1. Presented by: Erin Kennedy, Analyst Laura Kennedy, Principal Analyst Doug Hermanson, Senior Economist Home Improvement Webinar August 15, 2014 Home Improvement Webinar Driving Loyalty as Shoppers Narrow their Focus

2. © Copyright 2014 Kantar Retail Copyright © 2014 Kantar Retail. All Rights Reserved. 501 Boylston Street, Suite 6101, Boston, MA 02116 (617) 912- 2828 howard.zimmerman@kantarretail.com No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photography, recording, or any information storage and retrieval system now known or to be invented, without the express written permission of Kantar Retail. The printing of any copies for back up is also strictly prohibited. Disclaimers The analyses and conclusions presented in this seminar represent the opinions of Kantar Retail. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion. This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.

3. © Copyright 2014 Kantar Retail Agenda Macroeconomic Outlook –Forecasts –Home Improvement Twister: Stretching for the Corners of Household Growth Back to Basics: The Shopper Demands Functionality Closing Considerations: Aligning with Retailers to Create Loyalty 3

4. © Copyright 2014 Kantar Retail Home Improvement Forecasts 4Z

5. © Copyright 2014 Kantar Retail The 2014 Retail Landscape 5 Home improvement among the leading channels Recent Trends Home Improvement, drugstores, and food services outperforming Weak growth in most channels signals modest start to back-to-school Shoppers are spending, just not in a broad set of goods categories. Source: U.S. Department of Commerce and Kantar Retail Analysis *Includes discount department stores (mass merchandisers ex. supercenters) and conventional & national department stores **Includes warehouse clubs, supercenters and small-format value stores (value discounters). Excludes discount department stores (Mass merchandisers) ***The non-store channel includes the vast majority of online and catalog sales for all retailers.

6. © Copyright 2014 Kantar Retail 6 2014 Home Improvement Sales Forecast Home centers slower, but respectable growth in 2014 Household demand leads home centers A letup in lumber inflation contributes to slower growth Some recovery at hardware stores Inflation likely boosting paint stores Home Improvement Sales Growth % Change Yr-to-Yr, Not Seasonally Adjusted Source: U.S. Department of Commerce and Kantar Retail

7. © Copyright 2014 Kantar Retail This Year: 2014 Future: 2015 Past: 2013 Retail Sales: Building Supply Channel 7 Nominal versus inflation-adjusted or unit volume growth Sources: U.S. Department of Commerce, and Kantar Retail analysis Retail Sales Growth Rates NominalInflation-Adjusted Price Inflation NAICS Code =4441, Includes home improvement stores, hardware stores, building specialists, and paint supply stores. Excludes lawn and garden stores

8. © Copyright 2014 Kantar Retail Past: 2013This Year: 2014 Future: 2015 Home Improvement Sales: Channel Breakouts 8 Nominal versus inflation-adjusted or unit volume growth Sources: U.S. Department of Commerce, and Kantar Retail analysis Retail Sales Growth Rates NominalInflation-Adjusted Price Inflation NAICS Codes =44411: Home improvement centers (Lowe’s and Home Depot), 44419: Building Specialists, 44413: Hardware stores

9. © Copyright 2014 Kantar Retail Home Improvement Forecast Summary 9 Household vs. Pro. Households likely leading demand in 2014. Pro customers will lead acceleration in growth among home centers in 2015. More normal weather, low home inventories and sustained job growth will trigger more demand for new homes. Home Centers. Slower home sales that took root late in 2013 will have a lagging impact on home center demand in 2014. Appliance and flooring spending seems to be especially affected by the reduced housing turnover. Pro demand and sustained discretionary spending among households will lift home centers in 2015. Hardware stores. Hardware stores will manage a modest rebound in 2014, but they will lag home centers as big-ticket discretionary projects remain in favor. This trend is expected to continue in 2015, creating headwinds for hardware store growth.

10. © Copyright 2014 Kantar Retail Home Improvement Twister: Reaching for The Corners of Household Growth 10

11. © Copyright 2014 Kantar Retail Middle age groups will see little or no growth through 2020 Household Growth as Key Trend Source: U.S. Census Bureau and Kantar Retail Analysis 11 Growth is polarized toward youngest and oldest households U.S. Household Growth by Age Groups Compound Annual Growth Rates, 2012-2020 All Households Average Household Growth = 1.0%

12. © Copyright 2014 Kantar Retail Youngest/oldest households will become mostly Have-Nots Greatest uncertainty is whether young households will become Haves at stronger rate Household Growth as Key Trend Source: U.S. Census Bureau and Kantar Retail Analysis 12 Growth is skewed toward youngest and oldest Have Nots U.S. Household Growth by Age Groups Compound Annual Growth Rates, 2012-2020 Have NotsAll Households Have households Average Household Growth = 1.0% 2.0% ?? = Youngest Have Nots = Youngest Have households 3.8% 1.6% = Oldest Have Nots = Oldest Have households Summary: Household Growth Rates for Key Segments

13. © Copyright 2014 Kantar Retail Means strongest growth in totals of oldest, youngest Have Not households Means “graying” of Have households who stay skewed to middle-age households in peak income years Impact of Household Growth on Have/Have Nots? Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 13 Have Nots further polarize young/old… Graying of Haves Have vs. Have Not Households in 2020 Share of Segment by Age Group, Index to Total Age Group *Have Nots are households with average income of less than $60,000, representing about 60% of households **Haves are households with average income of $60,000 or higher, representing about 40% of households 18% 32% 18% 26% 21% 25% 28% / 79 / 127 / 114 / 76 / 114 / 82 / 91 / 116 ~60% of Households** ~40% of Households* Share / Index 2.0% ?? 3.8% 1.6%

14. © Copyright 2014 Kantar Retail Core set of factors are important to all shoppers But other factors are more important to specific age- income segments Success Hinges on Key Shopping Factors Source: Kantar Retail ShopperScape®, January and February 2014, and Kantar Retail analysis 14 Key is to zero in on difference makers for age-income segments Shopper DNA: Most Important Factors When Shopping How age-income segments differ from shared factors of importance Younger Older Interact with helpful, friendly employees Have fun/enjoy myself; Discover new products or brands Spend as little money as possible; Do all or most of my shopping in one place Purchase high-quality products HavesHave Nots Feel like I got a "good deal" Have a stress-free a shopping experience Complete my shopping as quickly as possible

15. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Average shopper mix is at center axis where: –Have Nots = ~60% of shoppers; Haves = ~40% of shoppers –Age 49 & under = ~50% of shoppers; Age 50 & older = ~50% of shoppers Read Whole Foods shopper mix as: –Distributed more so than average mix toward Haves (59%) and Age 49 & younger (62%) A Have & Have-Not Framework by Age Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 15 By mix of young/old and Have/Have Not shoppers by retailer Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ 1.6% 3.8% 2.0% ??

16. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Walmart, Retailers with Broad Appeal Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 16 Face greatest challenge from demographic and income trends Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ Personalization and contextualization capabilities will be key success drivers Leveraging loyalty programs could be advantage for Sears 1.6% 3.8% 2.0% ??

17. © Copyright 2014 Kantar Retail Differences Between Shoppers and HI Spenders Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 17 Have Households Home Improvement Capture Rate* Have Not Households Home Improvement Capture Rate* Lowe’s and Home Depot have similar capture rates for incomes and ages Walmart captures a higher share of younger have nots A small share of Sears shoppers spent the most on home improvement at Sears, but skew toward Haves Hardware stores capture a higher share of have nots, but similar across age segments *For example, read as among 18-34 Have households that shopped Walmart the past four weeks 22% spent the most on home improvement at Walmart

18. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Small-Box Formats Appeal to Young Have Nots Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 18 Walmart has current advantage with young, have nots Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ Benefit may go to small boxes that appeal to the fun/ enjoyment important to young shoppers Households likely light spenders on home improvement now, but Walmart has greater appeal to young have nots Benefit may go to small boxes that appeal to the fun/ enjoyment important to young shoppers Households likely light spenders on home improvement now, but Walmart has greater appeal to young have nots 1.6% 3.8% 2.0% ?? Location is representative and not exact for past four week Walmart shoppers in 2013 that spend the most on home improvement products at Walmart

19. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Older Have Nots Mostly an Open Quadrant Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 19 …but strongest household growth will be in this segment Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ Aldi may hold lessons of fewer SKUs that make it easier for this format to deliver better service valued by older shoppers Hardware stores and Tractor Supply in best position to fit needs of growing segment Aldi may hold lessons of fewer SKUs that make it easier for this format to deliver better service valued by older shoppers Hardware stores and Tractor Supply in best position to fit needs of growing segment 1.6% 3.8% 2.0% ??

20. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Older Haves: Core Home Center Shopper Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 20 Challenged by growth of older Have households Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ Can home centers keep shoppers as less inclined to walk a large store? Income prospects of core segment are bright, but changing needs of core shoppers and weak appeal to have nots a future challenge Can home centers keep shoppers as less inclined to walk a large store? Income prospects of core segment are bright, but changing needs of core shoppers and weak appeal to have nots a future challenge 1.6% 3.8% 2.0% ??

21. © Copyright 2014 Kantar Retail HavesHave Nots HavesHave Nots YoungerOlder Younger Older Online Competition/Opportunity Among Young Haves Source: Kantar Retail ShopperScape®, January-December 2013, and Kantar Retail analysis 21 Uncertain household growth among question marks Retailers' Shopper Mix Relative to Overall Shopper Mix For 2013, Based on Past-Four Week Shoppers Paycheck $ $ $ Household and Income Growth Where green = positive, yellow = mixed Paycheck $ Uncertain impact. Outlook clouded by lagging household formation, uncertain job prospects Certain impact. Rising incomes and changing behavior will keep leading shift away from traditional retailers— even if household formation lags Uncertain impact. Outlook clouded by lagging household formation, uncertain job prospects Certain impact. Rising incomes and changing behavior will keep leading shift away from traditional retailers— even if household formation lags 1.6% 3.8% 2.0% ?? Location is representative and not exact for past four week Sears shoppers in 2013 that spend the most on home improvement products at Sears

22. © Copyright 2014 Kantar Retail Have/Have Not, Gen Y/Boomer Implications 22 Older Haves. Home Centers will need to maintain loyalty and appeal of older Have shoppers, while stretching to areas of strongest household growth over the next five years. Digital tools and targeted deals/marketing may be the best strategies for this. Older Have Nots. May be best positioned to appeal to older have nots which will have the strongest household growth over the next five years. Customer service, easy to walk stores, value, and perhaps limiting SKU’s are important to capturing this shopper. Lowe’s and Home Depot may need to consider alternative small-box formats or store-within-a-store concepts to appeal to this growing segment. Young Have Nots. Walmart is best positioned to capture home improvement spending among the growing number of young have not households. Home centers will need to elevate their value proposition to gain a greater share of this growing household population. Young Haves. Wildcard?

23. © Copyright 2014 Kantar Retail Back to Basics: The Shopper Demands Functionality 23

24. © Copyright 2014 Kantar Retail 5.85.0 Setting the Stage: Shoppers’ Broader Store Set is Shrinking Source: Kantar Retail ShopperScape®, January-September 2007 and 2013 24 12.4 10.7 Average Number of Retailers in Shoppers’ Portfolio Blue-Total Retailer Portfolio Yellow-Core Retailer Portfolio

25. © Copyright 2014 Kantar Retail FUNCTION EMOTION TIME MONEY Are the Winners and Losers Just Flukes? From a shopper perspective, no. Source: Kantar Retail analysis 25 $ *  F 

26. © Copyright 2014 Kantar Retail Who Is the Shopper? Opportunities for unique triggers across cohorts Source: Kantar Retail ShopperScape®, January-April 2014 26 Relative Importance of Factor, by Generation More Important Less Important

27. © Copyright 2014 Kantar Retail Soure: Kantar Retail ShopperScape®, March 2013-May 2014 27 DIY Shoppers Prioritize Function and Emotion More Important Less Important (among shoppers who have shopped at a home improvement retailer in the past four weeks) Relative Importance of Factor, DIY Shoppers Foster loyalty with a functional and stimulating experience

28. © Copyright 2014 Kantar Retail Before the Project: DIY Retailers Can Lure Shoppers Source: Kantar Retail ShopperScape®, April 2014 28 (among shoppers who started a project in the past six months) How Shoppers Began to Gather Inspiration for Their Last DIY Project Note: The above categories were formed by grouping together similar means of inspiration. Blue equal sign indicates no significant difference vs. All Shoppers (90% confidence); Green arrow indicates larger percentage vs. All Shoppers (90% confidence); Red arrow indicates smaller percentage vs. All Shoppers (90% confidence).

29. © Copyright 2014 Kantar Retail Younger Shoppers Are More Likely to Plan to Use Retailer Services Source: Kantar Retail ShopperScape®, April 2014 29 Boomers = 52% I will buy the materials and do the work 18% A contractor will buy the materials and do the work 11% I will buy the materials and hire a contractor to do the work 6% I will buy the materials and have the store arrange installation Gen Y Boomers Gen Y Boomers (among shoppers who plan to start a project in the next six months) How Plan to Approach Their Next Home Improvement Project Note: Blue equal sign indicates no significant difference vs. All Shoppers; Green arrow indicates larger percentage vs. All Shoppers; Red arrow indicates smaller percentage vs. All Shoppers (90% confidence). Gen Y

30. © Copyright 2014 Kantar Retail Trip Preparation is Traditional Retailer websites, digital continues to gain influence Source: Kantar Retail ShopperScape®, April 2013 and April 2014 30 Top Ten Trip Preparation Methods (2014) Make a handwritten shopping list63% Look at printed store circular/ad for specific retailer(s) I am going to shop 45% Look at printed store circulars/ads to decide which retailer(s) to shop 41% Research merchandise online prior to shopping in store 37% Select paper/printed coupons to take with me on shopping trip 37% Look online to check availability of specific merchandise in the stores 30% Search for coupons online28% Look at online circular/weekly ad for specific retailer(s) I am going to shop 28% Look at online circulars/weekly ads to decide which retailer(s) to shop 26% Access a retailer Web site on a mobile device14% Significant Differences Versus 2013 Research merchandise online prior to shopping in store Look online to check availability of specific merchandise in the stores Look at online circulars/weekly ads to decide which retailer(s) to shop Access a retailer Web site on a mobile device Look at Facebook pages to decide which retailer(s) to shop Look at Twitter feeds to decide which retailer(s) to shop Significant Differences Versus 2013 Research merchandise online prior to shopping in store Look online to check availability of specific merchandise in the stores Look at online circulars/weekly ads to decide which retailer(s) to shop Access a retailer Web site on a mobile device Look at Facebook pages to decide which retailer(s) to shop Look at Twitter feeds to decide which retailer(s) to shop Top three methods are “analog”

31. © Copyright 2014 Kantar Retail Online, Home Depot’s Homepage Focuses on a Project Links shoppers to multiple resources Source: Retailer website, online circular 31 Home Depot’s circular mirrors its website. This consistency can help to earn shoppers’ trust.

32. © Copyright 2014 Kantar Retail Lowe’s Also Links Project-Oriented Solutions in Circulars, Email Source: Retailer circular, retailer email 32 In this Lowe’s circular, everything needed for the project is featured on one page, and the retailer gives shoppers options at multiple price points. An email from Lowe’s provides everything from inspiration to logistics

33. © Copyright 2014 Kantar Retail During the Trip: Bathroom Renovation Guidance Would Appeal to Younger Shoppers Source: Kantar Retail store visits 33 Alerts shoppers of installation services Directs shoppers to Pinterest for inspiration

34. © Copyright 2014 Kantar Retail Communication In-Store Lowe’s Features On-Shelf Education, Home Depot Offers Services Source: Kantar Retail store visits 34 Shelf signage outlines steps to replace screening and explains the differences between types of screening In the paint department, Home Depot alerts shoppers of painting services

35. © Copyright 2014 Kantar Retail At the Purchase: Provide Solutions to Keep Shoppers in the Store Source: Kantar Retail ShopperScape®, April 2014 35 Retailer had everything I needed I trust the retailer more than others Better productsBetter customer service Other Only retailer available where I live Better after-sale support/ warranty Better delivery/ installation options Retailer had everything I needed I trust the retailer more than others Better productsBetter customer service Other Only retailer available where I live Better after-sale support/ warranty Better delivery/ installation options “Other” Responses (among shoppers who completed a project in the past six month and purchased materials from one retailer) Reason for Purchasing from One Retailer for Last DIY Project

36. © Copyright 2014 Kantar Retail Product Availability Can Drive Shoppers to Another Retailer Source: Kantar Retail Shopperscape®, April 2014 36 Reason for Purchasing from More than One Retailer for Last DIY Project (among shoppers who completed a project in the past six months and purchased materials from multiple retailers)

37. © Copyright 2014 Kantar Retail At the Purchase: Large DIY Retailers Lead Conversion, But Struggle With Big-Ticket Purchases Source: Kantar Retail Shopperscape®, April 2014 37 Retailer Conversion Rates The Home Depot (Total)75% The Home Depot store75% The Home Depot website31% Lowe's (Total)71% Lowe's store71% Lowe's website27% Lawn and garden retailer66% Hardware store (e.g., Ace, True Value, etc.)62% Paint retailer (e.g., Sherwin-Williams)58% Menard's (Total)56% Menard's store56% Menard's website33% Carpet/flooring retailer55% Lumberyard48% Specialty home improvement retailer (e.g., kitchen and bath) 47% Large Home Improvement Retailers’ Likelihood of Conversion, Based on Project Type Painting exterior of home Minor landscaping (planting flowers, fertilizing lawn, etc.) Renovating kitchen or bathroom Installing new ceiling fan or lights Installing new carpet, tile, or hardwood floors Large Home Improvement Retailers’ Likelihood of Conversion, Based on Project Type Painting exterior of home Minor landscaping (planting flowers, fertilizing lawn, etc.) Renovating kitchen or bathroom Installing new ceiling fan or lights Installing new carpet, tile, or hardwood floors

38. © Copyright 2014 Kantar Retail Lowe’s Simplifies Shopping for a Paint Project by Providing Solutions and Guidance In Store Source: Kantar Retail store visits and analysis 38 Color coding simplifies on-shelf navigation Solution end caps removes friction along the path to purchase Appeals to the busy Gen X shopper

39. © Copyright 2014 Kantar Retail Offering Solutions Across Budgets Can Convert More Shoppers Source: Kantar Retail store visits 39 $$$$$

40. © Copyright 2014 Kantar Retail Displays Allowing Shoppers to Experience the Product Can Educate and Build Trust Source: Kantar Retail store visits 40 The ability to experience the product gives the shopper confidence that she is purchasing the correct product for her needs. It also suggests transparency on the part of the retailer/supplier, which can help to build trust.

41. © Copyright 2014 Kantar Retail Branded Educational Signage in Big Ticket Categories Could Help With Conversion Source: Kantar Retail Store Visits 41

42. © Copyright 2014 Kantar Retail Bathroom Vignettes: Solution End Caps of the Future? Source: Kantar Retail store visit 42 Bathroom pods feature coordinating products and accessories of different styles to inspire shoppers and potentially build baskets.

43. © Copyright 2014 Kantar Retail After the Project: Online Activity Presents an Opportunity to Engage Younger Shoppers Source: Kantar Retail ShopperScape®, April 2014 43 Percentage for All Shoppers in Parentheses (12%) (25%) (63%) What Shoppers Did After Completing Their Last DIY Project (among shoppers who completed a home improvement project in the past six month and purchased materials from one retailer)

44. © Copyright 2014 Kantar Retail Showcasing Shoppers’ Projects Can Create Emotional Connections Source: Company social media pages 44

45. © Copyright 2014 Kantar Retail Closing Considerations Offer cross-merchandised solutions. Make sure to articulate value. Aligning with retailers to create loyalty Source: Kantar Retail research and analysis 45 Providing a highly functional experience should be top priority. Once functionality is established, work to engage shoppers. Leverage online platforms to remove the friction along the path to purchase. Suppliers need to help large retailers convert shoppers completing big ticket projects. Engage the shopper with your brand and educate her on the merits of your product at the shelf. Help retailers simplify websites to make them more useful. Tailor your presence on social media sites to the different functions they serve.

46. © Copyright 2014 Kantar Retail Contact: Laura Kennedy Principal Analyst Laura.Kennedy@kantarretail.com +1 617 912 2851 www.kantarretailiQ.com Erin Kennedy Analyst Erin.Kennedy@kantarretail.com T:+1 617 912 2849 www.kantarretailiQ.com Doug Hermanson Senior Economist Doug.Hermanson@kantarretail.com T:+614.355.4044 www.kantarretailiQ.com