Finding the Win/Win in Promotional Spend May 21, 2013

TODAY’S PRESENTERS Dennis Moore - Global President Advanced Analytic Consulting, Nielsen Dennis is global lead for Advanced Analytic Consulting, a function dedicated to solving client business issues through the application of analysis and consulting. He brings 20+ years of experience delivering analytic solutions to some of the largest marketing organizations in the world. Michelle Christensen - Senior Analytics Lead, Wrigley Gum Michelle advises the business on price and pack strategy, investment decisions and business performance. Prior to this role, Michelle held positions across Consumer Insights, Category Management and Analytics for companies including Quaker, PepsiCo and Wrigley. 2

What we’ll cover How to better understand the impact of your Trade Promotions 1 High level insights on trade promotions 2 Wrigley Case Study 3

2012 North American Dollar Sales Everyday and promoted price - two levers controlling over $701B in sales & profitability 2012 North American Dollar Sales Across All Categories Promoted prices control 31% of total dollar sales Everyday prices control 69% of total dollar sales North American Number including US and Canada Source: Nielsen North American AOC 2012 w/e 12/29/12

Significant investments are made … COGS Adv Dist R&D Trade Promo Trade Spend is the 2nd largest manufacturer expense...has nearly doubled in the last 10 years and now represents 20+% of Revenue for FMCG firms ex alcohol/tobacco Total CPG industry estimate is $200B per year (Gartner and Promotion Optimization Institute joint estimate) Universally acknowledged that the spend is rife with inefficiency and waste Unsatisfied with current solutions for Trade Planning and evaluation Manufacturers are often making commitments on trade promotion budgets to retailers before operation plans have been established for the next year Need to think about trade promotion impact on retailer and manufactures Manufacturers: incentive misalignment in income vs. margin disconnect between retailer view of planning process vs. manufacturer Retailers: Key source of profit Category growth vs brand growth Trade Promotion is essential for shelf placement, feature & display presence and pricing tactics

squeezing profits and impeding growth The current environment is placing increasing pressure on retailers and manufacturers Frugal Consumers Cost of Goods Competitive Retail Landscape Bimodal consumer will continue to force difficult decisions that require unique focus on value and benefits for both products and stores Elevated and volatile commodity costs will continue to strain manufacturers and retailers The unique context and goals of each brand and retailer in each market often creates conflicting objectives squeezing profits and impeding growth

Consumers exhibit several behaviors when exposed to trade promotions in-store Purchase the same brand as they otherwise would have during that shopping trip Switch to the promoted brand for that purchase during that trip Pick-up the promoted brand in place of a purchase at another store Add the promoted brand as a truly incremental purchase Subsidized base is a special case of purchase when the same brand normally purchased is the brand on promotion Switching refers to a change in a consumer’s natural purchase behavior and the action of selecting the promoted brand Pick-up refers to the expansion of the shopping basket and the decision to purchase an item on deal that the consumer would have typically purchased at another store on a different trip Adding the promoted brand expands the consumption of a particular category 7

PSOV Methodology When increased promotions no longer drive category sales growth, our analytical approach must change Current Paradigm Purchase Behaviors Store Switch Brand Switch Non – Promoted Volume Subsidized Volume Incremental Volume Time Switch Market Expansion New Paradigm

Nielsen assets allow us to model to micro trade area for competitive effects Stores in Connecticut Brand A Brand B

Who actually benefits from the different sources of promoted volume? Promotional Impact Framework Manufacturer Benefit Retailer Benefit High Low Retailer Growth Same brand switching across stores Mutual Growth Market expansion & mutual share gains Subsidization Volume that would have been sold Manufacturer Growth Competitive brand switching within store The challenge is to develop promotions that drive market expansion and deliver mutual benefit to the manufacturer and retailer By aligning benefits in the promotional impact framework we can identify the win/win for retailers and manufacturers For simplicity in this work, we consider brand as the highest unit of manufacturer benefit. In live project work, we can of course define this at the manufacturer portfolio level. Source: Nielsen PnP and Retailer Switching Models 10

Less than 10% 10% to 20% 20+% I have no idea POLL #1 In general, how much of promotional spending actually drives mutual growth? Less than 10% 10% to 20% 20+% I have no idea

Are the $215.9M promoted sales truly incremental? Promotional Impact Framework Manufacturer Benefit Retailer Benefit High Low Retailer Growth Mutual Growth 32% 17% Subsidization Manufacturer Growth 27% 25% Across North America, both US and Canada, 17% of incremental volume drives mutual growth benefiting the retailer and the manufacturer across the 30 categories analyzed For simplicity in this work, we consider brand as the highest unit of manufacturer benefit. In live project work, we can of course define this at the manufacturer portfolio level. Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models 12

Poll #2 Which Country is more likely to see mutual growth….Canada or United States? Canada United States They are the same They are essentially the same

Promotional Impact Framework Overall, Canada and US have very similar offering for promotional Win/Win Promotional Impact Framework Manufacturer Benefit Retailer Benefit High Low Retailer Growth Mutual Growth 28% 33% 19% 16% Subsidization Manufacturer Growth 29% 24% 23% 28% Across North America, both US and Canada, 17% of incremental volume drives mutual growth benefiting the retailer and the manufacturer across the 30 categories analyzed For simplicity in this work, we consider brand as the highest unit of manufacturer benefit. In live project work, we can of course define this at the manufacturer portfolio level. Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models 14

Poll #3 Which category provides the most mutual growth? Beer Cereal Coffee Frozen Entrees Laundry Detergent

Stockable and Expandable Categories Find the Promotion win/Win Mutual Growth share of total Promotions 16% Mutual growth is influenced by true market expansion which tends to be higher for expandable categories and cross-store brand switching which is higher for stockable categories Categories that drive high mutual growth tend to be stockable as well as expandable US Specific Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models

share of total Promotions Categories with Large competitive landscapes and lower brand loyalty increase possibility for manufacturer Growth Manufacturer Growth share of total Promotions 40% True differences in manufacturer only growth will come from in store brand switching in this case. Categories that see large competitive landscapes and low brand loyalty will increase the chance for a manufacturer promotional win regardless of market expansion or retailer growth. US Specific Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models

share of total Promotions Storable and planned categories are most likely to draw purchases from other stores Retailer Growth share of total Promotions 48% With categories like coffee, soup, frozen hot snacks, and isotonics taking the lead again, its clear that storable, planned, trip drivers are what increases promotional retailer growth. US Specific Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models

share of total Promotions Using promotions Strategically are key for categories with high subsidization Subsidization share of total Promotions 27% Highly subsidized categories such as Beer, Medicine, Diapers have a difficult time driving the Win/Win Driving improved promotional efficiency is critical to improving the benefits for retailers and manufacturers Note: 30 category average 2013 Source: Nielsen Promotional Source of Volume Models

Strategize opportunities in promotional execution to find that promotion win/win There is no right answer, it will depend on your category and your brand as well as the channel

In summary of initial insights… Whether a manufacturer or retailer, more than half of your trade dollars aren’t working for you? Stockable and expandable categories = mutual growth Large competitive and lower brand loyalty = manufacturer growth Storable and planned categories = retailer growth Impulse oriented categories and highly promoted categories = more subsidization More effort on in-store promotions, or out of store promotions, or building brand loyalty can move from one box towards mutual growth Manufacturer growth – snacking and confectionary categories rank high like chocolate, candy, cookies. Cereal & cheese are other high ranking categories where it they are highly brand competitive and there is low loyalty. Retailer growth – interesting dynamics are at play here. Categories that are more planned and storable have a tendency to contribute to more retailer growth. We see Coffee and Soup ranking really high which likely have some habitual nature to them, there are strong brands that exist in these categories, but price position is a key driver that influences where consumers will shop for these planned categories. Categories like Laundry Detergent and Facial Tissue drive some of the most significant store switching for their brands and when you think about power brands like Tide & Kleenex it is likely the equity of these brands is helping drive that distinction. Subsidization – two of the most highly subsidized categories are beer & soft drinks. The high degree of promotions on these categories really mean there is little impact any more from these promotions. This can be a difficult situation to get out of because for most retailers and manufacturers it can almost be table stakes to compete effectively in these competitive categories. Other high ranking subsidized categories are Gum and Heart Burn relief. Gum can be impulsive for sure, but there can also be a regular, routine consumption nature to the category making the promotions less likely to drive expandable consumption than other snack categories. Heart Burn Relief may be more obvious in that when you need relief, you need relief and promotions will not likely be the key driver of purchase. Unless you find yourself already in the promotional win/win situation, what types of things should you be doing to help position yourself closer to that optimal positioning.    In the cases of categories that are heavy in manufacturer only growth (lower right quadrant); we see cases of larger competitive landscape categories with higher brand switching like Candy and Cereal.  With strong manufacturer growth, we can infer that they already have strong strategic execution of in store promotions (Displays and TPRs) that help encourage brand switching and in order to move towards that promotional win/win those categories would want to focus on strategic out of store promotions (Features) to increase retailer switching as well. In the cases of categories that are heavy in retailer only growth (upper left quadrant); we see cases of those storable and plannable categories that we discussed before like Sports Drinks and Frozen Hot Snacks.  With  these categories that are exceptionally strong in retailer only growth, we can infer that they have already have strong execution of out of store promotions (Features) that help encourage retailer switching and in order to move towards that promotional win/win those categories would want to focus strategic in store promotions (Displays and TPRs) to increase manufacturer switching as well. The last quadrant piece, which is our categories high is subsidization; “planned impulse” categories like Milk, Beer, and Gum.  These categories can try reducing promotion spending in order to increase effectiveness to their in and out of store promotions when they do run them in order to increase both their manufacturer and retailer growth to achieve that promotional win/win. More insights to come!

Wrigley Gum PSOV Case Study Confidential

Wrigley Gum Situation Declining Gum Category 60% category share with vast brand portfolio YoY losses in promotion effectiveness New questions from Sr. Management: Is there a role for promotion in an impulse category?

Analysis of the “database view” could not answer our complex, but real issues in promotion strategy Does promotion benefit the category? To what degree do we create value for the Retailer and Wrigley? How much subsidization happens on a brand after pack-type switching and pantry loading? -% Chg vs YA Incremental 10% Base 90% -% Chg vs YA

PSOV helped Wrigley uncover the true impact of promotion Database View PSOV View Incremental 10% Mutual Benefit New volume to category or would have bought competitive in another channel Wrigley ONLY Benefit Would have purchased Competition Base 90% Retailer ONLY Benefit Would have purchased Wrigley in another channel Subsidized Retailer and Wrigley Would have purchased Wrigley today or in the next two weeks

% Promotion Incrementality to Manufacturer/Retailer Wrigley uncovered differences across brands & how they laddered to portfolio and category value % Promotion Incrementality to Manufacturer/Retailer Brand B +lift

Wrigley could also address some long-held stakeholder hypotheses with facts Retailer A’s “Mega Discount” creates pantry loading. Feature activity in Retailer X creates above average switching with Retailer Y and hurts category profitability. Promotion activity on Packtype A (low margin) sources from Packtype B (high margin) and is dilutive for Wrigley and our Retailers.

Wrigley promotion Comparison Finally, PSOV led to a simple framework to guide our promotion investment decisions Wrigley promotion Comparison HIGH LOW LOW HIGH

magnitude & importance of insights led to a 3-year glide path to full in-market implementation Educate & Align Wrigley Organization Optimize against “low hanging fruit” 2013 Test & Learn on more provocative findings 2014 “Step Change” the role of promotion and investments within the Portfolio 2015

Path to more effective trade promotions More than half of all promotions are not working for you. In fact, only 17% of all trade promotions are truly incremental to both retailer and manufacturer Promotional Source of Volume can provide a new lens to view your trade promotions Determine the true return on your trade promotions Answer a lot of long held hypotheses Identify where to allocate promotional dollars for greatest impact (Brands, Channels, Portfolio) Develop win/win solutions for my brands and retailers 1 2

THANK YOU! Q&A If you have follow-up questions or want more information, please contact your Nielsen Professional Services rep If you are not a current Nielsen client, please contact us Phone: 800-553-3727 Email: CPGSolutions@nielsen.com OR, if you have any questions regarding the content of this webinar, you can also contact: Dennis Moore, email: Dennis.Moore@nielsen.com Other Nielsen Contacts: Doug.Bennett@nielsen.com 31