2 Overview 1.Big picture consumer/retail themes 2.BSA 3Q Benchmarking 3.Industry Insights and Consolidation Impact 4.Amazon/eCommerce Changing the Game

2

Overview

1. Big picture consumer/retail themes

2. BSA 3Q Benchmarking

3. Industry Insights and Consolidation Impact

4. Amazon/eCommerce Changing the Game

3

Bigger Picture Retail ShiftsTop 5 Retail Changes Last 5 Years

1. Square footage growth no longer a material driver in most channels

2. Focus has shifted to loyalty and increasing share of wallet with existing customers

3. eCommerce shift is leading to secular decline in bricks & mortar traffic

4. Consumers seem to be more permanently price sensitive from the recession & financial crisis

5. Millennials are making it more difficult to predict or influence behavior

4

Sloppy/Choppy Retail Sales1-2% Blended Same-Store Sales Growth

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

All Channel CompMass, Grocery, Drug, Dollar, Club

Source: Company Reports, CRC Estimates

5

Traffic Secularly Challenged?Most retailers fighting just to stay flat

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

All Channel TrafficMass, Grocery, Drug, Dollar, Club

Source: Company Reports, CRC Esti-mates

6

Leadership Changes at Retail• Over half of the top 13 retailers we closely follow

have changed CEOs in 2013/2014– Walmart, Target, Kroger, Safeway, Supervalu, PetSmart,

Home Depot (Nov-14)

• Target was the only company to make a deliberate move based on performance– Walmart results were below average with former CEO

• Kroger and Costco have had seamless leadership transitions (top 2 winners)

7

Key Emerging RetailThemes Last 60 Days

• Inventory levels are getting more in line after heavy 1H clearance/markdowns

• Promotional intensity also starting to lessen– Interesting to see higher food inflation getting passed

through with less-than-expected impact to volume recently

• Mass and online share winners in our work over back-to-school (BTS) timeframe

8

Key Emerging RetailThemes Last 60 Days

• The iPhone effect– One ~2,000 store chain (lower income demographic)

saw a 150-250bps negative impact starting the day of the iPhone launch.

– Increased adoption, better allocation of product, higher service plans

9

Most InterestingInsights & Inflections

• Missed seasonal sales in 1Q did not materially recover in 2Q (particularly department stores)

• Outlet mall traffic softer last 3-4 quarters, while “higher-end” off-price has performed well (Off 5th)

• Cabinet/faucet mix still favorable from high-end trade-up but also a decline in low-end sales this year

• Starbucks and Chipotle traffic trends both seem to be strengthening in 2Q despite additional menu pricing

• Seasonal sets appear to be showing up earlier for not only B2S but also holiday and winter programs

10

Back-To-School Insights

• B2S effectively in line but with winners and losers– Walmart appears to be leading (set 2-3 weeks earlier

this year)– Target and Dollar General also looking good– Office Superstores continue to be share donors– Drug Stores punted B2S (less assortment/inventory)– Department stores started well but had a mediocre

finish– Outlet mall traffic has been soft

• Activewear and athletic footwear best performers– Core denim still challenged

11

Initial Holiday Preview• Consumer Electronics remains a bright spot for

the holidays with new product launches including 4K TV and Apple product refreshes– Highly anticipated new products may cause weakness in

CE sales leading up to the holidays due to delayed purchases

– Some concern that CE sales during the holidays could cannibalize spend in other categories

• Costco and Walmart seem to be positioning to be the most aggressive with inventory and pricing this year– Fairly similar to last year

• Inventory in cold weather categories is looking more conservative due to favorable winter sales last year

12

Overview of Consumer HeadwindsLong list of negative cash flow items

• Key Issues in 2014– Weather put a big dent in 1Q consumer (and business) spend– Heating/utility bills higher due to extreme cold weather– Car repair/maintenance costs higher also due to weather– SNAP reductions most tangible headwind– Food/fuel inflation now rising

• Key Issues in 2014/beyond– Healthcare costs rising for both insured and uninsured– Big ticket purchases soaking up everyday spending power– Cost of owning/renting a home going up– Structural shift to eCommerce leading to secular traffic dip

13

Consumer Headwind MathConsumer Headwind Estimates

Annual Impact ($B) Annual Per Person Monthly Per PersonHealthcare Costs $94.5 $300 $25.00Auto (new) $60.0 $190 $15.87SNAP* $7.0 $149 $12.41Heating Bills $31.5 $100 $8.33eCommerce Shift $30.0 $95 $7.94Home Improvement $15.0 $48 $3.97Auto (repairs/maintenance) $10.0 $32 $2.65Appliances $4.0 $13 $1.06

$252.0 $927 $77.23

*SNAP only impacts 15% of AmericansSource: CRC estimates

14

Consumer Performance Index Strengthening Last Few

Months

Source: CRC

January February March April May June July August September-20%

-10%

0%

10%

20%

30%

40%

50%

24%

9%

-9%

22%

9%

28%

18%

22%

40%

CRC Consumer Positive/Negative Index

-20%

-15%

-10%

-5%

0%

5%

10%8%

5%

3% 3%

0%

-1% -1%

-3%

-8%

-16%

Net Category Spend Plans for Next 12 Months[Plans for Spending More Minus Plans for Spending Less]

Source: CRC Consumer SurveyBase: 1033

Consumer Spending IntentionsFavors Home/Housing and Travel

1515

16

US Birth Rates ImprovingHigh correlation to consumer confidence

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14-3%

-2%

-1%

0%

1%

2%

3%

4%

-1.3% -1.1%

0.6%

-2.4%

-0.5%

-1.5%

-1.1%

1.8%

-0.6%-0.3%

0.0%

0.8%

0.0%

2.8%

0.9%

Cleveland Research Proprietary Birth Index

Source: CRC

17

BSA – 3Q BENCHMARKING

18

Breakdown of Participants

Wholesale/Retail - 15%Man Reps - 46%Suppliers - 42%

Source: CRC/BSA Benchmarking

19

YTD Trends Above ExpectationsWeighted Avg. ~4% better than plan

10%+ BETTER than expected

5-10% BETTER than expected

0-5% BETTER than expected

0-5% WORSE than expected

5-10% WORSE than expected

10%+ WORSE than expected

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

7.7%

42.3%

30.8%

11.5%7.7%

0.0%

YTD Sales Trends vs. Plan

20

Optimism Around Initial 2015 plans

Up 6% Up 0-5% Down 0-5% Down 6%+0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

2015 Budgets

21

Solid 3Q ResultsWeighted Average up ~4%

10%+ BETTER 5-10% BETTER 0-5% BETTER 0-5% WORSE 5-10% WORSE 10%+ WORSE0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

3Q Sales (year-over-year)

22

Modest Acceleration from 2Q

10%+ BETTER 5-10% BETTER 0-5% BETTER 0-5% WORSE 5-10% WORSE 10%+ WORSE than 2Q

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Sales trends (y/y) 3Q vs. 2Q

23

Inflation likely less of a worry than prior years

Less of an issue than prior years

Consistent with prior years

More of an issue than prior years

A significant problem0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Inflation Concerns Muted

24

Government BusinessModest tailwind against easier compares

Still negative 1-4% better 5-10% better 10%+ better than overall trend

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Sales to the Government/Public Sector

25

eCommerce ‘Growth Gap’ Widening

More significant than LY Similar to the spread LY Less significant than LY0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Growth: eCommerce vs. traditional

26

eCommerce GrowthWeighted Average up ~10% y/y

Flat or down slightly year-over-year

Up 0-10% year-over-year Up 10-20% year-over-year Up 20%+ year-over-year0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

eCommerce Growth (y/y)

27

INDUSTRY INSIGHTS

28

Office Products Industry Last 60 days

• Retail Business – Bad to Worse

• Delivery/Contract Segment Much More Encouraging

• Share Gains in the Independent Segment

• Elevated roadblocks with Depot/Max integration

29

Retail: What’s wrong now?

Staples• Re-flow stores not getting same traction that

segment has seen in delivery

• Price match (plus 10% back) more margin dilutive than traffic accretive

• Is leaner headcount impacting decision making?

30

Retail: What’s wrong now?

Staples• Re-flow stores not getting same traction that

segment has seen in delivery

• Price match (plus 10% back) more margin dilutive than traffic accretive

• Is leaner headcount impacting decision making?

31

Delivery/Contract More Stable

• Easy comparisons (prior year) from Public Sector has been a tailwind

• Growth from jan/san, breakroom, etc. still a significant positive.

• Furniture an added driver – more large projects moving through.

32

Strength from IndependentsWhat’s the Driver?

Largely competitive share gains• Staples– Significant employee turnover– Changes in field sales compensation

(defection)

• Office Depot/Max– Their accounts getting a lot of attention– Signs of integration issues popping up

33

Integration/Consolidation Feedback

• Early commentary was positive, now fading– Integration of systems not going

smoothly– Office Max segment seems ‘on auto-

pilot’– Increased forecasting issues, missed

customer shipments, less inventory visibility, issues with product codes

34

B&M VS. ECOMMERCE

35

$40 Billion of Retail SalesMoved Online in 2014

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E0%

1%

2%

3%

4%

5%

6%

7%

0.9%1.1%

1.4%1.8%

2.1%2.5%

3.0%

3.4%3.6%

4.0%4.4%

4.7%

5.2%

5.8%

6.5%

eCommerce Share of US Retail Sales

Source: U.S. Census

36

eCommerce OutperformanceGap Widening vs. B&M Retail

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

E

4Q14

E0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

eCommerce Growth vs. Total Retail

eCommerce Growth Total Retail GrowthSource: U.S. Census

37

Walmart Share Slipping2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

0%

1%

2%

3%

4%

5%

6%

7%

8%

4.1%4.5%

5.0%5.3%

5.5% 5.7% 5.8% 6.0%

6.5%

7.1%6.8%

6.4% 6.3% 6.2% 6.1%

Walmart Share of Total U.S. Retail

Source: CRC estimates

38

Long-Term eCommerce Impact

• eCommerce/mobile growth forcing businesses to rethink existing distribution infrastructure and multi-channel fulfillment strategies

• Speed of distribution and fulfillment capacity increasingly critical– Industry standard moving from 2-day shipping to next-day

and eventually to same-day delivery (led by Amazon)

• Change in distribution requirements will likely spur incremental supply chain investments for businesses across multiple industries– Likely leads to physical build-out of new fulfillment centers

and supporting infrastructure

39

2014 .COM BENCHMARK

40

Key Conclusions

• eCommerce mix up 1 point vs. LY (from 6% to 7%)• 3-year target expected to move 10 points higher (17%)• Long-term ceiling potential now 25% (vs. 21% LY)• Total 2014 eCommerce growth = +28% (6 categories)• Total 2014 Amazon growth = +51% (6 categories)• Amazon Net Sales vs. Plan = +22% above plan• Amazon current eCommerce share = 32%• Digital Marketing = 17% of spend today vs. 8% in 2011

– Moving 10 points higher to 27% over next 3 years (CPG 40%)

41

Key Channel Conclusions

• Auto, Home Improvement best growth rates– Home Improvement growing +40% again in 2014– Auto growing 40% vs. 35% LY

• Discretionary category mix moving up quickly– 16% vs. 9% LY, ceiling now seen at 34% vs. 28% LY

• Office most mature category but highest ceiling– 20% mix today (vs. 15% LY) with 50% potential

• Food & Consumables growth slightly less robust– 20% overall growth (50% Amazon), 30% expected next 5 years– CPG investing the most: 80% allocating more resources, digital media

spend doubling from 20% of total to 40%

42

Average Online GrowthCore 6 categories +28% vs. 18% industry-wide

Source: CRC 2014 eCommerce Benchmarking Study

2013 2014E 2015E25%

26%

27%

28%

29%

26.6%

27.8%

28.5%

Total eCommerce Sales GrowthAll Categories

43

Average Online GrowthAuto/Home Improvement +40%


Auto

Build

ing

Prod

ucts

Discre

tiona

ry

Office

Food

& C

onsu

mab

les

Consu

mer

Ele

ctro

nics

0%

10%

20%

30%

40%

50%

60%55%

43%

26%

20% 19%16%

2014 eCommerce GrowthRanked by Category

44

eCommerce Penetration7% today to 17% in 3 years to 25% LT


Today In 3 Years Long Term0%

5%

10%

15%

20%

25%

30%

7%

17%

25%

eCommerce as % of Total SalesAll Categories

45

2014 eCommerce MixBy Category


Office Discretionary Consumer Electronics Auto Building Product Food & Consumables0%

10%

20%

30%

40%

50%

60%

20%

16%

12%

7%4% 2%

33%

25% 26%

18%16%

7%

50%

34%

43%

25%

18% 17%

eCommerce as % of Total Sales

Today In 3 Years Long Term

46

eCommerce Mix by CategoryTODAY


Office Discretionary Consumer Electronics Auto Building Products Food & Consumables0%

5%

10%

15%

20%

25%

20%

16%

12%

7%

4%2%

Current eCommerce as % of Total SalesBy Category

47

eCommerce Mix by CategoryIN 3 YEARS


Office Consumer Electronics Discretionary Auto Building Products Food & Consumables0%

5%

10%

15%

20%

25%

30%

35%33%

26%25%

18%16%

7%

2017E eCommerce as % of Total SalesBy Category

48

eCommerce Mix by CategoryLONG-TERM POTENTIAL


Office Consumer Electronics Discretionary Auto Building Products Food & Consumables0%

10%

20%

30%

40%

50%

60%

50%

43%

34%

25%

18% 17%

Long-Term eCommerce Potential as % of Total Sales

By Category

49

AMAZON

50

Amazon Gaining Scale/MuscleFull 100 bps share gain since 2007 (~$50b)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.2%0.2%

0.3%

0.4%

0.5%

0.6%

0.8%

1.0%

1.2%

Amazon Share of Total U.S. Retail

Source: CRC estimates

51

Amazon Demanding Attention

2010 2011 2012 2013 2014E 2015 2016E 2017E 2018E 2019E 2020E0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

3%

4%5%

6%

7%

9%

10%

11%

13%

14%

16%

Amazon Share of Top 10 Retail

52

Amazon Growth ContributionAdding a Full Point to Total Sales

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Amazon Contribution to Total Sales Growth Among Top 10

53

2014 Amazon GrowthCore 6 categories +50% vs. 25% Total Amazon NA


Office Building Products Food & Consumables Auto Discretionary Consumer Electronics0%

10%

20%

30%

40%

50%

60%

70%

58% 57% 56%

51%

35%

23%

2014 Amazon GrowthRanked by Category

54

2014 Amazon Sales vs. PlanNet 22% above plan across all categories


Office

Auto

Consu

mer

Ele

ctro

nics

Food

& C

onsu

mab

les

Build

ing

Prod

ucts

Discre

tiona

ry0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%45%

32%29%

25%

18%

11%

Amazon Net Sales vs. PlanPercentage of Companies Above Plan Minus Below

Plan

55

Amazon eCommerce Share


Consu

mer

Ele

ctro

nics

Food

& C

onsu

mab

les

Build

ing

Prod

ucts

Discre

tiona

ry

Office

Auto

0%

10%

20%

30%

40%

50%

60%

48%

39%

30% 29% 28%

19%

Amazon Share of eCommerceRanked by Category

56

Key Amazon Growth Vehicles

• Amazon Media Group (AMG) is a more significant growth driver going forward for both Amazon and suppliers– Great returns but also material profit engine

• Prime Pantry and AmazonFresh can change the game for replenishment and lower ticket items (early success for both very positive, especially Pantry)– Also more profitable formula to take share in

large categories

57

Amazon Supplier SurveyAverage Investment Levels/Growth

• “All-in” average trade funding = 10.5%– Largest suppliers nearly 13%

• 2014 trade spend up 1.7 points from 2013– 2013 also increased 1.5 points vs. 2012

• Average Amazon Media Group spend = $330k– Translates into average 2-3% of Amazon

sales– More companies reaching into 5-10% range

58

Source: CRC Amazon Survey

7% or under 7-10% 10-13% 13-16% 16%+0%

5%

10%

15%

20%

25%

30%

35%32%

20%

12%

18% 19%

What is your total “all-in” trade funding at Amazon this year (co-op +freight + damages, etc)?

Wide Range for Supplier FundingWeighted Average = 10.5%

59

Source: CRC Amazon Survey

None 0-2% higher 2-4% higher 4-6% higher 6%+ higher0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

26%

42%

24%

4% 4%

How much incremental funding does this represent vs. 2013?

Supplier Funding Up SignificantlyWeighted Average = 1.7 point increase vs. LY

60

DIGITAL MEDIA

61

Digital Marketing Spend


3 Years Ago Today 3 Years0%

5%

10%

15%

20%

25%

30%

8%

17%

27%

Digital MarketingAll Categories

62

Digital MarketingBy Category


Office Food & Consumables Auto Building Products Consumer Electronics0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

11%12%

10%

6% 6%

27%

21%

17%

14% 13%

47%

39%

22%20%

16%

Digital Marketing

3 Years Ago Today 3 Years

63

Digital Media Insights

• Facebook/Twitter investing heavily to provide better ROI visibility– Should accelerate digital adoption curve– Many companies still don’t invest in digital due to

lack of knowledge or ROI/data visibility• Most significant growth driven by mobile– Facebook mobile ads up 150% in 2Q (+$1b)

• Video ads now accelerating (FB autoplay) and expected to pull spend away from TV

64

Where Do I Invest?

• Mobile – better/easier consumer access• Digital/Social – stronger ROI• Assortment/content – drives conversion• Talent/Infrastructure – speed/agility key• Millennials – connect with next generation• Winners – focus on growth not size

65

APPENDIXOther Disclosures: We, Jason Whitmer, Eamon Kelly and Chris Hodson certify that the views expressed in the research report(s) accurately reflect my personal views about the subject security(s). Further I certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any company. Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered to third parties.The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer.Member FINRA/SIPC

66

Antitrust DisclosurePlease remember the antitrust laws apply to CRC and all of our activities. CRC has an antitrust policy and expects all participants in this meeting to adhere to that policy and the antitrust laws. Compliance with letter and spirit of state and federal antitrust laws is an important goal of CRC and essential to maintaining its reputation for the highest standards of ethical conduct. Please do not discuss your company’s pricing information, including discounts, credit terms, or specific terms of sale. Please do not discuss your company’s specific customer or marketing information, sales territories, or similar information, and do not discuss allocating or sharing customers, or refusing to do business with particular customers or other companies. What a company does individually is its own business. If during the course of your attendance at this meeting, you find yourself in any conversation with someone about these subjects, please stop the conversation, or if necessary leave the conversation and let one of the CRC staff members know. If you have questions about what is permitted or not permitted, please ask a CRC staff member for assistance.

Documents

2 Overview 1.Big picture consumer/retail themes 2.BSA 3Q Benchmarking 3.Industry Insights and Consolidation Impact 4.Amazon/eCommerce Changing the Game