IndependentsSupportingIndependents

Annual Report 2012IndependentNatural FoodRetailersAssociation

The Members of INFRA have heard over the past year how rapidly their Association grew. So much happened in 2012, our 7th full year of operations, that it is impossible to capture it all in this Annual Report. When I work with the INFRA staff and Board to measure success, I examine both the tangible and intangible activities. I look at the numbers that we are able to gather around member participation in programs and I look at the overall culture that we represent within the natural and organic food industry. I look at how the work that we do supports the core values and strategic directions the Board of Directors have articulated and I assess what I refer to as “organizational readiness” to take on the next big thing that will help our member stores thrive into the future.

We started 2012 with 65 members and ended on December 31st with 100. We gained 37 new members and lost two. Adding members at this level required an ability to remain nimble, add staff, increase our program offerings to ensure that INFRA could meet some of the needs of each member, and continue to build the community to allow for additional opportunities to work together as a virtual chain.

While we are making progress in member participation, our numbers illustrate that we have room for improvement. Aggregating activity of all 100 members through the use of scorecard reporting, the results for 2012 were:

• 45% of all members submitted estimates for the SPC Program

• 57% of members participated in the Grocery Buyers Calls

• 71% participated in Wellness Buyers Calls• 44% of the membership attended Category Reviews• 44% attended at least one in-person event• 18% use CoopMetrics• 24% are using the online Retail Training Program

INFRA members saved $1.796 million on $7.474 million of purchases through the EDLP, Co-Brand, Operational Supplies, LN and ECRS programs. (We don’t have an effective way of capturing

the financial impact of the SPC program, though we suspect that it would be fairly high)

The number of programs and activities that INFRA facilitates for retail members to align under often challenges me; however, looking at our participation numbers reinforces the fact that different programs are necessary in order to meet the diverse needs of our membership. Every individual member of INFRA finds benefit in something; our challenge is getting the right combination of offerings, education, and communication to support and increase participation in order to accomplish our vision as a purchasing cooperative.

Throughout 2012 we increased staff capacity at INFRA so that we could better serve members. We added six new positions, of which five were filled in 2012 and one remained open. Lyndsay Griffith, INFRA’s SPC Coordinator and second employee (after me), moved on and we hired a new Bookkeeper. In addition to staff we added programs, ECRS, the Retail Training Program, and marketing activities. We increased our offerings in our existing programs, did feasibility work for a Controlled Supplement Label, and increased the number of Regional Share Groups.

We also increased our visibility in the industry through our shared purchasing activities, our presence at tradeshows, and our organized position around the important issue of Non-GMOs. INFRA Members continue to be the leaders in supporting the Non-GMO Project. We raised 77% of all contributed retailer funds to the Project during October’s Non-GMO month. Many of our members are in the lead with their product standards statements and commitments to provide their consumers with the cleanest products possible.

Generally, overall, 2012 was another exceptional year for INFRA. It is exciting and continues to be a joy to work together as a group of diverse independent retailers who, while having meaningful differences, do share a common vision and mission. Good, real food for more and more people now and into the future. I look forward to what 2013 will bring.

CEO’s Report from Corinne Shindelar, CEO

14%

39%

47%SPC ProgramMisc ProgramsDues

2012 Income

4%

33%

5% 31%

27%

Cost SPCMisc Program CostsOverheadStaffingMember/BoardOther (Income)/Expense

2012 Expenses

0

40

80

120

160

2008 2009 2010 2011 2012

# of Members Goal Store Fronts

INFRA exceeded budgeted income expectations in 2012 by 16%. Income growth over 2011 was 42%, with a net profit increase of 57%.

Highlights of 2012 were:

• Our growth in the SPC program was very close to budget, exceeding it by just 1%. The SPC program came in at 48% growth over 2011. Our costs for the SPC program came in at 18% under budget and just 8% over 2011.

• We added 37 new members in 2012, which represents a 37% growth in dues over last year and 13% over budgeted dues income expectations.

• Our staff grew to 11.5 FTE’s in 2012. We came in under the staffing budget by 17% as we are still looking to fill a Regional Director position.

• Overall program costs increased by 65% over last year. We came in just 1% over budget for Miscellaneous Program costs, which included the development of the

Retail Employee Training Program, the ECRS pricing agreement, and the Controlled Supplement Label feasibility study and trademark expenses. 2012 also included a significant increase in our Category Management offerings. We offered one Category Management webinar in 2011, increasing that number to nine in 2012.

• We paid out 20% cash dividends in 2012 on our 2011 income, amounting to a total of $32,771. We did the same in 2013 per a vote at the Board of Directors’ meeting in February 2013. The total cash dividend paid out on our 2012 income is $44,238, a 35% increase.

Looking back to 2008, our total income was $318,123; in 2012 our total income was $1,313,288. That is an incredible 313% increase in five years! Total equity has also grown with the addition of new members, increased participation in our pass-through programs, and the SPC program. This puts us in a healthy position to further our mission and deliver increased benefits to you, our member-owners.

2012 Year End Financial Results by MJ Mueller, Bookkeeper

0

180,000

360,000

540,000

720,000

900,000

2008 2009 2010 2011 2012

INFRA Historical Income

0

70,000

140,000

210,000

280,000

350,000

2008 2009 2010 2011 2012

Cost SPCMisc Program CostsOverheadStaffingMember/BoardOther (Income)/Expense

INFRA Historical Expense

SPC ProgramMisc ProgramDues

Balance Sheet 2012 2011ASSETSCash on Hand $621,339 $349,621Other Assets $54,952 $36,434TOTAL ASSETS $676,291 $386,055

LIABILITIES & EQUITY

Liabilities $0 $0

Members' Equity $169,298 $164,842Retained Earnings $218,605 $37,282Current Year Earnings $288,388 $183,931Total Equity $676,291 $386,055

TOTAL LIABILITIES & EQUITY $676,291 $386,055

2012 Financial PerformanceProfit & Loss

INCOME 2012 2011SPC Program 892,150$ 603,547$ Misc Programs 231,939$ 184,173$ Dues 189,199$ 138,186$ TOTAL INCOME 1,313,288$ 925,906$

EXPENSESCost SPC 271,304$ 252,292$ Misc Program Costs 320,409$ 194,171$ Overhead 53,259$ 46,110$ Staffing 341,847$ 196,230$ Member/Board 38,591$ 42,193$ Other (Income)/Expense (510)$ 10,979$ TOTAL EXPENSE 1,024,900$ 741,975$

PROFIT/(LOSS) 288,388$ 183,931$

Dear INFRA Members,

The retail environment is rapidly changing and the products we, as independents, used to sell exclusively, are now carried in many conventional grocery stores at very competitive prices. The knowledge that customers used to come to us for is now abundantly available on the Internet, we have to be skillful and nimble to evolve and keep ourselves relevant in today’s marketplace. INFRA provides a unique opportunity for independents to gain the advantages of larger chain stores by incorporating cutting edge knowledge into how we operate our businesses.

A Natural Grocers by Vitamin Cottage store is opening 1.7 miles from my LifeSource Natural Foods store in Salem, Oregon, and their store will be 50% larger. Natural Grocers is a fast growing chain of 62 stores in the west, opening one new store per month. I have visited Natural Grocers and found they have high quality product standards, sell the same brands, provide 100% organic produce, and have everyday food and supplement prices averaging 20-30% lower than mine. I wondered whether I was pricing my products too high. I used CoopMetrics to look at the gross profit margins other stores were achieving. I found that my store was slightly below average in our gross profit margins compared to other INFRA members. I wanted to find out what was happening to others when Natural Grocers came to their town, many of these were INFRA members. Participating in Share Groups and the listserv helped me in reaching out to fellow INFRA members to ask about their experiences. There was a range of responses, one store grew 3%, and another lost 40%; however, most stores lost 10-25% of sales initially. I focused on the stores with the smallest amount of loss. I found advanced planning, including remodels and expansions, strong pricing strategies already in place, and larger stores with strong periphery departments did better.

Based on advice from fellow INFRA members and industry consultants, I developed the following three strategies to focus on:

• Continue to provide excellent customer service and do it even better;

• Significantly improve our competitive price image; and,

• Improve our periphery departments, particularly our deli and produce departments.

We take pride in the great customer service we provide; however, we know there is always room to grow and do better. Here are some of the things we are focusing on to prepare for competition:

• Adding a customer service position to provide for a roving staff person;

• Utilizing INFRA’s Retail Training Program to better educate our staff;

• In-house training sessions for front-end staff to reinforce and refine our customer service practices; and

• Utilizing information from two INFRA store audits while hosting Share Groups.

INFRA supports our efforts to improve our competitive price image through its “virtual chain”. It takes a lot of time and effort to negotiate deals with manufacturers and distributors, and INFRA staff work and provide our EDLP, Co-Brand, and SPC Programs. We are planning to use the EDLP and Cadia Co-Brand programs to offer a lower price option on product closer in price point to Natural Grocers pricing. We will be using the SPC Program to offer great monthly deals. We are looking forward to INFRA someday creating a joint purchasing agreement with a major distributor in the Northwest to help lower our cost of goods. We have hired Annie Hunt, who does the Category Management

webinars for INFRA, to consult with us around our pricing strategies. We will keep working with improving our inventory mix and pricing using INFRA’s Category Review webinars.

Through studying the Natural Grocers stores, we have learned they are very strong in their center store core sets, but weaker and more limited in their periphery departments so to differentiate ourselves, we will improve our periphery departments. We can see, by using CoopMetrics, that many INFRA stores do 15% or more of their business in food service. Our deli currently makes up 7.5% of our sales, our goal is to increase our deli sales to 12.5% of our total sales. We will expand our produce department by adding an 8 ft. produce multideck. Recently, there was a great discussion on the INFRA listserv about different approaches to doing produce signage and we are in the process of choosing a new signage system for that department. We are considering how to improve our fresh meat department since it is one of our fastest growing departments; currently, we have all prepackaged meats. I talked with an INFRA Member who has stores similar in size about offering a customer service meat department rather than our grab and go. They pointed out that some seafood and meat products sell much better with a customer service meat program so we are exploring this option for the future.

The Natural Grocers store coming to Salem is our big challenge for the present. It causes us to draw upon all our resources to improve what we are doing to be ready for even bigger challenges coming in the future. Stepping back from my own drama for the moment, I am very happy to see natural and organic foods becoming so popular that more stores are opening and that conventional grocery stores are selling more and more of these products. I am really glad that INFRA is here to support us in our mission, so that we may all be eating healthy organic foods.

President’s Report from Alex Beamer, Board Chair

Board of Directors

Board Chair Alex BeamerVice Chair Joe Nolan

Secretary/Treasurer Laughing WaterDirector Summer Auerbach

Director Terry BrettDirector Aaron GottschalkDirector Kimberly Hallinan

Director Jennifer MurrayDirector John Pittari

Director Cindy Weinfurter

INFRA Chief Executive Officer Corinne Shindelar

2727 26th Avenue South, Minneapolis, MN 55406 Phone: 612-724-1530 Fax: 612-435-2379http://www.naturalfoodretailers.net info@infretailers.com