Trade Promotion - Root Cause Analysis

EQUITY RESEARCH | November 3, 2015
US Consumer Packaged Goods and Retail
Trade Budgets at a Tipping Point

Opportunity for Food & Beverage to get fit
brings risk that retail bottom lines get leaner
Trade budgets funds funneled from Jason English

consumer packaged goods companies to (212) 902-3293
retailers for promotions -- have been jason.english@gs.com
resistant to restraint since they were Goldman, Sachs & Co.
introduced in the 1970s. At more than
$200 bn in the US alone, trade spending Stephen Grambling, CFA
is a bigger expense for manufacturers (212) 902-7832
than SG&A and a vital source of income stephen.grambling@gs.com
for retailers. Yet this spending is little Goldman, Sachs & Co.
understood by investors, and returns are
increasingly negative. A change agent has Matthew J. Fassler
arrived via the takeover of Heinz and Kraft (212) 902-6740
by cost-cutter 3G. We see a tipping point matt.fassler@gs.com
to cut back trade spending, and in this Goldman, Sachs & Co.
report, we introduce a framework for
analyzing the categories ripe for Trade Judy E. Hong
Budget Optimization and the potentially (212) 902-0490
significant P&L impact for manufacturers judy.hong@gs.com
Goldman, Sachs & Co.
and retailers.
Mitch Collett
(+44(20)7774-1060
mitch.collett@gs.com
Goldman Sachs International
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix,
or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with
FINRA in the U.S.
The Goldman Sachs Group, Inc.
November 3, 2015 Global: Consumer Staples
Contents
PM summary: TBO in focus as industry takes cost cuts beyond zero-based budgeting 3
A ghost of Nixons past the birth of trade budgets 6
The very large and largely invisible (to Wall Street) CPG expense it became 6
The very large and very complicated retail income stream 9
Trade budgets at a tipping point the catalysts for change 11
Where TBO can work and where risks may be too high 20
High-level CPG implications 26
High-level Retail implications 33
A deeper dive into Food companies 35
A deeper dive into Retail companies 66
Disclosure Appendix 68
Goldman Sachs Global Investment Research 2

PM summary: TBO in focus as industry takes cost cuts beyond zero-based budgeting
A large, and largely ineffective pot of money

Despite the importance of trade budgets in the grocery supply chain, the spending remains underappreciated by Wall Street and
investors because of its opaque nature. Born during the Nixon administration to provide a flexible inflation buffer for CPG
manufacturers in the face of potential price controls, trade budgets quickly evolved into a tool to drive sales and market share
through special price deals, in-store displays, and other forms of promotion. Because the money is dealt back to retailers through
vendor allowances or off-invoice reductions from gross sales, there is no way to track the spending precisely, but we estimate it
surpasses $200bn in the US alone. For food retailers, it often is a bigger income stream than EBIT. A widespread reduction in this
spending has the potential to significantly disrupt P&Ls across the supply chain and we believe the conditions for a tipping point are
in place. The increase in trade budgets changed the focus for food retailers toward making money by buying rather than selling,
while CPG focus shifted more toward selling and merchandising rather than innovating and marketing. Over time, returns on the
investment faded. A recent study by The Nielsen Company found that only 33% of trade promotions generate positive economic
returns while 22% of promotions actually destroy revenue. Our own analysis suggests promotions are destroying gross profit
dollars for Food and Beverage manufacturers in categories representing roughly 70% of sales. Various third-party surveys indicate
that CPG manufacturers are aware of the problem and some surveys suggest that tension between manufacturers and retailers may
be building; Wal-Marts ongoing efforts to extract further concessions probably does not help ease the tension.
A potential tipping point for TBO (trade budget optimization)

Negative returns for trade promotions are not a new problem and various information technology systems and processes have been
developed over the years to improve trade promotion management (TPM) capabilities. Data, however, suggest that efforts to date
have been generally ineffective. Trade promotion returns are eroding, creating greater economic incentive for change. Our analysis
indicates that only one in every five sales generated on promotion is an incremental sale; in other words, four in five are subsidized
sales that would have otherwise been sold at a higher price absent the promotion. This compares with a one-in-four incremental-to-
promoted sales ratio just four years ago. The ailing economics come at a time when retailers have less to offer the center-store
oriented trade budget funders as they pivot to meet shifting demands of an evolving consumer (e.g., expanding focus on the
perimeter and natural and organic offerings). The industry is ripe for change and a catalyst may be at hand.
Every big change needs a change agent and we believe the change agent may have arrived in the form of 3G and its takeover of two
of the largest trade spenders, Heinz and Kraft. Data suggest that Heinz made cuts to promotional pricing programs of roughly 25%
since the 3G acquisition in 2013. With the acquisition of Kraft, 3G now controls what we estimate is the largest trade budget in the
US Food industry at about $4.5bn and we expect a similar TBO strategy to be deployed. Other manufacturers have economic
incentive to pursue TBO and we believe KHC may give them cover and incentive to act, much like the wave of zero-based-budgeting
initiatives launched across the industry in the wake of 3Gs deployment of the practice at Heinz. We believe PEP and KO have been
steadily deploying TBO initiatives as part of a broader revenue optimization initiative.
A benefit for Food & Beverage, but not unequivocal or even

While we see a sizable opportunity for the CPG industry overall to curtail trade budgets, we appreciate that the investments can play
a valuable role in building awareness, interest and trial of some products. Curtailment also brings challenges of competitive and

retailer retaliation. As such, aggressive deployment of TBO will likely perpetuate volume losses for established CPG companies,
though in many instances the economic returns may prove worth it. In this report we present a framework for identifying where
TBO initiatives are likely to find more or less success. For an individual manufacturer the strength of its brand will matter, but so too
will the current economic returns of promotions and market structures for the various categories in which it competes. As such, we
look for areas where manufacturers will have both the will (negative promotional returns) and way (favorable market structure in the
form of high concentration and lower private label penetration) to deploy TBO. As we detail later, we believe categories
representing roughly 27% of Food and Beverage industry sales are ripe for sizeable trade promotion cuts. We identify another 43%
of industry sales where fine tuning is in order given negative returns, but where market structure will likely prove less conducive for
bolder actions.
Beverage companies such as KO, PEP, and DPS screen as highest opportunity candidates given heavy dependence on concentrated
exposure to the CSD category where promotional returns appear negative and market structure is favorable. We have already seen
improved pricing in US soda category over the past year as manufacturers have increased their focus on revenue pack management
programs and KO has aligned its interest through incidence pricing model with the bottlers. We see sizable runway for US CSD
system-wide margins to improve, though the pace may be more gradual and evolutionary as each manufacturer balances its market
share/profit goals, particularly given the industrys Direct Store Delivery (DSD) model that can more than offset lower costs if
velocity takes a step-down. In this context, we view trade spending as one tool that needs to be optimized and tailored and be
balanced by stepped-up efforts behind innovation and e-commerce capabilities.
Within Food, KHC is in focus where we expect 3G to cut into Krafts estimated $4.5bn trade budget. We see a $400mn savings
opportunity at legacy Kraft (220 bps of margin) to trim in ripe categories (e.g., mayonnaise, condiments, and beverages) while
fine-tuning elsewhere. Heinzs actions suggest it may go further, which may have unintended consequences while at the same time
creating cover for others. SJM stands to benefit if KHC cuts too far given its direct competition in coffee a relatively small category
for Kraft but core to SJM. And pet may also prove an opportunity for SJM. SJMs mass market pet food portfolio is currently
suffering from competitor lead deflationary pressure a common theme for those facing off against Nestle, which appears more
focused on driving RIG (real internal growth, which only captures volume and mix) in the current deflationary environment.
Analysis suggests the competitive activity is destroying value in the category and economic forces of profit maximization could lead
to more favorable promotional dynamics in this relatively concentrated and low-private label category over time. CPB screens as
another potential TBO benefactor, but more so given the leadership actions it can take rather than potential benefits of less
aggressive competition. Data suggest promotions in soup are destroying value. Since FY08 CPB has invested $360 mn of
incremental money into its trade budget for its US Soup, Sauces and Beverages segment, based on company reported promotional
investment. At the same time it has lost $219 mn of revenue due to volume declines. Full retraction of that incremental trade spend,
all-else-held constant, could add $0.79 to our FY16 EPS estimate. It could prove material.
A potential point of pain for Retail as Food gets fit

Retailers are directly impacted by CPG firms reducing trade budgets, which effectively raises prices to retailers and redirects their
efforts away from Hi-Low promotions explicitly subsidized by trade subsidies. Leading retailers acknowledge the fading efficacy of
trade spend, and while they are reluctant to cope with the short-term consequences of disruption, see long-run benefits to a more
rational market. The retailers best positioned operate with an EDLP approach, such that consumers are attracted by their
combination of consistent value, selection, and service, rather than by occasional price cuts; are less dependent on center-store
CPG; and, possess powerful private label offerings to capture share from fading brands, and to use as leverage in negotiations with
vendors.

Among big-box discount firms, COST is more focused on fresh grocery, also has a solid private label offer, and of course operates
with an EDLP approach. TGT is well-positioned given its EDLP approach, its relatively modest exposure to center-store CPG
expected to fall even further as it focuses on signature categories of style, baby, kids, and wellness; and, its own private label
offering. WMT is toughest positioned among these firms, given heavy exposure to center-store CPG/dry grocery and, most notably,
recent efforts reported extensively in the press to drive higher subsidies from vendors at a moment when these dollars are
drying up.
Within supermarkets, specialty retailers such as WFM/TFM/SFM are generally less exposed to cuts in trade spend given a focus on
fresh and non-national branded center store SKUs. Of the conventional cohort, we believe KR is most insulated given its better
private label mix and ability to drive center-store volume whereas SVU is most at risk given its exposure to independent retailers
more reliant on Hi-Low pricing to drive traffic as well as having a weaker private label offering. The dollar stores (DG, DLTR) are also
positioned well given EDLP strategies.

A ghost of Nixons past the birth of trade budgets

Trade spend emerged in the 1970s when inflation was high and the Nixon administration had begun to enact price controls on retail
products. Fearing that they too would fall victim of price controls at a time when input costs were soaring, the CPG industry
proactively raised prices by a material amount and then dealt back the difference of the old price and new to keep the retail prices to
the consumer the same. An expense line that could be flexed to combat inflation without officially raising prices had thereby been
created trade budgets were born.
What emerged as an inflation protection tool quickly evolved into a demand generation vehicle as retailers and CPG companies
began to use money to fund merchandising and promotion activity. Leading edge manufacturers at the time such as P&G, Lever
Brothers and General Mills are said to have been among the first to deploy these tactics and reportedly benefited from substantial
sales lifts. We suspect that much of the sales lift experienced by the early movers came at the expense of the laggards (much as
promotional lifts today are largely the result of market share shifts) and subsequently resulted in elevation of trade promotion
investment by others.
The result was the engraining of trade promotions as a critical way of doing business for CPG companies and a diversion of focus
and investment from traditional innovation and brand building initiative to selling and merchandising tactics; a shift from consumer-
pull to a consumer-push based model was afoot. A shift also occurred among retailers as it soon became more profitable to focus
on buying effectively (and collecting as much trade subsidization as possible) than selling effectively. The incentive structure for
businesses has flipped and both were now burdened with the incremental expense of tracking, auditing and ensuring accountability
(as best as possible) of the trade budgets and corresponding commitments on both sides.
The very large and largely invisible (to Wall Street) CPG expense it became
By the late 1990s, trade budgets were reportedly approaching 2x the size of advertising investment they eclipsed the 2X threshold
at the turn of the millennium as retailers found more services to charge for (slotting, circular flyers, etc.) and manufacturers
willingly cooperated to ensure distribution and merchandising of their products. By 2005 industry consultants estimate that CPG
trade budgets had grown to over $115 bn and represented 15% of industry gross sales. Consultants we have recently spoken with
estimate that CPG trade budgets have now eclipsed $200 bn in the US and often exceed 20% of gross sales for many food
companies. Nielsen puts the global trade budget figure at roughly $1 tn.
As we illustrate below, we estimate that trade promotions and other contra-revenue line items now exceed the entire SG&A
expenditures of the food manufacturing industry by roughly 25%; an expense line exceeded only by COGS. We believe the size of
the spend is largely underappreciated by Wall Street given that few companies disclose the contra-revenue expense line items that
rest above net sales.

Exhibit 1: We believe that CPG trade budgets now exceed SG&A for the industry at large and may be as much as 25% greater for
packaged food companies
Illustrative US Packaged Food P&L with gross-to-net sales components
2014Base(bn$) Comment/Assumption
TotalRetailSales 456.2 <NielsenAOC+Cchannelmeasured$sales
Retailermarkup 30% <Assumed

RetailerGrossProfitContribution 136.9
ManufacturerGrossSales 319.4
PromoContrarevenue (54.3)
Grosssalesrate 17% <Assumed
OtherContrarevenue (9.6)
Grosssalesrate 3% <Assumed
TotalContrarevenue (63.9) Larger cost bucket than SG&A
Grosssalesrate 20% and equally, if not more,
discretionary
ManufacturerNetSales 255.5 <Calculated
COGS (163.5)
%ofnetsales 64% <GScoveredFoodcompanyaverage
Grossmargin 36%
SG&A (51.4)
%ofnetsales 20.10% <GScoveredFoodcompanyaverage
EBIT 40.6
EBITmagin 15.90%
Source: The Nielsen Company, Goldman Sachs Global Investment Research.

Exhibit 2: We believe the majority of trade budgets are funded by center-store grocery manufacturers, as reflected by promoted dollar sales across departments
Promo $ sales by department
$90 $85
$80
$70
$60
$50
$40
$30 $21
$20 $15 $15 $16
$9 $9 $10 $11
$6 $8
$10 $2 $3 $3 $4
$
Deli
Tobacco/Alternatives
PetCare
BeautyCare
Bakery
Meat
GeneralMerchandise
Produce
HealthCare
PersonalCare
Alcohol
HouseholdCare
FrozenFoods
Dairy
Grocery
Exhibit 3: While some promotions are likely funded by retailers (e.g., fresh produce) we believe trade budgets are likely the largest for CSD manufacturers given
the size of the promoted sales base in the category.
Promo $ sales by category (only includes category with over $ 1 bn in sales)
$18 $16.4
$16
$14
$12
$10 $8.4
$8 $6.2 $6.6
$5.1 $5.4
$6 $4.1 $4.3 $4.6
$4 $2.4 $2.5 $2.8 $2.9 $3.0 $3.2 $3.5 $3.6
$1.9 $2.0 $2.3 $2.3
$2 $1.1 $1.1 $1.2 $1.2 $1.3 $1.5 $1.5 $1.5 $1.5 $1.6 $1.8 $1.8 $1.9
$
DogFoodDry
Shortening/Oil
FreshMeat
FrozenNovelties
Butter&Margarine
EggsFresh
PreparedFoodsRdy
VegetablesFrozen
NonChocolateCandy
VegetablesCanned
PizzaFrozen
Nuts
PreparedFoodsDry
Soup
Juices&DrinksRefrig
SnacksTortillaChips
Yogurt
Crackers
IceCream
PetFood
Cookies
Milk
ReadyToEatCereal
SnacksPotatoChips
ChocolateCandy
Coffee
PreparedFoodsFrozen
BottledWater
JuicesDrinksShelfStbl
Cheese
Bread&BakedGoods
PackagedMeat
FreshProduce
CarbonatedBeverages
Mixes
Serve

The very large and very complicated retail income stream

Following the advent of trade budgets, CPG-oriented retailers (e.g., grocers, etc.) discovered new ways to supplement their income
vendor-driven coupons, slotting, in-store displays, temporary price reductions, rebates, etc. In short, retailers turned to buying to
make money rather than just selling and many became very good at it. Our $200bn in estimated total trade spend in the U.S.
equates to over 50% of reported gross profit dollars for the combined food & beverage stores, drug stores and warehouse stores /
supercenters reported by the US Census Bureau. At a company level, the reported income stream from vendor allowances at
Kroger is now more than twice as large as its consolidated EBIT and this number is likely understated as portions of trade spend are
simply taken as off-invoice reductions incorporated directly into COGs. In fact, KRs annual report notes most vendor allowances are
accounted for as a direct reduction in the carrying value of inventory and not explicitly broken out. As shown in Exhibit 5 for
illustrative purposes, traditional non-EDLP food retailers have multiple avenues to reduce their cost of goods sold through trade
spend, yet the consumer and investors only see a small portion. This ambiguity is further complicated by the retailers own actions
via loyalty programs and price investments. Few retailers break out this data, which speaks to the opacity of the market dynamic
and, in our view, sensitivity to changes in these subsidies.
Exhibit 4: Vendor allowances disclosed in public filings are large Exhibit 5: yet likely under-state the overall income stream received
Vendor Allowances % of Retail Sales, Ex-Fuel Illustrative Breakdown of Trade Spend Across Stakeholders
VisibletoConsumer: VisibletoRetailer: VisibletoRetailInvestor:

2010 2011 2012 2013 2014
EverydayPrice $5.00 MSRP $5.00 NetSales $3.50
Vendorallowances WeeklySpecialPrice $4.50 NetSales $3.50 COGs $2.25
Coupon $1.00 TargetBaseCost $3.75 VendorAllowances $1.50
KR $6,400 $5,900 $6,200 $6,200 $6,900
NetPromoPrice $3.50 ActualBaseCost $4.00
WMK $60 $67 $75 $76 $90 ImpliedBaseGP$ $1.25
LessTempDisc $0.50
IMKTA $105 $110 $114 $122 $127
LessCouponTrade $1.00
Invoice $2.50
OffInvoiceReductio 0.25
Allowances%ofSales,ExFuel
COGS $2.25
KR 9.4% 8.3% 8.2% 8.1% 8.0% ActualGP$ $1.25
WMK 2.4% 2.5% 2.9% 2.9% 3.4%
IMKTA 3.7% 3.8% 3.8% 4.0% 4.1%
Source: Company data. Source: Goldman Sachs Global Investment Research.
While retailer / manufacturer relationships have always been some form of tug-of-war, recent consumer trends have likely
exacerbated the tension in food. Over the past few years, retailers have catered to consumers preferences by emphasizing fresh,
utilizing loyalty programs tied to fuel and pharmacy, and improving private label offerings. These initiatives have driven gross profit
growth for the largest food retailers globally even as five of the largest CPG companies have reported negative gross profit growth.
Importantly, retailers are still receiving and deploying center-store trade support. We would therefore expect any reduction from
vendors to still be disruptive to retailers in the near term, particularly those more reliant on complex pricing strategies to drive sales
rather than differentiated products or experiences (our assessment of retailer risk is on page 32). Longer term, a simplified approach
should benefit the retail market as unsustainable pricing levels dissipate.

Exhibit 6: The largest food retailers have been driving gross profit growth vs. Exhibit 7: Hi-Low pricing can train the consumer to unsustainable
declines at CPGs due in part to growth in fresh promotional levels, pressuring margins for the industry
Gross profit dollars Retail vs. CPG Illustrative pricing comparison under equal trade spend: EDLP vs. Hi-Low
$mn's 2012 2013 2014 2015 CAGR $6.00 Consumersanchorto

KR $19,523 $19,848 $22,575 $24,358 7.7% MSRP EDLPAvg Promo
promoprice>30%offEDLP
WMT $115,977 $117,893 $120,054 $119,942 1.1% $5.00
COST $12,484 $13,530 $14,499 $15,431 7.3%
TSCO.L $11,379 $11,007 $11,984 $11,247 0.4%
$4.00
CARR.PA $23,748 $24,266 $24,445 $21,234 3.7%
Total $147,984 $151,271 $157,128 $159,732 2.6%
$3.00
PG $41,415 $40,511 $36,884 $33,665 6.7%
PEP $34,176 $35,254 $35,766 $34,599 0.4% $2.00
KHC $5,788 $5,981 $5,886 $5,957 1.0%
KO $28,999 $28,564 $28,110 $26,889 2.5% $1.00
MDLZ $13,119 $13,111 $11,154 $10,833 6.2%
Total $81,379 $81,746 $78,536 $74,222 3.0% $0.00
Week1 Week2 Week3 Week4 Week5
Source: Company Reports, Goldman Sachs Global Investment Research. Source: Goldman Sachs Global Investment Research.

Trade budgets at a tipping point the catalysts for change
TBO tensions is building

In a recent study on trade promotional efficacy, The Nielsen Company reported that only one in four Nielsen clients say that they are
happy with their promotional program outcomes. Numerous other studies report similar findings. For example, a 2014 study by
Kantar Retail found that only 16% of manufacturers believed their retail counterparts were delivering good performance with their
trade promotion funds and, on average, they believe that nearly 20% of their funds are being dropped to the bottom line by retailers.
There is clear awareness of TBO opportunities by manufacturers. This is not a new issue and has been commonly discussed,
analyzed, and debated by the industry for over two decades. However, multiple factors appear to be coming to a head that could
catalyze more substantial change.
Exhibit 8: 94% of manufacturers rate trade promotion efficiency by retailers Exhibit 9: Manufacturers in general believe that retailers are dropping nearly
as a very/extremely important issue, yet only 16% rate retailer performance 20% of trade funds to their bottom line rather than passing through to
as very good/superior consumers or covering promotional costs
Percentage of manufacturers rating retail performance very good/superior Manufacturers reported use of trade funds by retailers
Gotoretailer
bottomline,
NewProductInnovation 42% 19.0%
DataAvailabilityandManagement 36%
ExecutionatRetail 33%
Coverretail
promocosts,
ShopperInsights 16.0%
32%
Passedthrough
toconsumers,
TradePromotionEfficiency 16% 66.0%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Source: Kantar Retail 2014 Category Leadership Benchmarking Study Source: Kantar Retail 2014 Category Leadership Benchmarking Study

as trade budget returns dwindle more deeply negative

One potential catalyst for change is the eroding economics of the already economically inefficient industry trade budget. Retail data
suggest that industry-wide promotional levels have seen little change since 2011, yet the instances where those promotions
generate incremental sales has steadily fallen. Based on Nielsen data, we calculate that four out of every five dollars sold on
promotion is simply a subsidization of a sale that otherwise would have occurred (and at a higher price absent the promotion).
Exhibit 10: The percent of sales generated on promotion has remained relatively steady since 2011, with nearly one in every three dollars generated on
promotion in the largest department center store grocery
Percentage of dollars sold on promo by department
34.2%
33.7%
40.0%
27.5%
35.0%
27.0%
30.0%
25.0%
20.0%
15.0%
10.0%
Grocery
Frozen
Deli
Dairy
Bakery
Meat
Produce
Merchandise
HealthCare
HouseholdCare
PersonalCare
PetCate
Alcohol
BeautyCare
Total
General
2011 2012 2013 2014 2015YTD
Source: The Nielsen Company; Goldman Sachs Global Investment Research.
Exhibit 11: Roughly one in every five promoted dollars sold is actually an incremental sale the other four dollars was simply a subsidization of a sale that
would have otherwise occurred; what is worse is that this conversion ratio is steadily falling
Percentage of promoted sales converted to incremental sales
35.0%
28.5%
26.8%
30.0%
23.1%
21.7%
25.0%
20.0%
15.0%
10.0%
Grocery
Frozen
Deli
Dairy
Bakery
Meat
Produce
Merchandise
HealthCare
HouseholdCare
PersonalCare
PetCate
Alcohol
BeautyCare
Total
General
2011 2012 2013 2014 2015YTD

with notable drops in categories such as peanut butter and dry mixes (predominantly dry pasta mixes such as macaroni and cheese).
13
Global: Consumer Staples
Looking more deeply into food, we find that few categories generate conversion ratios greater than 30%, and this does not take into
Exhibit 12: Few categories have promoted-to-incremental sales conversion ratios above 30%, and some that do (e.g., spaghetti sauce, ketchup, RTE cereal) may
departmental-wide observations, the promo-to-incremental sales conversation ratio has fallen for nearly all categories since 2011,
account sales that may simply be pulled forward by promotions for pantry stock by consumers. Not surprisingly, given
SpaghettiSauce
Eggs
RTECereal Butter&Margarine
Frzn.Pizza/Snacks FreshMeat
Ref.Juice Cheese
Ketchup Ref.Juice
Shortening/Oil BottledWater
Mayonnaise Jelly/Jams
NonChoc.Candy FreshProduce
Coffee HotCereal
Pasta Dog&CatTreats
PeanutButter Sugar/Substitutes
Frzn.BakedGoods Pickles
Bfst.Bars UnpoppedPopcorn
PackagedMeat Milk
Exhibit 13: The erosion of promotional efficacy has been substantial for the vast majority of packaged food categories
UnpoppedPopcorn Yogurt
Frzn.Meat DryDogFood
CannedVegetables MexicanSauce
Soup GranolaBars
Refr.Dough NonChoc.Candy
be related to pantry loading given the intuitively low expandable nature of consumption in these categories
GranolaBars ChocolateCandy
FrznPreparedFoods DryCatFood
BakingMixes Mayonnaise
Butter&Margarine Cookies
Cookies Bfst.Bars
CY11 to CY14 percentage point change in percentage of promoted sales converted to incremental sales
Jelly/Jams TableSyrups
Cheese TortillaChips
ChocolateCandy SpaghettiSauce
FreshProduce Gum
S.S.Juice PotatoChips
Sugar/Substitutes Crackers
Frzn.Vegetables PackagedMeat
SaladDressings Ketchup
Gum S.S.Juice
SoftDrink(noncarb) Refr.Dough
RTEPreparedFood Frzn.Vegetables
PotatoChips Coffee
DryMixes Pasta
Refr.SnackSpread/Dip Refr.SnackSpread/Dip
Nuts Frzn.Pizza/Snacks
Crackers Frzn.Meat
Frzn.Waffles RefrigeratedDressing
CarbonatedBeverages FrznPreparedFoods
RefrigeratedDressing SoftDrink(noncarb)
TableSyrups Bread&BakedGoods
DryCatFood
Percentage of promoted sales converted to incremental sales
Frzn.BakedGoods
HotCereal

RTEPreparedFood
FreshMeat CannedVegetables
Yogurt PoppedPoppcorn
Pickles CarbonatedBeverages
TortillaChips Soup
BottledWater SaladDressings
Bread&BakedGoods RTECereal
PoppedPoppcorn Nuts
MexicanSauce
Shortening/Oil
Dog&CatTreats
BabyFood
BakingSupplies
BakingMixes
Goldman Sachs Global Investment Research

DryDogFood
BakingSupplies
Flour
Frzn.Waffles
BabyFood
Spices/Seasonings Flour
Eggs DryMixes
Milk Spices/Seasonings
PeanutButter
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
3.0%
2.0%
1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
November 3, 2015
In analysis for a recent report the Nielsen company found that two-thirds of trade promotions have negative returns with 22%
actually destroying revenue given the promotional discount rate and high (and climbing) rate of subsidization. In our independent
analysis we found that manufacturer gross profit dollars are being destroyed by trade promotions in categories representing
nearly two-thirds of industry sales.
Exhibit 14: In a recent report The Nielsen Company found that only 33% of trade promotions generate positive returns and that of
the 67% that dont break-even, 22% actually destroy sales given the discount and subsidization rate
US trade promotion performance
Elinimation
wouldincrease
salesrevenue,
22%
Saleslift,but
don'tbreak
even,45%
MakeMoney,
33%
Source: Nielsen Trade Promotional Landscape Analysis Database, 3Q2014
Exhibit 15: Given low promotional conversion metrics, and assuming 100% funding of promotional discounts by manufacturers, we estimate that promotions
are destroying manufacturer gross profits in categories representing nearly two-thirds of industry sales
Estimated manufacturer gross profit percent accretion/(dilution) from promotional discounting at the category level
60.0%
40.0%
20.0%
0.0%
20.0%
40.0%
60.0%
80.0%
RTEPreparedFood
BottledWater
SoftDrink(noncarb)
Milk
DryDogFood
CarbonatedBeverages
Sugar/Substitutes
Coffee
Soup
S.S.Juice
Eggs
Refr.SnackSpread/Dip
Pasta
Flour
CannedVegetables
BakingMixes
TableSyrups
Ketchup
Bread&BakedGoods
NonChoc.Candy
Spices/Seasonings
BabyFood
Ref.Juice
Nuts
Cheese
Refr.Dough
Shortening/Oil
Gum
DryMixes
Bfst.Bars
DryCatFood
Mayonnaise
PotatoChips
FreshMeat
Jelly/Jams
SpaghettiSauce
SaladDressings
Pickles
PackagedMeat
GranolaBars
BakingSupplies
PoppedPoppcorn
MexicanSauce
Crackers
Frzn.Pizza/Snacks
PeanutButter
RTECereal
TortillaChips
FrznPreparedFoods
Frzn.Waffles
Yogurt
FreshProduce
Frzn.BakedGoods
Cookies
ChocolateCandy
Dog&CatTreats
Frzn.Vegetables
HotCereal
RefrigeratedDressing
Butter&Margarine
UnpoppedPopcorn
Frzn.Meat

The opportunity for manufacturers to optimize (and in many instances shrink) their trade budget is apparent in the data. To
demonstrate the magnitude of the opportunity for illustrative purposes, below we present analysis of a scenario in which industry
trade budgets were completely eliminated. Given Nielsen calculated promotional lifts, we calculate that industry-wide volumes
would fall by nearly 8%, but manufacturers would benefit from an effective 21.5% price benefit from trade budget removal. The net
effect on the bottom line in this admittedly utopian scenario is nearly the doubling of the Food manufacturer profit pool from
completely removing trade budgets and retaining all economic benefits.
Exhibit 16: Given low promotional efficacy, and using Nielsen measured promotional lift functions, we estimate that Food
manufacturers EBIT would nearly double in a arguably utopian scenario where trade budgets were eliminated and nearly all cost-
cut benefits retained by manufacturers
Illustrative US Packaged Food P&L scenario analysis in trade-budget removal scenario
2014w/noPromo
2014Base(bn$) (bn$) Comment/Assumption
NonPromotedSales 310.1 310.1 <nochange
PromoSubsidizedBaseSales 110.3 121.76 <+10.4%onremovalofsubsizeddiscount
PromoIncrementalSales 35.8 0 <eliminatedonpromoreduction
TotalRetailSales 456.2 431.9
%change 5.3%
Retailermarkup 30% 31.7% <assume30%base;solvefornopromotoholdretailGPCflat

RetailerGrossProfitContribution 136.9 136.9
ManufacturerGrossSales 319.4 295.0

%change 7.6% <equatestonearly8%volumedecline(7.8%)
PromoContrarevenue (54.3) If promo funds were eliminated...

Grosssalesrate 17% 0% <assumeeliminationinentirety
OtherContrarevenue (9.6) (8.9)
Grosssalesrate 3% 3% <assumeretentioninentirety
TotalContrarevenue (63.9) (8.9)
Grosssalesrate 20% 3%
ManufacturerNetSales 255.5 286.2

%netsaleschange 12.0%
%volumechange 7.8%
%impliedprice/mixchange 21.5%
COGS (163.5) (155.0) <basecalculated;nopromoscenarioloweredonvolume2/3rdsvolumedecline(assume1/3rdfixed)

%ofnetsales 64% 54% <coveredfoodcompanyavgforbase;nopromoscenariocalculated
Grossmargin 36% 46%
SG&A (51.4) (51.4) <basecalculated;assumenochangefornopromoscenario

%ofnetsales 20.10% 17.94% <coveredfoodcompanyavgforbase;nopromoscenariocalculated
EBIT 40.6 79.8 Nearly 2X increase in profit poool

EBITmagin 15.90% 27.89%

Retailers give less for more as they chase the trends

The economic incentive for manufacturers to shrink and optimize their trade budgets is growing, and it comes at a time when
retailers are turning further away from established CPG companies (the primary funders of trade budgets) and instead turning to the
perimeter of the store to find growth. And within the center-store they are increasingly prioritizing smaller natural and organic
brands for distribution while shrinking space for legacy Big Food offerings. The motive by retailers is clear as they are
understandably responding to shifting consumer preferences and behaviors, but the derivative impact is nonetheless resulting in
less room to support legacy brands. Big Food is now getting less in return for their funding, serving as another potential catalyst for
change.
Exhibit 17: Retailers are understandably shifting focus to the perimeter given Exhibit 18: And within center-store retailers are shrinking distribution space
consumer trends, but this leaves less opportunity for center-store operators for legacy brands to make room for more natural and organic offerings given
which are the largest contributors to trade funds consumer trends
Household penetration, unit buy rate and volume growth for grocery departments Growth of natural and organic labelled products vs. non-natural and organic
6.0% 14.0%
5.0% Center 12.0%
Perimeter
4.0% Store 10.0%
3.0% 8.0%
2.0% 6.0%
1.0% 4.0%
0.0% 2.0%
1.0% 0.0%
2.0% 2.0%
3.0% Nat&Organic NonNat& Nat&Organic NonNat&
4.0% Organic Organic
Frozen Grocery Dairy Meat Bakery Produce Deli $Growth VolumeGrowth
HHPenetration UnitBuyRate Volume 2012 2013 2014 52WE2015YTD
Source: The Nielsen Company, Goldman Sachs Global Investment Research. Source: The Nielsen Company, Goldman Sachs Global Investment Research.

A change agent on the brink of enacting change on a new scale KHC & the 3G influence
The incentive structure for a tidal wave of change in how the industry approaches trade budgets is in place, but every big change
requires a large-scale change agent. We believe this change agent has arrived in the form of Kraft-Heinz and 3G. With the
acquisition of Kraft, 3G is now managing the largest trade budget in the Food industry, as estimated by promotional sales dollar
levels. Management enacted sizeable changes to its trade budget management at Heinz. Nielsen promotional data suggest that 3G
may have cut trade spending by up to 28% and we expect a similar, though less severe, approach to be taken at Kraft. And
just as ZBB has become the buzz word and approach to emulate at other food companies, we expect all to emulate, at least in part,
3Gs TBO ways. While this may not prove the catalyst for change we expect, the aggregate of factors leads us to believe that the
probability for a dramatically different approach to trade budgets is higher now than it may have ever been.
Exhibit 19: Since 3G acquired Heinz in mid-2012 the companys percent of Exhibit 20: with the companys percent of volume on promotion falling in
sales on promotion has fallen dramatically kind
Heinzs percent of dollar sales on promo Heinzs percent of volume sales on promo
38% 38%
35.6%
36% 36%
34% 33.1% 34%
32% 32%
30% 30%
27.5%
28% 28%
26.0%
26% 26%
24% 24%
22% 22%
20% 20%
2011 2012 2013 2014 2015YTD 2011 2012 2013 2014 2015YTD
%$onPromo %VolumeonPromo

Exhibit 21: If the 2015 year-to-date rate olds, we calculate that the dollars Exhibit 22: Falling volume (cumulative 11% if YTD trend holds) explains part
spent to fund promotional discounts will have fallen by 36% since 2012 of the reduction on discount funding
Calculated dollars spent to fund Heinzs promoted price discounts Heinz volume sales
160 1,600
9.4%
140 22% 1,400
120 1,200
100 1,000 2%
18%
80 800
60 600
40 400
20 200

2011 2012 2013 2014 2014YTD 2015YTD 2011 2012 2013 2014 2014YTD 2015YTD
$spentonpricediscounting(mn) Volumesales
Exhibit 23: Lost volume sales explains part of Heinzs promotional spend Exhibit 24: We believe trade budget optimization and promotional
reduction, but adjusting for this we see a trend toward a 28% cumulative investment reductions were a meaningful driver in Heinzs relatively rapid
reduction in discount related promotional investment per pound sold. improvement in gross margins under 3Gs ownership
Discount related promotional investment/pound for Heinz Heinzs consolidated gross margin
0.11 44.0%
41.7%
Acquired at
41.3%
14%
Qend(Jun)
0.10 42.0%
40.0%
39.2%
38.8%
0.09
38.5%
40.0%
16.6%
37.7%
0.08
36.4%
38.0%
36.2%
35.9%
35.8%
35.5%
0.07
34.9%
34.8%
36.0%
0.06
34.0%
0.05
2011 2012 2013 2014 2014YTD 2015YTD
32.0%
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
Discountpertotalpound

Exhibit 25: We expect 3G to replicate its TBO play-book at Kraft and expect Exhibit 26: Using promoted sales as a proxy for trade budgets, we believe
larger industry implications given that Kraft is materially larger than Heinz as that 3G now controls the largest trade budget in the US Food industry with
the second largest food company in the US Kraft and Heinz combined; Krafts trade budget is likely 8.5X Heinzs
52 WE 10/03/15 retail measured US sales ($ bn) 52 WE 10/03/15 retail measured US promoted sales ($ bn)
$40 $18.0
$15.7
$35
$35 $16.0
$14.0
$30
$26
$12.0
$25
$10.0
$8.0
$19
$7.4
$20 $18
$6.8
$8.0
$15 $14
$4.8
$11 $6.0
$3.7
$9$10
$3.3
$3.2
$8 $9
$3.1
$2.9
$10
$2.7
$7 $7 $7 $8 $4.0
$2.4
$2.3
$2.2
$2.0
$6
$1.3
$4
$1.0
$0.8
$0.8
$3 $3 $3 $3 $3 $3
$0.7
$0.7
$0.7
$5
$0.6
$0.6
$0.5
$2.0
$0.3
$2 $2
$0.2
$1 $1 $2
$ $
MJN
HAIN
MKC
FLO
DF
POST
WWAV
GMCR
HNZ
Danone
PF
HRL
BIMBO
SJM
CPB
TSN
CAG
MARS
MDLZ
HSY
DPS
K
GIS
KRFT
Nestle
KO
PEP
HAIN
GMCR
MJN
MKC
FLO
POST
Danone
HNZ
WWAV
PF
DF
HRL
BIMBO
MDLZ
SJM
CPB
DPS
HSY
TSN
CAG
K
MARS
GIS
KO
KRFT
Nestle
PEP

Where TBO can work and where risks may be too high
Consequences of cuts likely to limit scale and scope of TBO

We see sizeable opportunity for the Food Industry, and the CPG sector overall, to cut trade budgets. That said, we appreciate that
trade promotions can play a valuable role in building awareness, interest, and trial, especially for new products. Data suggest trade
promotions can also generate positive economic returns in expandable consumption categories (e.g., candy and cookies) and,
therefore, there appears to be less opportunity for reductions in these categories. In most categories, however, it is market share
rather than category growth that is expanded by promotions. This, of course, creates a prisoners dilemma for many there may be
economic benefiting of lowering trade budgets, but much of that benefit may be offset by market share losses if a competitor fails to
follow suit or price gaps between private label widen. This competitive pressure may be only compounded by retailers who very
likely will shift distribution and merchandising support to the competitor who continues to fund them as they see fit or to its own
private label portfolio. As a result, we expect TBO, if deployed in scale, to perpetuate volume losses for established CPG
companies with notable risk in Food where portfolios appear bloated and are likely to see distribution curtailed (SKUs
rationalized) were they to curtail retail funding (though this may be an unavoidable outcome regardless of funding). The volume
losses, however, may be a worthy price to pay for the efficiency gains that follow.
Exhibit 27: Food portfolios appear over extended as SKUs have proliferated with little incremental sales contribution; TBO could
catalyze SKU rationalization and perpetuate the industrys recent volume weakness, though the economic benefits may prove
worthy of paying this price
Large-cap Food total distribution point and velocity growth
8.0%
6.0%
4.0%
2.0%
0.0%
2.0%
4.0%
6.0%
12/03/11
02/25/12
05/19/12
08/11/12
11/03/12
01/26/13
04/20/13
07/06/13
10/05/13
12/28/13
03/22/14
06/14/14
09/06/14
11/29/14
02/21/15
05/16/15
08/08/15
TotalTDPs(LHS) $SalesVelocity

Where negative returns and conducive market structure collide

Given the associated risk factors, we believe the scale and scope of the potential TBO opportunity varies meaningfully across
categories and manufacturers. Effective trade budget reduction and optimization will require both the will by manufacturers and the
way. Numerous software and service providers continue to help refine managements trade-promotion-management (TPM)
capability and give them visibility to returns at the individual promotional program level. Manufacturers, however, have substantial
opportunity to improve these capabilities, as evidenced by demonstrably low returns across most categories. And in most instances
we see opportunity for outright cuts. But given the before mentioned limiting factors it is clear that the opportunity is not equal.
For manufacturers to find opportunity they must first need a problem so we look at categories where promotional returns are
negative in aggregate. Secondly, they need a way in the form of strong brands and relatively conducive market structure where the
aforementioned prisoners dilemma may be less so we look for concentrated categories (as measured by manufacturer level HHI)
and degree of commoditization (with private label market share as the proxy).
Based on this analytical framework, we see categories that generate 27% of measured sales being ripe for outright trade budget cuts
(negative promotional returns and favorable market structure) while categories representing another 43% of industry sales are apt
to face market structure challenges, but have economic incentive for reductions given negative promotional returns. In short, the
Food and Beverage industry has apparent opportunity to reduce and/or optimize trade spend in categories representing
roughly 60% of industry sales.

Exhibit 28: We believe that Food manufacturers are more likely to have success reducing and optimizing their trade budgets in categories that are less
commoditized (using private label share as a proxy) and more concentrated among manufacturers (HHI)
Manufacturer Concentration (HHI) and Private Label share by category

Exhibit 29: Overlay promotional returns with market structure and we believe we have a more complete framework to identify the will and the way of where
categories are likely going to see TBO initiatives; roughly a quarter of industry sales fall in the Ripe for TBO bucket while another 44% fall in a TBO fine-tuning
bucket where promotional returns are negative
Category plot on market structure characteristics (private label, concentration) and calculated gross profit returns of promotions

Heinz case study validates framework

Our framework for identifying which categories manufacturers are most likely to find success with TBO is supported by results at
Heinz. Promotional cuts at Heinz were broad based with Mustard a recent category launch the only exception. High-level analysis
suggests results were mixed with condiments/sauces (where it held or grew market share) a likely win while frozen cuts were less
effective (as evidenced by share erosion, though it is unclear whether or not the margin benefits offset the lost sales). When we plot
Heinz categories across our promo returns-market structure framework, we find that most of the categories where it appears to have
found success fall within the Ripe for TBO quadrant.
Exhibit 30: Broad based reduction in volume on promo by Heinz; more Exhibit 31: HNZ has broadly struggled in frozen since 2012, while its
tactical adjustments to percentage price discount condiments/sauces portfolio generally performed well
Volume and price discount change for HNZs categories Sales growth for HNZs categories from 2012 to 52 we 9.19.15
5.0% SOUP 30%

20%
MUSTARD
3.0% FROZENHORS 10%
%changepricediscount
D'OEUVRES WORCESTERSHIRE
SAUCE 0%
1.0% 10%
CATSUP CANNEDGRAVY
20%
30%
1.0%
SPAGHETTI/MARINARA
SAUCE 40%
FrozenPreparedFood
SpaghettiSauce
FrozenPotato
Ketchup
CannedGravy
WorcesthireSauce
Vinegar
3.0%
FROZENPOTATO
FROZENPREPARED
5.0% FOODS VINEGAR
13.0% 8.0% 3.0% 2.0% 7.0% 12.0%
%changevolumeonpromo HNZ Category PrivateLabel
Exhibit 32: Heinzs distribution proved relatively resilient, other than frozen Exhibit 33: Except frozen, Heinz has gained market share in most of its top
prepared foods categories since 2012
Change in TDP for HNZs categories from 2012 to 52 we 9.9.15 Heinz market share change from 2012 to 52 we 9.19.15
15.0% 6.0%
10.0% 5.0%
5.0% 4.0%
0.0% 3.0%
2.0%
5.0%
1.0%
10.0% 0.0%
15.0% 1.0%
20.0% 2.0%
25.0% 3.0%
FrozenPreparedFood
Vinegar
SpaghettiSauce
FrozenPotato
WorcestershireSauce
Ketchup
CannedGravy
CannedGravy
Mustard
WorcestershireSauce
Ketchup
FrozenPreparedFood

Exhibit 34: Most of the categories where Heinz cut trade promotions yet held or grew market share fall in the Ripe for TBO quadrant of our framework while
areas where it suffered losses fall in the Likely on-going battle field quadrant, offering some validation of our framework
Scatter plot for HNZ promo returns and market structure

High-level CPG implications
TBO in perspective it is not all about margins

The focus of this report is to analyze trade budgets and the opportunity for reductions. We see substantial opportunity for the
industry to improve in this area, but it is important to maintain perspective that this is but one important strategy for improvement
for the industry and one that falls under a broader revenue optimization umbrella that includes other important strategies such as
pack-type architecture optimization (a recent focal area for carbonated-soft-drink manufacturers). And while we believe TBO may be
as big, or bigger, of an opportunity as ZBB for the industry, we do not mean to diminish the importance of all-around cost discipline
in CPG. Nor do we suggest that the industry shift too far toward maximizing margin while ignoring the important (and increasingly
difficult) need to grow sales in an ever-evolving consumer demand environment.
Most food companies have built portfolios of products that are not well aligned with changing consumer preferences. As we wrote
previously (see Millennial Munching: A generational shift reshaping the future of food, April 19, 2015) we expect the millennial
generation to account for roughly 70% of food at home growth over the next decade and legacy food companies need to invest in
the existing product quality (cleaner labels) and portfolio position (buy or build in growthy areas while potentially shedding
misaligned pieces of the portfolio) to capture their fair share. To maximize value creation the CPG industry needs to win in all three
areas cost discipline/ZBB, revenue optimization/TBO and portfolio rebalancing. And as funds are reduced for push-based trade
promotion tactics, the industry should look for opportunities to reallocate to pull-based brand building initiatives. While a shift to
digital likely plays a role, measured advertising spend behind traditional media vehicles has been falling and we do not think it is
coincidence that Heinz has found success in categories where it competes with its namesake brand a brand that it has reallocated
measured ad spend behind.
Exhibit 35: We believe CPG companies who create the most value will be those who most effectively deploy revenue
optimization/RBO opportunities while at the same time addressing their overall cost structure and rebalancing their portfolio to
capture the sizeable growth in share of Millennial food at home expenditures
Source: Goldman Sachs Global Investment Research.

Exhibit 36: Food manufacturers have been cutting traditional media Exhibit 37: Heinzs TBO success behind its namesake brand came as it
investment. While a shift to digital likely plays a role, data suggest a ramped advertising spend behind the brand while pulling back in brands
reallocation of funds to pull-based vehicles may be warranted where TBO was less successful; unlikely coincidental
YoY percentage change in traditional measured media spend Rolling 12-month measured media spend by brand for Heinz
4,700,000 35,000
4,600,000 30,000
4,500,000 25,000
4,400,000
20,000
4,300,000
15,000
4,200,000
10,000
4,100,000
4,000,000 5,000
3,900,000 0
MAY2013
JUL2013
SEP2013
NOV2013
JAN2014
MAR2014
MAY2014
JUL2014
SEP2014
NOV2014
JAN2015
MAR2015
MAY2015
JUL2015
3,800,000 14.5%
MAY2013
JUL2013
SEP2013
NOV2013
JAN2014
MAR2014
MAY2014
JUL2014
SEP2014
NOV2014
JAN2015
MAR2015
MAY2015
JUL2015
Classico Heinz OreIda SmartOnes TGIFridays
Source: Kantar Media, Goldman Sachs Global Investment Research. Source: Kantar Media, Goldman Sachs Global Investment Research.
High level which categories are ripe

Ripe for trimming
Carbonated soft drinks screen as perhaps the largest TBO opportunity in center-store grocery given the categorys size ($35 bn),
heavy dependence on promotion (46% of sales), negative promotional returns, and relatively conducive market structure (KO and PEP
account for 54% of category sales). The high level of promotions in CSDs also reflects the retailers historical attempts to use CSDs as a
traffic driver, particularly around key holiday periods (Memorial Day, July 4th, and Labor Day). We believe the soft drink companies
and retailers are increasingly aware that promotions have become less effective and have already begun to attack the issue. Data,
however, suggest there is opportunity for far more optimization. A similar argument can be made for shelf-stable-juices (including
sports drinks), where Nielsen categorizes brands such as Gatorade and Powerade as well as KHCs Capri-Sun and CPBs V8.
While most snack-food categories screen poorly given expandable consumption and resulting economic incentive for promotions,
potato chips surprised us as a category that may be excessively promoted. Over 47% of potato chip sales are generated on
promotion and, assuming full manufacturer funding, promotional returns appear to have eroded into negative territory given falling
promotional efficacy since 2011. Given the dominance of PEPs Frito brand, the company would appear to have opportunity to drive
greater efficiency. Indeed, PEP implemented its Project Drive trade spending and revenue management program for its Lays potato

chip line this year in order to simplify its SKUs and improve profitability for both PEP and retailers, which is evident with
promotional sales for YTD 2015 down to 44.8% vs. 45.4% for the same YTD period in 2014. We see PEP continuing on this effort but
expect key focus to be improving profitability at both manufacturer and retailers rather than boosting its own margins at the
expense of retailer margins. Granola bars and breakfast bars other snack categories that screen relatively well and a potential area
of opportunity for GIS and K. GIS would also appear to have opportunity in baking mixes, but its recent decision to become more
promotional during key holiday periods tempers our optimism of action on this front.
The mass-market dry pet food category screens as another area of opportunity, which is not surprising given the intuitively low
rate of brand switching among many pet parents. The category is heavily concentrated between Mars and Nestle and concentration
has only risen following Mars acquisition of PGs pet portfolio. Mars focus on overall efficiency is well known in the industry, but it
is unclear if market-leading Nestle would be motivated to lead the charge given managements focus on RIG (real-internal-growth,
which includes volume and mix and does not factor in price/promo).
Condiments, spreads, and sauces more broadly also stand out as opportunity areas and we have higher conviction that action will
be taken given KHCs participation in these categories and their prior track record at Heinz. Specifically, the data suggest opportunity
in mayonnaise, barbecue sauces, ketchup, jams/jellies, and canned gravy.
Exhibit 38: We believe manufacturers will find greatest TBO success in categories representing 27% of measured Food and Beverage sales given negative
promotional returns, relatively high concentration and low private label share; notable standouts include CSDs, Soup and Dry Pet Food
Key TBO screening metric by Food and Beverage category
RipeforTBO
%of
%of measured Promo 11YTD
measured %$on F&B %Promo gross efficacy #1brand #2brand #3brand
Category $sales F&Bsales Promo promo pricedisc. profitlift change HHI HHIRank PLshare share share share LeadMnfctr.
CarbonatedBeverages 35,343,316,362 7.6% 45.6% 11.1% 23% 51.9% 5% 2,025 77 3% 29% 27% 16% CocaColaCompany
ShelfStableJuices 14,782,228,123 3.2% 35.0% 3.5% 17% 32.0% 4% 1,472 119 7% 33% 12% 7% PepsiCo
PotatoChips 7,060,380,915 1.5% 47.4% 2.4% 10% 9.3% 4% 3,792 29 8% 60% 11% 4% PepsiCo
Juices&DrinksRefrig 6,197,301,109 1.3% 32.6% 1.3% 13% 14.5% 3% 2,403 59 10% 35% 32% 7% CocaColaCompany
Soup 5,866,150,364 1.3% 23.9% 1.3% 18% 32.7% 8% 2,257 66 12% 43% 13% 10% CampbellSoup
DryDogFood 5,223,730,731 1.1% 21.5% 0.8% 18% 45.4% 3% 2,917 42 17% 45% 23% 8% NestleHoldings
Granola/YogurtBars 2,754,770,695 0.6% 34.8% 0.7% 9% 3.7% 3% 1,686 102 8% 31% 16% 15% GeneralMills
BabyFood 5,836,409,563 1.3% 15.3% 0.6% 9% 15.3% 8% 2,536 57 5% 31% 28% 27% AbbottLaboratories
RefrigeratedDough 2,011,069,863 0.4% 22.7% 0.4% 13% 14.3% 7% 5,066 14 20% 68% 10% 1% GeneralMills
BakingMixes 2,071,794,420 0.4% 26.8% 0.4% 14% 18.2% 9% 1,714 100 6% 33% 15% 13% GeneralMills
Gum 3,019,997,982 0.6% 18.7% 0.4% 12% 13.3% 6% 4,194 21 0% 58% 28% 5% Mars
Mayonnaise 1,413,111,962 0.3% 39.9% 0.4% 12% 10.6% 3% 3,572 33 11% 55% 17% 6% Unilever
DryCatFood 2,357,839,084 0.5% 17.9% 0.3% 10% 13.2% 1% 3,803 28 9% 56% 23% 9% NestleHoldings
SnacksHealthBars&Sticks 1,509,258,187 0.3% 27.6% 0.3% 15% 25.4% 4% 1,680 104 2% 35% 13% 10% ClifBar
BreakfastBars 914,017,840 0.2% 39.7% 0.2% 12% 14.6% 2% 4,123 22 6% 47% 44% 1% Kellogg
CornChips 750,119,920 0.2% 45.1% 0.2% 10% 8.6% 2% 8,641 4 3% 93% 1% 1% PepsiCo
BarbecueSauces 657,637,026 0.1% 39.1% 0.1% 15% 19.2% 4% 2,175 71 8% 42% 17% 5% Ken'sFoods,Inc
Ketchup 720,331,602 0.2% 30.5% 0.1% 14% 18.5% 5% 4,518 18 19% 63% 15% 1% Heinz
SaladDressingDeli 326,461,345 0.1% 27.5% 0.1% 17% 28.8% 4% 1,780 97 3% 26% 24% 18% LancasterColony
Jams/Jelly 398,726,589 0.1% 21.4% 0.1% 10% 6.1% 4% 3,223 38 18% 47% 27% 1% J.M.Smucker
CannedGravy 224,573,936 0.0% 11.5% 0.0% 21% 35.9% 30% 3,884 27 17% 58% 12% 8% Heinz

Fit to be tuned
The aforementioned categories checked multiple TBO opportunity boxes negative promotional returns, generally low private label
share and generally high degrees of concentration and therefore appear to be the most ripe areas of opportunity. We do not,
however, believe the opportunity for TBO is limited to just those categories. Below we screen for categories where promotions are
negative, but market structure is less conducive. We see more tactical opportunity for improvement in these categories, but we also
see greater risk of volume losses for those who lead the charge.
Beverages rise in the TBO Fine Tuning screen as well with bottled water, coffee, and non-carb soft drinks (powdered soft
drinks, enhancers, etc.) all screening with negative promotional returns. Bottled water, however, would likely see an already
sizeable private label share grow with less branded promotional support (though the economics may justify it) while non-carb soft
drinks and coffee are relatively fragmented and face risk of competitive retaliation. Coffee, in particular, intrigues us as we expect
KHC to take a more aggressive TBO stance with its Maxwell house brand and GMCRs promotional aggression has historically
succeeded in consolidating most of the K-cup volume into its system, but more recently, its owned brands have been seeing a
sizable share erosion. Given the competitive nature of the K-cup category, we may not be far enough out of the shake out phase
of K-cup development to see broad based trade-budget rationalization.
Other categories that appear to be over-promoted, but would likely see private label gains on branded TBO include cheese,
packaged meat and canned vegetables. We expect TBO levers to be pulled in cheese and packaged meat, but at a more tactical
pruning level by KHC given the riskier characteristics of the category; we delve deeper into this later in the report. Dry mix prepared
foods, which includes brands such as KHCs Mac & Cheese and GISs Hamburger Helper is another opportunity for TBO given the
elevated promotional intensity seen in recent years, but that intensity in a relatively fragmented category serves as a potential
impediment as well.
We dismissive of opportunity in a few other categories that pop up in this screening notably milk, fresh eggs and fresh meat
where we believe promotional activity is predominantly funded by retailers in effort to drive traffic. They screen well, but we do not
believe there is real opportunity for manufactures in these categories.

Exhibit 39: We see opportunity for trade budget fine-tuning in categories representing 43% of industry sales given negative promotional returns; the magnitude
of outright trade budget cuts, however, may be constrained by competitive retaliation or private label given market structure
Key TBO screening metric by Food and Beverage category
NegativePromoReturnsbutLessCondusiveMarketStructureFineTuningOpportunity
%of
%of measured Promo 11YTD
measured %$on F&B %Promo gross efficacy #1brand #2brand #3brand
Category $sales F&Bsales Promo promo pricedisc. profitlift change HHI HHIRank PLshare share share share LeadMnfctr.
PackagedMeat 18,885,224,136 4.1% 36.7% 4.5% 10% 2.6% 7% 1,017 138 15% 18% 16% 10% KraftFoods
Bread&BakedGoods 24,253,502,741 5.2% 24.9% 4.2% 12% 18.2% 6% 1,442 121 28% 22% 10% 6% GrupoBimbo
Cheese 17,261,659,910 3.7% 35.0% 3.7% 13% 12.8% 6% 2,200 67 37% 27% 7% 3% KraftFoods
BottledWater 12,756,577,193 2.7% 36.1% 3.1% 18% 40.2% 5% 1,851 65 24% 29% 18% 9% NestleHoldings
Coffee 10,594,437,544 2.3% 37.8% 2.8% 18% 35.4% 6% 1,139 133 10% 22% 14% 12% J.M.Smucker
Milk 19,482,745,921 4.2% 25.0% 2.0% 18% 45.3% 10% 2,884 43 51% 14% 8% 4% DeanFoods
IceCream 5,941,787,633 1.3% 43.0% 1.7% 14% 13.5% 6% 1,551 115 22% 25% 18% 7% Unilever
DryMixesPreparedFoods 6,030,478,247 1.3% 29.0% 1.3% 11% 13.1% 8% 1,202 130 10% 22% 19% 14% KraftFoods
Nuts 5,980,539,549 1.3% 27.4% 1.2% 12% 15.3% 9% 1,504 116 29% 21% 10% 8% KraftFoods
CannedVegetables 5,117,194,936 1.1% 25.1% 1.1% 15% 21.4% 10% 1,583 110 33% 14% 12% 6% DelMonte
NonChocolateCandy 5,246,157,951 1.1% 27.5% 1.0% 14% 16.6% 6% 950 141 9% 18% 18% 8% Mars
RTSPreparedFoods 5,974,834,106 1.3% 23.9% 1.0% 28% 66.4% 6% 901 142 16% 16% 14% 9% Conagra
FreshEggs 5,616,319,475 1.2% 34.9% 1.0% 14% 27.4% 8% 2,540 55 46% 13% 13% 10% PostHoldings
FrozenNovelties 4,122,388,749 0.9% 29.7% 0.8% 18% 34.6% 2% 1,683 103 12% 28% 25% 9% NestleHoldings
FreshMeat 6,392,386,184 1.4% 24.1% 0.8% 10% 5.8% 8% 1,649 106 25% 28% 11% 7% TysonFoods
Shortening/Oil 3,612,414,853 0.8% 27.0% 0.8% 13% 15.0% 5% 1,645 107 36% 13% 10% 6% Conagra
CottageCheese&SourCream 3,219,754,721 0.7% 26.4% 0.6% 15% 25.2% 7% 1,866 91 36% 17% 13% 7% DaisyBrand
Pasta 2,137,304,755 0.5% 32.0% 0.5% 16% 24.0% 6% 2,007 83 30% 26% 19% 8% Barilla
LiquidSaladDressing 1,803,647,801 0.4% 34.1% 0.4% 10% 6.4% 5% 1,460 120 16% 24% 18% 12% Clorox
DeliSandwiches 3,052,996,010 0.7% 17.1% 0.4% 9% 7.5% 9% 1,784 96 30% 28% 6% 5% NestleHoldings
NonCarbSoftDrinks 2,124,215,840 0.5% 27.1% 0.4% 27% 66.0% 1% 1,610 49 12% 35% 11% 9% KraftFoods
SpaghettiSauce 1,717,999,352 0.4% 30.9% 0.4% 12% 6.2% 4% 1,564 113 11% 33% 13% 7% MizkanGroup
FrozenDessert/Fruit/Tops 1,874,595,327 0.4% 23.7% 0.3% 25% 54.8% 10% 2,099 73 42% 10% 9% 9% KraftFoods
TrailMixes 880,529,345 0.2% 30.5% 0.2% 14% 27.8% 6% 3,328 36 56% 8% 7% 4% KraftFoods
Flour 862,507,373 0.2% 16.1% 0.1% 13% 18.2% 16% 1,257 126 21% 18% 15% 10% GeneralMills
Fruit/FruitSaladDeli 1,029,850,591 0.2% 10.5% 0.1% 19% 41.8% 12% 1,786 95 37% 13% 11% 8% DelMonte
Mustard 422,759,147 0.1% 27.5% 0.1% 19% 42.3% 0% 2,193 68 25% 38% 10% 5% ReckittBenckiser

High level which companies are ripe

TBO can prove a powerful industry tool to fund reinvestment and sustain bottom-line growth as top line capabilities are restored
and we believe all can benefit from it. The potential scale and scope, however, varies given portfolio differences. Beverage
companies such as KO, PEP, and DPS screen as highest opportunity candidates given heavy promotional dependence and
concentrated exposure to the carbonated soft drinks category where promotional returns appear negative and market structure is
favorable. We have already seen improved pricing in US soda category over the past year as manufacturers have increased their
focus on revenue pack management programs and KO has aligned its interest through incidence (revenue or gross-profit based)
pricing model with the bottlers as opposed to historical fixed pricing (volume-based) model. We see sizable runway for US CSD
system-wide margins to improve, though the pace may be more gradual and evolutionary as each manufacturer balances its market
share/profit goals, particular given the industrys Direct Store Delivery (DSD) model that can more than offset lower costs if velocity
takes a step-down. In this context, we view trade spending as one piece of tool that needs to be optimized and tailored, and be
balanced by stepped up efforts behind innovation and e-commerce capabilities.
KHC is in focus, where we expect 3G to cut into Krafts estimated $4.5bn trade budget. We see a $400mn savings opportunity at
legacy Kraft (220 bps of margin) to trim in ripe categories (e.g., mayonnaise, condiments, and beverages) while fine-tuning
elsewhere. Data suggest Krafts trade budget has grown in recent years (37% of sales are now sold on promotion vs. 35% in 2011)
and in many instances it has failed to boost volume or dollar market share. A retraction of this ineffective spend could lower its
aggregate trade budget by 6% while Heinz-level cuts in ripe categories could result in another 3% cut. Analysis suggest this
aggregate 9% reduction rate would carry relatively little risk. Heinzs actions suggest it may go further, which may have unintended
consequences while at the same time creating cover for others.
SJM stands to benefit if KHC cuts too far given its direct competition in coffee a relatively small category for Kraft but core to SJM.
And pet may also prove an opportunity for SJM. SJMs mass market pet food portfolio is currently suffering from competitor lead
deflationary pressure a common theme for those facing off against Nestle, which appears more focused on driving RIG (real
internal growth which only captures volume and mix) in the current deflationary environment. Analysis suggests the competitive
activity is destroying value in the category given negative promotional returns. The economic forces of profit maximization should
lead to more favorable promotional dynamics in this relatively concentrated and low-private label category. Other important
categories such as jams, jellies and spreads may also prove an opportunity for SJM to take a TBO lead.
CPB screens as another potential TBO benefactor, but more so given the leadership actions it can take rather than potential benefits
of less aggressive competition. Data suggest promotions in soup are destroying value and the company also has opportunity in
categories such as shelf-stable juice and sauces. In aggregate it generates 51% of measured sales in categories that screen ripe for
TBO. Since FY08 CPB has invested $360 mn of incremental money into its trade budget for its US Soup, Sauces and Beverages
segment, based on company reported promotional investment. At the same time it has lost $219 mn of revenue due to volume
declines. Full retraction of that incremental trade spend, all-else-held constant, could add $0.79 to our FY16 EPS estimate. It could
prove material. As the market leader, CPB has the opportunity to take the lead on this front and data suggest retailers may already
be doing it for them.
MJN screens favorably as measured promotional activity results in exceptionally low incremental sales generation. That said, data
suggests its promotional level is already quite low in the US and we are more intrigued by how similar the US promotional return
level is to international markets. MJN is currently being buffeted by competitive pressure in various markets around the world with
Nestle a notable agitator. If this analysis were applicable more broadly, which intuition suggests may be the case, the economic
argument for more rational dynamics ahead has merit.

Exhibit 40: Using promoted sales as a proxy, beverage companies likely have Exhibit 41: KO, DPS, CPB, PEP and MJN have the highest sales exposure to
the largest trade budgets as a percent of sales, followed by snack firms while TBO Ripe categories
KRFT appears an outlier relative to center-store peers Percentage of company sales by TBO category classification
Percentage of dollars sold on promotion
47%
50% 120%
46%
44%
43%
42%
45% 100%
40%
39%
40% 80%
36%
35%
35%
35% 60%
30%
30%
30%
30%
30%
30%
29%
28%
28%
30% 40%
26%
26%
25%
24%
22%
25% 20%
20%
18%
20% 0%
Danone
MDLZ
MKC
HSY
K
HNZ
CAG
GIS
PF
HAIN
Unilever
Mars
POST
Nestle
TSN
HRL
SJM
PEP
GMCR
CPB
WWAV
KRFT
DPS
KO
MJN
14%
15%
10%
MJN
DF
MKC
WWAV
HAIN
FLO
POST
HNZ
TSN
MARS
Nestle
SJM
HRL
CAG
Danone
PF
CPB
BIMBO
GIS
KRFT
K
HSY
MDLZ
DPS
PEP
KO
GMCR
FineTuneN Ripe

High-level Retail implications
The framework for assessing Retail risk

We assess the risk to food retailers from trade budget optimization by CPG companies utilizing five metrics to determine which
companies are most/least at risk. Our framework includes the following.
Private label penetration: Retailers with a higher penetration of private label within dry grocery that resonates with the
customer will be better positioned to negotiate with vendors looking to cut trade spend, or to gain share as national brand
promotions are cut.
Non-perishables exposure: Quite simply, retailers with greater exposure to center store (non-perishables) will be more
impacted by CPG companies cutting trade spend in these categories. Conversely, retailers with a greater percentage of their
mix beyond center-store, such as general merchandise or perishables, will be less impacted by trade spend cuts.
Center store volume growth: Retailers successfully driving volume increases in food, either via comparable store sales or
new unit expansion, will be in a better position to negotiate with vendors given the paucity of growth.
Market share within non-perishables: Greater market share within center store should translate to greater negotiating
power given the potential volume loss these retailers could represent for CPG companies.
Pricing strategy: Retailers implementing an EDLP (everyday low price) strategy will be better positioned to withstand trade
budget optimization, as their customers are attracted by consistent value rather than by occasional price cuts or promotions,
as is the case for retailers implementing a Hi-Low strategy.
High level EDLP, perimeter focus, and private label win

While budget cuts are not likely to benefit any retailer outright in the near term, the longer-term implications are positive for
retailers able to navigate the initial storm, including most of the food retailers under our coverage, as they should gain share from
weaker players. Moreover, consumer expectations could become more rational as Hi-Low options fade, improving margins for the
industry. We expect retailers with greater scale, better program efficiency (EDLP vs. Hi-Low), and private label penetration to
overcome headwinds from TBO through commensurate price hikes, diversion to own brand, and share gains from smaller firms. In
Exhibit 42, we rank our food retail coverage using the framework outlined above. Given the binary outcome of EDLP vs. Hi-Low, we
weighted this criterion half as much as the others. Key takeaways follow.
Big-box discount firms: COST is more focused on fresh grocery, has a solid private label offer, and of course operates with
an EDLP approach. TGT is well-positioned given its EDLP approach, its relatively modest exposure to center-store CPG
expected to fall even further as it focuses on signature categories of style, baby, kids, and wellness; and, its own private
label offering. WMT is toughest positioned among these firms, given heavy exposure to center-store CPG/dry grocery and,
most notably, recent efforts reported extensively in the press the drive higher subsidies from vendors at a moment
when these dollars are drying up.

Supermarkets and dollar stores: Specialty retailers such as WFM/TFM/SFM are generally less exposed to cuts in trade
spend given a focus on fresh and non-national branded center store SKUs. Of the conventional cohort, we believe KR is
most insulated given its better private label mix and ability to drive center-store volume whereas SVU is most at risk given
its exposure to independent retailers more reliant on Hi-Low pricing to drive traffic as well as having a weaker private label
offering. The dollar stores (DG, DLTR) are also positioned well given EDLP strategies.
Exhibit 42: EDLP, Perimeter Focus, and private label win in our framework, though most of our coverage is better positioned than
smaller, private peers more dependent on trade spend to drive traffic
FrameworkComponents Ranking
Privatelabel% Nonperishables 4yrtrailingAvg. MarketShare EDLPor Private Mkt HiLow Total
DryGrocery %TotalSales* CenterStoreGrowth Nonperishables HiLow Label Perishable Volume Share Rank
COST 25.0% 47.8% 5.4% 4.8% EDLP 8 9 7 10 6 40
TGT 21.0% 36.7% 2.5% 2.7% EDLP 6 10 4 9 6 35
DLTR 34.1% 62.9% 9.9% 1.2% EDLP 11 3 8 6 6 34
WFM 18.0% 33.2% 11.5% 0.5% EDLP 2 12 10 4 6 34
WMT 8.0% 50.2% 3.5% 14.4% EDLP 1 7 5 12 6 31
KR 25.5% 60.7% 4.6% 5.4% HiLow 9 4 6 11 0 30
DG 24.0% 75.7% 10.8% 1.4% EDLP 7 1 9 7 6 30
AHLD 37.6% 59.1% 1.6% 1.5% HiLow 12 5 2 8 0 27
TFM 19.0% 34.5% 13.7% 0.1% HiLow 3 11 11 1 0 26
SFM 19.0% 49.2% 21.4% 0.1% HiLow 3 8 12 2 0 25
DELH 27.6% 53.7% 1.9% 1.0% HiLow 10 6 3 5 0 24
SVU 20.0% 63.0% 1.4% 0.3% HiLow 5 2 1 3 0 11
*ExFuel
Source: Company data, Goldman Sachs Global Investment Research.

A deeper dive into Food companies
Kraft: A $4.5 bn budget ripe for at least a 10% cut

The majority of KRFTs portfolio (70% of sales) screens well for TBO fine tuning. Only 10.9% of KRFTs portfolio falls under our ripe
categorization. Fine tuning for KRFT might not sound like the most groundbreaking framework but for this market leader even small
cutbacks in trade spend could prove needle moving. Across the board, KRFT is more reliant on promotional activity than category
averages. In Remaining Deli Items (mainly comprised of Lunchables), KRFT was 10.2% more promotional than the category average,
while GP lift was -6.6% vs%. This negative profit lift, given the categorys overall performance, suggests that KRFTs reliance on
promotion is actually destroying gross profit. GP lift is also negative for KRFT in Cheese, Prepared Food-Dry Mixes, Coffee and Nuts.
We believe that management will aggressively pursue cuts in a similar fashion to the slashing occurring at HNZ. KRFTs legacy
brands can likely sustain a pull back on promotional spend.
For KRFT Cheese (25% of sales), promotional activity has ramped since 2011 and the data suggests that this hike in spending was
ineffective across all subcategories, Processed Sliced Cheese being the only exception (23% of KRFT Cheese portfolio). Therefore, a
cut in trade spend is unlikely to have a material negative impact (if it didnt help on the way up it is unlikely to hurt on the way
down). A deeper analysis suggests that KRFT could shrink Cheese trade spend by 17.4% without a significant impact on market
share. There is evidence in recent months that KRFT has already begun to pull back trade spend while seeing growth in volume,
suggesting that previous promotional activity was wasted spend. We see a similar trend in Packaged Meat, particularly Refrigerated
Bacon (25% of KRFTs Packaged Meat portfolio) where promotional activity also seems to be ineffective. Since 2011 KRFT has
increased its promoted sales in Refrigerated Bacon by 28.2%, but saw only a 10.7% increase in total sales as both volume and dollar
shares shrank. Additionally, its promotional posture caused price growth to lag and its premium to private label to fade from 25.5%
to 20.9%. An estimated 25% reduction in Bacon trade spend would effectively return KRFT to its 2011 promotional posture
equating to roughly a 6.3% reduction in its aggregate Packaged Meat trade funds. We have already seen success in Processed Sliced
Cheese, where KRFT has pulled back trade spend and experienced share gains. This demonstrates that TBO could bear fruit if
executed across the portfolio.
Combining the classic duo of meat and cheese (as well as some smaller contributors such as Ground Coffee and Nuts-Jars), KRFT
could cut its trade budget in fine tune categories by 5.9%. This would bring trade spend back to 2011 promotional levels without
impacting volumes and share that negatively.

Exhibit 43: HNZ has substantially reduced promotions while promotional Exhibit 44: Sales on promotion for KRFT has spiked since CY11
levels for KRFT are much higher than that for HNZ and most other food Percentage of sales on promotion for KRFT
names
Percentage sales on promotion for major food names
37.5% 37.3%
37.0%
36.5% 36.4%
36.2%
36.0%
35.5% 35.4%
35.0%
34.5%
34.0%
CY11
CY12
CY13
CY14
Source: The Nielsen Company, Goldman Sachs Global Investment Research Source: The Nielsen Company, Goldman Sachs Global Investment Research
Exhibit 45: However, KRFTs weighted average $ and volume shares have Exhibit 46: Promotional ineffectiveness is highlighted with negative GP lift
gone down across top categories for with Juices being the only exception
Weighted average $ and EQ shares for KRFT GP lift for KRFTs top categories
23.0% 22.9% 15%

22.6% 10%
22.5% 22.3% 5%
22.1% 0%
5%
22.0% 10%
15%
21.5% 20%
21.1% 25%
21.0% 30%
35%
20.4%
Nuts
Saladdressingscreamy
Coffee
Cheese
Preparedfoodsdry
Remainingdeliitems
Packagedmeat
JuicesDrinksShelfStbl
20.5%
20.1%
20.0%
mixes
19.7%
19.5%
CY11 CY12 CY13 CY14
KRFT$share KRFTEQshare
Source: The Nielsen Company, Goldman Sachs Global Investment Research Source: The Nielsen Company, Goldman Sachs Global Investment Research

Exhibit 47: KRFT scatter plot shows 10.9% of categories under RIPE and over 70% of KRFT categories under fine tune bucket with negative GP lift
Scatter plot for KRFT based on market structure and promo GP lift dynamics of categories the company operates in
Source: The Nielsen Company, Goldman Sachs Global Investment Research

Exhibit 48: KRFT has opportunity to both fine tune and cut trade spend across many categories
Promotional and market structure metrics across key KRFT categories
1114%$ 1114Inc. Avg.%

%of AnyPromo Promo Promoto Conv. changein $spenton Implied Promo GP PL Company Share
KraftFoods,Inc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share rank
TotalKRFTcat.Avg 33.5% 0.8% 24.7% 6.2% 10.8% (3,897) 4.2% 23.8% 6.8% 23% 1,747 21.8%
TotalKRFT 37.3% 1.9% 31.1% 2.6% 11.2% (711) 4.8% 26.6% 6.8% 23% 1,747 21.8%
Cheese 35.0% 2.4% 24.1% 5.8% 12.5% (773) 4.5% 23.8% 12.8% 37% 2,200
KRFTcheese 25.1% 39.0% 3.7% 34.6% 0.0% 11.8% (245) 5.1% 28.2% 7.5% 27.2% 1
Packagedmeat 36.7% 0.7% 28.1% 6.9% 10.3% (744) 3.9% 28.9% 2.6% 15% 1,017
KRFTpackagedmeat 18.0% 36.8% 0.3% 29.8% 3.9% 9.7% (138) 4.0% 29.7% 0.0% 18.3% 1
Preparedfoodsdrymixes 29.0% 1.5% 21.6% 8.3% 11.0% (213) 3.5% 17.4% 13.1% 10% 1,202
KRFTpreparedfoodsdrymixes 7.1% 34.3% 0.6% 26.6% 7.9% 10.6% (65) 4.8% 23.8% 7.2% 21.7% 1
Remainingdeliitems 22.9% 1.6% 21.4% 4.7% 7.2% 113 1.6% 44.5% 68.9% 36% 1,707
KRFTremainingdeliitems 6.7% 33.1% 1.3% 18.2% 5.4% 9.4% (46) 3.6% 20.0% 6.6% 18.3% 1
Coffee 37.8% 5.3% 29.6% 5.8% 17.9% (889) 8.4% 12.1% 35.4% 10% 1,139
KRFTcoffee 6.3% 45.1% 0.6% 46.5% 1.7% 12.8% (62) 5.2% 32.4% 7.6% 11.9% 3
Nuts 27.4% 4.2% 21.0% 8.5% 11.7% (239) 4.0% 17.0% 15.3% 29% 1,504
KRFTnuts 6.3% 33.3% 1.2% 30.6% 3.8% 18.0% (88) 7.4% 17.1% 32.8% 20.6% 1
JuicesDrinksShelfStbl 35.0% 0.3% 23.9% 3.8% 16.7% (1,057) 7.2% 12.6% 32.0% 7% 1,472
KRFTJuicesDrinksShelfStbl 4.7% 40.9% 7.4% 26.5% 2.3% 5.4% (24) 2.7% 26.7% 10.4% Nottop3
Saladdressingscreamy 37.3% 1.6% 24.1% 4.4% 14.4% (26) 7.1% 15.1% 24.0% 5% 8,909
KRFTsaladdressingscreamy 1.8% 37.8% 0.7% 22.8% 6.0% 16.0% (29) 8.4% 13.0% 29.8% 94.2% 1
Saladdressingsliquid 34.1% 1.1% 23.2% 4.7% 9.9% (68) 3.8% 22.3% 6.4% 16% 1,460
KRFTsaladdressingsliquid 1.7% 43.9% 0.1% 31.2% 2.7% 7.7% (12) 3.8% 34.6% 10.1% 17.6% 2

CPB: Where did the trade spend go? Apparent opportunity for retraction
CPB appears ripe for TBO, especially in its core Soup, Sauces & Beverages portfolio. Since FY08 CPB has invested $360 mn of
incremental money into its trade budget for its US Soup, Sauces and Beverages segment, based on company reported promotional
investment. At the same time it has lost $219mn of revenue due to volume declines. Full retraction of that incremental trade spend,
all-else-held constant, could add $0.79 to our FY16 EPS estimate it could prove material. This is likely an unachievable extreme
outcome, but it nonetheless highlights the opportunity at the company. Core to this opportunity is its soup portfolio where analysis
suggest that promotional price investments destroy gross profit dollars at the category level while category dynamics are favorably
concentrated (between GIS & CPB) with low private label share (12%). As market leader CPB has the opportunity to take the lead on
this front and data suggest retailers may already be doing it for them.
CPBs percent of dollars sold on promo in Soup has fallen materially since 2011 (-10.9 pts through 2014 and down another -4.1 pts
through the first nine months of 2015). But where did the money go? Measured promotional activity for CPBs soup portfolio has
fallen materially but the companys reported promotional impact on revenue has failed to improve. While this may be partially
driven by a move to more EDLP and less Hi-Low pricing, the data suggest retailers may be supporting CPBs soup less while still
pocketing a comparable amount of trade funds. Risk of shelf space losses in an arguably weak category may have prevented CPB
from more aggressively pulling the funds back, but recent measured data suggest shelf space losses may be happening regardless.
Total-distribution-points for the soup category recently inflected negative (-5% in the four-week period ending October 3, 2015) with
condensed and ready-to-serve soup down 4% and down 8.6%, respectively. Within RTS, CPB is suffering outsized TDP declines of
12%, due in part to discontinuations for its Go! line of soups as well as Healthy Request. We believe distribution losses can and
should embolden management to retract funding. The process would likely be accompanied with some pain such as accelerated
distribution losses and related volume weakness but analysis suggest the price related offsets of effective TBO should more than
mitigate the headwind. Outside of soup we see select opportunity for TBO behind categories such as crackers (where it is more
dependent on promotions than the category average and primarily operates behind the strong Goldfish equity), but we see the
benefit paling in comparison to its large soup portfolio.

Exhibit 49: We see opportunity for CPB to retract trade spend, especially in soup where retailers appear to be providing less
support with no corresponding benefit yet accruing to the companies P&L
Promotional and market structure metrics across key CPB categories
1114%$ 1114Inc. Avg.%

%of AnyPromo Promo Promoto Conv. changein $spenton Implied Promo GP PL Company
CampbellSoupCo sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalCPBcat.Avg 29.5% 3.6% 24.3% 5.9% 14.1% (3,187) 5.6% 19.4% 20.0% 11% 1,675 18.0%
TotalCPB 32.7% 4.2% 24.9% 4.2% 12.8% (378) 5.1% 19.2% 17.3% 11% 1,675 18.0%
Soup 23.9% 7.8% 27.4% 8.1% 18.4% (450) 7.7% 18.9% 32.7% 12% 2,257
CPBsoup 35.1% 21.3% 10.9% 31.7% 6.4% 17.8% (213) 8.3% 21.2% 29.7% 42.5% 1
Juicedrinksshelfstbl 35.0% 0.3% 23.9% 3.8% 16.7% (1,057) 7.2% 12.6% 32.0% 7% 1,472
CPBjuicedrinksshelfstbl 12.0% 18.9% 1.4% 27.5% 1.2% 20.2% (44) 5.0% 12.0% 41.4% Nottop3
Bread&bakedgoods 24.9% 1.8% 16.9% 6.1% 12.1% (887) 3.7% 14.5% 18.2% 28% 1,442
CPBbread&bakedgoods 11.2% 25.3% 5.0% 19.0% 6.5% 10.4% (25) 3.0% 22.3% 7.7% Nottop3
Crackers 46.0% 1.1% 20.5% 5.0% 6.4% (168) 3.3% 25.0% 6.0% 9% 2,540
CPBcrackers 9.7% 48.2% 7.3% 20.3% 7.3% 10.5% (41) 5.7% 18.0% 11.2% 14.4% 3
Cookies 37.5% 1.2% 25.6% 4.6% 4.9% (151) 2.0% 29.5% 14.4% 15% 2,013
CPBcookies 5.1% 39.7% 0.4% 35.1% 3.4% 12.1% (26) 7.0% 30.9% 6.6% Nottop3
Remainingsauces/saucemixes 21.5% 1.2% 21.3% 3.9% 12.7% (54) 3.4% 20.8% 15.5% 9% 705
CPBrem.sauces/saucemixes 4.4% 23.5% 3.9% 37.1% 9.9% 10.2% (11) 3.5% 34.9% 2.4% 20.4% 1
Juice&drinksrefrig 32.6% 0.5% 31.4% 3.0% 13.2% (308) 5.0% 24.5% 14.5% 10% 2,403
CPBjuice&drinksrefrig 4.2% 28.3% 10.3% 37.3% 8.9% 11.3% (12) 3.9% 33.8% 1.9% Nottop3
Mexicansauces 29.6% 0.5% 15.1% 1.5% 6.0% (31) 1.9% 19.5% 2.5% 14% 1,023
CPBmexicansauces 3.3% 20.8% 3.3% 23.1% 2.0% 7.2% (4) 1.7% 24.4% 3.4% 19.8% 1
Spaghetti/marinarasauce 30.9% 3.8% 36.8% 4.0% 12.3% (81) 4.7% 32.2% 6.2% 11% 1,564
CPBspaghetti/marinarasauce 1.6% 12.9% 5.5% 34.0% 7.6% 6.2% (1) 1.2% 36.9% 16.8% Nottop3

MDLZ: Apparent opportunity, but likely challenges in cookies and crackers

The Gum category, with practically no private label share (0.16%) and high concentration, appears to be the stickiest opportunity for
MDLZ. The category as a whole screens well in our ripe for TBO framework. MDLZ can leverage its number-two position (behind
Mars) in the category to cut trade and drive change for the category. GP lift for MDLZs Gum portfolio, -27.1%, is below the category
average, -13.3%. Reduced trade spend can be a small step in the right direction for MDLZ to accelerate its performance. Trade spend
for Candy, although less than 6% of MDLZ sales, is proving to be more of a black hole than just a typical cavity. MDLZ spends less
than the category average (23.9% vs. category 34.8%) yet experiences a significant negative GP lift, -37.6%, vs. the categorys
positive 17.7% lift. Across its core Cookies and Crackers categories MDLZ spends 11%/5.4% more on promotion than the category
average. This strategy has fared well for MDLZs Crackers portfolio, one of the few to exhibit positive GP lift (18.6% vs. category 6%).
Incremental trade spend on Cookies, however, continues to contribute to profit leakage (-6.4% GP lift vs. category 14.4%). Recently,
MDLZ has been extremely vocal on its ZBB cost cutting efforts (targeting $1bn in savings over three years). However, we believe
that, by attacking this cost bucket, MDLZ can help set an industry standard and further drive profitability.
Exhibit 50: MDLZs ability to fine tune trade spend will set the stage for bottom-line growth going forward
Promotional and market structure metrics across key MDLZ categories
1114%$ 1114Inc. Avg.%

%of AnyPromo Promo Promoto Conv. changein $spenton Implied Promo GP PL Company Share
MondelezInternationalInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share rank
TotalMDLZcat.Avg 36.9% 0.2% 23.8% 5.1% 6.4% (954) 2.5% 27.4% 8.3% 10% 2,436 34.8%
TotalMDLZ 42.9% 2.6% 24.8% 3.7% 9.3% (270) 4.1% 23.2% 3.4% 10% 2,436 34.8%
Cookies 37.5% 1.2% 25.6% 4.6% 4.9% (151) 2.0% 29.5% 14.4% 15% 2,013
MDLZcookies 41.4% 48.5% 2.4% 27.2% 3.3% 10.1% (164) 5.5% 22.9% 6.4% 40.0% 1
Crackers 46.0% 1.1% 20.5% 5.0% 6.4% (168) 3.3% 25.0% 6.0% 9% 2,540
MDLZcrackers 28.0% 51.5% 1.7% 21.0% 3.6% 3.4% (37) 1.9% 28.8% 18.6% 39.3% 1
Gum 18.7% 0.6% 22.8% 6.0% 12.3% (88) 2.9% 22.0% 13.3% 0% 4,194
MDLZgum 12.6% 22.4% 4.5% 27.1% 3.0% 16.1% (41) 4.6% 17.9% 27.1% 28.2% 2
Candy 34.8% 2.3% 30.2% 8.0% 5.8% (533) 2.6% 36.6% 17.7% 4% 1,904
MDLZcandy 5.8% 23.9% 2.6% 22.8% 7.8% 18.3% (22) 5.2% 9.8% 37.6% Nottop3
Crackerssandw.&snackpacks 26.9% 3.7% 22.7% 3.8% 3.5% (13) 1.0% 27.2% 16.6% 7% 1,233
MDLZcrackerssandw.&snackpacks 3.6% 26.4% 7.2% 23.2% 5.1% 8.1% (6) 2.4% 22.3% 1.2% 18.9% 1

SJM: Feeding profit dollars to furry friends

Across its core categories, SJMs reliance on promotion is relatively in line with category averages. However, many of these
categories, Dry Cat Food, Dry Dog Food, and Baking Mixes appear ripe for TBO. We also see opportunity for fine tuning within
Peanut Butter and Dog & Cat Treats. Coffee stands out as an example of relatively effective trade spend, with SJM spending about
1% less than the category average but generating positive profit lift (15.7%) vs. the categorys -35.7%. Through the first nine months
of 2015 percent of dollars sold on promo is up 2.6%. The Coffee categorys relatively low market concentration leaves little room for
SJM to benefit from a TBO overhaul. However, if KHC leads the way and cuts spend in its Coffee portfolio, SJM could see an
opportunity to follow. The Pet Food categories exhibit the most favorable market conditions for SJM to effectively cut spend. SJMs
percent of dollars sold on promo in Dog & Cat Treats, Dry Cat Food and Dry Dog Food have fallen since 2011 (-3.2%/-8.6%/-2.9%). In
particular, SJMs Dry Cat Food and Dry Dog Food appear most ripe for TBO, with favorable market dynamics, especially for Dry Dog
Food which ranks as one of the ripest categories for TBO. SJMs number-two market position in Dry Cat Food (7.6% of sales) and
negative GP lift signal that this would be a good place for SJM to attack. Further fine tuning could benefit SJMs Wet Cat Food and
Wet Dog Food categories which all exhibit relatively favorable market conditions and low promotional returns. SJM also has a big
opportunity to fine tune trade spend in its Peanut Butter category (11.9% of sales), which is destroying profit when compared with
the category GP lift (-14.1% vs. category 3.9%). Outside of Pet Food, cutting trade in Baking Mixes could prove profitable for SJM as
dollars sold on promo are down -10.5% (vs. category -5%) and GP lift is below the category (-22.6% vs. category -18.2%). If SJM can
remove these ingredients from its mix it could see incremental dollars flow to the bottom line.

Exhibit 51: Opportunity for SJM to cut trade spend

Promotional and market structure metrics across key SJM categories
1114%$ 1114Inc. Avg.%

TheJ.M.SmuckerCompany sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalSJMcat.Avg 29.3% 2.0% 24.7% 4.7% 12.4% (1,523) 4.9% 16.3% 17.0% 13.7% 2,058 26.0%
TotalSJM 29.8% 0.8% 26.4% 2.9% 8.3% (185) 3.0% 22.4% 1.2% 13.7% 2,058 26.0%
Coffee 37.8% 5.3% 29.6% 5.8% 17.9% (889) 8.4% 12.1% 35.4% 10% 1,139
SJMcoffee 32.7% 36.9% 1.4% 32.8% 2.4% 4.8% (51) 2.1% 30.6% 15.7% 21.6% 1
Peanutbutter 30.1% 5.4% 29.0% 5.1% 7.9% (54) 2.8% 27.8% 3.9% 19% 2,881
SJMpeanutbutter 11.9% 29.3% 9.0% 23.3% 3.8% 11.6% (36) 4.0% 18.4% 14.1% 46.1% 1
Dog&cattreats 21.4% 2.8% 14.4% 3.3% 0.5% (2) 0.1% 21.7% 20.3% 10% 2,286
SJMdog&cattreats 10.4% 21.5% 3.2% 14.1% 1.7% 2.8% (5) 0.6% 15.0% 7.3% 34.5% 1
Catfooddry 17.9% 1.6% 19.4% 0.8% 9.9% (46) 2.0% 13.4% 13.2% 9% 3,803
SJMcatfooddry 7.6% 17.9% 8.6% 21.3% 1.8% 7.7% (10) 1.7% 17.6% 3.8% 23.5% 2
Dogfooddry 21.5% 0.5% 11.0% 2.9% 17.9% (240) 4.6% 5.3% 45.4% 17% 2,917
SJMdogfooddry 6.2% 20.3% 2.9% 12.9% 7.8% 4.5% (5) 1.2% 14.6% 2.5% 8.2% 3
Shortening/oil 27.0% 2.0% 31.1% 5.1% 12.6% (170) 4.7% 21.2% 15.0% 36% 1,645
SJMshortening/oil 5.6% 24.0% 9.2% 36.5% 5.2% 25.2% (45) 10.9% 12.0% 54.6% 9.8% 2
Bakingmixes 26.8% 5.0% 26.0% 9.2% 14.1% (103) 5.0% 22.5% 18.2% 6% 1,714
SJMbakingmixes 4.3% 26.1% 10.5% 34.4% 7.1% 16.1% (18) 5.8% 24.8% 22.6% 15.1% 2
Jelly/jams 21.4% 0.4% 24.3% 3.7% 10.4% (10) 2.6% 24.4% 6.1% 18% 3,223
SJMjelly/jams 2.5% 25.5% 3.8% 28.6% 1.2% 11.8% (6) 3.4% 24.2% 10.4% 46.8% 1
Preservesmarmalade 22.9% 1.5% 21.2% 3.7% 7.9% (7) 2.1% 27.1% 3.3% 27% 2,717
SJMpreservesmarmalade 1.9% 22.0% 2.7% 26.0% 0.3% 15.2% (6) 4.0% 22.5% 21.5% 41.4% 1
Remainingjams/spreads 18.2% 2.1% 14.8% 3.8% 2.6% (2) 0.5% 23.9% 16.2% 14% 1,246
SJMrem.jams/spreads 1.3% 17.2% 0.2% 16.0% 6.9% 15.7% (3) 3.1% 11.1% 30.3% 25.8% 1

HSY: Sweet opportunity for fine tuning.

There appear to be limited ground-breaking opportunities for HSY given the market structure surrounding its chocolate-centric
portfolio. HSYs biggest categories (Chocolate Candy and Chocolate Mini-Candy) fall within our fine tuning framework. Chocolate
Mini-Candy, in particular, exhibits favorable market conditions with close to no private label involvement and extremely high
concentration. HSY holds the number-one market position in both Chocolate Candy and Chocolate Mini-Candy. Promotional spend
for both categories has been higher than the category average while percent of dollars sold on promo from 2011 to 2014 have
declined 3.3% and 5.9%, respectively. Although GP lift for both of these categories is positive and higher than the category average,
we see opportunity for HSY, as the category leader, to potentially tweak its spend.
Exhibit 52: Fine-tuning at HSY can help offset fading sweet tooth
Promotional and market structure metrics across key HSY categories
1114%$ 1114Inc. Avg.%

TheHersheyCo. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalHSYcat.Avg 35.6% 2.9% 27.9% 9.5% 6.3% (835) 2.9% 35.0% 15.3% 3% 2,733 38.4%
TotalHSY 41.1% 1.2% 30.1% 4.2% 4.1% (185) 2.4% 33.7% 22.5% 3% 2,733 38.4%
Chocolatecandy 35.6% 3.2% 24.0% 9.9% 4.1% (179) 2.0% 37.1% 23.7% 2.2% 2,958
HSYchocolatecandy 47.9% 36.1% 3.3% 28.9% 3.8% 1.5% (26) 0.7% 38.0% 33.2% 42.3% 1
Chocolateminicandy 40.8% 6.6% 29.5% 14.6% 8.0% (81) 4.4% 34.3% 8.9% 0.2% 4,949
HSYchocolateminicandy 15.0% 42.4% 5.9% 35.1% 6.9% 6.9% (46) 3.9% 33.4% 11.7% 65.7% 1
Remainingcandy 50.1% 0.5% 46.3% 4.7% 7.2% (128) 4.2% 44.1% 19.7% 1% 1,601
HSYremainingcandy 12.6% 65.0% 3.5% 44.3% 2.7% 7.7% (55) 5.5% 39.6% 14.2% 31.5% 1
Nonchocolatecandy 27.5% 1.3% 30.1% 6.3% 13.7% (252) 4.8% 23.2% 16.6% 9% 950
HSYnonchocolatecandy 11.9% 31.5% 2.4% 27.9% 2.5% 17.4% (61) 6.5% 11.9% 34.1% 18.0% 2
Breathsweeteners 16.5% 0.8% 15.9% 7.0% 2.6% 5 0.5% 34.1% 42.3% 7% 2,182
HSYbreathsweeteners 4.0% 16.0% 3.7% 11.1% 2.4% 31.3% 16 5.2% 58.2% 175.3% 33.8% 1
Desserts/gel/syrups 25.8% 1.1% 23.7% 4.6% 6.1% (43) 1.8% 25.6% 7.4% 17% 1,030
HSYdesserts/gel/syrups 2.9% 30.7% 3.8% 8.6% 5.7% 4.4% (3) 1.3% 8.8% 2.5% Nottop3
Bakingsupplies 19.9% 12.1% 14.1% 23.1% 7.5% (70) 2.4% 30.5% 7.3% 15% 658
HSYbakingsupplies 2.1% 12.8% 23.0% 30.1% 10.5% 16.1% (10) 6.3% 19.3% 26.1% Nottop3
Gum 18.7% 0.6% 22.8% 6.0% 12.3% (88) 2.9% 22.0% 13.3% 0% 4,194
HSYgum 1.9% 15.3% 1.6% 14.4% 7.0% 3.0% (1) 0.6% 25.6% 16.6% 5.3% 3

PF: Birds eye view shows opportunity for fine tuning

While there is limited opportunity for PF to lead the charge slashing trade spend, there are small pockets of opportunity. PF sets an
impressive example in Pickles/Olives/Relishes where the company is slightly (3.6%) more reliant on promotion than the category but
PFs percent of dollars sold on promo is up 2.2% (vs. category -1.4%) from 2011-2014 and promo lift is 30.6% (vs. category -3.2%).
PFs Table Syrups/Molasses portfolio also stands out with 62% GP lift (vs. category -18%). However, percent of dollars sold on
promo is down -2.4% (vs. category -2.1%) signaling that PF may already be pulling back trade spend. A more glaring opportunity
shows itself in Baking Mixes, a category ripe for TBO. As the number-three player in Baking Mixes, PF has the opportunity to
participate in a category-wide pullback in trade spend. In Baking Mixes, PF is 6% more reliant on promo dollars than the category
and percent of dollars sold on promo is down 4.3%. Outside of Baking Mixes PF faces challenging market conditions for its three
largest categories Frozen Vegetables, Frozen Prepared Foods and Pickles/Olives/Relishes (together accounting for more than 50%
of sales). PF holds the market leading position in both Frozen Vegetables and Pickles/Olives/Relishes. However, PL share for these
categories is high and promo lift is positive, leaving little room for TBO. Although the market structure appears challenged, PF can
leverage its market position in Frozen Vegetables to cut back promo spend (6.5% higher than the category). For Frozen Vegetables,
PFs percent of dollars sold on promo is down 5.4% and profit lift, though positive, is significantly lower than the category (0.2% vs.
category 30%). Although PF will likely face an uphill battle pulling trade spend out of the category, which is dominated by PL (36%
share), any cut in its reliance on promo dollars could prove incremental.

Exhibit 53: Although frozen might be a cold opportunity for PF; pockets of fine tuning opportunity exist
Promotional and market structure metrics across key PF categories
1114%$ 1114Inc. Avg.%

PinnacleFoods sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalPFcat.Avg 26.7% 2.2% 23.3% 5.8% 8.5% (1,989) 2.7% 25.7% 2.5% 23% 1,403 8.6%
TotalPF 32.3% 1.1% 29.9% 4.3% 9.0% (100) 3.6% 32.1% 4.3% 23% 1,403 8.6%
Vegetablesfrozen 26.0% 2.9% 23.3% 5.6% 1.9% (28) 0.5% 36.0% 29.9% 36% 1,847
PFvegetablesfrozen 23.4% 32.5% 5.4% 26.1% 5.2% 10.1% (32) 4.3% 31.6% 0.2% 15.0% 1
Preparedfoodsfrozen 30.0% 2.5% 26.7% 5.6% 6.4% (304) 2.2% 29.6% 10.0% 11% 825
PFpreparedfoodsfrozen 18.2% 29.9% 4.4% 31.7% 6.4% 9.0% (18) 3.1% 32.5% 4.2% Nottop3
Pickles/olives/relishes 21.8% 1.4% 18.3% 4.6% 9.0% (50) 2.2% 23.1% 3.2% 25% 1,141
PFpickles/olives/relishes 9.6% 25.4% 2.2% 27.5% 0.4% 2.3% (2) 0.6% 38.0% 30.6% 14.3% 1
Bakingmixes 26.8% 5.0% 26.0% 9.2% 14.1% (103) 5.0% 22.5% 18.2% 6% 1,714
PFbakingmixes 8.1% 32.7% 4.3% 38.5% 3.5% 12.1% (14) 5.6% 35.0% 3.8% 12.5% 3
Preparedfoodsrdyserve 23.9% 1.6% 22.3% 5.6% 27.7% (533) 8.9% 2.3% 66.4% 16% 901
PFpreparedfoodsrdyserve 7.8% 18.7% 4.9% 26.2% 2.6% 10.3% (7) 2.7% 21.4% 8.2% Nottop3
Saladdressingsliquid 34.1% 1.1% 23.2% 4.7% 9.9% (68) 3.8% 22.3% 6.4% 16% 1,460
PFsaladdressingsliquid 6.6% 33.5% 4.4% 31.2% 7.9% 10.5% (9) 4.3% 32.2% 0.5% 11.9% 3
Tablesyrups/molasses 19.5% 2.1% 20.0% 6.5% 12.8% (27) 3.3% 18.0% 17.8% 30% 1,756
PFtablesyrups/molasses 4.5% 17.2% 2.4% 29.0% 0.8% 3.6% 1 0.7% 49.1% 61.9% 18.9% 1
Unprepmeat/seafoodfrz 33.2% 2.3% 27.6% 6.0% 5.3% 97 1.6% 39.9% 57.4% 40% 1,742
PFunprepmeat/seafoodfrz 3.8% 44.3% 2.1% 40.5% 5.2% 13.5% (7) 5.9% 35.7% 7.4% Nottop3
Breakfastfoodsfrozen 23.8% 0.2% 19.0% 5.5% 9.0% (86) 2.5% 20.5% 5.2% 21% 1,662
PFbreakfastfoodsfrozen 2.8% 35.8% 1.7% 44.7% 4.3% 23.3% (9) 10.4% 24.5% 44.1% Nottop3
Bread&bakedgoods 24.9% 1.8% 16.9% 6.1% 12.1% (887) 3.7% 14.5% 18.2% 28% 1,442
PFbread&bakedgoods 2.5% 25.3% 5.5% 9.7% 6.0% 7.7% (2) 2.5% 7.0% 12.5% Nottop3

GIS: Dough rises as a ripe opportunity for TBO

GISs portfolio appears ripe for TBO (33.6% of portfolio), particularly in its Refrigerated Dough, Granola Bars, Soup and Baking
Mixes categories. GISs number-one market position in Refrigerated Dough (68% market share), led by its flagship Pillsbury brand,
will allow the company to spear head trade spend cost cutting efforts. The data suggests that significant profit is being destroyed
(GP lift -24.6% vs. category -14.3%). This negative profit lift combined with a favorable market structure, GISs reliance on promo
dollars and a 11.7% drop in dollars sold on promo since 2011 creates the perfect recipe for TBO. GIS also has the opportunity to fine
tune its trade spend in Ready-to-Eat Cereal (19% of sales) and Yogurt (13% of sales). In both categories, GIS relies more heavily on
trade promo than the category average while profit lift is lower than category average. This leaves room for GIS to reap benefits
from pulling back on trade spend. GIS also has the opportunity to follow CPBs lead in the Soup category. GISs reliance on trade
spend in Soup (although only 5.4% of sales) is eating away at profits. GISs percent of dollars sold on promo in Soup since 2011 has
fallen 10.8% through 2014 while reliance on promo is 15.9% higher than the category average. Because a large portion of GISs
portfolio falls on our radar as ripe for TBO, a company-wide cutback on trade spend could prove materially beneficial.

Exhibit 54: GISs portfolio appears ripe for TBO

Promotional and market structure metrics across key GIS categories
1114%$ 1114Inc. Avg.%

GeneralMills sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalGIScat.Avg 30.8% 2.0% 27.3% 5.5% 9.5% (2,147) 3.6% 27.1% 0.8% 10% 2,196 25.1%
TotalGIS 37.4% 1.5% 28.0% 4.2% 9.1% (601) 4.4% 25.9% 1.4% 10% 2,196 25.1%
Readytoeatcereal 36.1% 0.1% 36.4% 5.5% 8.7% (298) 3.5% 35.0% 7.2% 8% 2,552
GISreadytoeatcereal 19.1% 39.9% 0.5% 38.1% 4.6% 12.6% (168) 6.3% 31.4% 7.8% 30.9% 2
Yogurt 32.9% 3.3% 18.8% 4.7% 4.8% (118) 1.6% 26.6% 12.3% 9% 2,074
GISyogurt 12.8% 34.6% 1.1% 20.2% 2.9% 7.7% (53) 2.9% 23.2% 0.8% 24.8% 2
Doughproductsrefrig 22.7% 10.1% 27.4% 6.8% 13.1% (96) 4.8% 24.1% 14.3% 20% 5,066
GISdoughproductsrefrig 9.9% 23.8% 11.7% 31.3% 4.4% 16.1% (92) 6.7% 21.4% 24.6% 67.7% 1
Granola/yogurtbars 34.8% 0.2% 27.3% 2.5% 9.4% (106) 3.8% 23.9% 3.7% 8% 1,686
GISgranola/yogurtbars 6.2% 35.7% 1.8% 28.3% 3.0% 12.0% (45) 5.1% 21.7% 13.0% 30.7% 1
GISpreparedfoodsdrymixes 6.1% 33.2% 1.0% 29.1% 7.5% 19.8% 49 5.7% 63.4% 139.9% 13.8% 3
Snacksremaining 30.1% 2.0% 19.4% 4.3% 13.0% (173) 4.6% 14.8% 20.4% 4% 2,035
GISsnacksremaining 4.4% 26.4% 0.3% 30.9% 4.4% 31.0% (79) 12.8% 1.1% 73.1% 15.5% 2
Soup 23.9% 7.8% 27.4% 8.1% 18.4% (450) 7.7% 18.9% 32.7% 12% 2,257
GISsoup 5.4% 39.8% 10.8% 37.6% 9.1% 16.4% (77) 10.2% 29.1% 21.0% 12.8% 2
Bakingmixes 26.8% 5.0% 26.0% 9.2% 14.1% (103) 5.0% 22.5% 18.2% 6% 1,714
GISbakingmixes 5.0% 25.5% 4.8% 30.0% 7.5% 19.0% (50) 7.0% 16.9% 35.5% 32.9% 1
Horsd'oeuvres/snacksfrozen 26.1% 2.9% 30.4% 1.1% 5.9% (31) 1.7% 34.4% 15.6% 10% 1,268
GIShorsd'oeuvres/snacksfroz 3.8% 40.5% 0.4% 36.4% 0.2% 10.3% (22) 4.1% 32.4% 0.3% 29.6% 1
Fruitdried 27.4% 2.2% 24.1% 3.5% 7.6% (47) 2.3% 25.7% 3.2% 19% 1,298
GISfruitdried 3.6% 39.6% 0.3% 31.3% 1.7% 7.7% (16) 3.3% 33.6% 9.4% 9.6% 3
GISvegetablesfrozen 3.4% 26.2% 6.9% 32.3% 5.8% 16.4% 24 5.0% 70.9% 137.2% 8.3% 3
Pizzafrozen 41.0% 2.6% 33.9% 5.6% 9.2% (190) 4.4% 32.3% 3.6% 11% 2,504
GISpizzafrozen 2.9% 34.4% 7.0% 22.3% 5.4% 7.2% (15) 3.6% 24.5% 3.3% 9.0% 3
Breakfastbars 39.7% 0.1% 28.1% 2.1% 12.4% (51) 5.6% 20.7% 14.6% 6% 4,123
GISbreakfastbars 2.7% 35.5% 1.5% 25.4% 7.0% 10.2% (16) 4.1% 22.1% 7.3% 43.8% 2
Vegetablescanned 25.1% 6.1% 27.5% 9.6% 15.3% (281) 5.5% 23.2% 21.4% 33% 1,583
GISvegetablescanned 2.0% 19.8% 11.4% 43.4% 8.9% 25.5% (35) 12.3% 19.0% 52.7% Nottop3
Pastriesshelfstable 35.0% 1.8% 28.8% 4.8% 8.9% 39 3.5% 56.2% 88.9% 10% 5,317
GISpastriesshelfstable 1.5% 28.4% 5.6% 35.1% 0.4% 7.8% (6) 3.0% 35.1% 10.4% 18.7% 2

K: Ready-to-Eat away trade spend

Across its nine largest categories, accounting for 80% of its portfolio, K is more reliant on promo dollars than the category average.
Much of this trade spend is destroying profit dollars. As the category leader in Ready-to-Eat Cereal, Shelf Stable Pastries, and Frozen
Waffle/Pancake/French Toast, and the number-two player in Crackers, K has the opportunity to fine tune spending. Percent of dollars
sold on promo has fallen in RTE Cereal, Crackers and Pastries suggesting that money can continue to be pulled out of the system to
benefit K. In addition, GP lift is negative for all 3 categories while category average is positive (RTE Cereal K -4% vs. category 7.2%,
Crackers K -3.7% vs. category 6%, Shelf Stable Pastries K -5.3% vs. category 89%). Outside of these categories, K will likely face
difficulty pulling spend out of Cookies where percent of dollars sold on promo is up 2.1% between 2011 and 2014. K has minimal
exposure to ripe categories apart from Granola/Yogurt Bars (4.6% of sales) and Breakfast Bars (4.5% of sales). However, favorable
market dynamics in these ripe categories (extremely high concentration and low PL share) will most likely prove beneficial if K can
cut spend.
Exhibit 55: Limited exposure to ripe categories leaves K to fine tune trade spend throughout portfolio
Promotional and market structure metrics across key K categories
1114%$ 1114Inc. Avg.%

Kellogg sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalKcat.Avg 36.3% 0.3% 27.9% 4.9% 6.9% (1,541) 2.8% 30.3% 10.6% 10% 2,779 32.2%
TotalK 41.1% 0.2% 31.0% 4.4% 9.8% (403) 4.8% 27.9% 1.7% 10% 2,779 32.2%
Readytoeatcereal 36.1% 0.1% 36.4% 5.5% 8.7% (298) 3.5% 35.0% 7.2% 8% 2,552
Kreadytoeatcereal 28.8% 41.1% 0.3% 36.3% 7.6% 11.2% (148) 5.3% 30.7% 4.0% 33.5% 1
Crackers 46.0% 1.1% 20.5% 5.0% 6.4% (168) 3.3% 25.0% 6.0% 9% 2,540
Kcrackers 14.5% 49.0% 4.1% 27.6% 2.3% 10.1% (81) 5.8% 26.4% 3.7% 26.5% 2
Pastriesshelfstable 35.0% 1.8% 28.8% 4.8% 8.9% 39 3.5% 56.2% 88.9% 10% 5,317
Kpastriesshelfstable 7.8% 41.0% 0.5% 27.8% 5.2% 9.6% (32) 4.1% 22.5% 5.3% 69.8% 1
Cookies 37.5% 1.2% 25.6% 4.6% 4.9% (151) 2.0% 29.5% 14.4% 15% 2,013
Kcookies 7.5% 48.7% 2.1% 39.0% 1.6% 11.3% (44) 6.1% 34.7% 1.3% 9.4% 2
Waffle/pancake/frnchtstfrz 32.2% 1.3% 20.3% 7.3% 5.5% (24) 2.0% 26.8% 10.4% 20% 4,054
Kwaffle/pancake/frnchtstfrz 7.4% 37.7% 3.7% 20.0% 6.0% 5.5% (17) 2.3% 25.1% 8.8% 60.1% 1
Granola/yogurtbars 34.8% 0.2% 27.3% 2.5% 9.4% (106) 3.8% 23.9% 3.7% 8% 1,686
Kgranola/yogurtbars 4.6% 36.7% 2.6% 31.9% 0.1% 13.9% (28) 6.1% 19.1% 20.0% 15.6% 2
Breakfastbars 39.7% 0.1% 28.1% 2.1% 12.4% (51) 5.6% 20.7% 14.6% 6% 4,123
Kbreakfastbars 4.5% 45.3% 0.8% 29.5% 1.2% 11.2% (24) 5.5% 24.9% 8.1% 46.6% 1
Ksnacksremaining 3.0% 45.8% 3.1% 28.0% 0.1% 13.0% (19) 6.6% 20.6% 16.4% 7.3% 3
Kpreparedfoodsrdyserve 2.8% 31.8% 2.6% 19.6% 6.1% 7.3% (7) 2.6% 23.2% 2.0% Nottop3
Crackerssandwich&snackpacks 26.9% 3.7% 22.7% 3.8% 3.5% (13) 1.0% 27.2% 16.6% 7% 1,233
Kcrackerssandwich&snackpacks 2.6% 22.0% 4.7% 30.6% 0.4% 4.3% 2 1.0% 44.5% 59.4% 18.8% 2
Fruitdried 27.4% 2.2% 24.1% 3.5% 7.6% (47) 2.3% 25.7% 3.2% 19% 1,298
Kfruitdried 1.7% 46.1% 1.8% 31.9% 0.2% 6.3% (5) 2.9% 30.2% 10.9% Nottop3
Breakfastfrozen 19.4% 0.1% 18.0% 3.4% 3.1% (14) 0.6% 25.8% 16.7% 22% 1,890
Kbreakfastfrozen 0.8% 25.4% 4.9% 16.4% 9.5% 4.8% (1) 1.8% 21.3% 7.4% 4.4% 3

CAG: Follow the leader

CAGs biggest categories (Frozen Prepared Foods and Prepared Foods-Ready Serve) do not appear ripe for TBO. However, in many
of its smaller categories (Packaged Meat, Ketchup, Frozen Potatoes), CAG has the opportunity to hide behind industry/brand equity
leaders (namely HNZ) and execute trade spend cuts which can prove incremental to profitability. We see limited opportunity in
Frozen Prepared Foods where market dynamics appear challenged and CAG GP lift is 12.8%. However, percent of dollars sold on
promo for the first nine months of 2015 is down -1.4% indicating that a move away from such strong promotional activity might be
beneficial. Almost 40% of CAGs portfolio falls within our fine tuning framework. Mixed market dynamics and questionable brand
equities across its portfolio will limit company-wide trade cuts but there is still opportunity to reap benefits from fine tuning
spending activity. Within its fine tune categories we have identified the opportunity for CAG to cut 2.7% of its trade budget; short of
the roughly 5% target figure that we estimate implied by its recently announced $100mn trade spend efficiency target.

Exhibit 56: Company-wide trade cuts unlikely at CAG yet opportunity remains for fine tuning
Promotional and market structure metrics across key CAG categories
1114%$ 1114Inc. Avg.%

ConagraInc sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalCAGcat.Avg 26.8% 1.7% 25.5% 5.3% 9.7% (2,471) 3.3% 24.5% 2.1% 16% 1,391 15.0%
TotalCAG 31.2% 0.7% 28.6% 3.2% 9.0% (267) 3.5% 27.1% 1.2% 16% 1,391 15.0%
CAGpreparedfoodsfrozen 26.1% 34.4% 0.1% 30.1% 3.2% 6.3% (55) 2.3% 32.4% 12.8% 16.0% 1
CAGpreparedfoodsrdyserve 10.7% 36.4% 0.2% 24.6% 6.5% 17.8% (70) 7.2% 11.5% 35.4% 16.0% 1
Vegetablescanned 25.1% 6.1% 27.5% 9.6% 15.3% (281) 5.5% 23.2% 21.4% 33% 1,583
CAGvegetablescanned 6.7% 28.0% 3.7% 25.1% 4.1% 3.5% (7) 1.1% 35.7% 24.3% 12.4% 2
Snacksmeat 17.4% 1.9% 23.9% 2.6% 3.5% (19) 0.7% 27.4% 17.0% 6% 3,107
CAGsnacksmeat 6.2% 14.2% 0.8% 22.3% 2.8% 7.6% (7) 1.2% 19.5% 1.8% 23.2% 2
Packagedmeat 36.7% 0.7% 28.1% 6.9% 10.3% (744) 3.9% 28.9% 2.6% 15% 1,017
CAGpackagedmeat 5.3% 35.8% 1.7% 33.7% 5.3% 12.0% (25) 5.1% 30.8% 6.2% Nottop3
Shortening/oil 27.0% 2.0% 31.1% 5.1% 12.6% (170) 4.7% 21.2% 15.0% 36% 1,645
CAGshortening/oil 5.0% 33.3% 2.0% 36.4% 5.1% 25.1% (58) 12.6% 11.8% 54.4% 12.6% 1
Popcornunpopped 30.2% 2.1% 27.7% 1.2% 2.2% 5 0.6% 43.1% 50.6% 13% 2,700
CAGpopcornunpopped 4.3% 26.9% 0.5% 32.6% 3.3% 0.6% (1) 0.2% 46.9% 44.9% 41.8% 1
Butter&margarine 34.4% 0.7% 25.9% 9.7% 0.3% 4 0.1% 45.2% 46.2% 31% 1,958
CAGbutter&margarine 3.0% 17.7% 9.3% 25.4% 1.1% 13.1% (9) 3.3% 18.8% 18.1% 6.7% 3
Bakedgoodsfrozen 24.6% 7.2% 28.6% 14.5% 6.5% (51) 2.5% 42.5% 20.5% 16% 952
CAGbakedgoodsfrozen 2.8% 35.4% 12.0% 49.1% 7.3% 11.2% (17) 6.6% 43.4% 5.5% 11.1% 3
Desserts/gels/syrups 25.8% 1.1% 23.7% 4.6% 6.1% (43) 1.8% 25.6% 7.4% 17% 1,030
CAGdesserts/gels/syrups 2.7% 31.4% 0.9% 33.4% 2.0% 1.1% (1) 0.3% 40.2% 36.6% 10.0% 3
Breakfastsfrozen 19.4% 0.1% 18.0% 3.4% 3.1% (14) 0.6% 25.8% 16.7% 22% 1,890
CAGbreakfastsfrozen 2.7% 14.5% 4.3% 19.0% 3.8% 5.1% (2) 0.9% 23.0% 8.0% 9.9% 2
Frozenpotatoes 26.8% 1.9% 22.0% 4.3% 2.8% (17) 0.8% 32.0% 23.2% 30% 2,285
CAGfrozenpotatoes 2.2% 25.0% 2.3% 26.8% 0.2% 8.7% (5) 2.5% 28.1% 1.9% 9.7% 2
CAGspaghetti/marinarasauce 1.4% 35.9% 7.7% 32.3% 5.4% 3.9% (2) 1.5% 35.8% 23.3% 7.3% 3
Catsup 30.5% 0.9% 31.2% 4.9% 14.1% (37) 5.2% 22.3% 18.5% 19% 4,518
CAGcatsup 1.3% 37.0% 1.3% 44.2% 5.6% 11.7% (5) 4.6% 37.3% 0.7% 15.0% 2
Cookingsauce 31.3% 6.8% 25.6% 5.9% 15.6% (13) 6.1% 17.5% 25.8% 7% 2,170
CAGcookingsauce 1.0% 38.8% 7.0% 28.2% 5.3% 8.9% (3) 3.6% 25.4% 1.0% 39.5% 1
CAGsnacksremaining 0.6% 10.3% 5.0% 8.3% 8.7% 8.8% (1) 1.2% 4.6% 17.2% Nottop3

MJN: Gross profit is bottled up.

MJNs portfolio, concentrated in Baby Food (98.2% of sales), appears extremely ripe for TBO. The category is concentrated with low
PL share (5%). This paves an easy path for the entire category to reconsider trade spend. Although percent of dollars sold on
promotion is positive (2.7%) and up another 0.5% (vs. category -0.3%) through the first nine months of 2015, gross profit lift is down
49.4% from 2011 to 2014 (vs. category -15.3%). MJN, a close third in the Baby Food category behind market leaders Abbott and
Nestle, but the market leader in infant formula, has a real opportunity to impact gross profit.
Exhibit 57: Opportunity for MJN to graduate from infancy with trade budget optimization
Promotional and market structure metrics across key MJN categories
1114%$ 1114Inc. Avg.%

MeadJohnson&Company sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalMJNcat.Avg 15.3% 1.8% 4.6% 8.4% 9.5% (101) 1.7% 9.1% 15.3% 5% 2,536 27.3%
TotalMJN 13.1% 2.0% 2.0% 14.3% 19.0% (50) 3.3% 8.4% 49.4% 5% 2,536 27.3%
Babyfood 15.3% 1.8% 4.6% 8.4% 9.5% (101) 1.7% 9.1% 15.3% 5% 2,536
MJNbabyfood 98.2% 14.0% 2.7% 2.0% 14.3% 19.0% (50) 3.3% 8.4% 49.4% 27.3% 3

HNZ: Hopefully the rest of the industry can Ketchup

HNZ has been leading the charge slashing trade spend and is seeing some promising results; though not uniformly. Gross margins
have ramped significantly since HNZs massive promotional cuts. We believe that these actions will set off a domino effect in the
industry, resulting in a significant cut in industry trade spend while boosting margins and profitability across companies. HNZ has
led the charge and plowed a path that others can follow. Apart from Mustard, which is a relatively new launch for HNZ, promotional
cuts occurred across the portfolio. Following the reduction in promo, HNZs distribution proved to be relatively resilient other than
in Frozen Prepared Foods, where HNZ has struggled for several years.
Exhibit 58: HNZ has made the first movenow others can follow
Promotional and market structure metrics across key HNZ categories
1114%$ 1114Inc. Avg.%

HJHeinzCompany sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalHNZcat.Avg 28.3% 3.5% 27.5% 6.5% 7.8% (701) 2.9% 30.6% 6.9% 21% 2,128 19.7%
TotalHNZ 28.4% 2.5% 28.9% 5.4% 7.2% (72) 2.9% 29.7% 8.8% 21% 2,128 19.7%
HNZvegetablesfrozen 25.8% 24.3% 5.2% 23.0% 4.9% 2.9% 5 0.7% 38.7% 48.2% 14.5% 2
HNZpreparedfoodsfrozen 21.1% 33.7% 5.5% 30.4% 7.3% 5.8% (14) 2.3% 32.3% 14.3% Nottop3
Catsup 30.5% 0.9% 31.2% 4.9% 14.1% (37) 5.2% 22.3% 18.5% 19% 4,518
HNZcatsup 15.0% 28.7% 1.2% 30.4% 2.6% 17.1% (28) 6.4% 16.2% 30.7% 62.7% 1
Pizza/snacksfrozen 36.6% 3.0% 33.2% 4.7% 8.3% (216) 3.5% 33.0% 6.8% 11% 1,602
HNZpizza/snacksfrozen 8.6% 24.3% 2.2% 23.0% 5.4% 10.2% (8) 3.1% 19.4% 9.3% Nottop3
HNZspaghetti/marinarasauce 7.4% 30.8% 2.2% 33.3% 10.8% 14.8% (13) 5.8% 27.6% 17.0% 12.8% 2
Cannedgravy 11.5% 21.6% 23.2% 30.1% 21.1% (20) 8.9% 28.0% 35.9% 17% 3,884
HNZcannedgravy 4.7% 9.2% 28.9% 56.3% 0.4% 17.6% (12) 8.6% 37.8% 19.5% 58.1% 1
HNZbreakfastfrozen 2.6% 34.1% 5.9% 23.7% 6.2% 12.8% (4) 5.0% 22.8% 14.4% Nottop3

GMCR: TBO opportunity may remain lukewarm as single-serve coffee competition heats up
GMCRs portfolio does not appear ripe for significant TBO, given its high exposure to the coffee category (72% of GMCR tracked
sales), which we view as having relatively low pricing power given higher fragmentation and sizeable private label share. GMCR has
a higher proportion of trade promo sales in coffee relative to its industries, where any promo percentage of sales are 43.3% vs. the
category average of 37.8%, likely a function of GMCRs exposure to single-serve coffee, where promo percentage tends to be higher
than that of ground coffee. Promo dollars have also picked up dramatically since 2011 relative to the category, growing 12.8% vs.
coffee category promo $ growth of 5.3%, which is consistent with the increasingly competitive dynamics within coffee and single-
serve coffee in particular.
Overall, GMCRs trade spend appears to be relatively inefficient based on below-average conversion to incremental sales. The
overall effect on gross profit dollars appears more balanced, however, as gross profit lift associated with GMCRs trade spend, at
-0.1%, is vastly better than the overall coffee category as a whole, in which gross profit dollars saw a 35.4% degradation. In addition,
higher trade spending and subsequent growth in the single-serve category over the past few years have also driven GMCR to
capture many partner brands within its system.
Given the dynamics that have emerged from the single-serve coffee category in 2015 (1) growing price competition among
manufacturers; (2) a more modest industry growth rate; and (3) growing partner brand and private label share at the expense of
Keurig-owned brand share we do not expect any meaningful change to GMCRs trade budget. In the near term, GMCR may need
to keep its trade and promotional spend elevated to combat share losses within the single-serve coffee category, though we find
GMCRs recent focus on trade spending effectiveness as a step in the right direction.
Exhibit 59: GMCR has higher rates of promo spend relative to its categories, with lower incremental conversion rates
Promotional and market structure metrics across key GMCR categories
1114%$ 1114Inc. Avg.%

KeurigGreenMountainInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalGMCRcat.Avg 37.2% 5.0% 29.0% 5.6% 16.4% (744) 7.7% 14.1% 28.8% 9.6% 1,193 0%
TotalGMCR 48.7% 17.0% 23.2% 5.0% 7.5% (45) 4.0% 21.5% 0.1% 9.6% 1,193 0%
Coffee 37.8% 5.3% 29.6% 5.8% 17.9% (889) 8.4% 12.1% 35.4% 10% 1,139
GMCRcoffee 72.0% 43.3% 12.8% 23.9% 5.9% 7.6% (44) 4.1% 21.7% 0.1% Nottop3
Tea 31.0% 3.0% 22.2% 2.6% 16.7% 290 4.8% 58.5% 121.1% 6% 953
GMCRtea 3.1% 41.4% 12.2% 10.0% 4.5% 4.7% (1) 2.2% 19.9% 6.7% Nottop3
Pkg'dmilks&modifiers 21.2% 4.2% 17.8% 6.3% 11.9% (146) 3.5% 16.2% 16.5% 15% 3,682
GMCRpkg'dmilks&modifiers 1.8% 33.9% 6.4% 17.0% 12.2% 6.8% (1) 3.0% 16.4% 2.2% Nottop3

WWAV: Limited TBO opportunity on the horizon

WWAV generally shows lower percentage of promotional spend vs. the category average but given negative returns from
promotional spending across the board. With the exception of the packaged milk and modifiers (creamers) category, WWAV
underspends the average in each category and has grown its promo spending less than the average as well. However, WWAV does
seem to be able to attain better incremental conversion from promotion, in particular in the Milk category and creamers categories.
A large part of this difference may stem from WWAVs exposure specifically to organic and plant based milk, which are less
commoditized and may yield better returns than conventional milk.
Additionally, despite the large profit degradation and somewhat concentrated industries, an opportunity for TBO seems unlikely
given the high private label share (51% in overall Milk and 32% overall WWAV category average) and WWAVs lower share rank
position (below top 3). Within Milk, WWAVs position in Almond milk and Soy milk does look stronger with WWAV holding 69% and
44% share respectively (vs. private label of 18% and 13%, respectively) but given relatively low HH penetration in these categories,
WWAV may be inclined to induce trial and awareness through promotions and discounting.
Exhibit 60: WWAV shows limited TBO opportunity on lower share rank, higher PL categories, and focus on growing HH penetration
Promotional and market structure metrics across key WWAV categories
1114%$ 1114Inc. Avg.%

TheWhitewaveFoodsCompany sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalWWAVcat.Avg 25.7% 3.1% 10.3% 7.9% 14.8% (2,671) 3.4% 7.8% 28.6% 32.1% 2,551 0.0%
TotalWWAV 22.5% 2.4% 13.0% 2.1% 12.0% (86) 3.0% 8.9% 21.5% 32.1% 2,551 0.0%
Milk 25.0% 8.7% 0.4% 10.4% 18.2% (603) 3.1% 4.0% 45.3% 51% 2,884
WWAVmilk 48.3% 20.4% 3.0% 10.2% 0.5% 15.6% (47) 3.4% 1.3% 36.1% Nottop3
WWAVpkg'dmilks&modifiers 25.8% 24.0% 0.2% 20.3% 5.0% 12.2% (29) 3.9% 15.7% 17.6% Nottop3
Freshproduce 34.4% 2.5% 23.9% 2.6% 6.3% (557) 2.2% 31.6% 12.0% 19% 749
WWAVfreshproduce 12.9% 28.1% 3.6% 17.7% 3.0% 5.7% (7) 1.7% 27.4% 10.4% Nottop3
Coffee 37.8% 5.3% 29.6% 5.8% 17.9% (889) 8.4% 12.1% 35.4% 10% 1,139
WWAVcoffee 2.6% 20.3% 2.5% 9.8% 2.3% 11.6% (2) 3.0% 7.4% 22.1% Nottop3
Juices&drinksrefrig 32.6% 0.5% 31.4% 3.0% 13.2% (308) 5.0% 24.5% 14.5% 10% 2,403
WWAVjuices&drinksrefrig 1.8% 28.1% 1.7% 13.0% 3.7% 8.6% (1) 2.4% 16.3% 7.3% Nottop3
Dessert/fruit/topfroz 23.7% 3.0% 22.2% 9.8% 25.1% (168) 9.0% 10.9% 54.8% 42% 2,099
WWAVdessert/fruit/topfroz 1.6% 18.6% 1.7% 1.0% 1.5% 6.6% (1) 1.1% 10.6% 6.5% Nottop3

PEP: Sweet and salty portfolio appears ripe for TBO but maintaining velocity is key
PEPs portfolio appears generally ripe for TBO, especially in carbonated beverages (28% of sales) and snacks (37% of sales). In
general, PEP has a slightly higher-than-category average trade spend, with any promo dollars disproportionately highest in
carbonated beverages, juices, and potato/tortilla chips, while promo to incremental conversion rates of 22.6% is slightly better than
category averages of 22%. Breaking down trends between carbonated beverages and snacks, we see opportunity for TBO in both. In
carbonated beverages, we see a 50.3% implied gross profit degradation for PEP despite a favorable industry structure. In snacks, we
point to PEPs over-indexing of trade spend (especially in potato and tortilla chips, which account for 21.9% of PEP sales mix) and
declining incremental conversion rates.
While the analysis here suggests that the opportunity for PEP could be significant, we do not envision a drastic cut to its trade spend
for a few reasons: (1) Snacks and beverages are both considered expandable categories, so maintaining strong in-store presence is
still important and (2) PEP operates with DSD models in both snacks and beverages. Lower trade promotions potentially leading to
slower velocity could have a meaningful de-leveraging effect, offsetting any near term cost benefit.
Exhibit 61: PEPs portfolio with concentrated market positions in CSDs and salty snacks is well positioned for TBO opportunities
Promotional and market structure metrics across key PEP categories
1114%$ 1114Inc. Avg.%

PepsiCoInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalPEPcat.Avg 42.6% 1.1% 22.0% 4.1% 14.5% (8,614) 7.8% 14.7% 23.5% 6.0% 3,346
TotalPEP 44.8% 1.6% 22.6% 4.2% 15.4% (2,862) 9.0% 14.3% 26.1% 44.1%
CarbonatedBeverages 45.6% 0.2% 22.4% 4.9% 23.1% (5,146) 14.6% 6.3% 51.9% 3% 2,025
PEPCarbonatedBeverages 27.7% 51.0% 0.8% 26.1% 4.5% 22.9% (1,526) 15.8% 8.5% 50.3% 26.6% 2
Juicesdrinksshelfstable 35.0% 0.3% 23.9% 3.8% 16.7% (1,057) 7.2% 12.6% 32.0% 7% 1,472
PEPJuicesdrinksshelfstable 13.3% 43.7% 4.9% 18.6% 6.1% 14.5% (321) 6.9% 12.1% 26.2% 33.4% 1
Snackspotatochips 47.4% 0.2% 21.7% 3.8% 10.4% (411) 5.8% 20.3% 9.3% 8% 3,792
PEPSnackspotatochips 12.2% 51.9% 0.8% 22.4% 3.6% 11.8% (325) 7.6% 20.2% 13.4% 59.7% 1
Snackstortillachips 52.0% 0.8% 17.7% 3.2% 4.8% (115) 2.6% 22.4% 8.6% 5% 5,965
PEPSnackstortillachips 9.7% 54.1% 1.2% 17.3% 3.3% 7.5% (150) 4.4% 19.9% 1.4% 76.8% 1
Juices&drinksref 32.6% 0.5% 31.4% 3.0% 13.2% (308) 5.0% 24.5% 14.5% 10% 2,403
PEPJuices&drinksref 5.7% 32.0% 3.0% 34.6% 3.9% 24.0% (213) 10.6% 13.6% 50.8% 31.9% 2
Snacks(remaining) 30.1% 2.0% 19.4% 4.3% 13.0% (173) 4.6% 14.8% 20.4% 4% 2,035
PEPSnacks(remaining) 4.3% 28.2% 2.0% 16.2% 3.1% 7.7% (35) 2.3% 14.9% 6.1% 40.8% 1
Snacks(puffedcheese) 42.0% 5.1% 18.6% 2.5% 10.0% (78) 4.7% 16.6% 10.9% 3% 7,649
PEPSnacks(puffedcheese) 4.1% 43.4% 7.0% 17.7% 2.9% 12.2% (87) 6.0% 13.7% 19.1% 87.3% 1
Cereal 34.1% 0.4% 34.0% 5.6% 6.6% (256) 2.5% 36.4% 15.3% 10% 2,064
PEPCereal 4.0% 32.7% 1.8% 36.2% 0.4% 2.3% (11) 0.8% 47.7% 39.8% Nottop3
BottledWater 36.1% 0.3% 20.2% 5.3% 18.3% (1,025) 8.0% 5.2% 40.2% 24% 1,851
PEPBottledWater 3.4% 30.5% 6.4% 24.1% 6.6% 27.5% (136) 11.3% 2.9% 65.9% 9.2% 3
Snacks(varietypacks) 52.0% 10.8% 10.6% 5.4% 0.8% (5) 0.4% 14.3% 12.2% 1% 9,111
PEPSnacks(varietypacks) 3.3% 53.0% 11.5% 10.6% 5.2% 0.7% (4) 0.4% 14.0% 12.1% 95.4% 1
Snacks(cornchips) 45.1% 10.1% 22.6% 2.3% 10.2% (34) 4.6% 20.4% 8.6% 3% 8,641
PEPSnacks(cornchips) 2.0% 47.1% 11.3% 21.4% 3.4% 11.3% (37) 5.3% 19.1% 12.8% 92.9% 1
Dip(canned) 41.2% 1.4% 5.5% 1.9% 1.8% (6) 0.8% 8.8% 4.2% 4% 6,000
PEPDip(canned) 1.7% 47.7% 2.0% 4.1% 1.9% 6.2% (18) 3.1% 2.5% 12.5% 77.1% 1

DPS: Some room for a Tea-BO opportunity, but will likely have to follow share leaders.
Comparing DPS metrics to its categories shows that DPS is fairly in line with the average overall, only notably outspending the
category on Tea and underspending on shelf-stable juices and non-carb. The non-carb data shows a fairly straightforward story:
DPS underspends the category, offers a significantly smaller discount on average, and faces much less negative gross profit
degradation. However, juices and Tea are not as clear. In the case of shelf stable juices, DPS cut back on spending by 3.5% through
2014 and still has incremental conversion from promotion in line with the average. However, the average discount in this category is
larger and DPS faces its most negative gross profit degradation in this category as well. The cut back on promotion spending is not
resulting in savings. On the flip side, DPS is outspending the category significantly in Tea, resulting in greater incremental
conversion (35.0% compared to category average of 22.2%). However, DPS still faces a large price discount and gross profit
degradation from this trade spending. This situation suggests there is some opportunity for TBO for DPS in Tea. Finally, considering
the competition and private label share across the categories suggests DPS may not be in the best position for TBO due to market
dynamics. While private label share is relatively low across the board, we note that market concentration is also low, and even more
importantly, DPS holds a share rank of 3 or lower in all categories, meaning it will likely have to follow the share leaders.
Exhibit 62: DPS will likely have to follow leaders

Promotional and market structure metrics across key DPS categories
1114%$ 1114Inc. Avg.%

DrPepperSnappleGroupInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalDPScat.Avg 42.5% 0.4% 22.4% 4.5% 19.9% (6,154) 12.1% 10.0% 39.0% 4.4% 1,862
TotalDPS 42.7% 0.4% 23.0% 2.0% 17.6% (734) 9.7% 12.5% 34.6% 4.4% 1,862 12.3%
DPSCarbonatedBeverages 75.4% 47.1% 0.9% 23.9% 2.2% 18.6% (623) 11.0% 13.3% 36.4% 15.9% 3
Juicesdrinksshelfstable 35.0% 0.3% 23.9% 3.8% 16.7% (1,057) 7.2% 12.6% 32.0% 7% 1,472
DPSJuicesdrinksshelfstable 11.6% 29.7% 3.5% 23.9% 1.6% 20.5% (70) 8.0% 7.2% 44.6% Nottop3
Tea 31.0% 3.0% 22.2% 2.6% 16.7% 290 4.8% 58.5% 121.1% 6% 953
DPSTea 5.2% 39.5% 2.4% 35.0% 0.0% 17.7% (34) 8.6% 23.2% 28.4% Nottop3
Softdrinks(noncarb) 27.1% 1.1% 17.1% 0.7% 26.9% (199) 9.4% 7.1% 66.0% 12% 1,610
DPSSoftdrinks(noncarb) 2.8% 16.0% 0.8% 14.3% 2.7% 10.9% (4) 2.1% 15.8% 14.1% 10.5% 3
Desserts/gels/syrups 25.8% 1.1% 23.7% 4.6% 6.1% (43) 1.8% 25.6% 7.4% 17% 1,030
DPSDesserts/gels/syrups 2.7% 25.7% 2.7% 24.2% 2.7% 3.6% (2) 1.0% 29.1% 18.1% Nottop3

KO: Price-pack architecture as another way of implementing TBO

KO represents an interesting case study on TBO as the company has been vocal about its strategy to shift towards more profitable
SKUs to enhance overall margin mix via its price-pack architecture strategy in North America, and to streamline promotional
spend. While we see evidence that some of the shift away from promo spend has been occurring, the analysis does suggest that KO
has ample runway for further optimization. KOs portfolio skews most heavily towards carbonated beverages (at 59.8% of KO sales),
and while KOs any promo dollars in CSDs is higher than the category average at 53.3% vs. 45.6%, total any promo dollar spend has
declined 0.3% since 2011, while promo dollar spend for the category increased +0.2%. Evidence that KO has put more emphasis on
price/mix and optimizing trade spend manifests itself in a lower implied discount percentage (at -12.9% vs. category average of -14.6%)
and a better promo to incremental conversion ratio within CSDs at 25.0% vs. the category average of 22.4%. That being said, current
implied gross profit degradation of -36.1% suggests further room to optimize spend, in a category we view as more amenable to
TBO given stronger pricing power (more rational dynamics, KO is number one in CSDs, and private label share is low). Outside of
CSDs, we also see opportunity for TBO in tea and juices given KOs outsized any promo dollar spend in juices and lower incremental
promo to conversion rates in teas. We do offer a similar caveat as with PEP, as the high-cost DSD model makes it tougher to
implement a significant cut in trade spend, and potentially risking a slowdown in velocity.
Exhibit 63: KOs price-pack architecture strategy is starting to manifest itself in the any promo data, but there is still ample runway
Promotional and market structure metrics across key KO categories
1114%$ 1114Inc. Avg.%

CocaColaCompany sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalKOcat.Avg 41.2% 0.1% 23.4% 4.6% 19.5% (7,245) 11.2% 10.5% 38.8% 7.3% 1,961
TotalKO 46.2% 1.3% 24.6% 3.5% 18.0% (1,907) 10.9% 12.8% 34.6% 7.3% 1,961 25.5%
KOCarbonatedBeverages 59.8% 53.3% 0.3% 25.0% 3.4% 18.5% (1,333) 12.9% 13.4% 36.1% 28.8% 1
BottledWater 36.1% 0.3% 20.2% 5.3% 18.3% (1,025) 8.0% 5.2% 40.2% 24% 1,851
KObottledwater 13.5% 34.0% 4.1% 20.7% 7.8% 27.1% (299) 12.8% 0.9% 64.4% 18.1% 2
Juices&DrinksRef 32.6% 0.5% 31.4% 3.0% 13.2% (308) 5.0% 24.5% 14.5% 10% 2,403
KOjuices&DrinksRef 12.4% 35.2% 0.7% 33.0% 3.3% 10.6% (88) 4.1% 27.1% 4.9% 34.8% 1
Juices&DrinksShelfStbl 35.0% 0.3% 23.9% 3.8% 16.7% (1,057) 7.2% 12.6% 32.0% 7% 1,472
KOjuices&DrinksShelfStbl 10.4% 44.8% 1.0% 26.9% 7.2% 18.3% (167) 9.3% 14.4% 35.1% 11.9% 2
Tea 31.0% 3.0% 22.2% 2.6% 16.7% 290 4.8% 58.5% 121.1% 6% 953
KOtea 2.7% 30.2% 1.7% 20.4% 9.9% 14.0% (21) 4.4% 14.0% 23.6% 8.7% 3

DF: Milk dynamics sour for TBO

DF shows a clear illustration of when market economics may outweigh the metrics we consider, with milk market dynamics
resulting in TBO being an unlikely opportunity despite what the metrics may say. At first glance, DF is doing a remarkable job with
trade spend, underspending the average in every category, and yet reaping benefits in significantly greater incremental conversion
on promotion. This difference is most notable in milk, with DF spending 15.8% on promo dollars vs. the average of 25.0%, and yet
attaining incremental conversion of 17.4%, much better than the average of 0.4%. Looking further, the gap narrows, with DF facing
price discounts in line with the average and overall gross profit degradation similar to the category as well. We believe these metrics
are somewhat consistent with logic about the milk category as a whole being heavily discounted, with milk often acting as the cost
leader for grocers to drive traffic to the store. Additionally, since milk is heavily commoditized, the change in price of commodity
costs is felt more strongly, and the numbers through 2014 may be skewed by the rise in milk prices, resulting in the lower gross
profits seen here. Furthermore, the branded aspect of DF and the benefit of it can be seen in the lower trade spend and higher profit
lift. A branded provider is able to compete on brand and not just promotion, and is able to also capture more pricing power at points
of cost inflection. This branded element can explain why DF does face slightly better gross profit than the category and a better
promo lift of +5.7% vs. the average of -4.0%. Moving beyond Milk, we do see a positive difference for DF when looking at ice cream,
a category in which DF is able to attain a positive gross profit lift of 26.2%, significantly outperforming the average of -13.5%. Finally,
to evaluate the overall opportunity for TBO we consider also the competitive dynamics in these categories, and note that the low to
moderate market concentration and very high private label share result in DF not being well suited in the market for TBO as a whole.
Exhibit 64: DF superficially screens well on incremental conversion, but fragmentation and 50+% private label share limits TBO
opportunity for the milk category
Promotional and market structure metrics across key DF categories
1114%$ 1114Inc. Avg.%

DeanFoodsInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalDFcat.Avg 26.6% 7.3% 5.0% 9.5% 17.1% (1,144) 3.4% 1.2% 38.5% 46.2% 2,666
TotalDF 18.5% 3.1% 19.4% 0.5% 16.3% (95) 2.5% 9.3% 32.2% 46.2% 2,666 11.1%
Milk 25.0% 8.7% 0.4% 10.4% 18.2% (603) 3.1% 4.0% 45.3% 51% 2,884
DFMilk 79.1% 15.8% 3.4% 17.4% 0.0% 18.4% (74) 2.6% 5.7% 40.2% 14.0% 1
IceCream 43.0% 0.6% 33.7% 6.4% 13.9% (430) 7.2% 28.8% 13.5% 22% 1,551
DFicecream 6.8% 38.7% 3.3% 45.9% 1.8% 6.1% (6) 2.4% 47.4% 26.2% Nottop3
CotChs/SourCream/Top 26.4% 0.7% 22.1% 6.8% 15.5% (146) 4.5% 17.9% 25.2% 36% 1,866
DFCotChs/SourCream/Top 5.5% 19.7% 1.5% 30.8% 3.7% 20.9% (10) 5.2% 14.7% 42.0% Nottop3
FrozenNovelties 29.7% 2.9% 24.8% 1.9% 17.8% (255) 6.2% 12.7% 34.6% 12% 1,683
DFfrozenNovelties 2.3% 24.2% 3.2% 31.8% 4.8% 8.6% (2) 2.6% 31.8% 4.9% Nottop3
Tea 31.0% 3.0% 22.2% 2.6% 16.7% 290 4.8% 58.5% 121.1% 6% 953
DFtea 1.8% 22.3% 0.1% 11.0% 3.4% 15.1% (3) 4.1% 6.1% 31.7% Nottop3

Danone: Current strategy and incentives make TBO unlikely

Danone promotes a similar amount to the overall category in its main US business yogurt (34% vs. 33%). Our analysis suggests that
the promotions boost sales by 23% and GP by 12% and therefore the company is unlikely to reduce promotions despite the category
being relatively concentrated and having a low PL share.
Furthermore, Danones targets are more focused on organic growth vs. profitability with two thirds of the long-term incentive
program centered around outperforming sales growth vs. one third on profitability. As a result, we believe the company is less likely
to make significant cuts to trade budgets.
Also, the yogurt category in the US remains underpenetrated relative to other DMs; yogurt consumption is about 40% mature
relative to the G7 average, although growth has stalled since mid-2014.
Exhibit 65: Current strategy and incentives make TBO unlikely for Danone
Promotional and market structure metrics across key Danone categories
1114%$ 1114Inc. Avg.%

DanoneGroup sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalDanonecat.Avg 32.9% 3.3% 18.8% 4.7% 4.8% (118) 1.6% 26.6% 12.3% 9.5% 2,074 32.9%
TotalDanone 28.1% 1.7% 18.6% 5.9% 4.2% (31) 1.3% 23.7% 11.5% 9.5% 2,074 32.9%
Yogurt 32.9% 3.3% 18.8% 4.7% 4.8% (118) 1.6% 26.6% 12.3% 9% 2,074
Danoneyogurt 89.9% 34.1% 6.8% 18.6% 5.9% 4.2% (31) 1.3% 23.7% 11.5% 32.9% 1

Unilever: TBO opportunities present in mayonnaise and frozen novelties

Unilevers promotions in food have come down between 2011 and 2014 (-1.5%) in contrast to the categories (+ 1.2%) which we
believe partly reflects the groups growth focus on personal care and strategy to run the food businesses for margins and cash.
Unilever also changed its management incentive KPI in 2014, replacing volume growth with free cash flow growth; therefore a
decrease in promotional activity could be linked to a de-emphasis on growth.
In our view, Unilevers biggest TBO opportunities come from frozen novelties (10%) and mayonnaise (8%) where the group has
market leading positions and promotes ahead of the category; Unilever also generates a lower GP uplift from promotions in these
categories (vs. the average), implying inefficient promotional spend which would also be motivation to ease activity.
Promotions are not accretive to gross profit in these categories because the incremental volume benefit is not sufficient to offset
price investment; in mayonnaise a 15% discount only yields a -21% uplift while in frozen novelties a 26% discount yields a -55%
uplift. In prepared foods, whilst Unilever promotes ahead of the category, it actually sees a GP uplift and therefore may not be
incentivised to pull back on promotional spend. This category also only represents 1.4% of sales so wouldnt have a material impact
on the groups behavior. Unilevers strategy in ice-cream and tea has been to premiumise, which is reflected by lower promotions
vs. the category average and a reduction in promotions between 2011 and 2014.
Exhibit 66: TBO opportunity present in mayonnaise and frozen novelties

Promotional and market structure metrics across key Unilever categories
1114%$ 1114Inc. Avg.%

%of AnyPromo Promo Promoto Conv. changein $spenton Implied Promo GP Company
UnileverGroup sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift PLshare HHI share Sharerank
TotalUnilevercat.Avg 34.8% 1.2% 27.4% 5.6% 9.6% (1,300) 4.2% 28.6% 2.6% 18% 1,958 23.9%
TotalUnilever 30.2% 0.1% 28.3% 4.2% 17.7% (405) 7.7% 17.2% 31.2% 18% 1,958 23.9%
Icecream 43.0% 0.6% 33.7% 6.4% 13.9% (430) 7.2% 28.8% 13.5% 22.3% 1,551
Unilevericecream 10.9% 39.4% 2.4% 34.8% 9.2% 23.2% (158) 12.6% 19.9% 45.8% 24.8% 1
Frozennovelties 29.7% 2.9% 24.8% 1.9% 17.8% (255) 6.2% 12.7% 34.6% 11.8% 1,683
Unileverfrozennovelties 10.2% 31.7% 3.3% 31.0% 1.1% 24.6% (104) 10.3% 7.6% 54.9% 25.0% 2
Butter&margarine 34.4% 0.7% 25.9% 9.7% 0.3% 4 0.1% 45.2% 46.2% 31% 1,958
Unileverbutter&margarine 9.5% 23.8% 1.1% 17.3% 2.1% 9.4% (22) 2.5% 17.1% 8.9% 22.0% 1
Mayonnaise 39.9% 5.8% 30.1% 3.3% 12.1% (78) 5.5% 25.2% 10.6% 11% 3,572
Unilevermayonnaise 8.0% 42.7% 6.9% 33.6% 0.1% 15.3% (62) 7.8% 24.4% 20.5% 55.5% 1
Tea 31.0% 3.0% 22.2% 2.6% 16.7% 290 4.8% 58.5% 121.1% 6% 953
Unilevertea 3.9% 22.0% 0.5% 18.0% 5.9% 20.8% (25) 6.5% 9.1% 44.5% Nottop3
Unileverpreparedfoodsdry 3.3% 38.2% 3.4% 28.3% 10.5% 4.0% (5) 1.6% 31.1% 18.8% Nottop3
Soup 23.9% 7.8% 27.4% 8.1% 18.4% (450) 7.7% 18.9% 32.7% 12% 2,257
Unileversoup 2.4% 20.8% 1.7% 19.2% 4.4% 18.9% (11) 4.2% 6.1% 41.4% Nottop3
Frozendessert/fruit/top 23.7% 3.0% 22.2% 9.8% 25.1% (168) 9.0% 10.9% 54.8% 42% 2,099
Unileverfrozendessert/fruit/top 1.4% 45.9% 2.1% 47.4% 4.0% 17.3% (17) 10.0% 34.5% 20.5% 9.3% 2

Nestle: TBO opportunities exist but unlikely to be implemented

Nestle tends to promote at a higher level than the categories in which it operates (Nestle 29% vs. 21% category average). This is not
surprising given that Nestles short-term targets are focused on organic growth, RIG, and operating profit as well as market share
and cash flow generation. Volume and share driven growth are therefore a greater focus than pricing or profit growth. Longer-term
incentives max out at 7% EPS growth as long as Nestle does not materially underperform the STOXX 50 Europe 50 index (ex
financials), again suggesting profit growth is not the greatest focus within the group.
Nestle on average promote above the average of its category exposures and we estimate that, overall, while the promotion adds
17% to dollar sales it reduces gross profit by about 7%. Overall PL share of Nestles categories is low at about 10% but Nestles
categories on average have a median level of fragmentation. Of the 12 categories for which we have data for Nestle we estimate
that gross profit is reduced by promotions in seven (56% of total Nestle US sales). However, promotions lift sales in all of the
categories.
Dry cat and dog food (15% of sales), bottled water (15%) and milk (9%) have the greatest opportunity to reduce promotions but we
believe the company is unlikely to do so given its focus on revenue and RIG growth as well as a high level of PL share in bottled
water and dry dog food.
Nestle management have indicated their desire to improve growth in certain US growth categories (e.g., frozen food). As such,
Nestle may be one of the manufacturers to seize promotional opportunities if other competitors make cuts with retailers in its
categories despite the opportunity to boost profits at the expense of sales with TBO.

Exhibit 67: For Nestle, TBO opportunities exist but unlikely to be implemented
Promotional and market structure metrics across key Nestle categories
1114%$ 1114Inc. Avg.%

NestleHoldingsInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalNestlecat.Avg 21.0% 1.3% 17.7% 4.0% 8.6% (3,370) 2.6% 15.6% 7.7% 10.2% 2,175 30.1%
TotalNestle 29.4% 1.7% 19.8% 3.0% 8.7% (923) 3.1% 17.0% 6.7% 10% 2,175 30.1%
BottledWater 36.1% 0.3% 20.2% 5.3% 18.3% (1,025) 8.0% 5.2% 40.2% 24% 1,851
NestleBottledWater 14.8% 37.1% 0.3% 22.4% 3.5% 15.4% (256) 6.7% 11.1% 29.3% 28.8% 1
Dogfooddry 21.5% 0.5% 11.0% 2.9% 17.9% (240) 4.6% 5.3% 45.4% 17% 2,917
Nestledogfooddry 9.4% 21.4% 0.9% 12.7% 1.5% 14.5% (83) 3.5% 0.9% 33.6% 44.6% 1
Nestlepkg'dmilks&modifiers 8.9% 19.8% 5.8% 21.0% 2.9% 16.0% (110) 4.8% 12.8% 29.9% 55.5% 1
Nestlepreparedfoodsfrozen 8.2% 38.0% 1.1% 30.9% 6.5% 7.9% (67) 3.2% 30.7% 6.3% 14.5% 2
Pizza/snacksfrozen 36.6% 3.0% 33.2% 4.7% 8.3% (216) 3.5% 33.0% 6.8% 11% 1,602
Nestlepizza/snacksfrozen 7.6% 43.5% 0.8% 36.0% 4.7% 12.3% (115) 5.9% 30.9% 7.1% 31.6% 1
Babyfood 15.3% 1.8% 4.6% 8.4% 9.5% (101) 1.7% 9.1% 15.3% 5% 2,536
Nestlebabyfood 6.8% 13.6% 2.4% 12.8% 1.6% 2.0% 5 0.3% 22.4% 28.1% 30.7% 1
Catfoodwet 19.4% 2.9% 26.8% 1.1% 3.1% (13) 0.7% 29.1% 19.5% 6% 6,222
Nestlecatfoodwet 5.9% 20.6% 3.2% 22.8% 3.5% 4.3% (15) 1.0% 25.9% 13.2% 77.9% 1
Catfooddry 17.9% 1.6% 19.4% 0.8% 9.9% (46) 2.0% 13.4% 13.2% 9% 3,803
Nestlecatfooddry 5.1% 18.5% 0.4% 16.8% 6.3% 14.3% (38) 2.9% 8.2% 28.5% 55.5% 1
Candy 34.8% 2.3% 30.2% 8.0% 5.8% (533) 2.6% 36.6% 17.7% 4% 1,904
Nestlecandy 4.7% 30.3% 7.5% 42.9% 3.5% 2.1% (11) 0.9% 52.4% 44.8% Nottop3
Frozennovelties 29.7% 2.9% 24.8% 1.9% 17.8% (255) 6.2% 12.7% 34.6% 12% 1,683
Nestlefrozennovelties 4.5% 31.3% 2.5% 18.3% 4.3% 19.5% (82) 7.2% 7.2% 42.3% 27.8% 1
Icecream 43.0% 0.6% 33.7% 6.4% 13.9% (430) 7.2% 28.8% 13.5% 22% 1,551
Nestleicecream 4.1% 44.5% 4.1% 36.4% 7.1% 21.5% (134) 12.9% 23.8% 39.2% 17.8% 2
Sandwichesdeli 17.1% 3.8% 17.8% 9.1% 9.3% (61) 2.0% 18.7% 7.5% 30% 1,784
Nestlesandwichesdeli 3.4% 31.4% 6.0% 23.4% 6.4% 4.9% (17) 2.0% 25.0% 10.5% 27.8% 1

HRL: Limited opportunity for Hormel to trim fat.

We see comparatively less room for HRL to cut TBO given fairly in-line promotional activity in key categories, while areas where it
has higher-than-average spending (Peanut Butter) have actually generated positive GP lift. HRLs spend in the Fresh Meat category
is largely in support of its Jennie-O Turkey Store products, which is a comparatively niche product against the majority of a category
comprising tray pack beef, pork, and chicken. As with TSN, cuts in trade spend in the packaged meats category by KHC could
present an opportunity.
Exhibit 68: Areas of heavy promotional spend have generated GP lift; we see limited TBO rationalization opportunity
Promotional and market structure metrics across key Hormel categories
1114%$ 1114Inc. Avg.%

%of AnyPromo Promo Promoto Conv. changein $spenton Implied Promo GP Company
HormelFoodsCorporation sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift PLshare HHI share Sharerank
TotalHormelcat.Avg 29.5% 0.6% 24.7% 6.2% 12.3% (1,353) 4.1% 22.3% 9.3% 20% 1,335
TotalHormel 30.2% 0.8% 20.7% 4.6% 6.8% (111) 2.3% 21.3% 0.4% 20% 1,335 5.5%
Packagedmeat 36.7% 0.7% 28.1% 6.9% 10.3% (744) 3.9% 28.9% 2.6% 15% 1,017
HRLpackagedmeat 30.1% 36.3% 2.4% 26.9% 9.8% 9.7% (50) 3.7% 30.1% 0.1% Nottop3
HRLpreparedfoodsrdyserve 19.2% 26.7% 0.8% 29.9% 2.6% 8.6% (23) 2.7% 28.6% 2.4% 13.7% 2
HRLremainingdeliitems 9.7% 30.8% 3.9% 40.2% 0.4% 10.4% (16) 3.7% 37.6% 3.8% 5.6% 2
Freshmeat 24.1% 3.6% 19.0% 7.6% 10.3% (134) 2.1% 24.5% 5.8% 25% 1,649
HRLfreshmeat 9.6% 27.4% 4.0% 23.5% 9.4% 9.4% (12) 2.8% 24.2% 3.3% 6.8% 3
Peanutbutter 30.1% 5.4% 29.0% 5.1% 7.9% (54) 2.8% 27.8% 3.9% 19% 2,881
HRLpeanutbutter 7.3% 37.2% 3.3% 35.5% 6.3% 7.7% (10) 3.0% 35.6% 11.1% 17.4% 2

TSN: Promotions already lightlittle room for improvement.

We see less potential for TSN to fine tune TBO given its low average reliance on promotional activity vs. key category averages.
With the exception of more-commoditized fresh meat, TSNs promotional activity has generally fallen in recent years while the
company has simultaneously experienced increases in GP across the portfolio. TSNs category leadership in frozen breakfast and
slightly higher-than-average promotional spend in that category could be one potential area of rationalization, though we see
limited impact in the near-term given strong GP gains in recent years despite flat promo spend. Within the higher-value packaged
meat category, possible cuts in trade spend from key competitor KHC (Oscar Meyer) could be a tailwind as TSN benefits from a
more rational competitive landscape.
Exhibit 69: Tyson Foods light promotional activity reliance leaves little potential for TBO rationalization
Promotional and market structure metrics across key Tyson categories
1114%$ 1114Inc. Avg.%

TysonFoodsInc. sales $/$ Change Incremental Change discount disc.(mn) priceinv. $lift profitlift share HHI share Sharerank
TotalTSNcat.Avg 30.3% 0.4% 24.6% 6.3% 7.6% (987) 2.4% 28.7% 6.0% 18.9% 1,255 18.9%
TotalTSN 24.8% 6.0% 26.4% 0.0% 8.0% (186) 2.3% 26.9% 2.9% 18.9% 1,255 18.9%
Packagedmeat 36.7% 0.7% 28.1% 6.9% 10.3% (744) 3.9% 28.9% 2.6% 15% 1,017
TSNpackagedmeat 37.3% 35.7% 4.8% 31.5% 1.7% 10.7% (143) 4.5% 29.4% 3.5% 16.1% 2
Freshmeat 24.1% 3.6% 19.0% 7.6% 10.3% (134) 2.1% 24.5% 5.8% 25% 1,649
TSNfreshmeat 21.6% 23.9% 9.4% 27.3% 6.9% 13.1% (27) 1.5% 21.3% 16.2% 28.1% 1
TSNpreparedfoodsfrozen 20.2% 26.2% 5.5% 20.8% 1.2% 1.4% (7) 0.4% 29.4% 25.0% 12.7% 3
TSNbreakfastfrozen 8.8% 23.1% 0.0% 14.3% 3.1% 2.8% (5) 0.6% 20.0% 12.2% 35.3% 1
Unprepmeat/seafoodfrz 33.2% 2.3% 27.6% 6.0% 5.3% 97 1.6% 39.9% 57.4% 40% 1,742
TSNunprepmeat/seafoodfrz 4.9% 17.7% 13.9% 26.9% 3.6% 2.8% (2) 0.6% 34.0% 25.2% 6.1% 1
TSNremainingdeliitems 2.4% 15.3% 9.5% 30.1% 7.1% 6.5% (2) 1.1% 29.8% 9.9% Nottop3

A deeper dive into Retail companies

We assess the risk to food retailers from trade budget optimization by CPG companies utilizing five metrics to determine which
companies are most/least at risk. Our framework metrics include 1) private label penetration, 2) non-perishables exposure, 3) center
store volume growth, 4) market share within non-perishables, and 5) pricing strategy (EDLP vs. Hi-Low). As shown in Exhibit 70
below, we rank each of these metrics across our US-centric food retail coverage group and include pricing strategy as a half ranking
(EDLP) or zero (Hi-Low) given its binary nature.
Exhibit 70: EDLP, Perimeter focus, and private label win in our framework, though most of our coverage is better positioned than
smaller, private peers more dependent on trade spend to drive traffic
FrameworkComponents Ranking
Privatelabel% Nonperishables 4yrtrailingAvg. MarketShare EDLPor Private Mkt HiLow Total
DryGrocery %TotalSales* CenterStoreGrowth Nonperishables HiLow Label Perishable Volume Share Rank
COST 25.0% 47.8% 5.4% 4.8% EDLP 8 9 7 10 6 40
TGT 21.0% 36.7% 2.5% 2.7% EDLP 6 10 4 9 6 35
DLTR 34.1% 62.9% 9.9% 1.2% EDLP 11 3 8 6 6 34
WFM 18.0% 33.2% 11.5% 0.5% EDLP 2 12 10 4 6 34
WMT 8.0% 50.2% 3.5% 14.4% EDLP 1 7 5 12 6 31
KR 25.5% 60.7% 4.6% 5.4% HiLow 9 4 6 11 0 30
DG 24.0% 75.7% 10.8% 1.4% EDLP 7 1 9 7 6 30
AHLD 37.6% 59.1% 1.6% 1.5% HiLow 12 5 2 8 0 27
TFM 19.0% 34.5% 13.7% 0.1% HiLow 3 11 11 1 0 26
SFM 19.0% 49.2% 21.4% 0.1% HiLow 3 8 12 2 0 25
DELH 27.6% 53.7% 1.9% 1.0% HiLow 10 6 3 5 0 24
SVU 20.0% 63.0% 1.4% 0.3% HiLow 5 2 1 3 0 11
*ExFuel
Source: Company data, Goldman Sachs Global Investment Research.
Costco (COST): COST has been the most nimble of the big-box discount retailers in tilting its food business toward fresh and
perishable categories, reflecting its alignment with progressive higher-income consumers and aggressive efforts to stay on-trend.
Moreover, it has developed a sizable and credible private label offering that has given it substantial buying power across the
franchise. COST has been willing to hold its own in disputes with vendors, at one point walking away from Apple at a time when
other mass players could not get their hands on AAPL product, and more recently jettisoning its relationship with American Express.
Given its willingness to take steadfast stances, its ongoing unit and market share growth, and its transparent commitment to
running lean and buying lean, we see COST as well-positioned to toe the line in vendor negotiations and to withstand pressure from
vendors on pricing.

Dollar stores (Dollar Tree, Dollar General): EDLP strategies should help both dollar stores withstand potential cuts in trade spend
better than Hi-Low peers given less reliance on coupon/promotions to drive traffic. Dollar Trees higher private label mix (34%)
should also mitigate trade spend cuts, particularly in the Dollar Tree segment where private label is 40% of sales and discretionary
represents 50% of sales. While non-perishables do represent a large percentage of the mix for dollar stores, both companies are
driving positive volume in these categories, growing stores and represent significant players in terms of market share which should
help drive greater bargaining power with CPG companies.
Kroger (KR): While Krogers Hi-Low pricing strategy leaves it exposed to cuts in trade spend we believe it is better positioned to
withstand potential cuts, relative to other traditional supermarkets, based on the following mitigating factors: 1) Resonating private
label KR has a strong corporate brand portfolio which would be immune to trade spend cuts and provide better bargaining power
where national brands can be displaced; 2) Focus on fresh while non-perishables still represent nearly 61% of sales, KR has been
intensifying its efforts to grow the fresh business and shifting away from slower growth center-store categories; 3) Promotional
effectiveness and market share KR is driving positive volume growth in center store categories given its use of data analytics and
KR owns a significant market share in these categories, which could give it more bargaining power with CPG companies.
Specialty grocers (Whole Foods Market, Sprouts Farmers Market, Fresh Market): Relative to traditional supermarkets, we
believe specialty grocers are generally less exposed to cuts in trade spend. Specifically, perishables represent a majority of sales at
WFM (67%), TFM (66%), and SFM (51%) while trade spend is less relevant on the dry grocery side of the business given lower
exposure to large CPG companies coupled with private label programs and less reliance on couponing/promotions. Cuts in trade
spend could actually make specialty grocers more competitive on price if traditional peers must raise prices to compensate for trade
budget cuts.
Supervalu (SVU): Supervalus Retail Food segment will be the most exposed to cuts in trade spend while the Save-A-Lot (60%
private label) and wholesale businesses will be less affected. For context, Retail Food represents 27% and 37% of consolidated sales
and EBITDA, respectively. Retail Food relies on a Hi-Low pricing strategy, 63% of sales represent non-perishables and volume
growth in center store has been muted at best, leaving the segment at risk to cuts in trade spend budgets which are used to help
drive traffic. In addition, SVUs private label program is weaker than larger traditional peers and efforts to drive a greater focus in
fresh are still in early stages. Furthermore, market share is small relative to peers, which likely translates to less bargaining power
with CPG companies.
Target (TGT): TGT's food strategy is in a state of flux, as it works to reposition food, reorienting its offering away from center store
and toward a natural/organic focus. While its sales could suffer in the near-term, over time it is tilting away from center-store CPG,
in favor of a focus on "signature categories:" style, baby, kids, and wellness. Its EDLP posture also makes it less dependent on
vendor funding.
Wal-Mart (WMT): WMT is toughest positioned among the big-box discounters. In fairness, its scale gets it meaningful negotiating
leverage. And, it has historically operated not only with an EDLP pricing stance, but with a desire to simplify deals with "dead net
pricing," minimizing incentives and subsidies in favor of a dependable (low) cost that would enable it to price aggressively at the
point of sale, with confidence about sustainability. That said, it emergence as the nations largest grocer has rendered it highly
dependent on center store CPG vendors, and its stalling growth has made those same vendors a bit more reluctant to succumb to
WMT's demands, based on our conversations with the supplier community. Interestingly, there have been extensive press reports
suggesting that as WMT has chosen to ramp SG&A spending to improve in-store execution, it is seeking slotting fees and other
vendor subsidies, just as vendor dollars are beginning to dry up. We expect this to accelerate tensions between WMT and its
vendors, with vendors more likely to divert subsidies to more dynamic channels.

Disclosure Appendix
Reg AC
We, Jason English, Stephen Grambling, CFA, Matthew J. Fassler, Judy E. Hong, Mitch Collett, Rosie Edwards and Adam Samuelson, hereby certify that all of the views expressed in this report
accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report.
Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division.
Investment Profile
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returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage
universe.
The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:
Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI,
ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month
volatility adjusted for dividends.
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Jason English: America-Food: Packaged & Manufacturing, America-Household Products/Personal Care. Stephen Grambling, CFA: America- Off-the-Mall Broadline Retailers, America-On-the-Mall
Broadlines Retail, America-Retail Supermarkets. Matthew J. Fassler: America-Retail: Specialty Hardlines. Judy E. Hong: America-Beverages US, America-Tobacco US. Mitch Collett: Europe-Beverages,
Europe-Food. Rosie Edwards: Europe-Food, Europe-HPC & Tobacco. Adam Samuelson: America-Ag Processors, America-Fertilizers, America-Protein.
America- Off-the-Mall Broadline Retailers: Burlington Stores Inc., DAVIDsTEA Inc., Dollar General Corp., Dollar Tree Stores Inc., Five Below Inc., Kohl's Corp., Party City Holdco Inc., Ross Stores Inc.,
TJX Cos..
America-Ag Processors: Archer-Daniels-Midland, Bunge, Darling Ingredients Inc., Green Plains Inc., Ingredion Inc..
America-Beverages US: Boston Beer Co., Brown-Forman Corp., Coca-Cola Co., Coca-Cola Enterprises Inc., Constellation Brands, Cott Corp., Dean Foods Co., Dr Pepper Snapple Group, Keurig Green
Mountain Inc., Molson Coors Brewing Co., Monster Beverage Corp., PepsiCo Inc., WhiteWave Foods Co..
America-Fertilizers: Agrium Inc., Agrium Inc., CF Industries Holdings, CVR Partners, Intrepid Potash Inc., Mosaic Co., Potash Corp. of Saskatchewan Inc., Potash Corporation of Saskatchewan Inc..
America-Food: Packaged & Manufacturing: Amplify Snack Brands Inc., Campbell Soup Co., ConAgra Inc., General Mills Inc., Hershey Co., J. M. Smucker Co., Kellogg Co., Kraft Heinz Co., Mead
Johnson Nutrition Co., Mondelez International Inc., Pinnacle Foods Inc., Post Holdings.
America-Household Products/Personal Care: Church & Dwight Co., Clorox Co., Colgate-Palmolive Co., Edgewell Personal Care, Energizer Holdings Inc., Estee Lauder Cos. Inc., Freshpet Inc., Kimberly-
Clark Corp., Procter & Gamble Co..
America-On-the-Mall Broadlines Retail: J.C. Penney Co., Macy's Inc., Nordstrom Inc..
America-Protein: Hormel Foods Corp., Pilgrim's Pride Corp., Sanderson Farms Inc., Tyson Foods Inc..
America-Retail Supermarkets: Aramark Holdings, Casey's General Stores Inc., Fresh Market Inc., Kroger Co., Sprouts Farmers Market Inc., Sunoco LP, SUPERVALU Inc., United Natural Foods Inc.,
Whole Foods Market Inc..
America-Retail: Specialty Hardlines: Advance Auto Parts Inc., AutoZone Inc., Bed Bath & Beyond Inc., Best Buy Co., Cabela's Inc., CarMax Inc., Costco Wholesale, Dick's Sporting Goods, Genuine Parts
Co., GNC Holdings, Hibbett Sports Inc., Home Depot Inc., KAR Auction Services Inc., Lowe's Cos., Lumber Liquidators Holdings, Michaels Cos., O'Reilly Automotive Inc., Office Depot, Restoration

Hardware Holdings, Sportsman's Warehouse Holdings, Staples Inc., Target Corp., Tractor Supply Co., Ulta Salon Cosmetics & Fragrance Inc., Vitamin Shoppe Inc., Wal-Mart Stores Inc., Williams-
Sonoma Inc..
America-Tobacco US: Altria Group, Philip Morris International Inc., Reynolds American Inc..
Europe-Beverages: Anheuser-Busch InBev, Britvic Plc, C&C Group, Carlsberg, Coca-Cola HBC AG, Davide Campari, Diageo, Heineken, Pernod Ricard, Remy Cointreau, SABMiller.
Europe-Food: Agrana, Aryzta, Associated British Foods, Barry Callebaut, Chr Hansen, Dairy Crest, Danone, Kerry, Lindt & Sprungli, Nestle, Novozymes, Orkla ASA, Suedzucker AG, Tate & Lyle, Unilever,
Unilever Plc.
Europe-HPC & Tobacco: Beiersdorf, British American Tobacco, Henkel, Imperial Tobacco, L'Oreal, Ontex Group, Oriflame Holding, PZ Cussons, Reckitt Benckiser, SCA (Svenska Cellulosa), Swedish
Match.
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EQUITY RESEARCH | November 3, 2015

US Consumer Packaged Goods and Retail

Trade Budgets at a Tipping Point

Trade budgets funds funneled from Jason English

Goldman Sachs Global Investment Research 2

A large, and largely ineffective pot of money

A potential tipping point for TBO (trade budget optimization)

A benefit for Food & Beverage, but not unequivocal or even

Goldman Sachs Global Investment Research 3

A potential point of pain for Retail as Food gets fit

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A ghost of Nixons past the birth of trade budgets

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Retailermarkup 30% <Assumed

Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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The very large and very complicated retail income stream

VisibletoConsumer: VisibletoRetailer: VisibletoRetailInvestor:

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$mn's 2012 2013 2014 2015 CAGR $6.00 Consumersanchorto

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Trade budgets at a tipping point the catalysts for change

TBO tensions is building

0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

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as trade budget returns dwindle more deeply negative

Source: The Nielsen Company; Goldman Sachs Global Investment Research.

2011 2012 2013 2014 2015YTD

Source: The Nielsen Company; Goldman Sachs Global Investment Research.

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Source: The Nielsen Company; Goldman Sachs Global Investment Research.

Source: The Nielsen Company; Goldman Sachs Global Investment Research.

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Source: Nielsen Trade Promotional Landscape Analysis Database, 3Q2014

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Retailermarkup 30% 31.7% <assume30%base;solvefornopromotoholdretailGPCflat

ManufacturerGrossSales 319.4 295.0

PromoContrarevenue (54.3) If promo funds were eliminated...

ManufacturerNetSales 255.5 286.2

COGS (163.5) (155.0) <basecalculated;nopromoscenarioloweredonvolume2/3rdsvolumedecline(assume1/3rdfixed)

SG&A (51.4) (51.4) <basecalculated;assumenochangefornopromoscenario

EBIT 40.6 79.8 Nearly 2X increase in profit poool

Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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Retailers give less for more as they chase the trends

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Consequences of cuts likely to limit scale and scope of TBO

Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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Where negative returns and conducive market structure collide

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Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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Source: The Nielsen Company, Goldman Sachs Global Investment Research.

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Heinz case study validates framework

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