Wholesale Grocery Profit Pools

K&M Profitability and Growth StrategyExcerpt

K&M

Wholesale

Grocers

Where are the Profit Pools in the Grocery Value Chain?

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Privileged and Confidential

Background and Context

Background: K&M is the largest wholesale grocery supply company in the U.S. and the lead supply

chain company in the food industry.

K&M served about 5,000 stores from more than 50 locations in 15 states. Among K&M’s customers are many of the largest and most well known grocery chains in the US.

Situation: K&M rose from near extinction 20 years prior, to its position of prominence largely by

focusing on a core customer group: large grocery chains. As a result of this survival strategy, K&M had grown prolifically over the past 15 years (22% CAGR versus ~2% for the grocery (retail and wholesale) industry).

Complication: However, along with this growth K&M had seen monotonically decreasing margins and

management feared a continuation of this trend may lead to negative profitability and ultimate insolvency as has happened to historic competitors in this razor-thin margin business.

Question: Could a new perspective on strategy yield a path to profitable growth or should the

company explore strategic “alternatives”?

Answer: By applying a profit pool lens, pockets of profitable growth could be identified along the

value chain to both improve the core business and once again return to profitable growth.

2


The “Problem”: K&M Has Experienced Unprofitable Growth

$1.8$2.5

$3.4 $3.7

$5.1$5.9

$7.1

$8.3

$9.8

$11.4

$13.6

$18.6

$15.2

$19.4

6.0%6.1%

6.4%6.4%6.3%6.5%6.5%6.6%

6.9%7.2%

7.5%7.4%

7.8%8.0%

$0

$5

$10

$15

$20

$25

Yr -

13

Yr -

12

Yr -

11

Yr -

10

Yr -

9

Yr -

8

Yr -

7

Yr -

6

Yr -

5

Yr -

4

Yr -

3

Yr -

2

Yr -

1

Today

Reven

ue -

Bil

lio

ns

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Revenue Gross Margin Net Profit Margin

Revenue

CAGR

22%

Ma

rgin

(% S

ale

s)

K&M Sales Have Increased But Profit Margins Have Declined…


Strategy Development: A 3 Step Process

Understanding Our

Profit Pools

Understanding “True”

Profitability

Prioritizing

Opportunities for

Profitable Growth

Define the Value Chain:

• How broad?

• Where do we “play”?

• Where could we play?

Define the pool:

• Size

• Distribution of profits

Prioritize identified opportunity areas

for “deeper dive”:

• “Fast Adapt” initiatives in current

business model place in the

value chain

• New areas to exploit:

‒ Do we have a core

competency?

‒ Do we have a strategy?

Customer Level: Profitability

• Correctly defined

• NPS and quantification of impact

on growth AND profits

Supplier Profitability:

• Pricing leverage, if any

• Cost reduction/efficiency

initiatives

Product line profitability:

• Pockets of opportunity?

• Dependency/Intercorrelation with

Customer and Supplier

Profitability

Integration into budgets, and

performance metrics:

• Keep the business units and

individuals accountable

Existing Customers/Existing

Geographies/Current Place in the

Value Chain

• Growth in the Core

Adjacency Growth

• New Customers/Existing

Geographies/Current VC

• New Customers/New

Geographies/Current VC

• New place in the VC (based on

profit pool opportunities)

‒ Existing Customers/Vendors/

Geographies

‒ New Customers/Vendors/

Geographies

New Product Extensions:

• Emerging trends

• Different ways to exploit core

competencies – “outside the box”

Execution:

• Build

• Buy/Acquire

• Partner


Why a Profit Pool Approach

Focuses management on both revenue and profit growth – does not ignore the

bottom line in favor of top line growth

Encourages thoughtful understanding of cost structure, existing and new

competitive threats, current and evolving customer needs, and unique core

capabilities

Identifies the location and size of profit concentrations within an industry – across

the relevantly defined value chain – and how those profits might shift and evolve

This broad view can help management identify heretofore unknown or

unexplored pockets of opportunity for profitable adjacency growth leveraging core

skills and capabilities

Applies to all logical growth extensions:

New products and services

New customers or customer segments

New geographies

New distribution channels

New related businesses

5Source:


Where is K&M in the Food Value Chain?

ProductionProcessing &

Manufacturing

Source: USDA, FMI, Department of Commerce, QA Analysis

Wholesaling Retailing

Consumption

$1.2 TR

$154 BN

Foodservice

$257 BN

Retail $285 BN

$238 BN

Foodservice

$529 BN

Retail $654 BN

Away From

Home

At Home

Our Vendors

and Our

Vendors’

Vendors

Our Vendors Our

Customers

and Potential

Customers

Our

Customers’

Customers –

The

Consumer

Our Place in the

Value Chain – and

Our Competitors’


Who are the Players in Our Value Chain: Examples

ProductionProcessing &

ManufacturingWholesaling Retailing

Consumption

$1.2 TR

• ADM

• Cargilll

• Bunge

• Ingredion

• Farm Products

• Land O Lakes

• CHS

• Large and

Local Farmers

• etc.

• Kraft-Heinz

• Nestle

• Conagra

• P&G

• Campbells

• Kellogg

• General Mills

• Unilever

• Mars

• Tyson

• Coca Cola

• Pepsico

• Other CPGs

Foodservice

• SYSCO

• US Foodservice

• PFG

• McLane

• GFS

Retail

• K&M

• Supervalu

• United Naturals

Food Inc.

• Wakefern

• Nash Finch

• Tree of Life

• Aramark

• Sodexo

• Cintas

• Compass

Foodservice

• Walmart

• Target

• Costco

• Kroger

• Whole Foods

• Safeway

• Ahold

• Albertsons

• Small Chains

• Independents

Retail

Away from

Home

Restaurants/

Dining Out

At Home

Grocery and

Specialty

Stores;

Convenience

Stores; etc.


The “Away-from-Home” and “At-Home” Food Profit Pool Map

K&M Current

Space

Source: Company Financial Statements; Thomson; Onesource; Yahoo Finance; US Government/Census Data; Quincy Analytics Analysis and Triangulation

K&M Margin

K&M Has Significant Opportunity to Exploit Pockets of Profitability Across

the Food Value Chain


Pockets of Profitability in K&M’s Core Competent Space:

Moving “Stuff” Around and Buying & Re-Selling

Wholesale Average: 6.7%

Our Industry

Emerging Customer Segment

One Third of our Largest

Customers

Our Most Profitable

Customers

Percent of Revenue (3 Year Average)* Third Party Logistics (e.g. CH Robinson; OHL)

** Broad Distribution (e.g. UPS; FedEx)

Source: Company Financial Statements; Thomson; Onesource; Yahoo Finance; US Government/Census Data; Quincy

Analytics Analysis


K&M Strategic Imperatives – 5 Steps to Profitable Growth

Fix The Core Accelerate Operational Improvements Already Underway

Renegotiate Broken Contracts Customers (6 Key Contracts)

Vendors (1 Key CPG)

Create a New Customer Engagement Model to Reduce Customer Anger

Expand Penetration With Existing Customers in Existing Product Categories

Highly Focused Adjacencies – New Customers Convert New Chains to Self Distribution in Existing Markets (Northeast and Mid-Atlantic)

Convert New Chains in Recently Entered Markets (e.g. Southeast; West Coast)

Leverage Core Merchandising Competency to Product Lines that Reflect Emerging Customer and Retailer Trends and Profitability

Naturals and Organics

Non-Food – Growth of GMHBC

Private Label and Value Brands

Reinvent/Revolutionize the Value Chain (“T3”) Highly Automated “Super Warehouse”/Logistics Center

Remove Steps from the Supply Chain (e.g. Mixing Centers)

Expand Beyond Traditional Grocery into New Retail/Wholesale Categories

If Acquisition, Pursue the “Mega Deal” – Either Alone or With a PE Partner Acquire #2 Grocery Wholesaler who Focuses on a Stable and Profitable Customer Base


The only way to succeed in a low-cost strategy was to eliminate steps in the supply chain

Manufacturing Plant

T3 – A Highly Automated

Distribution Facility

Quincy Analytics Helped K&M Implement Direct to Store (D2S), a Revolutionary, Automated Model that Eliminates Steps and Reduces Costs

DC / Mixing Center

Outside Storage / In Market Depot

Retailer Warehouse

Store

Manufacturing Plant

Store

Exploiting Profit Pools Along the Value Chain


Operating Cost Reductions Attainable via the D2S Model Will Result in $55M

in Annual Savings and Increased Volumes with Large CPG Vendors

Transportation

$0.32

Transportation

$0.40

Warehouse

$0.21

Warehouse

$0.63

Co

st

per

Case

$0.95

$0.61

Operating Cost Per Case

Current and Future

Current K&M Cost Future K&M Cost

at Highly Automated Facility

Cost Savings

$0.34 / case

Source: Quincy Analytics Pro Forma Costing Model and Capital Budgeting Analysis

Exploiting Profit Pools Along the Value Chain


Strategic Priorities, Opportunities and RisksO

pera

tin

g P

rofi

t

($m

m)

Low High

Level of Financial and Operational RiskSource: Quincy Analytics Pro Forma Financial Model

Working closely with management and drawing on extensive primary, secondary, and K&M

proprietary data, a clear path to profitable growth was identified. Even without the risky “mega

deal,” Quincy Analytics helped K&M find a path to a 10X improvement in operating profitability.

Wholesale Grocery Profit Pools

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