Page

Achieving High Performance in the Food and Non-alcoholic Beverage Industry

The US$2 trillion global market for food and non-alcoholic beverages is complex and highly fragmented. Just four companies meet Accentures criteria as high-performance businesses and only two of them have managed to outperform across all dimensions of our High Performance Business methodology. Accenture research suggests that the businesses best positioned to take the lions share of future value will be characterized by a clear focus on a limited number of attractive, innovation-sensitive categories and niches. High performers will seek to dominate these categories by being the first to spot nascent consumer trends, rapidly and continuously innovating against them and rigorously focusing their marketing spend on their most successful products and brands.

Despite its maturity, the Food and Non-alcoholic Beverage industrys fragmentationcomprised of more than 30 distinct product categories inhibits consolidation. Deal activity has picked up recently as more companies have sought focus by trying to unravel diverse and undifferentiated portfolios. However, the top 20 players still account for less than a quarter of a global market characterized by vast differences in local taste, perishability issues and varying food technologies. Moreover, most of these producers are struggling to sustain margins.

Rates of growth and profitability, nevertheless, vary significantly across individual food and beverage categories. Sales growth of bottled water far outstrips that of carbonates, for example. And ready-made meals sell almost twice as fast as pasta.

Such differences reflect rapidly evolving patterns of consumer demand a reflection, in turn, of profound changes in demography and lifestyle. More women in the workforce and increased urbanization have fueled worldwide demand for convenience foods. At the same time, obesity rates and food-related diseases like diabetes have skyrocketed, powering a parallel desire for healthy and organic food. In fact, as consumers have become wealthier, more informed and thus more confident, eating for pleasure has caught on in many countries, cultivating more exotic, ethnic tastes.

There are, to be sure, significant differences globally in these megatrends. Interest in healthy nutrition rises in line with disposable income, while convenience

consumption depends on both income and the sophistication of local retail networks. Emerging markets offer sizeable growth opportunities, if only because of their relatively low per capita consumption rates. However, the bulk of absolute future growth will come from North America, Western Europe and Asia Pacific where the three types of megatrend demandsconvenience, health and indulgenceare strongest.

High-performance businesses position themselves to take advantage of megatrends shaping the competitive environment.

Page 2

Page 3

115

28

52

41

24

88

1366

295

124

474

362

334

1549

150

510

321

CAGR2004-2009

World

Africa andMiddle East

Australasia

Asia Pacific

Latin America

North America

Eastern Europe

Western Europe .5%

5.5%

2.4%

3.8%

2.5%

2.9%

4.8%

2.5%

CAGR2004-2009

Forecast Sales Growth for Packaged Food, 2004-2009

Forecast Sales Growth for Non-alcoholic Beverages, 2004-2009

2004 (US$ billions) )2009 (US$ billions

33

9

44

35

8

25

593

139

57

179

174

174

720

76

210

149

5.0%

2.0%

4.6%

5.8%

3.0%

5.7%

3.2%

3.9%

t

World

Africa andMiddle East

Australasia

Asia Pacific

Latin America

North America

Eastern Europe

Western Europe

Non-alcoholic Beverages

Packaged Food

Source: Euromonitor, The World Market for Packaged Food, June 2005

Sources: Euromonitor, The World Market for Soft Drinks, Nov 2005, The World Market for Hot Drinks, Feb 2006

Page 4

Each organization in our peer set of 3 publicly quoted companies boasted global sales of more than US$5 billion annually. In addition, these companies all derived at least 75 percent of their sales from food and non-alcoholic beverages and 30 percent of these sales were outside their home regions. All provided branded packaged products (rather than food or beverage ingredients). The three companies that emerged from our analysis as high-performance businesses all distinguish themselves on measures of revenue growth, profitability, return on capital and working capital management.

They also deliver superior economic profit, which has allowed them to deliver consistently superior returns to shareholdersmore than double the industry average over the past five years. More importantly, their returns on invested capital consistently outstrip those of their competitors, thanks both to higher margins and a higher percentage of sales per invested capital in each of the last three years.Indeed, high-performance businesses have grown nearly twice as fast as the industry average by focusing on high-growth categories and implementing selective acquisitions to round out their

portfolios and extend channel and geographic reach. However, only two companies have consistently delivered superior returns to shareholders over both long and short time frames, as well as superior revenue growth and profitability, and high future value expectations.

Strategic Market DominationRigorous portfolio management focused on winning in high value/high potential markets

Flexible and Low-cost OperationsLow-cost and flexibleduplication enables seamless execution

Insight-driven MarketingSpot it first, renovate and innovate, faster and better execution

Customer and Channel ManagementLaser-like focus on key customers/channels and ubiquitous product availability

Culture of Continuous RenewalHighly flexible organization that seamlessly executes and embraces operating change

Market Focus and Position

Performance Anatomy

Distinctive Capabilities

The Building Blocks of High Performance in the Food and Non-alcoholic Beverage IndustryAccenture defines a high-performance business as one that consistently outperforms its peers through economic and industry cycles, and through changes in leadership.

Our extensive cross-industry research has identified three building blocks that underpin high performance in any industry and that all such businesses have mastered.

Our industry-specific research has identified the characteristics that high performers have in common across the three building blocks.

Key TrendsHigh performers have delivered consistently strong revenue growth.

Acquisitions have proven an important source of new revenues for many companies.

The weakest performers have underperformed due to large, diverse and undifferentiated portfolios.

5-Year Average Revenue Growth Average 5.8%

8.7%

4.3%

2.1%

HighPerformers

High Performers

Average Performers

Weak Performers

Sources: S&P, Accenture Analysis

AveragePerformers

WeakerPerformers

Page 5

The industrys complexity has led to the evolution of very different organizational models. Many food and beverage companies are still organized along local/regional lines, with a presence in only a limited number of categories, often with a short shelf life. Some have taken a global, multi-category approach, remaining highly diversified in many different categories but with a small number of truly global brands.

Only the high-performance businesses have become successful category specialists, with a presence across most geographies but with a limited portfolio, tightly focused on a handful of categories and power brands. This strategic category domination is key to their status as high-performance businesses. While their peers battle to build brand share and the struggle for shelf space intensifies, high-performance businesses have successfully leveraged their key brands, targeting categories with low private-label penetration and the potential to increase both frequency of purchase and the amount consumed.

Market Focus and Position

Page 6

Leading companies have consistently focused on building number and 2 positions in a limited number of high-growth, high-margin categories or niches. Wrigley, for example, confines itself to the confectionery category. And although PepsiCo plays across numerous soft drink categories, its food presence is limited to a small global portfolio of snacks whose flavors and packaging are adjusted to accommodate local tastesa natural fit with its carbonates portfolio.

Such businesses achieve category domination with a selective approach to acquisitions, which concentrates on reducing portfolio complexity while increasing category domination, distribution power and geographic reach. Witness PepsiCos recent acquisitions of Quaker Oats and South Beach Beverages (SoBe), which sought to either gain entry into or reinforce the companys dominance in attractive

fast-growing categories. The Quaker Oats acquisition, which included Gatorade, was designed to bolster a march on Coca-Cola in the energy drinks category, and SoBe reinforced PepsiCos position in premium specialty juices. Both brands are fast-growing, high-margin categories in line with the health trend helping to counter-balance Pepsis traditional carbonates portfolio.

Many companies, by contrast, still operate a global, multi-category model, which dramatically increases their exposure to business complexity and thus inhibits growth. One company has a presence across more than a dozen separate categories of food, soft and hot drinks; another has an even more diverse product portfolio that includes a large number of local, often non-scaleable and undifferentiated brands.

The strategic category message, however, is clearly catching on. Danone, for example, has been systematically disposing of non-core businesses while refocusing its portfolio to concentrate on higher growth regional opportunities and on health-conscious products like pro-biotic yogurt, where it now leads the market. Indeed, Danone now enjoys its strongest revenue growth in a decade.

Pasta 3%Sauces 5%

Glass Containers 7%

Beer 8%

Prepared Foods 9%

Italian Cheeses 9%

Water 0%Biscuits 20%

Fresh Dairy 29%

Beverages 27%

Biscuits 8%

Fresh Dairy 55%

Sales Split by Category, 2005Sales Split by Category, 1995Ten years ago, Danone was an unfocused food conglomerate.

Danone now enjoys the strongest revenue growth in a decade.

Following a lengthy spell of portfolio consolidation and disposals, Danone is now posting the highest organic growth rates for a decade.

Sources: Danone annual reports and Accenture analysis

Page 7

High-performance businesses in this industry display three distinctive capabilities that set them apart from their peers and are very difficult to replicate:

Insight-driven marketing Customer and channel management Flexible and low-cost operations

Distinctive Capabilities

Page 8

None of these capabilities would be as effective if they did not also rest on the exceptionally robust performance foundations that distinguish high-performance businessesthe sales and marketing, supply chain, finance, IT and HR functions that comprise a fit-for-purpose business infrastructure. Moreover, all three capabilities work together to make high performance possible.

Insight-driven marketing, for example, supports superior customer and channel management, and both depend on the flexible and low-cost operations that enable seamless execution. The industrys maturity, however, means that most leading companies operate pockets of excellence. Wrigleys success, for example, is partly due to being category-advantagedthe company is focused almost exclusively on confectionery, especially chewing gum.

Insight-driven marketing hinges on the ability to spot trends first, before the competition. High-performance businesses can do this because of their superior understanding of both market dynamics and consumer needs.

These companies relentlessly track key consumer trends in strategic geographies by means of exceptionally rigorous, sophisticated and fact-based business analytics that deliver relevant and insightful data. They then use the data to manage systematically the insights they have gainednot just to manage information. Whats more, they make these insights accessible right across the organization to facilitate rapid and well-informed decision-making.

There is no direct correlation in this industry between the size of

R&D spend and high performance. Instead, high-performance businesses distinguish themselves by rapidly capitalizing on consumer insight to deliver a continuous flow of new products to market. Leading companies tend to have strong new product pipelines to continuously refresh their portfolios. They also derive a large proportion of sales from products launched in the last three years.

Innovations are often incremental, rather than spectacular, science-driven or breakthrough in nature. But the continuous refreshment of a companys product portfolio is absolutely vital to the retention of consumer interest and maintenance of retail shelf space. These refreshments include line extensions, repackaging and reformulations, as well as genuinely new products. Overall, incremental product innovation accounts for most of this mix and plays a critical role.

Wrigley, for example, launches fewer than 50 new products a year, but most of these are line extensions or new flavors. However, by upgrading its R&D capabilities and restructuring its marketing team to focus on global brands and excellent local execution, the company has capitalized on its unified commercial operations and centralized supply chain to consistently deliver innovation rates above 5 percent every year since 2000.

Leading businesses support their innovation capabilities by spending a higher proportion of sales than their peers on clever, innovative marketing, and revitalizing brands through advertising and promotions. Take, for example, PepsiCos repositioning of its portfolio on a better-for-you platform through the Smart SpotTM initiative. (The campaign is currently confined to North America but is earmarked for global roll-out.) Smart Spot consolidated 00 of the companys healthier products, including the Tropicana range of fruit juices. Half of the companys media

spend is now devoted to Smart Spot. Not all attempts to capitalize on the health and wellness trend have been successful. One food giants efforts to reformulate hundreds of products in nutritional terms was compromised by its product portfolio, which included too many diverse categories.

Page 9

Performance AnatomyPerformance anatomy, like distinctive capabilities, rests on foundation functions, but it also describes a companys mindset. In the Food and Non-alcoholic Beverage industry, performance anatomy describes a unique adaptability. High-performance businesses in this industry are just much better at cooperating with their suppliers and customers than their competitors and their peers in related sectors such as alcoholic beverages and personal care.

Operating margins are lower than in related industriesa function of a relatively short product shelf life. So whether they like it or not, Food and Non-alcoholic Beverage companies are very dependent on external relationships and need to be tightly networked. High-performance businesses are especially good at third-party manufacturing, distribution and low-cost sourcing; their relative dependence on their retail customers also has led to close and highly successful working relationships. Some actually have integrated their supply chains with those of their customers, who run Collaborative Planning Forecasting & Replenishment (CPFR) for them.

Packaged food and beverages companies must also contend with both the growing power of supermarkets and the private label penetration that this power reinforces. They also face the challenge of a multi-channel selling environment as the share of sales through alternative channels like kiosks and vending machines steadily increases. Indeed, customer and channel management is critically important. And leading companies exhibit a laser-like focus on key customers and channels.

Witness Kelloggs purchase of Keebler, whose cookies and crackers are available in vending machines across the United States. The acquisition not only gave Kelloggs critical mass in US snacks, it also allowed the company to distribute its own Pop-Tarts, Nutri-Grain bars and packaged cereals through many more channels, greatly extending its customer reach.

Simply boosting expenditure on trade promotions does not guarantee better returns, so high-performance businesses go further. Not only do they employ integrated commercial planning to maximize the effectiveness of trade investments; they also use sophisticated analytics to evaluate the performance of past promotions and include the results in the next round of promotional planningall with an execution mindset worthy of a financial fund manager.

Of course, without flexible and low-cost operations high-performance businesses would not be able to sustain excellence in their other distinctive capabilities. High performance is getting harder to achieve as soaring commodity prices and other cost pressures squeeze margins, while the growth of emerging markets extends and globalizes supply chains.

So leading businesses focus on streamlining and leveraging economies of scale in all key areas of their supply chain, from long-term commodity planning to outsourcing. Thus, they create a global operations footprint, increase collaboration with both customers and suppliers, and seek to relentlessly drive out costs. PepsiCo, for example, has cushioned itself from the impact of rising aluminum prices by halving the aluminum content in its packaging since 200. PepsiCo, Wrigley and Kelloggs, moreover, use financial hedging to try and manage the prices of their key commodities. And all three companies have dramatically upgraded their technology infrastructures (and thus their operational efficiency) with global ERP roll-outs.

Page 0

Page

High-performance businesses have turned category focus, incremental innovation, targeted marketing and R&D investment and ruthless cost control into a continuous cycle to deliver long-term shareholder value. They have achieved this advantageous position by means of rigorous portfolio management and by developing a highly flexible organization with three distinctive capabilities that enable them to seamlessly embrace and execute.

The FutureHowever, there are many challenges to the industrys future value. While consolidation continues, it is likely to be very gradual, as long as local taste and shelf-life issues limit economies of scale and most producers still juggle with the complexity of managing a diverse and often locally customized brand portfolio.

Accenture research suggests that the key to capturing future growth opportunities will remain a relentless focus on premium product categories: foods and drinks that satisfy at least two of the three megatrend demands (convenience, health and indulgence) and ideally all of them. Indeed, the high-performance businesses of the future will stand above their peers as a result of their ability to exploit the megatrendsfor fast and efficient nutrition, guilt-free indulgence and quality convenience.

Efficient Nutrition(Fast but nutritious and healthy)

Health & Wellness More information & labeling More evidence for health claims More control through food plus food minus and natural/organic alternatives

The Time Factor More individual (portion) control More control over time and quality of preparation Convenient packaging/channels

Convenience Plus(Convenience with from scratchquality and entertainment)

The Sensory Experience More premium & indulgent More ethnic & exotic tastes

Guilt-free Indulgence(Low & light without compromising)

Significant growth opportunities for products that deliver against hot spots which satisfy two or more key consumer trends

Indulgence

ConvenienceHealth

Page 2

Copyright 2007 AccentureAll rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document makes reference to trademarks that may be owned by others. The use of such trademarks herein is not an assertion of ownership of such trademarks by Accenture and is not intended to represent or imply the existence of an association between Accenture and the lawful owners of such trademarks.

To find out more about how companies in the Food and Non-alcoholic Beverage industry can achieve high performance, please contact:

Keith BarringerManaging Director,Consumer Goods and Services+44 207 844 4600c.keith.barringer@accenture.com John JacksonEurope+44 20 7844 2779john.jackson@accenture.com Fabio VacircaEurope+39 27 7758 483fabio.vacirca@accenture.com Greg SupronNorth America+ 973 30 68gregory.j.supron@accenture.com

Apolonia KerschAsia Pacific+6 29 005 5355apolonia.kersch@accenture.com

Silvio BarbozaLatin America+55 5 88 385silvio.l.barboza@accenture.com

About AccentureAccenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture col-laborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With approximately 70,000 people in 49 countries, the company generated net revenues of US$9.70 billion for the fis-cal year ended Aug. 3, 2007. Its home page is www.accenture.com.