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December 19, 2003

Small Steps To Improved CSD Category Profitability in Supermarkets – How slight shifts in CSD pack size promotion mix can dramatically improve category profits – . December 19, 2003. www.hoytnet.com.

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December 19, 2003

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  1. Small Steps To Improved CSD Category Profitability in Supermarkets– How slight shifts in CSD pack size promotion mix can dramatically improve category profits – December 19, 2003 www.hoytnet.com 8912 East Pinnacle Peak Road • Scottsdale, AZ 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com • nancyswift@hoytnet.com

  2. Today • Importance of CSDs to Supermarkets’ overall marketing and merchandising mix • The CSD consumer • The issues – CSD category performance in Supermarkets, 2001 - 2003 • Recommendations

  3. Importance of CSDs to Supermarkets’ overall marketing and merchandising mix

  4. It is no secret that supermarket trip frequencies have declined precipitously over the past seven years. • One trip = 105.5MM visits • Shopper Trips By Channel (1996 – 2002)(Avg. # Trips/Household/Channel/Year) • Trip Losers • Trip Gainers Total Trips • Down 2.3 Billion Trips in Seven Years 180 167 Source: AC Nielsen Homescan, 2003

  5. Meanwhile, spending per trip has remained relatively flat as Big Buy heavy user families have migrated to Supercenters and Clubs • Annual Shopper Dollars Per Trip By Channel Source: A.C. Nielsen Channel Blurring Study, May 2003

  6. Despite These Trends, 100% of U.S. Households Continue to Shop the Grocery Channel With No Drop-off in Sight: • % Household Penetration By Channel Per Year: 1996 - 2002 + Ptsvs. ‘96 Channel 1996 1997 1998 1999 2000 2001 2002 Grocery Conv. and Gas Drug Chains Trad. Discount Warehouse Clubs Supercenters Dollar Stores 100 52 90 95 49 N/A 39 100 52 89 94 48 N/A 45 100 52 86 94 49 47 47 100 50 87 95 50 52 52 100 48 86 94 49 54 55 100 45 86 93 50 60 59 100 46 86 92 52 63 62 – -6 -4 -3 +3 +16 +23 Source: AC Nielsen, Channel Blurring Studies, 1998 - 2003 inclusive

  7. In Addition, Consumers Shop Grocery Far More Frequently Than Any Other Channel and 3.5 Xs More Than Lower-priced Supercenters • US CPG ChannelsTrip Frequency – Annual # Trips/Household/Year/Channel, 1996 - 2002 + Ptsvs. ‘96 Channel 1996 1998 1999 2000 2001 2002 Grocery Mass Merchandise Drug Supercenters Dollar Warehouse Clubs Conv. and Gas Totals 95 29 16 13 6 8 13 180 85 28 15 14 9 9 18 173 83 26 15 15 10 9 13 171 78 25 15 17 10 10 14 169 75 23 15 18 11 10 15 167 73 22 15 21 12 10 14 167 (22) (7) (1) 8 6 2 1 (13) Source: AC Nielsen, Channel Blurring Studies, 1998 - 2003 inclusive

  8. Consumer Satisfaction Surveys Repeatedly Show That Shopper Satisfaction Levels Are Higher With Supermarkets Than With Any Other Channel Shopper Satisfaction1-10 Scale: 1 = not satisfied, 10 = extremely satisfied Your Supermarket Supermarkets (in general) Mass Merchandisers Wholesale Clubs Dollar Stores Chain Drug Stores Fast-food Restaurants Convenience Stores 7.49 6.67 6.49 6.16 6.05 5.93 5.11 5.09 Source: Progressive Grocer, 2003

  9. One of the most important reasons for this is supermarkets’ ability to meet or exceed consumer expectations with respect to the following categories which consumers regard as uniquely the providence of the food store. • Top Grocery Channel Categories, 2002 • Share • % Growth vs. 2001 • $ Sales (B)F/D/M/WM • F • D • WM • F • D • WM • Total CPG • Carbonated Beverages • Bread & Baked Goods • Milk • Fresh Produce • Packaged Meat • Snacks • Cheese • Frozen Prepared Foods   • Cereal • $407.4 • 15.8 • 13.9 • 12.4 • 11.2 • 10.6 • 11.6 • 9.0 • 8.4 • 8.7 • 65% • 77% • 86% • 87% • 90% • 88% • 75% • 89% • 87% • 84% • 10% • 7% • 1% • 2% • 0% • 0% • 4% • 0% • 0% • 1% • 18% • 13% • 12% • 10% • 9% • 11% • 16% • 10% • 12% • 13% • 2 • 3 • 2 • -2 • 15 • 1 • 2 • 3 • 2 • -1 • 1 • 7 • 4 • 5 • -64 • -5 • 4 • -14 • 11 • 16 • 14 • 15 • 31 • 18 • 40 • 18 • 20 • 21 • 28 • 31 Source: A.C. Nielsen Strategic Planner, Wal-Mart Channel Service; 2002. Ranking based on total grocery channel sales.

  10. Our purpose today is to focus on one of these categories – carbonated beverages – because: • Excluding perishables, carbonated beverages is the #1 merchandisable category in the store • Carbonated beverages is one of the few categories that offers Supermarkets the opportunity to compete head-to-head on price with Supercenters and Clubs and win every time • With only two exceptions, carbonated beverages is the most powerful category Supermarkets can use to re-build trip frequencies and recapture heavy users • Hoyt & Company and Beverage Aisle believe that there may be an opportunity to increase CSD category profits by as much as 53% and simultaneously bring this category into much better alignment with current CSD heavy user shopping preferences

  11. Despite the flurry of competitive activity that Supermarkets have encountered from alternate channels, Supermarkets remain solidly entrenched as the industry’s destination channel for CSDs: • % Total CSD Volume By Channel • Channel • % • Supermarket • Convenience & Gas • Mass/Supercenter • Drug • Clubs • Total • 63.7% • 18.7% • 8.3% • 5.1% • 4.2% • 100.0% Source: Based on CSD factory volumes, not retail sales, Hoyt & Company Internal Records, 2003

  12. Carbonated Beverages rank only behind Bakery and Milk in terms of this category’s ability to generate increased Supermarket trip frequencies among the broadest spectrum of the population possible: • Top 15 Supermarket Product Categories Ranked In Order of Pulling Power HHPenetration PurchaseFrequency PullingPower X = Rank Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Median Bread & Baked Goods 99.4 35.5 3,529 Milk 97.8 34.3 3,355 Carbonated Beverages 97.6 30.3 2,957 Snacks 98.5 25.7 2,531 Paper Products 99.5 23.5 2,338 Candy 98.0 21.8 2,136 Juice, Drinks - Non-Frozen 97.5 20.9 2,038 Packaged Meats - Deli 96.2 18.9 1,818 Fresh Produce 96.7 18.5 1,789 Cereal 96.6 17.8 1,719 Condiments, Gravies, and Sauces 98.5 17.2 1,694 Cheese 97.2 17.2 1,672 Vegetables - Canned 96.5 14.6 1,409 Cookies 95.3 14.4 1,372 Pet Foods 70.0 19.6 1,372 80.1 6.5 473 Source: A.C. Nielsen Consumer Facts

  13. Carbonated Beverages also represent the supermarket’s greatest opportunity to increase top line dollar sales: • Leading Supermarket Categories Ranked In Order of $ Power X = X = HHPenetration PurchaseFrequency PullingPower Avg.Purch. Size DollarPower Rank Category 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Median Carbonated Beverages 97.6 30.3 2,957 $4.00 11,829 Bread & Baked Goods 99.4 35.5 3,529 2.53 8,928 Milk 97.8 34.3 3,355 2.64 8,856 Paper Products 99.5 23.5 2,338 3.46 8,090 Pet Food 70.0 19.6 1,372 5.79 7,944 Cereal 96.6 17.8 1,719 4.43 7,617 Snacks 98.5 25.7 2,531 2.92 7,392 Medications/Remedies/Health Aids 97.3 10.8 1,051 7.03 7,387 Packaged Meats-Deli 96.2 18.9 1,818 3.98 7,236 Juice, Drinks - Non-Frozen 97.5 20.9 2,038 3.43 6,989 Prepared Foods - Frozen 91.7 12.4 1,137 5.75 6,538 Candy 98.0 21.8 2,136 2.93 6,260 Cheese 97.2 17.2 1,672 3.50 5,851 Electronics, Records, Tapes 72.4 4.4 319 15.00 4,778 Ice Cream Novelties 94.1 13.0 1,223 3.82 4,673 80.1 6.6 473 3.28 1,679 Source: A.C. Nielsen Consumer Facts

  14. The CSD Consumer

  15. CSD consumers come from relatively large, affluent households: CSD Consumer Demographics Total U.S. 2000 CSD Consumer Demographics Total U.S. 2002 Size – 1 Mem Size – 2 Mem Size – 3-4 Mem Size – 5+ Mem. Inc. <$20,000 Inc. $20,000 - $29,999 Inc. $30,000 - $39,999 Inc. $40,000 - $49,999 Inc. $50,000 - $59,999 Inc. $70,000+ 63.1 95.7 123.4 139.0 80.1 91.6 100.3 115.4 111.2 114.1 Size – 1 Mem Size – 2 Mem Size – 3-4 Mem Size – 5+ Mem. Inc. <$20,000 Inc. $20,000 - $29,999 Inc. $30,000 - $39,999 Inc. $40,000 - $49,999 Inc. $50,000 - $69,999 Inc. $70,000+ 61.7 97.6 122.6 132.8 83.2 95.0 105.7 108.4 113.8 100.4 Source: A.C. Nielsen 2003

  16. Unfortunately, it is precisely the larger households who are most aggressive about migrating their shopping to other channels: • Avg. # Trips Per HH Per Year – Supermarkets(2002 vs. 2001) -7 -6 -4 -5 Source: A.C. Nielsen Channel Blurring Study, 2003

  17. In fact, the indications are that the heavy CSD shopper now buys CSDs in as many as four different channels with two of these channels capturing an almost equal share of her take-away dollars: Total U.S. – 52 we 12/28/02 - upc-coded products; Grocery w/SC, Mass, Drug, Club & Dollar Store channels only Source: A.C. Nielsen Channel Blurring Study, 2003

  18. It is crucial for supermarkets to recapture as much of this business as possible because the heavy CSD shopper... • Spends an average of $1,112 or 61% more per year in Supermarkets than the average Supermarket shopper: Total Spending Per Year Heavy CSD Buyers Avg. Supermarket Shoppers Difference $2,929 $1,817 $1,112 (+61%) • Buys an average of 12 unique CSD brands per year compared to 6.6 brands per year for light buyers: • Ideal for Supermarkets who are perceived as the channel of choice for offering incomparable variety in core categories. Source: Beverage Marketing, 2003

  19. The other reason is that Carbonated Beverages have become one of the Top 10 Categories at Wal-Mart: • The Top 10 Categories At Wal-Mart, 2002 Rank Category Sales ‘02 ‘01 ‘00 $ Sales % Chg 1 Computer/Electronics #1 #2 #5 $3.8 Billion +40.9% 2 Housewares/Appliances #2 #1 #1 $3.1 Billion -0.1% 3 Paper Products #3 #3 #2 $2.8 Billion +8.2% 4 Pet Food #4 #5 #4 $2.6 Billion +14.6% 5 Office/School Supplies #5 #4 #3 $2.5 Billion +9.0% 6 Medications/Remedies #6 #6 #6 $2.0 Billion +9.7% 7 Carbonated Beverages #7 #8 #8 $2.0 Billion +15.4% 8 Candy #8 #7 #7 $1.9 Billion +7.7% 9 Snacks #9 #9 #10 $1.9 Billion +19.7% 10 Hair Care #10 #10 #9 $1.8 Billion +13.8% Source: ACNielsen Wal-Mart Channel, 52 Weeks Ending 12/28/02

  20. And, despite its already substantial base, Carbonated Beverages remain one of Wal-Mart’s Top 10 Growth categories • Top 10 Growth Categories at Wal-Mart, 2002 Categories By $ Growth $ Volume % Chg $ Change 1 Computer/Electronics $3,760 MM +40.9% +$1,092 MM 2 Bread & Baked Goods $1,712 MM +25.0% +$342 MM 3 Pet Food $2,637 MM +14.6% +$337 MM 4 Snacks $1,902 MM +19.7% +$313 MM 5 Fresh Produce $1,012 MM +39.6% +$287 MM 6 Carbonated Beverages $1,968 MM +15.4% +$262 MM 7 Cereal $1,083 MM +30.9% +$256 MM 8 Prepared Foods-Frozen $996 MM +28.0% +$218 MM 9 Hair Care $1,778 MM +13.8% +$216 MM 10 Paper Products $2,763 MM +8.2% +$210 MM Source: ACNielsen Wal-Mart Channel, 52 Weeks Ending 12/28/02

  21. One of the most important things to understand about heavy user CSD households is that loyalty to any single brand tends to be relatively low due to these households’ need to satisfy so many different tastes within the same household: • This is why these households buy an average of 12 unique brands per year versus light user households who buy only 6.6. • This is also why we get the following remarkably low brand loyalty numbers for taste brands that can only be considered national icons. • Brand Loyalty Indices Leading CSD Brands, 2002 vs. 2000 • Brand • Coke Classic • Pepsi • Diet Coke • CF Diet Coke • Diet Pepsi • CF Diet Pepsi • CF Pepsi • CF Classic • 2002 HH Loyalty % • 22.5 • 21.6 • 17.9 • 15.3 • 15.0 • 11.7 • 9.0 • 8.2 Point Chg ’00-’02 -0.3 -0.8 -0.4 -0.8 -0.1 -0.6 -0.6 -0.4 Source: A.C. Nielsen HomeScan, 2003

  22. The other factor to note about recent CSD purchasing behavior in Supermarkets is that although CSD shoppers are spending about 2% more per trip on CSDs than they did in 2000, they are making 7.7% fewer trips: • This appears to be due to supermarkets’ success in trading these shoppers up to promotionally-driven larger sizes with the inadvertent result that the category is not as strong as it was as a traffic-puller: • CSD Supermarket Shopper Purchasing Dynamics, 2002 vs. 2000 Source: A.C. Nielsen HomeScan, Consumer Facts and Channel Facts, 2003

  23. To what extent do Supermarkets promote the larger CSD pack sizes? % of Total CSD Units Sales On Promotion By Pack Size, 2003 vs. 2001 Pack Size 2001 2003 20 oz. Single Bottle 67.6 oz. Bottle A/O Bottle Sizes 6 Pack Cans 12 Pack Cans 24 Pack Cans A/O Cans Total U.S. 7.7% 69.4% 46.4% 61.7% 80.8% 82.4% 75.7% 62.6% 12.5% 88.0% 47.7% 57.2% 81.5% 83.9% 71.9% 61.9% Source: A.C. Nielsen 52 weeks ending 9/8/01 and 9/6/03

  24. While the need for Supermarkets to trade shoppers up to larger pack sizes is obvious, the indications are that Supermarkets may wish to moderate this strategy with respect to CSDs because... • The category is unique with respect to its utility as a traffic builder for Supermarkets. In this context, over-promotion of larger sizes appears to be dampening this advantage. • Satisfying the purchasing preferences of the heavy user CSD household is paramount. Given the relatively large number of different CSD brands these households buy in a year, enabling these shoppers to buy these brands on promotion but in trial-friendly, smaller pack sizes would seem to be an obvious and simple solution. • As we will show in a moment, small shifts in promotion emphasis to smaller pack sizes is a way for supermarkets to dramatically improve CSD category profitability.

  25. The last thing we would note about the CSD consumer is the extent to which this consumer has been trained to lie in wait for deals – a trend that grows progressively more severe as the price gap widens between promotional and off-promoted prices Trend in Any Promotion Share of Total Volume and Gap in On-Promotion vs. Off-Promotion Price Total U.S.: Supermarkets > $2MM 12-Pack Cans Source: A.C. Nielsen 2003

  26. The issues – CSD Category Performance In Supermarkets, 2001 - 2003

  27. CSD sales in Supermarkets have grown marginally since 2001, driven primarily by growth in 12-pack cases but offset by a major decline in 6-packs. Overall, CSD growth in the two years between 2001 and 2003 has not kept pace with total Supermarket growth in the one year between 2001 and 2002. • CSD Dollar Sales In Supermarkets, 2003 vs. 2001 By Pack Size Pack Size 2001 ($B) 2003 ($B) % +/- Vs. 2001 % Contribution 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans A/O Pack Cans Totals Total Supermarket Sales, 2002 vs. 2001: $611.1 2,616.5 1,471.1 808.0 4,856.0 1,350.5 92.1 $11,805.3 $713.8 2,474.3 1,529.4 575.7 5,422.5 1,363.1 48.2 $12,127.0 16.8% (5.4)% 4.0% (28.8)% 11.7% 0.9% (47.7)% 2.7% 3.4% 8.9% (12.3)% 5.0% (20.1)% 48.9% 1.1% (3.7)% 100.0% Source: A.C. Nielsen 52 weeks ending 9/8/01 and 9/6/03; Progressive Grocer, April 2003, Data Bank USA, August 2003 Supermarket Profit was calculated from Data Bank USA wholesale prices, August 2003, less $.70/case for supplier allowances

  28. While only marginal CSD sales gains in Supermarkets may be unsatisfactory, the serious issue concerning this category is profitability: Between 2001 and 2003, CSD profits in Supermarkets dropped 12.1%, again driven primarily by losses in 12-pack cans: • CSD Profitability in Supermarkets, 2003 vs. 2001 by Pack Size Pack Size 2001 ($MM) 2003 ($MM) % +/- 2001 % Contribution 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans A/O Pack Cans Totals $151.2 307.5 486.0 (30.4) 28.2 (30.7) N/A $911.9 $190.6 308.1 573.1 (28.7) (140.1) (101.5) N/A $801.6 26.1% 0.2% 17.9% (5.4)% (596.4)% (230.6)% N/A (12.1%) 11.1% 0.2% 23.9% (0.4)% (45.0)% (19.4)% N/A 100.0% Source: A.C. Nielsen 52 weeks ending 9/8/01 and 9/6/03; Progressive Grocer, April 2003

  29. Unfortunately, 2001 - 2003 Supermarket CSD profit performance is not an anomaly but a continuation of a trend that can be traced back as far as 1994 • Supermarket CSD Category Margins vs. Previous Year: 1994 - 2003 Year Pt. Diff. Vs. Previous Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 -1.4% -1.3% -0.4% -0.8% -2.0% -1.2% -0.5% -1.3% -1.8% Source: UBS Warburg Beverage Analysis Department, 2003

  30. All of the six Nielsen regions except the Southwest showed dollar growth between 2001 and 2003 but only two of these regions achieved profit gains: • CSD Sales and Profit Performance By Nielsen Region, 2001 - 2003 $ Sales (MM) $ Profits (MM) % Contribution To Profits NACS Region 2001 2003 % +/- 2001 2003 % +/- Northeast Southeast East Central West Central Southwest Pacific Total U.S. $2,545.3 2,077.2 2,325.9 1,460.1 1,189.9 2,207.7 $11,806.1 $2,624.1 2,153.4 2,405.3 1,502.3 1,184.5 2,257.7 $12,127.3 3.1% 3.7% 3.4% 2.9% (0.4)% 2.3% 2.7% $323.7 (88.4) 317.2 33.2 158.5 167.7 $911.9 $406.4 (86.6) 181.8 4.7 114.1 181.3 $801.7 25.5% (2.0)% (42.7)% (85.8)% (28.1)% 8.1% (12.1)% 27.0% (0.6)% (44.2)% (9.3)% (14.5)% 4.4% $100.0% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  31. Supermarkets have been maximally aggressively in their attempts to address the CSD profitability issue. Most common approaches: • Raise everyday shelf prices • Raise average promoted prices • Reduce the % of units sold on promotion • Reduce the depth of the promotional discount

  32. Between 2001 and 2003, Supermarkets raised everyday shelf prices both nationally and in five of the six Nielsen regions. In addition, Supermarkets raised the promoted price across the board: • 2001- 2003 Supermarket CSD Pricing, Everyday Shelf and Promoted Prices Everyday Shelf Price Promoted Price NACS Region 2001 2003 % +/- 2001 2003 % +/- Northeast Southeast East Central West Central Southwest Pacific Total U.S. 1.17 1.13 1.60 1.07 1.20 1.01 1.18 1.35 1.31 1.65 1.05 1.30 1.10 1.28 15.4% 15.9% 3.1% (1.9)% 8.3% 8.9% 8.5% 1.12 1.26 1.67 1.26 1.69 0.96 1.25 1.32 1.40 1.89 1.35 1.84 1.27 1.46 17.9% 11.1% 13.2% 7.1% 8.9% 32.3% 16.8% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  33. These price increases, however, were limited to smaller pack sizes comprising about 39% of total CSD sales. Pricing on all other pack sizes either remained the same as it was in 2001 or was marginally reduced • 2001 - 2003 Everyday & Promoted Price Pricing Changes by Pack Size Everyday Shelf Price Promoted Price 2003 %Total $ Sales Pack Size 2001 2003 % +/- 2001 2003 % +/- 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans A/O Pack Cans 5.9% 20.4% 12.6% 4.7% 44.7% 11.2% 0.4% 100.0% $0.93 1.16 1.40 1.98 3.61 6.25 4.89 $1.18 $0.99 1.18 1.54 1.98 3.58 6.07 3.90 $1.28 6.5% 1.7% 10.0% 0.0% (0.8)% (2.9)% (20.2)% 8.5% $0.56 0.88 1.51 1.20 2.53 4.90 3.89 $1.25 $0.69 0.91 1.66 1.20 2.53 4.89 3.39 $1.46 23.2% 3.4% 9.9% 0.0% 0.0% (0.2)% (12.9)% 16.8% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  34. If one compares the changes in everyday and promoted prices by region since 2001 with the changes in CSD profitability for these regions over the same period, nothing pops out to suggest any reasonably obvious correlation between the two: • 2001 - 2003 CSD Everyday & Promoted Price Changes vs. Profitability Changes by Region • Region • Everyday Price vs. 2001 • Promoted Pricevs. 2001 • Profitabilityvs. 2001 • Total US • 8.5% • 16.8% • (12.1) • Northeast • 15.4% • 17.9% • 25.5 • Southeast • 15.9% • 11.1% • (2.0) • East Central • 3.1% • 13.2% • (42.7) • West Central • (1.9%) • 7.1% • (85.8) • Southwest • 8.3% • 8.9% • (28.1) • Pacific • 8.9% • 32.3% • 8.1 Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  35. The other way in which Supermarkets have attempted to address the profitability issue is to reduce both the percentage of units sold on promotion and the depth of the promotion discount: • % Units Sold on Promotion and % Promotion Discount ChangesCSDs, 2001 - 2003 % Units Sold on Promotion % Promotion Discount NACS Region 2001 2003 % +/- 2001 2003 % +/- Northeast Southeast East Central West Central Southwest Pacific Total U.S. 63.5% 60.0% 65.2% 61.5% 55.4% 65.0% 62.6% 61.9% 60.1% 65.7% 60.1% 58.9% 62.5% 61.8% (2.5)% 0.1% 0.7% (2.2)% 6.2% 3.9% (1.2)% -33.3% -25.7% -32.0% -22.4% -25.1% -31.2% -31.0% -34.0% -23.3% -31.5% -17.1% -25.6% -28.0% -28.3% 1.9% (9.5)% (1.8)% (23.7)% 1.7% (10.2)% (8.7)% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  36. Again, if one attempts to correlate CSD profitability trends with the changes in the percentage of cases sold on promotion and/or the depth of the promotional discounts since 2001, no solid pattern emerges on which one can base a decision: • Note particularly that West Central which has been one of the most aggressive in reducing promotional investment but nevertheless suffered an 86% decline in profits. • Region • % Sold on Promovs. 2001 • Promo Discountvs. 2001 • Profitabilityvs. 2001 • Total US • (1.2) • (8.7) • (12.1) • Northeast • (2.5) • 1.9 • 25.5 • Southeast • .1 • (9.5) • (2.0) • East Central • .7 • (1.8) • (42.7) • West Central • (2.2) • (23.7) • (85.8) • Southwest • 6.2 • 1.7 • (28.1) • Pacific • (3.9) • (10.2) • 8.1 Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  37. Although Supermarkets have indeed been creative about experimenting with different CSD pricing and promotion scenarios, one area that appears to invite further exploration is shifting the emphasis one puts on promoting different CSD pack sizes: • What has evolved over the years is a category whose sales are now dominated by 12 and 24-pack cans, with a slight assist from large bottles. This is true not only of total U.S. but of each of the 6 Nielsen regions: • Share of Total 2003 CSD Category Sales By Pack Size Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  38. Based on the profits per case delivered by each of the most common CSD category pack sizes, this preponderance of 12 and 24-pack can sales is obviously one of the root causes of the CSD category profitability issue • CSD Profitability By Pack Size, 2003 Pack Size % Total Case Sales % on Promotion Profit Per Case 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans 1.7% 17.1% 6.5% 5.2% 54.7% 14.8% 12.5% 68.0% 47.7% 57.2% 81.5% 83.9% $6.09 $0.99 $4.85 ($0.31) ($0.14) ($0.38) Source: A.C. Nielsen Databank, 2003

  39. Between 2001 and 2003, Supermarkets did try to improve this situation via aggressive promotion of the 20 oz. Single bottle. However, it appears that these efforts were diluted by continued promotion of 12-pack cans resulting in overall profit declines in all regions but two: • % Change In Share of CSD Promotion Units by Pack Size, 2001 - 2003 % TotalCs. Sales Reg. 1Northeast Reg. 2 Southeast Reg. 3 E. Central Reg. 4 W. Central Reg. 5 Southwest Reg. 6 Pacific TotalUS Pack Size 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottles 6-Pack Cans 12-Pack Cans 24-Pack Cans Profitability % ∆ vs. ‘01 1.7 17.1 6.7 5.2 54.6 14.8 100.0 24.3 (4.2) 0.9 (35.9) 16.8 9.9 25.5 247.6 (7.6) 7.9 (17.3) 2.5 174.3 (2.0) 21.9 (13.0) (4.5) (55.0) 27.9 (8.9) (42.7) 272.5 (6.2) (20.2) (6.8) 8.8 (16.1) (85.8) 192.6 (13.3) 10.5 (35.1) 11.1 (91) (28.1) 171.7 (6.1) 13.3 (38.5) 19.4 26.3 8.1 84.1 (8.2) (1.1) (33.4) 15.2 6.4 (12.1) Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  40. Nevertheless, it is instructive to look at what happened to 20 oz. Bottle performance as a result of these efforts, suggesting that relatively small changes in promotion mix emphasis can yield disproportionately large rewards, especially on relatively low base volume pack sizes: • 2001- 2003 CSD 20 oz. Single Bottle Performance in Supermarkets by Region and In Total • (All numbers represent % change between 2001 and 2003) % 20 oz. Cont. to TotalCSD Category Profits % ∆ Share of CSD Promoted Units 20 oz.% Total Cs. % ∆ $ Sales % ∆ Profitability NACS Region 2001 2003 %∆ Northeast Southeast East Central West Central Southwest Pacific Total U.S. 1.6% 1.8% 1.7% 1.9% 1.8% 1.6% 1.7% 24.3% 247.6% 21.9% 272.5% 192.6% 171.7% 84.1% 16.3% 18.5% 19.3% 12.5% 10.1% 20.7% 16.8% 40.7% 21.8% 58.2% 2.5% 11.7% 25.3% 26.1% 8.1% 26.7% 5.5% 5.6% 14.3% 20.1% 16.5% 9.1% 31.1% 15.1% 411.9% 22.2% 23.3% 23.8% 12.3% 16.5% 17.5% 72.6% 55.2% 15.9% 44.2% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  41. Why 20 oz. Single bottles? • Because in 2001, this segment was not only the most under-promoted but also the most profitable: • 20 oz. Single Bottles versus Balance of CSD Pack Sizes, 2001 % Total CSD Promoted Units AverageProfit Per Case Pack Size 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans A/O Pack Cans 1.2% 42.7% 10.7% 7.5% 32.7% 4.9% 0.4% 100.0% $5.33 0.91 3.88 (0.23) 0.03 (0.12) N/A N/A Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  42. Recommendations

  43. Based on CSD category profitability trends since 2001, the immediate challenge for supermarkets appears to be shifting the promotion mix away from 12’s and 24’s as much as possible without losing the power of these packs as image and traffic builders: • 2001 - 2003 CSD 12 + 24 Pack Cans Profit Performance in Supermarkets By Region and In Total • (All numbers represent % change from 2001 to 2003) Reg. 1Northeast Reg. 2 Southeast Reg. 3 E. Central Reg. 4 W. Central Reg. 5 Southwest Reg. 6 Pacific TotalUS Pack Size • 12 Pack Cans • % Total CSD Cs. Sales • % Chg Share Ttl CSD Prom. Units • % Chg Dollar Sales • % Chg. Profitability • 24 Pack Cans • % Total CSD Cs. Sales • % Chg Share TTL CSD Prom. Units • % Chg Dollar Sales • % Chg. Profitability 45.5 16.8 9.4 (5.5) 12.9 9.9 (1.4) (79.6) 58.7 2.5 1.4 (3.9) 6.5 174.3 113.3 (251.0) 52.5 27.9 18.2 (174.9) 27.8 (8.9) (11.0) (445.7) 62.0 8.8 6.5 (146.2) 9.2 (16.1) (14.6) (31.7) 56.5 11.1 9.4 (57.2) 23.5 (9.1) (9.4) (97.3) 57.3 19.4 8.3 (35.3) 9.1 26.3 22.9 36.6 54.7 15.2 11.7 (596.4) 14.8 6.4 0.9 (230.6) Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  44. To where does one shift this mix? To the relatively under-promoted segments – most small bottle sizes and especially 6-pack cans: • 2001 – 2003 Change in Promotion Emphasis By Pack Size, Total CSDs % Change Units Sold on Promotion % Change Share of on Promotion Pack Size % Sales (Cs) 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans A/O Pack Cans 1.7% 17.1% 6.5% 5.2% 54.8% 14.8% N/A 100.0% 63.4 (2.0) 2.8 (7.3) 0.8 1.9 (5.1) (1.2) 84.1 (8.2) (1.1) (33.4) 15.2 6.4 (40.7) N/A Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  45. The success that Supermarkets achieved with 20 oz. bottles over the past several years suggests that this “shift the mix” solution is doable without the need for radical changes to overall CSD category merchandising strategies. • For example, let’s assume an objective of reversing the percentage of units sold on promotion for 12-pack cans to 6-pack cans. • % Units Sold On Promotion, 2003 % Sales Current Mix Objective 6-Pack Cans 12-Pack Cans 5.5% 54.7% 57.2% 81.5% 81.5% 57.2% • If supermarkets were able to make this one shift in CSD promotion mix, the impact on total CSD category profitability would be enormous: • Impact of 6 & 12-Pack Can Promotion Mix Change on Total CSD Category Profitability % Mix Profitability % Mix Profitability Difference 6-Pack Cans 12-Pack Cans Total Category Profitability % Change vs. Present 57.2% 81.5% ($28,722.9) ($140,062.7) $801,569.8 81.5% 57.2% ($100,446.2) $356,230.4 $1,226,139.6 ($71,723.3) $496,293.1 $424,569.8 +53% Source: A.C. Nielsen, 52 weeks ending 9/8/01 and 9/6/03

  46. Obviously, the benefits from doing this will vary by region and retailer based primarily on the importance of 12-pack cans to total CSD sales. Here’s how this approach impacts on a region-by-region basis: • Impact of 6 & 12-Pack Can Promotion Mix Changes on Total CSD Category Profits Current6-Pack/12-Pack Mix Current Profitability ($MM) Profits if Mix Is Reversed % Change Vs. Present NACS Region % Sales Northeast Southeast East Central West Central Southwest Pacific Total U.S. 21.6% 17.8% 19.8% 12.3% 9.8% 18.7% 100.0% 57.2/76.9 59.2/79.7 64.1/81.9 56.4/84.1 48.7/81.1 57.4/84.8 57.2/81.5 $406,375.2 ($86,631.2) 181,809.5 4,704.5 114,052.8 181,258.9 801,569.8 $477,143.8 123,680.9 254,614.6 62,141.1 163,012.4 277,082.2 1,226,139.6 +17.4% +72.7% +40.0% +122.7% +42.9% +52.9% +53.0% Source: A.C. Nielsen, 52 weeks ending 9/6/03

  47. The difference in this approach versus the 2001 - 2003 20 oz. single bottle campaign is that this approach more directly addresses the 12-pack can issue. Specifically: • 6-pack cans are a more viable substitute for 12-pack cans than the 20 oz. Single bottles from a consumer usage point of view. • It is not very practical to promote 12-pack cans at the same time as 6-pack cans, although this is not true of 12-pack cans versus 20 oz. Single bottles. • Any reduction in 12-pack can promotional volume will help increase every day price shelf sales, although we recognize that this is not a one-to-one trade-off. • On a separate note, the indications are that more frequent promotions of 6-pack cans (or bottles) would enable supermarkets to recapture a small but important competitive edge because: • 6-pack cans are not broadly available in Supercenters and Clubs. • 6-packs build more trip frequency than 12-packs. • Independent research confirms that all of those large, heavy-user CSD families who buy 12 unique CSD brands per year would welcome the option of buying these brands on promotion in 6-packs, providing the price differentials make sense.

  48. And, speaking of pricing, if the following scenario is even directionally accurate, it seems to be in everyone’s best interest to reduce promotion emphasis on 12 and 24-pack cans. • In view of the relatively small share of the business now done by 6-pack cans, bringing the profit ratio between Supermarkets and Bottlers on this pack size into better balance should be a priority objective. • Profit Per Case By Pack Size – Supermarkets and Bottlers – CSDs, 2003 Ratio ofBottler to SupermarketProfits Pack Size % Total Case Sales Supermarkets Bottlers 20 oz. Single Bottles 67.6 oz. Bottles A/O Bottle Sizes 6-Pack Cans 12-Pack Cans 24-Pack Cans 1.7% 17.1% 6.5% 5.2% 54.7% 14.8% $6.09 $0.99 $4.85 ($0.31) ($0.14) ($0.38) $8.72 $0.47 $2.69 $0.61 $0.11 $0.08 1:1.43 1:0.47 1:0.55 1:92 1:25 1:46 Source: Databank USA, August, 2003.

  49. The indications are that the principal bottlers have become aware of this need and are already moving in this direction by reducing wholesale prices on 6-packs much more than 12 or 24 packs: • Wholesale Price Changes Per Case on Cans: 52 Weeks through 8/31/2003 12-Packs 24-Packs 6-Packs Pepsi Coke Cadbury Total $ .07 (.10) (.16) (.04) $ .10 (.08) (.03) .02 $ (.31) (.71) (.02) (.39) Source: Databank USA 2003

  50. Nevertheless, because of virtually universal over-emphasis on promoting 12-packs, what the consumer “sees” on an everyday basis is $1.98 for 6-packs versus $2.53 for 12-packs – and acts accordingly: • Average Everyday CSD Shelf vs. Average Promoted Prices by Pack Size, 2003 Pack Size Everyday Shelf Promoted Price 20 oz. Single Bottles 67.6 oz. Bottles A/O Small Bottles 6-Pack Cans 12-Pack Cans 24-Pack Cans $0.99 $1.88 N/A $1.98 $3.58 $6.07 $0.69 $0.91 N/A $1.20 $2.53 $4.89 • Anecdotally, we frequently see 6-packs priced at $2.49 while 12-packs are promoted at four (or even five) for $10.00. Source: A.C. Nielsen & Databank USA, 2003

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