Driving innovation through the private brand organization July 2011 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

| 2 US consumers still feel pressured Are having a hard time making ends meet Are living paycheck to paycheck Are somewhat or very worried about losing a job Are making significant lifeplan changes because of declining asset values 38% 45% 42% 57%

McKinsey & Company | 3 Consumer response to the downturn that has created a “new normal”… PENNY pinching Cutting BACK Changing HABITS Shifting CHANNELS Trading DOWN

McKinsey & Company | 4 Percent intending to keep behavior Behavior Percent changing behavior …and consumers say these behaviors will stick Purchase private brand/ store brand products more 50 Purchase high-end designer/luxury brands less 45 Shop at mass merchants more 50 Go out to eat less60 Shop at club stores more35 Shop at dollar stores more40

McKinsey & Company | 5 19% 24% 16E14E12E10E $40 B Projected private brand dollar share Percent Flat growth assumptions ▪ Market has reached the equilibrium level of PL share at current levels ▪ Manufacturers provide a stronger value proposition for consumers and retailers that curbs PL attractiveness ▪ Retail economics continue to make PL investment difficult ▪ No external shocks occur Higher growth assumptions ▪ Consumers increasingly embrace PL ▪ Retailers like Walmart, Target, and Costco continue to grow PL ▪ Additional retailers expand PL offering to differentiate and compete ▪ Retailer consolidation continues As a result, US private brand share has the potential to reach 24 percent High growth assumption 2010 revised base 2007 base

McKinsey & Company | 6

| 77 Organization is more than just structure – each element plays an important role in driving innovation Style Skills Systems Strategy Staff Shared values Structure

McKinsey & Company | 8 There is no ‘one size fits all’ answer - the right organization depends on what you are trying to achieve Penetration Enhance profitability Improve value perception to win the weekly grocery trip Differentiate to drive trips, build baskets and cement loyalty Sophistication “The private brand journey” STRATEGY

McKinsey & Company | 9 Several key capabilities are required - the importance of eac capability depends on what you are trying to achieve Identify Market 1 Customer intelligence and trend identification 2 Product innovation 1 Supplier development 3 Product development 4 Quality assurance 7 Brand management 8 Packaging 9 Marketing and merchandising 12 Supply chain optimization 5 Category management 10 Supplier selection and negotiation Develop Source 6 Project management Measure 14 Performance management 13 Inventory management SKILLS

McKinsey & Company | 10 Tesco uses customer intelligence and trend identification to tailor ranges and products to different customer segments SKILLS

McKinsey & Company | 11 Good Best Their strong category management skills result in thoughtfully designed category architectures Tesco Strong Bitter £3.98 4x440mL Carlsberg Special Brew £4.72 4x450mL Tesco Value Lager £0.92 4x440mL Tesco Dutch Export Lager Hofmeister Lager £2.24 4x450mL Good Best Private brand SKILLS Better £1.78 4x500mL

McKinsey & Company | 12 To re-launch core-tier, ASDA leveraged existing and built several new capabilities, including product development ▪ 1,000 reformations, and 500 new products, all tested and approved by customers ▪ In-store signage and merchandising reinforce emphasis on customer input, with significant space dedicated to private brand items SKILLS

McKinsey & Company | 13 They also enhanced its customer insight capabilities to test products with consumers SKILLS

McKinsey & Company | 14 The right organization structure evolves as private brand becomes more sophisticated and developed Increasing PB penetration and sophistication Merchan -dising Technica l QA Brand mgmt Design Product develop- ment Marketin g Private brands team Private brands team Brand mgmt Product develop- ment Merchan- dising Technical QA Marketing Private brands team Brand mgmt Product develop- ment Technical QA Vendor Marketing Current merchandising organization ILLUSTRATIVE When it is appropriate ▪ Organization is fully aligned on the role of private brand – part of culture ▪ Private brands at maturity ▪ Cross-category innovation (e.g., Tesco Finest) ▪ Focus on rapidly expanding private brand tiers and ranges ▪ Focused on building core range and enhancing profitability STRUCTURE

McKinsey & Company | 15 These retailers have evolved their models over time Increasing penetration and sophistication ▪ Large dedicated team of ~350 employees focused on rapidly building out tiers and largely new items ▪ Integrated into merchant organization ▪ Small dedicated team for brand management and innovation ▪ Large dedicated team with limited integration with merchants ▪ Increased integration and collaboration with merchants (though not fully integrated like Tesco) STRUCTURE

McKinsey & Company | 16 Although Tesco has integrated private brand into its merchandising organization, a central team still drives cross-category innovation Commercial and Trading Director Category Director Brand Management Buying Product Development Technical Business/ Customer Planning International Buying Office; sourcing hubs, sourcing support Category Director (s) STRUCTURE:

McKinsey & Company | 17 Co-locating the Own Brand team with Merchants ensures alignment STRUCTURE Examples Category Manager Merch Planning Analyst (dedicated) Pricing and Promotions Analyst (shared) Marketing Analyst (shared) Supply Chain Analyst (shared) Own Brand Analyst (shared) Space Planning/Analyst (shared) Merchant-led category team structure

McKinsey & Company | 18 A ‘national brand-like’ top-to-top process could help set private brand strategies and drive innovation Supply chain improvements CRM-based tactics Exclusive packaging Expanded Assortment Availability improvements New shopper marketing programs Exclusive products New pricing strategy New promotional strategy New merchandising strategy Types of collaboration efforts Percentage of respondents Differentiators Good hygiene Others Winners SYSTEMS – PROCESSES

McKinsey & Company | 19 A competitor formulation breakdown process often create unprecedented transparency and identifies cost savings 90 DISGUISED PRODUCT EXAMPLE Product AProduct BProduct CClient product Country origin 3 Country origin 2 Country origin 1 Fruit juice example Base 100 NOTE: Pictures are illustrative and not representative of actual products SYSTEMS – PROCESSES

McKinsey & Company | 20 Fast follower apparel retailers clearly identify who they are following and have processes to track trends SYSTEMS - PROCESSES $230 $49 90

McKinsey & Company | 21 UK restaurants Niche products in North America Restaurants in urban markets UK C/L Example: Indian food in the mass market The same systematic approach can be applied in food SYSTEMS - PROCESSES Private brand development

McKinsey & Company | 22 KPIs need to be tailored to the organization and where it is in the private brand journey ▪ Overall category profitability (rate and $) ▪ Private brand profitability – overall and penny profit relative to national brand ▪ Private brand SKU efficiency (i.e., sales per PL SKU) ▪ Private brand penetration by category ▪ Growth in private brand penetration, with targets assigned to category and private brand teams ▪ Private brand market share and share of growth ▪ Percentage of sales from new private brand items ▪ Private brand brand value perception (from customer) ▪ Number of private brand SKUs vs. competitors ▪ Number of new items launched ▪ Private brand health (quality, value, and innovation) NOT EXHAUSTIVE SYSTEMS - MEASUREMENT Foundational metrics Growth and innovation metrics

McKinsey & Company | 23 Finally, highly visible, senior-level commitment to private brand is required to deliver a differentiated program Private brand penetration grew over 15 points during Leahy’s term as CEO Private brand is embedded in several areas of the “steering wheel” that is used to measure performance and guide decision making SHARED VALUES

McKinsey & Company | 24 At Loblaw, both Dave Nichol and more recently Galen Weston have successfully championed private brand Dave Nichol created a “control brand culture” when he launched and built out the PC and No Name brand. In more recent years, Chairman Galen Weston has championed private brand and commitment remains strong SHARED VALUES

McKinsey & Company | 25

McKinsey & Company | 26 Skills Strategy ▪ How well has the organization defined its aspirations for private brand and is there alignment on these aspirations? ▪ What skills does your organization excel at today and how can you better leverage these to drive innovation and growth? ▪ What are the key areas that you need to shore up to achieve your aspirations? Key questions to help you get started

McKinsey & Company | 27 Systems/ Processes Key questions to help you get started ▪ How well have you defined your sources of innovation? How systematic are your scans of these sources and how do these scans feed the pipeline? Retailers: ▪ What national brand processes could be effectively applied to private brand to drive innovation and growth? Suppliers: ▪ How could you change your interactions with your customers to drive growth?

McKinsey & Company | 28 Systems/ Measure- ments Shared values Key questions to help you get started ▪ How do you define success today? ▪ Are there simple changes to KPIs that could quickly create better alignment and focus on aspirations? ▪ How integral is private brand to your corporate strategy? ▪ Do Senior leaders champion private brand? If not, what are the barriers?