labor isn’t “free.” DSD has high indirect labor costs. These indirect costs (invoice processing) are equivalent to warehouse direct labor costs (ordering, stocking, etc.). Occupancy cost (fair share expense of shelf space) is significant. DSD margins and allowances are not large enough to cover the handling and merchandising costs. Remember in the average c-store, salty snacks generally uses 16% of the inside selling space and only generates 4% of the inside sales. That alone would indicate that the category is probably not making money. Of the space, generally Frito-lay has 75 % to 80%. The challenge then is to identify the proper balance of space and assortment to drive traffic and generate greater “true” profits. Source: Five-Chain C/SCAPE Study Gross Profit = Weighted gross profit over time (26-52 weeks) Terms & Allowances = Prompt payment discount, all promotional allowances averaged over 52 weeks including off-invoice, billbacks, MDFs, BDFs, buy downs, etc.

How Salty Snacks Can Help Frito-Lay allowances do not cover the gross profit gap. The Bottom Line Example Retailer Frito-Lay generates strong sales to the category. Frito-Lay generates important store traffic. Frito-Lay is also over-spaced and estimated lump sum monies do not cover the cost of the space. There is an opportunity to achieve more efficient sales and greater profitability with a better balance between DSD and warehouse brands. Rebates from Frito-Lay $517,000 No. of Stores ÷ 2,000 No. of Weeks ÷ 52 Weekly funds/store $4.97 Avg. weekly Frito-Lay sales/store $382.16 Lump Sum $4.97/$382.16 = 1.3% This slide is meant to drive discussion about Frito-Lays lump say payments to retailers. The lump sum payments only come out to 1.3% of sales and increase gross profit from 28% to 29.3%. This 1.3% is still not enough money to cover the ABCs of Frito-lay product. In addition, the 1.3% still doesn’t bring gross profit margins close to warehouse snacks.   Use this as an opportunity to drive home the importance and role of Frito-Lay in terms of driving sales and traffic. However, in the end revert back to the supermarket share mix (62/38) that optimizes consumer needs with profitability. Gap of 7.9% *Based on C/SCAPE Profitability Source: Five-Chain C/SCAPE Study

Retailers Can Make More Profits Selling Snacks: Warehouse-Delivered Snacks (WDS) Offer an Effective Merchandising Solution to Drive Retailer’s Sales & Profits WDS Deliver SUPERIOR Penny Profit & margins Versus DSD Snacks MVEs Improves The Visibility of Top-Selling WDS That Respond Well to Improved Placement Snacks Dollar Sales & Gross Profit Increased 20% and 23%, respectively And, Pringles Similarly Provides Retailers More Margin & Penny Profit in the Potato Chip Segment

Study #1: Willard Bishop Consulting Study---Two Chains & 600 Stores Snack Category Weekly Sales and Profit per Store Versus Year Ago* (Includes Alternative, Packaged Sweet & Salty Snacks) +20% vs. PY +23% vs. PY Evidence Retailers Merchandising an MVE are Securing Gains in Dollar Sales & Gross Profits of +20% and +23%, Respectively, Across all Snack Categories * Snack MVE Assessment, Willard Bishop, 2007.

A Financial Impact of the MVE Adds Up Category Dollar Sales & Profit Increases From The Snacks MVE Are Possible Without Raising Retail Prices or Re-negotiating Buy-Side Programs! Projected Impact of MVE on Snack Sales and Profits (Includes Alternative, Packaged Sweet & Salty Snacks) Evidence These MVE Results Confirm That An Average Store Could Grow Snack Category Sales & Profit by Nearly $12,500 and $5,000, Respectively, Per Year 1 SOI Report, NACS, 2007; 2 Convenience SuperStudy™, Willard Bishop, 2005; 3 Snack MVE Assessment, Willard Bishop, 2007.

FasMart's Snacks Assessment---Phase 2 National Brand DSD Snacks were identified to play an important role in the potato & corn chip segments Warehouse-Delivered Snacks play a bigger role in all other snack segments because of; Great brands. Higher margins.

Driving WDS Sales & Profits Direct Store Delivered vs Driving WDS Sales & Profits Direct Store Delivered vs. Warehouse Delivered Snacks

Snack Category Balance Is Important DSD WDS Traffic Driver Profit Driver Average Margins Average Margins 23% 28%+

Warehouse Delivered Snacks Are More Profitable The Value of Thousands of POWER Brands with Rebates, from Hundreds of Manufacturers, Across Categories; Drives Cost Down and Retailers Enjoy Higher Margins

Educate Your Customer Review Category Plans Identify and Build On High Margin Power Brands Optimize Prime Selling Locations Remove Duplicate Low Margin SKUs Assure In-Stock Position Plan In-Store Promotions

DSD vs. WDS Example, New England Independent Retailer Category: Chips Lay’s, 2.34 oz Uncle Ray’s, 3 oz Margin 30% 34% Retail $1.29/PP $1.19/PP Cost $.90 $.79 Category: Meat Snacks Oberto, 3.5 oz Pemmican, 3.65 oz Margin 26% 28% Retail $5.99 $5.99 Cost $4.41 $4.29 Category: Crackers Frito Lay PB, 1.38 oz Ritz PB, 1.38 oz Margin 30% 40% Retail $.30PP $.49 Cost $.21 $.29

Key Takeaways - Next Steps - WDS Sales & Margins can improve Leverage the scale, efficiency, effectiveness and brand strength of WDS