THE CHANGING

CONSUMER LANDSCAPE

TRISTAN KITCHENER | +61 407 827 738tristan@kitchenerpartners.com.au | www.kitchenerpartners.com.au

The analyses, forecasts and projections contained in this report represent Kitchener Partners’ considered opinion based on the sources as cited. Kitchener Partners has taken reasonable care in the preparation of this report, but does notand will not warrant that the estimates, future events or projections herein can or will be achieved. Whilst reasonable care has been taken to confirm the reliability of the information and opinions expressed herein, no warranty is madeas to the accuracy or completeness of this document. Kitchener Partners and its affiliates and/or any related corporation (as defined in the Corporations Act 2001), its officers, directors and employees accept no liability for theinformation or findings contained in this report or any other communication be it written or otherwise in relation to the subject matter of this report.

GROCERY INDUSTRY GROWTH YOY (%)

DISCOUNTERS MARKET SHARE (%)

THE CHANGING RETAIL LANDSCAPE

AGENDA

CURRENT AND FUTURE CONSUMER DRIVERS

THE LIKELY FUTURE STATE AND OPPORTUNITIES

LARGE VS SMALL RETAILERS (% GROWTH)

Source: Company Data, Morgan Stanley Research

% G

row

th Y

OY

RETAILER MARKET SHARES (AUSTRALIA)

34.8%

$38.8 bn

27.7%

$30.9 bn

11.3%

$12.6 bn

8.6%

$9.6 bn

1.1%

$1.2 bn

0%

$0.0 bn

Other

Supermarkets 16.5%

$18.4 bn

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY23E FY24E FY25E FY26E

Chart Title

Woolworths

Coles

IGA

Aldi

Costco

Kaufland

Source: Company Data, Morgan Stanley Research

% M

ark

et

Share

ALDI STILL AUSTRALIA’S MOST-TRUSTED BRAND IN 2019…

• DISTRUST leads to consumer churn

• DISTRUST kills consumer engagement

• DISTRUST kills supplier engagement

• DISTRUST is the tipping point for reputational

damage and an unsustainable future

Source: Roy Morgan Single Source 2019 – All brand Net Trust Score survey (n=4,000)

Top 10 Brands by Net Trust Score

Source: Morgan Stanley; Coles F&L, WW F&L until 2015, then F only until 1Q16

WOOLWORTHS vs COLES F&L LFL SALES GROWTH (%)

The supermarket war

turns into a Mexican

stand-off…

WHAT ARE THE CONSUMER

NEEDS?

THE TRADITIONAL CONSUMER HIERARCHY OF NEEDS

Ethics

Environment

Animal Welfare

Food Fraud / Sabotage

Unnatural Production

Healthy Nutritional Food

Food Safety

FOOD SAFETY

ROCKMELON SALES IMPACT (WOOLWORTHS)

LISTERIOSIS RECALL, 1st March 2018$60m sales lost

Un

its

Pe

r St

ore

Pe

r W

ee

k

Jul 17 Jan 18Jan 18 Jul 19 Dec 19Jul 18

COST OF A RECALL

DON’T UNDERESTIMATE THE COSTS OF A RECALL…

EVERYONE SUFFERS FROM THE IMPACT……including ‘Brand Australia’

From Sept 2019: 230+ (and continuing) incidents of tampering by consumers (anti-social attention seekers and on-line hoaxers)

KEY OUTTAKES FROM STRAWBERRY CONTAMINATION

WHAT WENT WRONG?

Centralised crisis management to slow

the acceleration of public concern

Starting a new (positive) conversation:

“cut ‘em up don’t cut ‘em out”

i.e. balance the consumer risk vs public scare,

and position the grower as the victim

No appointment of a crisis management specialist

= no containment of public concernFailure to warn and engage industry left:

• growers and suppliers unprepared and vulnerable

• prompted retailers to quickly recall ALL strawberries

from sale

No consistent messaging or control actions across states resulted in unnecessarily

scaring the public, encouraging copycats and perpetuating the crisis…

Good Issues Management comes down to:

• extensive preparation

• rigorously tested protocols

• commitment to structured communication

Robust traceability systems to only

withdraw affected product

WHAT

WORKED?

THE

LEARNING

Source: Issues Management, SDA Strategic 2019

WHAT ARE THE FUTURE

DRIVERS?

“The best way to anticipate change in your sector is to spend time outside of your sector”

Michael Cameron, GPT

• Only 9% of the plastic ever produced has been recycled

• The average plastic bag is used for just 12 minutes, but takes up to 450 years to break down

1. SUSTAINABILITY

• Food waste

• Packaging

Photographer: Chris Jordan

GREEN APPEAL

• Removal of dark coloured plastic (harder to recycle)

• ‘Pre-cycle’ areas in store for consumers to remove 10 and 20 packaging

• Removal of all hard-to-recycle plastics (polystyrene, PVC) by the end-2019

• All produce packaging made from recycled alternatives by the end-2020

• All plastic packaging to be reusable, recyclable or compostable by 2025

• Australian and NZ retailers are making similar claims – are you ready?

2. PROVENANCE AND AUTHENTICITY: “Have you met my pig? She’s delicious.”

• Natural

• Local

• Heritage

• Nostalgic

• Craft

• Organic

Source: Innova Market Insights 2019

NEW PRODUCT LAUNCHES WITH SELECTED CLAIMS BY YEAR

TIME OF DAY INFLUENCES SNACK TYPE

• Better-For-You: Morning and midday (33% of eatings)

• Savory: Midday onwards (36% of eatings)

• Sweet: Afternoon onwards (32% of eatings)

Source: Hartman Group, SnackNation 2018

3. PERSONALISED MARKETING: GEN Z IS DIFFERENT! ETHNICALLY DIVERSE, SOCIALLY TOLERANT, GLOBALLY CONNECTED, ENVIRONMENTALLY AWARE…

…easily misunderstood

GEN Z (aged 7-22 years):

• Biggest generation globally

• Live on Instagram and YouTube (not email or Facebook)

• 52% primarily find out about new products from social

media (influencers have outsized impact)

• Truly embrace online grocery shopping (have never lived in

a time without the internet or Amazon)

• 60% self-diagnose spending too much time on their phones

• Want corporations to take a stand on social issues (and will

pay more if they do)

= very different to previous generations

INSTAGRAMMABLE FOOD MOMENTS

• 55% (US) and 43% (UK) of 26 to 35 year-olds share what they eat online

• Smart labels and apps are also boosting consumer engagement and providing

more transparency about products

• Blockchain is boosting the capabilities of companies to track their products from

paddock to plate and share these journeys with consumers

THE STATE OF THE

INDUSTRY

FRUIT QUALITY HAS IMPROVED…

https://www.youtube.com/watch?v=kmRowjgsp7E

CONSISTENT QUALITY…NIR

SA: 1,000 tonnes of hail-damaged apples and pears at $1.50/kg, with a return to the grower of c. $0.70/kg

1. Range proliferation

2. Too many packhouses (slower sales velocity/stock turn =

risk of poor product quality)

3. Over-supply (new plantings in marginal growing regions)

THE INDUSTRY PAIN-POINTS

Potential Opportunities Are Increasing

• Targeted direct supermarket business with Coles/ Woolworths/ALDI

• Costco/Kaufland for super-size pack deals

• Gourmet food stores and independents (premium products)

• On–line direct to customer or through specialist e-traders

• Meal-kit providers

• Food service

• Specialty ingredients

• Export…new channels are emerging!

Residential buying groupsLocal community groups joining forces to purchase fresh produce in bulk

“Forget last mile delivery, last 50m is the future of fresh food in China”

This ‘hyper local’ model has solved

the last mile delivery costs that has

hindered eCommerce’s

development in the fresh food

sector. We consolidate all orders

and deliver in bulk to the pick-up

location, dramatically cutting costs

Buying Power

We target social media savvy

residents who form buying groups

in their local community. In return,

they use their combined buying

power to obtain better prices on

our fresh produce

Geographic Proximity

Product

Place

Retail eCommerce Residential

Buying

People

Price

Channels

Australian Fresh Food

This innovative model

leverages trust through Peer 2

Peer sales. In doing so, it

introduces a new fourth ‘P’ –

people.

Peer 2 Peer

This disruptive model gives

residents access to our fresh

produce from Australia,

something that has previously

been too expensive for most

consumers, or too risky for

local shops to buy and sell

Price

Place

People

Product

THE TACTICS OF THE

RETAILER AND LIKELY

FUTURE STATE

1. Major supermarkets vs Hard discounters

2. Big ‘full-service’ stores vs Small ‘top-up’ stores

3. Food-to-Go vs Cook-at-Home

4. Online vs Bricks & Mortar

THE RETAIL BATTLEGROUND

34% of shoppers don't know what they're eating for

dinner until 5pm, and 50% don't have time to cook

Meal-kit market now moving in-store:

• Base-load production volume for Marley Spoon

• Product innovation and differentiation for WW (in an unprofitable category)

Use WW to access best suppliers and favourable terms…

ONLINE CONTRIBUTION TO SALES GROWTH IS INCREASING…

…making stores less profitable

50%

45%30%

10%8%

Source: Company Data, Morgan Stanley Research Estimates

Online and Instore Contribution to Coles F&L LFL Sales Growth

Shoppers who buy online:

• Spend larger amounts (up to 80% more)

• Spending is primarily driven by women (men $104 vs women $171 per shop)

11%6%

5%

Online customer penetration:

• <5% use store-pick model (marginal cost, marginal revenue)

• >5% dedicated fulfillment center (and provider)….

Ocado:

• Largest dedicated online grocery retailer, represent 8 of the largest global retailers

• End-to-end operating solution for online grocery retail

• Profitable: make 5.6% EBITDA (more that all bricks-and-mortar UK retailers)

• 54,000 items (double average retailer); Coles to double online range to 40,000 SKUs

• 50% of sales in fresh

• Technology/automation reduces picking and handling costs (only 12% of sales)

• Average cost of delivery paid by the consumer is only £1.70

IT’S GOING TO GET A LOT TOUGHER(so…..focus on lowering costs)

EMBRACE THE CHANGE, PUT THE CONSUMER FIRST

(so…..leverage trends and insights)

SUMMARY

BE DIFFERENT

(so…..innovate and add value across everything)

THE CHANGING

RETAIL & CONSUMER

LANDSCAPE

TRISTAN KITCHENER | +61 407 827 738tristan@kitchenerpartners.com.au | www.kitchenerpartners.com.au