Prepared by:

1. Evaluating Club Stores andCash-and-Carries as Foodservice Supply Sources January 2012 Prepared by:

2. Introduction

3. Background • Well-established - and growing - channel • Leaders’ emphasis on “foodservice” is growing • Economic conditions have changed operator behavior • Key questions emerging: • Is the club store operator customer changing? • Are the purchase habits changing? • What does the future hold for club stores? • What is the implication for foodservice suppliers?

4. Objectives of Study • Update 2006 study findings: • Growth was 9% in midst of economic boom • Restaurant Depot was emerging with 40+ units • Membership had reached 100 million • Distributors did not see as threat • Determine operator usage, behavior, needs • Examine foodservice future of the club store • Assess manufacturer implications

5. Data Sources • Site visits and market basket study • Operator survey • Fielded in December 2011 • 332 club store users across segments • Operator in-person interviews • Distributor management and DSR discussions • Club store interviews • Technomic experts

6. Highlights • Two types of club stores targeting operators: • Foodservice-focused • Consumer/small business-focused • Foodservice products are a strategic focus for both types • Different approaches and operator response • Interest level and usage depends on operator type • Distributor response depends on customer size/importance

7. Club Store “Foodservice” Business • Need to re-think “foodservice” in club store channel • Foodservice products sold outside of core, traditional operator segments • Small business F&B purchases are considerable • Distinctions made in sizing and customer profiles

8. Current State

9. Foodservice-Focused Club Stores • Restaurant Depot • Broad geographic coverage • Serves foodservice industry; not general public • Smart & Final/Smart Foodservice • Concentrated in Western U.S. • Smart Cash&Carry is regional rival to RD • GFS Marketplace • Upper Midwest and Florida locations • Heavy foodservice and small business focus

10. Consumer-Focused (or Dual-Focused)Club Stores • Sam’s Club • National coverage • Large consumer base, but “built to serve small business” • Costco • National coverage • Few SKUs, controlled margins, “treasure hunt” experience • BJ’s • Eastern stores from Maine to Florida • Acquired in 2011 by Leonard Green, a minority owner of RD

11. Foodservice Growth Factors • Geographic expansion • Particularly Restaurant Depot • Increased foodservice emphasis, esp. by Sam’s Club • Market conditions favorable for clubs • Increased understanding of operator needs by more “consumer-oriented” club stores • Pack sizes • Safety considerations • Improved item continuity

12. Membership Base • Membership renewal rates are strong (85%+) • Business members – 87% to 92% depending on retailer • Focused on converting members to higher value membership plans • Membership at consumer clubs has 5-year CAGR of 6%

13. 2012 CORE Club Store Customers Small “Beyond Restaurant” Operators • Too small for distributors to serve • See little need for ongoing distributor relationship • Prefer flexibility of club store buying • Usually highly price conscious • Interest in club stores as high as ever – or higher Small Businesses (examples include)

14. 2012 CORE Club Store Customers • Can’t or won’t meet distributor minimums • Driven by convenience and “see/touch/smell” • Make impulse buys/willing to alter menus • Price sensitivity has driven club store interest to new heights • Availability of perishables, non-foods is driver Independent Restaurants

15. 2012 OCCASIONAL Club Store Customers Larger Independents/Small Chains • Not a universal solution • Loss of buying power and logisticscomplexity are concerns • Price stability a major plus(commodity costs are troubling) • Decision makers like control • Club stores have role more than in past

16. 2012 Club Store NON-Customers • Delivery is a requirement • Item continuity is not “guaranteed” • Buying power is thought to be significantly reduced • Distributors are considered highly supportive • One-off, emergency sourcing is only interest Regional or Small Chains I used to shop frequently at Restaurant Depot until I got busier and my restaurant grew. I had to understand that my time is better spent developing my business rather than doing such time intensive work. – Multi-Unit Operator ($1 million AUV)

17. Operator Behavior and Perceptions

18. Appeal of Club Stores • Industry conditions have further motivated independents to examine club stores • No minimum orders • Perceived price advantages • Convenience (shop as needed) • Small multi-unit operators re-examining alternatives • Not just emergency source • Specialty items • Commodities • Supplies/non-foods

19. Appeal of Club Stores • Shopper can “see/touch/smell” • Major plus for executive chefs • Can examine all items, not just broadliner samples • Quality goods • Perception that item quality mirrors that of broadliners • Package size • Space constraints often cited by kitchen personnel • Brand names and private label • Choice exists for BOH/FOH • Decisions can be made on category-by-category basis

20. Restaurant Depot: Unique Solution • Double-digit sales growth • “Passionate” base of customers • Viewed as more comprehensive sourcing solution than other club stores • Operators cite many “pros”: • Product selection/variety • Quality/price relationship • “Cons” exist but are not deterrent for small operators • “Controlled chaos”

21. Appeal of Restaurant Depot • I don’t specifically tell my distributors that I am buying a lot of my food at Restaurant Depot. But I talk to them a lot about pricing - all the time. • They will tell me that their quality is better, and offer to take me on a tour of their distribution centers. But I don’t need that. They figure out that I am going to Depot, especially when I’m no longer ordering certain things from them. They know what’s going on. At the end of the day, it’s about the bottom line. • - Independent FSR ($500k to $750k in volume) • I shop at Restaurant Depot for the variety. They’ve got everything a restaurant needs. Whether you need dry goods, napkins, tomatoes, or a cocktail shaker, they have it. It’s a one-stop-shop for everything. It’s great not having to go to multiple places. • - Independent Bar & Grill ($500 to $750k in volume)

22. Operator Usage over Past 24 Months % of Foodservice Customers • Average member buys 20% of F&B and 16% of non-foods from club stores

23. Reasons for Increased Use • All aspects of cost (actual, consistency, trust, comparables) are relevant for the customer

24. Category Purchases • Better price and product selection are most common purchase drivers, regardless of category “Usually” or “Typically” Purchase

25. Operator Evaluation of Supply Alternatives Operator Perceptions(Rating of Excellent or Good)

26. Market Basket Price Comparison • Major consumer-focused clubs have very similar pricing *National broadliner pricing reflects delivered price to Tier 1 account.

27. Club Store Market Profile

28. Club Store Performance Total Sales ($B) Total Units F&B SKUs F&B Sales ($B) +7% +3% +2% +8%

29. U.S. Club Store Foodservice Sales Total F&B Sales = $64 billion • F&B = 47% of club store sales *Percentages based on midpoints of ranges

30. Private Label Emphasis Private Label Food and Beverage Sales ($B) +8% • Private label equals 12% of club store F&B sales

31. Future Club Store Environment

32. Private Label Strategies • Increased emphasis on private label • Restaurant Depot has 15 brands • Sam’s Club has dedicated foodservice private label • Bakers & Chefs brand: • 2006 = 34 items, 2011 = 134 items • Costco focuses on Kirkland Signature • Develops co-branded private label products • Turkey breast with Foster Farms • Soup with Campbell’s

33. Distributor Response • Acknowledge growing customer use • See clubs as bigger threat • Response different for large independents • COP not thought to be at risk • See most movement in: • Non-foods • Commodities (e.g., flour, sugar, fryer oil) • Specialty items (e.g., ethnic ingredients, specialty cheeses)

34. Future Purchasing “I would purchase more from club stores if…” • 38% of operators using club stores anticipate increasing shopping frequency; only 3% expect a decrease

35. Future Growth Expectations Total Sales ($B) Total Units F&B Sales ($B) +6% +2% +7% $84 $64 F/S Other 2015 2011 *Assumes 2.5% inflation

36. Outlook and Implications

37. Preliminary Hypothesis Hypothesis Club stores have become a more viable, complete sourcing solution for large, mainstream independents. Conclusion: Not True Yet • Too many difficulties/complexities • As operator reaches certain size: • Distributor attentiveness increases • Distributor prices decrease • Support, guarantees, consistency are huge requirements But...

38. Leveraging Club Stores • Large independents and small multi-units willleverage club store pricing against distributors • Price transparency has impact • Club stores maintain margin caps • Distributor profitability will be affected • Will have to “sharpen pencil” and “over-service” • Will utilize both sourcing alternatives • Category by category decisions

39. Expansion Strategies • 77% of club store customers travel fewer than 10 miles • Convenience is a driver • Restaurant Depot is highly successful with new openings • Management sees widespread expansion potential • Independents will gravitate to new RD locations • Base of small (under $500K) operators is huge • Costco will open more than 10 per year

40. Broadening Operator Appeal • Channel will respond to the needs of the operator: • Possibility for payment terms • New checkout practices (including loading support) • New/expanded small business loan programs • Greater use of category experts on floor • Expanded selection of foodservice-specific items

41. Small Business F&B Potential • Small businesses have flocked to club stores • Converting from small distributors, OCS, grocery stores, office supply, etc. • Trend will continue • Categories in most demand include: • Non-alcoholic beverages • Coffee (along with sugar packets, cups, etc.) • Pantry items • Condiments • Snack foods

42. Landscape Change • National broadliners have taken note of: • Restaurant Depot success • GFS Marketplace value to Gordon Food Service • Power distributors will evaluate model • Likely to be at least one new foodservice-focused club entrant in next three years • BJ’s acquisition by Leonard Green may lead to change • Unit conversions?

43. Recommendations

44. Recommendations • Presence in channel is imperative to reach foodservice and small business • Design and develop distinct club store strategies targeted to three club store models • Understand the club stores’ buying principles • Lowest pricing is paramount to consideration • Develop items with foodservice and consumer appeal • Consider offering test programs to club stores • Consider “in-and-out” or “treasure hunt” to get placement

45. Recommendations • Explore co-branding opportunities • Understand private label priorities of retailers • Stores are focusing on developing partnerships • Co-branded items can improve quality perception from operator perspective • Be prepared to open R&D/manufacturing process to potential partner • Cutting cost and retaining quality is expected

46. Recommendations • Differentiate packaging • Multiple requirements • Ease of handling and storage • Including store exit (where advertising potential also exists) • Safety assurances • Size requirements vary by retailer • Tell “story” on packaging • Club stores want leading brands and/or brands with a “story”

47. Recommendations • Develop educational merchandising/signage support • Lack of customer service personnel in stores • Lack of category/product support is leading complaint • Club stores want manufacturer-driven assistance • Take advantage of business-only hours • Foodservice sample programs • Menu/application/cost control advice • Share consumer insights • Independents may not know brand preferences

48. Recommendations • Effectively target club store customer • Know who they are • Know why they are in club stores • Know what they want • Embark on aggressive campaign to educate club stores on… • Operator needs • Category importance • Particularly non-foods

49. Appendix

50. Size and Growth of Channel • Growth rates remain strong given club members’ need for value Source: 2011 Warehouse Club Industry Guide (HHC), Technomic , company reports