retailer report packaging

© 2006 Flexible Packaging Association

971 Corporate Blvd., Suite 403Linthicum, MD 21090

410-694-0800410-694-0900 fax

www.flexpack.org

Retail Driven Change: How and WhyRetailers Influence Packaging Decisions

A Flexible Packaging Association Report

Prepared for FPA by:

Strategic Analysis Inc. and

Packaging & Technology Integrated Solutions

Copyright © 2006 by the Flexible Packaging Association. All rights reserved. No part of this publication maybe reproduced in any form or by any means, electronic or mechanical, including photocopying, withoutpermission in writing from the Flexible Packaging Association. Statements of fact or opinion are made on theresponsibility of the author alone and do not imply an opinion or endorsement on the part of FPA, its officersor its membership. Address all questions or inquiries to the Flexible Packaging Association, 971 CorporateBoulevard, Suite 403, Linthicum, Maryland 21090, 410-694-0800.

TABLE OF CONTENTS EXECUTIVE SUMMARY .....................................................................................................1 INTRODUCTION .................................................................................................................3 Research and Resources............................................................................................. 3 Flexible Packaging Overview.................................................................................... 3 Exhibit 1. Flexible Packaging Market by Retail Area .............................................. 3 Exhibit 2. 2004 Retail Sales of Fresh Produce ......................................................... 4 Exhibit 3. PTIS Packaging Value Chain................................................................... 6

Purchase Decisions are Made in the Store................................................................. 6 Exhibit 4. Changing Advertising Effectiveness, 1995-2000 .................................... 7

THE CONSUMER PURCHASE DECISION ........................................................................9 First Moment of Truth ............................................................................................... 9 In-Store Marketing..................................................................................................... 11 Second Moment of Truth ........................................................................................... 11 Third Moment of Truth.............................................................................................. 13 Exhibit 5. Packaging Drives Consumer Moments of Truth...................................... 13

Shelf Impact and Package Design.............................................................................. 14 Point-of-Purchase Information................................................................................... 14 RETAIL CHANNELS ...........................................................................................................15 Exhibit 6. Retailer Overview .................................................................................... 15 Exhibit 7. 2004 Food Retailer Market Share by Channel........................................ 16 Exhibit 8. The Changing Face of Supermarkets ....................................................... 19 Exhibit 9. Topline Retail Channel Trends ................................................................ 20 CHANNEL TRENDS IMPACT RETAIL PACKAGING DECISIONS ...................................23 Exhibit 10. Channel Trends Impacting Retail Packaging Decisions ........................ 23

Exhibit 11. Household Shopping Trips..................................................................... 24 Exhibit 12. The Well Curve ...................................................................................... 25 Exhibit 13. New Formats Help Traditional Supermarkets Compete ........................ 26 Exhibit 14. New Formats Compete Against Traditional Supermarkets ................... 27

PACKAGING FOR THE RETAIL CHANNEL......................................................................29 Exhibit 15. Packaging Implications / News – Grocery............................................. 29

Exhibit 16. Packaging Implications / News – Drug Stores....................................... 30 Exhibit 17. Packaging Implications / News – Mass Merchandisers......................... 31 Exhibit 18. Packaging Implications / News – Club Stores ....................................... 33 Exhibit 19. Packaging Implications / News – Convenience Stores / Gas Stations... 34 Exhibit 20. Packaging Implications / News – Dollar Stores..................................... 35 Exhibit 21. Packaging Implications / News – e-Commerce ..................................... 36

NATURAL AND ORGANIC FOODS – GROWTH DRIVING RETAIL.................................37

Exhibit 22. Packaging Implications / News – Natural / Organic.............................. 38 Organic Demand Greater Than Supply...................................................................... 39

PRIVATE LABEL – RETAILER-CONTROLLED PACKAGING .........................................41 Exhibit 23. Private Label Share by Category............................................................ 43 Exhibit 24. Best Private Label Products by Retailer................................................. 45

MEGATRENDS: DRIVERS OF CHANGE AND THE IMPORTANCE OF PACKAGING....47 Exhibit 25. Consumer Impact on Retailer Packaging............................................... 49

INDUSTRY PARTICIPANTS’ ROLES.................................................................................51 Exhibit 26. Industry Participant Influence ................................................................ 51

Consumer Product Goods Company (CPG) .............................................................. 52 Packaging Manufacturers........................................................................................... 52 RETAILER DIRECT INFLUENCE IN PACKAGING ..................................................................53

Exhibit 27. Retailer Direct Influence ........................................................................ 53 Retailer Point-To-Point Handling -- Supply Chain and Display Efficiencies ........... 53

Consumers’ Influence on Retailers............................................................................ 55 Exhibit 28. Retailer Positioning and Consumer Preferences .................................... 56

Exhibit 29. Global Sourcing by Retailers ................................................................. 57 IMPACT ON FLEXIBLE PACKAGING ...............................................................................61

Exhibit 30. Trend Analysis in Flexible Packaging Applications.............................. 61 Exhibit 31. Blister Packaging ................................................................................... 62 Exhibit 32. Multipacks.............................................................................................. 63 Exhibit 33. Bundling -- Prepared Food..................................................................... 65 Exhibit 34. Bundling -- Club Pack............................................................................ 66 Exhibit 35. Pre-Packaged Meat................................................................................. 67 Exhibit 36. Produce................................................................................................... 68 Exhibit 37. Dairy....................................................................................................... 69 Exhibit 38. Freezer Section....................................................................................... 70 Exhibit 39. Essential Luxuries .................................................................................. 71 Exhibit 40. Shelf Stable Foods.................................................................................. 72 Exhibit 41. Health and Beauty/Pharmaceutical Packaging....................................... 73

Exhibit 42. Health and Beauty/ Convenience - Pharmaceutical Packaging ............. 74 Exhibit 43. Pet Food ................................................................................................. 75

Exhibit 44. Lawn and Garden .................................................................................. 76 Exhibit 45. Dollar Bins ............................................................................................. 77 Exhibit 46. Shelf Impact ........................................................................................... 78 Exhibit 47. Promotional Displays ............................................................................. 79 Exhibit 48. Supply Chain Efficiencies (RFID, etc.) ................................................. 81 Exhibit 49. Shipping and Display Efficiencies ......................................................... 82 SUMMARY: RETAILER IMPACT ON PACKAGING DECISIONS .....................................83 APPENDIX A: QUOTES.....................................................................................................85 APPENDIX B: REPORT PREPARATION..........................................................................87

EXECUTIVE SUMMARY The challenge for retailers today is growing their business after a decade of cost cutting and consolidation. The Flexible Packaging Association commissioned this market research report that examines drivers and dynamics in the retail marketplace and their impact on packaging decisions. Packaging is no longer just about cost. Rather, packaging is a key enabler and driver for the retailer. Successful retailers are looking for value-added packaging solutions that do not compromise performance.

Flexible packaging is currently a strong and positive aid to retailers. Based on key growth markets across the retail channel, retailers will utilize more and more flexible packaging to provide better shelf impact, as well as improved consumer and product performance.

The significant shifts in the retail environment, particularly in new store formats, have important implications for FPA members and their businesses. Retailers have come a long way in recognizing the power of packaging. The relationship between consumers, retailers, consumer packaged goods companies (CPGs), and packaging manufacturers remains dynamic.

The retailer has become the ultimate product marketer at the expense of the national brand owner’s position. Now, 80% of consumer purchase decisions are made in the store.1 Packaging is more important than ever, as more and more retailers understand the significance of shelf impact in selling products from the aisle.

Consumer lifestyle demands, individual preferences, demographics, and the desire for new products are major drivers that influence what consumers expect and will ultimately purchase. Particularly significant, lifestyle trends of health and wellness, convenience, and sustainability have driven impressive growth to fresh and organic retail channels, smaller, more convenient formats, and big changes in retailer thinking about packaging. The Wal-Mart decision to use biopolymers for fresh produce, despite the higher cost, surprised many. But this mass merchandiser is also trying to attract the more affluent consumers who are headed for Costco and Target by increasing their range of offerings, including more upscale and organic products.

Retailers have continued to increase their level of influence on packaging decisions. It’s

not just about cost – it’s about finding value-added solutions that attract consumers.

Due to their size and purchasing power, mass merchandisers and club stores have more influence than traditional grocery and drug stores when it comes to package development. But new ways that reflect collaboration rather than strict cost reduction are working. In April 2006, Wal-Mart

1 Six Seconds to Woo Consumers with Innovation, Donna Berry, March 24, 2005 , Dairy Business View, Ingredient Technology

Executive Summary 1

hosted a Packaging Fair in Bentonville, Arkansas, inviting 45 leading packaging suppliers from across the industry. The packaging companies were invited to meet with over 400 product vendors and begin individual discussions for ideas to consider changes to their packaging. Wal-Mart is helping to facilitate connections between packaging and product vendors that will lead to packaging that is more sustainable without compromising performance. Wal-Mart is not demanding immediate change from suppliers; they are asking them to consider possibilities that lead to a lighter environmental footprint. The message is to step outside current thinking and consider change in materials, formats, technology, or supply chain that can lead to better packaging solutions and present them for discussion in Bentonville.

A growing number of retailers understand and control Private Label Packaging –nearly one out of every four products purchased from a U.S. retail channel - mass merchandiser, drug chain, or supermarket - is a Private Label product, controlled by a retailer.2

In some product categories the Private Label market share exceeds 50%. While many Private Label products are in mature markets, retailers are adding premium product tiers, as well as creating new categories - particularly in fresh foods. Retailers and their design agencies manage package development and innovation here, as the CPG’s are in direct competition for sales and shelf space with the same retailers.

Retailers exert a growing influence on packaging that is increasing the complexity of CPG supply chain and packaging operations.

In order to remain fresh in the eyes of both consumers and retailers, CPG’s work with packaging manufacturers for the development of innovative packaging. Retailers request and require changes in package offerings, and CPG’s are approached regularly for new ideas. The CPG’s marketing/procurement group and consumer packaging team typically get involved in developing new initiatives, supported by design agencies. These teams generally understand what packaging options are available to them, but work collaboratively with packaging manufacturers for innovations in packaging technology. Packaging manufacturers provide the R&D and investment for packaging innovation as well as influence end-user consumption and retailer’s operational efficiency through packaging designs. With long-term investments in new materials, resins, manufacturing technology, and packaging systems for the end user, many suppliers have strong marketing groups that work interactively within the industry. Long-term relationships have fostered innovations through cooperative effort leading to packaging innovations that improve shelf life, functionality, convenience, shelf appearance - a whole range of possible features and benefits.

2 2005 Private Label Share by Channel, IRI CPG Year in Review.

2 Executive Summary

Source: FPA

INTRODUCTION Research and Resources This market research report on The Impact Retailers have on Packaging Decisions was expanded for the Flexible Packaging Association (FPA) by Packaging & Technology Integrated Solutions, (PTIS), LLC. PTIS is a leading packaging consultancy that has strong expertise across the value chain and works across retail channels. The report also includes sections from the Retail Driven Change: How and Why Retailers Influence Packaging Decisions research presented at the 2005 FPA Fall Executive Conference prepared by Strategic Analysis Institute (SAI). At the request of FPA, this report was amended in April 2006, to focus on the new role of retailers and their significant impact in driving packaging decisions that meet consumer needs and expectations. The objective of this report is to assist FPA members in understanding the policies and trends among retailers across channels and their impact on packaging decisions. Procedures and methodology are discussed in Appendix B: Report Preparation. The SAI research was conducted for the exclusive use of FPA members. Flexible Packaging Overview Flexible packaging has been an integral part of the retail growth reported across North America. FPA studies indicate that applications for food packaging represent over 75% of flexible packaging sold into the retail sector as shown. Continuing innovation within the industry has led to new formats, features, and materials that capture consumer attention across all retail channels.

Fresh produce is packaged under familiar brand names like Dole, Bird’s Eye, and Green Giant, as whole fruits and vegetables, ready to eat salads, cut-up fruits, and ready to cook items, now represent over $5 billion in retail sales annually. A new range of breathable, microwaveable, easy open, and cook-in materials have supported fresh produce sales and created new categories. The fresh perimeter including the deli, prepared foods, and bakery employ increasing amounts of flexible packaging to maintain freshness and merchandising appeal.

Exhibit 1. Flexible Packaging Market By Retail Area: $13.5 Billion

Exhibit 2. 2004 Retail Sales of Fresh Produce

Source: International Fresh-Cut Produce Ass’n.

3 Introduction 3

Meat and poultry case-ready items requiring barrier lidding films and thermoforms are strong, particularly in the ready-to-cook category. The center of the store includes stand-up pouches in many categories from soup to nuts. Snack foods, dry foods, sauces, and entrees are providing shelf impact with well-designed pouches that provide easy open and recloseable features. Retort pouches have almost replaced cans in the canned salmon and tuna category. Sparkling shrink labels have created excitement in the dairy case, snack food canister, and beverage categories. In the frozen food case, stand-up bags are merchandising frozen meal kits to good advantage, with many new entrants. The flexible packaging innovation leading to these many new products/categories has given retailers the means to differentiate and fuel retail growth. Situation Analysis The challenge for retailers today is finding ways to grow their business after a decade of cost-cutting and consolidation. Packaging is no longer just about cost. Rather, packaging is a key enabler and driver for the retailer. Successful retailers are looking for value-added packaging solutions that do not compromise performance. In recent years it was supply chain efficiency; now, it is growing the topline. In today's increasingly competitive environment, retailers understand that there is a heightened importance on accelerated growth and differentiation – with effective, innovative packaging as a competitive weapon. Retailers have come a long way in recognizing the power of packaging. The reason is that 80% of consumer purchase decisions are made in the store.3 With many similar products to choose from, shoppers are less loyal to a brand and more likely to choose from what is available on the shelf. Now that most purchase decisions are made at the point-of-sale, packaging is the key communicator for the product. This means that regardless of how products are advertised, brands are essentially being made or broken on the shelf, in the few seconds while a shopper decides. The relationship between consumers, retailers, consumer packaged goods companies (CPG’s) and packaging manufacturers remains dynamic. The retailer has become the ultimate product marketer at the expense of the CPG’s position. With powerful mass and regional retailers driving the supply chain, many package selections have become a retailer decision.

3 Six Seconds to Woo Consumers with Innovation, Donna Berry, March 24, 2005 , Dairy Business View, Ingredient Technology

4 Introduction

It is estimated that there are 1,000,000 SKU’s (Standard Stocking Units) available in the U.S. A CPG may offer over 50 SKU’s of a popular item, like Nabisco Oreo’s for example, but a retailer displays a fraction of this number. An average supermarket carries about 40,000 SKU’s.

Club stores carry an even smaller number. Costco, for example, carries only 4,000 SKU’s nationally. Costco’s 2005 sales topped $50 billion with 340 warehouse stores. These sales figures place it fourth among all retailers in the United States, with less than 0.4% of the SKU’s available. In this channel, packaging must be well understood and carefully selected to sell the product. The retailer is the key decision maker here, with strong results that support good choices. (Costco was named 2005 Retailer of Year by Mass Market Retailer.)4

Further, Private Label packaging controlled by retailers now represents over 25% of total food sales.5 There seems to be an amazing number of products sold under private label, with major chains offering up to four product tiers distinguished by retailer designated packaging. Designs range from very similar to national brands, basic generics, and traditional store brand, to premium labels. Private Label is one of the fastest growing retail areas, offering shoppers a wider range of product selection, while returning an average

15% to 25% more margin to retailers over national brands. Private labels can also be unique to a retail chain, strongly differentiating them from competitive offerings. Strong store brands like Whole Foods, Trader Joes, Wegman’s, and Publix, have fueled growth and built solid customer loyalty. Amidst the staggering number of choices, the consumer remains the ultimate decision maker. Consumption is driven by changing needs and wants, but most importantly, by consumer perception of value. Yet with all these products, an average family gets 80% to 85% of their needs from 150 SKU’s, often ignoring the thousands of items in that store. Retailers understand the importance of packaging that drives the consumer purchase decision. The traditional value chain has changed. It has become collaborative, with large retailers exerting strong influence over CPG’s and packaging manufacturers to achieve value added packaging solutions. PTIS has developed the Sustainable Packaging Value Chain Model shown in Exhibit 3. There is interest in packaging development across the value chain in all areas, each

4 massmarketretailers.com, April 14, 2006 5 2005 Private Label Share by Channel, IRI CPG Year in Review.

5 Introduction 5

contributing to value-added solutions. These working relationships support innovation initiatives as well as cost and productivity. There is more comprehensive thinking about retail packaging in all areas including trade associations, contract manufacturers, consultants, universities and design agencies. This new thinking leads to research by universities in areas like RFID, active polymers, time temperature applications, and more, extending the value of these developments for retail packaging. Growing awareness of retail packaging within government agencies can lead to better working relationships. Exhibit 3. PTIS Sustainable Packaging Value Chain

Retailers understand that the focus has to remain on value + benefits rather than cost. Cost driven initiatives no longer deliver the effective packaging retailers need to stay competitive. Mass merchandisers and club stores have important influence due to purchasing power and high volume of products. For example, more than 20% of goods produced by CPG’s and 18% of private labels is sold through Wal-Mart channels.6 Maintaining working relationships and communications across the value chain has never been more important in today’s competitive retail marketplace. Purchase Decisions are made in the Store In today’s competitive environment, retailers have taken control of the marketplace from national brand marketers. Inviting new retail destinations that differentiate grocery stores from discounters through upscale formats, fresh foods, private label, and natural/organic products appears to be resonating with consumers. Retail managers understand the value and benefits of packaging more than ever before. Many retailers are the decision makers for which packages will appear on shelves. Retailers decide the ratio of profitable store brands with national brands listed to their advantage. Consumers face more product choices than ever.


Disposal CONSUMERS

Retail Channels

Foodservice / Institutional

CPGs – Packagers/

Manufacturers

Contract Packagers /

Manufacturers / 3P Services

Converters

Equipment Suppliers

Material Suppliers

Universities Government Consultants

6 Introduction 6

Exhibit 4. Changing Advertising Effectiveness, 1995-2000 With nearly 80 percent of all consumer purchase decisions made in the store aisle at the point-of-purchase, product marketing and promotion have changed drastically. Retailer controlled in-store marketing is quickly replacing mass media channels. While effective marketing outside of the store may increase the chance of a consumer considering a particular brand while they are scanning the shelf, product selection is inherently tied to the package. The product under consideration by the shopper is the package. The marketer is depending on the package to communicate all the value and benefits to the consumer from its shelf position. Considerations that drive the purchase decision are understood in the consumer’s moment of truth.

Changes in TV Advertising Effectiveness:

National Networks vs. Cable Channels

In 1995, with major network advertising, it took only 3 TV commercials to reach 80% of 18-49-year-old women

In 2000, as hundreds of cable channels became available, it took 97 TV commercials to reach the same group

Source: Pakintell, 2005 IFPA

7 Introduction 7

8 Introduction

THE CONSUMER PURCHASE DECISION Leading retail marketers know success is about the real life buying experience and making the consumer connection. When the consumer recognizes a brand package from the aisle, puts it into the cart, and then purchases it – the marketer has achieved their objective. Understanding and influencing consumer in-store actions is the key to brand marketing strategies. In work at Procter & Gamble (P&G), the idea or concept of ‘Moment of Truth’ was refined to focus marketing energy into these critical moments of consumer decision making.7 The next step in the shopper’s value judgment occurs as the product is used in the household. The critical elements of this use experience are the Second Moment of Truth. For some leading experts, it is becoming increasingly important to consider a Third Moment of Truth, as this impacts initial trial as well as repeat purchase. PTIS believes this relationship between packaging and use experience leading to brand repurchase is essential in understanding the consumer shopping experience, and the retailers and CPG’s are recognizing the relevance like never before. First Moment of Truth A consumer spends only a few seconds looking down the shopping aisle at any product display before deciding what brand to put in the shopping cart. Understanding the first seconds when the customer first sees the product (which is actually the package) on the shelf is the First Moment of Truth (FMOT). Procter & Gamble coined a term for the in-store equivalent of the 30-second commercial: FMOT, or “first moment of truth. The FMOT is the amount of time it takes shoppers to make up their minds about a product — somewhere around six seconds. The retail store is where the 'moments of truth' occur in business. It's when a consumer surveys the store shelf and votes.”8 This concept is taken very seriously by P&G, who have established an entire team dedicated to improving the chance that the consumers buy a P&G brand. A corporate position, Director of First Moment of Truth, has been created. There is a 15-person FMOT department at P&G headquarters in Cincinnati as well as 50 FMOT leaders stationed around the world, who coordinate in-store displays and promotions. As part of FMOT, there is a commitment to using as few words as possible in its product messages, realizing the limit of information absorbed by busy shoppers in just six seconds. 7,8 Shelf Promotion: In a Shift, Marketers Beef Up Ad Spending Inside Stores, Emily Nelson and Sarah Ellison, The Wall Street Journal, Sept. 21, 2005 7,8 Shelf Promotion: In a Shift, Marketers Beef Up Ad Spending Inside Stores, Emily Nelson and Sarah Ellison, The Wall Street Journal, Sept. 21, 2005

First Moment of Truth is the Consumer Purchase Decision

9 The Consumer Purchase Decision 9

Recognition is the first step in product selection by the shopper. Shelf impact and package stopping power are critical in the FMOT. The package must be easily visible from the aisle. The difficulty of breaking through shelf clutter should not be underestimated. Only packages that effectively grab a consumer’s attention will be successful in the FMOT. Stores typically carry 15-30 SKU’s in a single category, all competing for shopper attention. Bright colors can attract attention or be distracting for a shopper trying to locate a preferred brand. The shopper’s eye quickly “sweeps” across the shelves, searching for the specific item. Shoppers generally look to the center of the display, reading from left to right, missing most of the packages on upper and lower shelves. On average, the capture or recognition rate is believed to be about 20 percent for all packages on the shelf as the customer walks through the aisle. Even when shoppers are focusing in a category, over one third of the brands displayed are usually ignored. 9 For quick recognition, the package must be optimized for viewing distance. Color and shape are the first things a shopper will notice, followed by a brand logo, graphics, and texture. A well-designed package quickly draws the shopper’s eye, and then must deliver the brand message clearly. To the consumer, the package is the product until the product is removed. Well-designed packages distinguish products from competition on the shelf in these examples. There is no doubt that these packages are easy to locate with colors and logo and that communicate product function and convenience, and the shopper easily connects to brand equity. To the consumer’s , the product on the shelf = product + packaging + brand equity + services. These concepts are inseparable in the consumer frame of reference when they are searching for a package on the shelves. The perceived product value is the basis for the purchase decision. Packaging effectiveness must not be viewed in isolation away from the retail environment. Competitive products surround the brand package, each fighting for consumer attention. Prices are clearly marked, and savvy shoppers quickly do the math. During that First Moment of Truth, in those few seconds where the consumer connection can be made, the package relays the product message as well as its value equation to the consumer. For consumers, it is not just about cost anymore. Value = product + benefits / retail price when compared to the other products on the shelf.

9 Documenting the Business Value Of New Packaging Innovations, Scott Young, Perception Research Services, Fort Lee New Jersey, Package Design, June 2005


In-Store Marketing P&G insight into the six second FMOT is helping to power a shift in the advertising business: the growth and increasing sophistication of in-store marketing. In response to the fragmentation of television and print ads, brands are promoted in store. Package design is linked from packaging concept to format to special shelf displays as well as in-store advertising. Digital shelf signage, interactive Point of Purchase displays, and in-store TV advertising like the Wal-Mart TV network are appearing across retail channels. For all the excitement, agencies and retailers face major challenges coordinating so many marketing pieces. Second Moment of Truth The Second Moment of Truth (SMOT) occurs when a consumer uses the product. Every product use experience is the opportunity to win consumers. Brand share is built on the trust earned when moments of truth are won. If the use experience does not live up to expectations, the consumer connection is broken and loyalty is lost.

Once purchased, different package features become significant. In the home, the need for package visibility is reduced, although consumers prefer packages with strong Shelf Impact that can be quickly identified on pantry shelves. Consumers appreciate and reward marketers that clearly identify packages with easily read labels. It seems this lesson is often relearned, losing sales. In the Second Moment of Truth, the product is actually used or

consumed by household members. In this consumer experience, the purchaser establishes product value. Does the product live up to the promise on the package? Does the food product taste good? Was it is easy to prepare? Does the purchaser believe the price was fair? Is the household satisfied with performance? All of these questions are still related to the package – is it convenient to use? Can it be opened easily? Are the directions clearly spelled out?

Second Moment of Truth is Consumer Use Experience


The decision to repurchase is made in this moment, and is not easily undone. The consumer sits in judgment as to whether the expected value was delivered – or not. With so many competitive choices, particularly in the center of the store, packaging can determine whether a product stays on the shelf or not.

When the retort pouch for tuna was introduced, many shoppers and marketers questioned the much higher price point, almost double the price of the can. Once purchasers tried the new package, the pouch quickly became the preferred product. Consumers saw the value of eliminating problems with opening small cans and sharp edges. They noticed better taste and texture, due to shorter processing times. The retort pouch was far more portable for work or school, easy to open and far less mess. The retort pouch easily become the category standard for tuna – with only basic generics remaining in the can format.

Package structures that provide functional benefits lead to an improved usage experience and customer satisfaction. Good packaging ultimately leads to stronger brand preference and loyalty. This is the essence of SMOT – only people who use the packaged product will experience the functional benefits. Consumers easily form associations with the usage experience, linking it in memory to package attributes recalled during the next shopping trip.

Third Moment of Truth The Third Moment of Truth (TMOT) occurs when the purchaser shops again and repeats the consideration process. It may be another store, or in a crowded aisle, busy with other shoppers. The package with strong Shelf Impact will create instant recognition and consumer connection. The use experience comes quickly to mind as well in those few seconds to drive package selection - or not. These few seconds as the shopper scans the shelves are where a package billboard visually cues the purchaser, causing the consumer to stop and consider the product. Stopping power completes the connection for repurchase. The packaging again is the brand messenger. The purchase selection is quick. Good package visibility leads to recognition and good usage association drives repurchase. Shelf Impact and billboard attributes are just as important as in the FMOT, particularly if the shopping trip is to a different location. Changing competitive offerings, new shelf position, special promotions, and other factors can influence perception of product value. The package must continue to clearly communicate product benefits to foster the value equation.


Winning these moments of truth requires that the package be the key enabler. Packaging gives visibility to the product. The package enables the product to be found as a busy shopper scans the aisles. Only the packaging can provide Shelf Impact – getting the consumer’s attention in those short seconds of FMOT. If they don’t see it, they won’t select it. The package has brand colors, logos, and iconic designs that enable quick recognition among competitive products. Packaging enables the first consumer connection in choosing a product.

Packaging enables all the brand and product benefits to be conveyed in the blink of an eye. In the store display, all the benefits are linked to the package that tells the product story. Convenience is cued to the consumer with features like zippers, reclosable spouts, easy to open caps. The product promises great flavor to be enjoyed – from the design graphics and photos. Freshness is cued from the package with transparent and foil materials, clear windows – evoking new and up-to-the–moment style. Consumer groups are fragmented, and retail executives need to understand the different groups and what is important to them. Consumers buy based on perceived value, not on price, where the benefits must be clearly communicated by the package. Retailers recognize that much of this comes back to understanding the context and the value of the package. The industry must consider the consumer behaviors in the purchase decision – the Three Moments of Truth can guide the priorities in package design for best impact. Effective packaging will be the consumer connection needed to win these Moments of Truth. Exhibit 5. Packaging Drives Consumer Moments of Truth

First Moment of Truth is Consumer Decision to Purchase Six Second Decision in the Store where Shelf Impact is Key

Second Moment of Truth is Consumer Use Experience Packaged product must deliver the Benefits to the Purchaser

Third Moment of Truth is the Repurchase Decision Package Stopping Power + Good Experience drive repurchase

Third Moment of Truth is the Decision to Repurchase


Shelf Impact and Package Design Packaging that works communicates clearly in each consumer moment of truth – product identity and functionality, as well as telling the consumer why this is the right choice. Shelf Impact refers to a package’s ability to break through competitive shelf clutter and assists the consumer in locating the package on the shelf. Stopping Power is the ability of the package to draw consumer attention to the package as the shopper moves down the shopping aisle. It is important to remember that what people see and miss in their few seconds at the shelf is primarily physiological (what draws their eye) rather than psychological (a conscious decision of what to look at). In other words, if a shopper comes to the shelf looking for a brand, he or she will most likely find it - but this may not happen until the brands with Shelf Impact have broken through label clutter and generated consideration. These brands will have created a sales opportunity, while less visually prominent brands will not. Because shelf visibility is primarily physiological rather than rational or considered, it is driven by visual contrast with surrounding products. Most often this contrast takes the form of color contrast, which speaks to the value of owning a color and creating a consistent brand block on shelf. A bright red package may stand out in a sea of black or white, yet also become recessive when surrounded by other brightly colored packages. Point-of-Purchase Information

Packaging and point-of-sale decisions can't be made in isolation, such as when marketers, designers, or consumers are viewing packaging on a conference room table or on a computer monitor. To make informed decisions, new concepts simply have to be viewed and tested within a shelf context to document the visual contrast and engagement that they create at retail. When a product like this is shown on an overhead TV monitor in a Wal-Mart store, it has a much better chance of standing out in memory than a traditional design.

While the network gives marketers another chance beyond the shelf to reach consumers, design must be visually memorable to work in this media, where continuous ads for a wide range of products are played in a loop. It is recommended that packaging decisions be part of a broader, integrated point-of-sale strategy involving shelving and merchandising support aimed at ensuring purchasing consideration.

Wal-Mart In-Store Network Changing traditional advertising Wal-Mart TV network is seen by 130 million shoppers a month, according to ratings data produced by Nielsen Media Research. Wal-Mart has created a new mass audience for marketers. Wal-Mart TV even sells advertising like TV networks, with rates comparable to cable channels.

The TV sets, which have sound, are located in parts of the store where people tend to gather, such as the deli and checkout aisles. Last year, 122 new products were launched on Wal-Mart TV, including goods from P&G, Unilever and Gillette.

- By Constance L. Hays, New York Times, Published: February 21, 2005


RETAIL CHANNELS With 53% of flexible packaging used for food packaging at retail, the changes in the type of retail channels strongly influence packaging decisions. The traditional grocery chains have declined as mass merchandisers and convenience formats expand into the food business. Exhibit 6. Retailer Overview

Food retailers today now include conventional supermarkets, superstores, supercenters, membership clubs, discounters, convenience stores, dot coms, and gas stations. With busy lifestyles, people are shopping where it is most convenient for them. Packaging opportunities have been created in every channel, as the target consumer has clear expectations about the shopping experience at each type of store.

Retail Channels 15

Exhibit 7. 2004 Food Retailer Market Share by Channel

From the Store Format Report, Willard Bishop Consulting, 2004 published 2005

Superstores account for the largest dollar share, 20.1%, within the traditional grocery

channel at approximately $163 billion dollars in annual sales. Supercenters continue to be the most dynamic force in food retailing. Domestic supercenter sales reached $104 billion in annual sales, representing just 2,300 stores. Wal-Mart opened 370 new units. Target assimilated the supercenter concept into its discount store division and has grown to 120 units in this channel.

Food/Drug Combos and Conventional Supermarkets deliver the second- and third-

largest sales to the channel at $114 billion and $100 billion, with dollar shares of 14.1% and 12.4%, respectively. The major chains have strengthened their position through merger and consolidation, fortifying themselves by claiming locations and adding outlets for their store brands. Supermarkets are getting smaller, with a niche focus on organic, gourmet ethnic, and specialty products.

16 Retail Channels

Fresh Format stores account for nearly 1% of dollars spent on grocery and consumables

in the U.S. in 2004. While that percentage is small in the overall store format landscape, it is an emerging trend that presents an opportunity for both traditional and non-traditional operators.

Non-Traditional Grocery: Non-traditional grocery now exceeds traditional grocery in total store count and sells nearly 32% of all grocery and consumable products in the U.S.

Supercenters continue to dominate the non-traditional channel with approximately $104 billion dollars in sales. Their growth is fueled by price advantages over traditional grocery retailers and aggressive increases in store openings and conversions. They also increased their trip frequency and market basket size in 2004, a benefit of the inclusion of grocery and consumable products to the mass format.

Mass Merchandise - This channel is blurring as more food items and Health and Beauty (HBA) are being added to the selection moving stores into supercenter classification. With 600 K-Mart stores gone, and transformation of several hundred Wal-Mart discount centers, the channel continues to decline.

Club stores, the next largest format, came in at $54.4 billion in sales for 2004. Costco leads this channel, targeting a more affluent consumer with premium items and service areas. Reported sales growth at Costco for 2005 was over 12%, with just 340 stores. Stronger differentiation at Sam’s and BJ’s Wholesale is expected as share competition increases among the top three.

Dollar stores offer a compelling business model. The small footprint fits where mass

players cannot easily go, the compact size offers convenience over big box formats, a low overhead/low cost formula keeps prices low, and high volume offsets low transaction size. From a supplier perspective, the channel is fast becoming a viable and high-growth sector that is taking consumers and market share away from competitive retail formats. The channel represents an increasing number of outlets to place products and more shoppers to see those products. One analyst says the concept is benefiting from the "curiosity factor.”

Drug Stores are growing aggressively, as Walgreen’s adds stores and increases product

selection in health and wellness to include foods and related items. CVS is poised for growth in California, Texas, and Florida, home to increasing numbers of target consumers. Rite Aid is also showing strength in this channel.

Retail Channels 17

The shifting landscape of grocery and consumables retailing is evident in the numbers.

In 2004, total dollar sales for the non-traditional channel equaled 68% of total sales of the three biggest traditional grocery formats combined. The three largest traditional grocery formats (Conventional, Superstore, and Food/Drug Combos) accounted for $376.4 billion in sales.

Convenience - The importance of convenience stores in grocery and consumables is

frequently underestimated. In 2004, convenience stores captured a 16% dollar share. This channel continues to reinvent itself, feeling the pressure of high oil prices, reduced in-store traffic from pay-at-pump technology, and changes in tobacco promotional programs. These smaller format stores are primarily designed to serve Stop & Go shoppers, but as the stores expand, so does their reach into traditional grocery markets. Fresh foods are featuring heavily in much of this growth. In Philadelphia, WaWa’s became the third largest grocery retailer last year.

Food Service will continue to grow in the U.S., as convenience options are important to busy consumers. Food Service packaging for retail is becoming more important with more in-store delis and take-out areas for prepared foods. While outside the scope of this study, food service packaging continues to develop rapidly on many fronts. Opportunities are increasing for flexible packaging, within the $500 billion food service industry.

18 Retail Channels

Exhibit 8. The Changing Face of Supermarkets

The supermarket is continuing to evolve to meet the needs and rising expectations of the new consumer. As newer stores are opened or remodeled, the impact is felt throughout all the retail channels. As smaller footprint and specialty stores are developed, busy shoppers are less inclined to visit the very large stores. Smaller, older locations for drug stores are being closed as larger combo stores are built near grocery stores. It is a continuing ripple effect as the newer retail formats are fine-tuning and attracting consumers.

The Changing Face of Supermarkets

According to the Food Marketing Institute (FMI):

Supermarkets are getting smaller – averaged 34,000 sq ft for 2004

Most new stores being built target a specific market such as gourmet foods, natural organic foods, or a growing ethnic group

The most popular features in new stores included deli departments, fresh seafood, floral/plant shops, prepared foods for take-out, ethnic foods, pharmacies, and in-store bakeries

The fastest-growing features in new stores last year were dollar-item aisles/departments and self-checkout lanes

Nearly one in five new stores featured specialized low-price/dollar-item sections versus 6% in 2002

Self-scanning checkout lanes were included in nearly one-third of new supermarket, almost double the 2002 figure of 17.5 percent

Value and convenience are crucial for products of the future. Need to try to place products in popular parts of the store and standardize where UPC code is placed.

Retail Channels 19

Exhibit 9. Topline Retail Channel Trends

Channel

Trend

Comments

Retail Grocery

More periphery and fresh. Adding more home meal replacement. HH shopping trips declining. Looking for unique reason for being. Consolidation will continue. Growing emphasis on convenience and freshness.

Drug

Women’s convenience store. Pharmacists don’t have much say in packaging. Expanding offerings at front-end. Purported new growth area. New Target prescription bottle is a hit.

Mass/Supercenter

20% of major CPG products go through Wal-Mart. One-stop shopping increasing. Value driven. Wal-Mart chain able to reach 100 million consumers / week. Mass is losing slightly, but supercenter growth over 10%

Club Stores

Continued but slower growth. Significant amount of major retail products go through this channel including Procter & Gamble, Kellogg’s, Kraft, etc. Branded, good design important. Have rigid specs on packaging.

Convenience and Gas Stations (C&G and C-Stores)

More new products, single serve, and convenience focus. Nearly every gas station has a store. Drugstores have also expanded to compete with C&G. Higher margins, easier price points – Not big $, but lots of outlets. Bubba Store

Home and Office Stores

Significant growth in Home Depot, DIY stores. Merchandising opportunities

Natural / Organic Whole Foods, Wild Oats, etc.

Growing 20% per year over 10 year period…2003-2004 organic food sales, yet household penetration down from 38%-30%? Focus on premium packaging.

20 Retail Channels

Dollar Discount Stores

Still growing, but at a slower rate in number of stores and penetration. Originally an outlet for overstocks and products that haven’t sold but CPG’s now produce products just for this channel. Reaches 2/3 of U.S. households once a month.

Food Service

Significant increase in take-out and sit--down restaurants. Takeout occasions have increased yearly since the 1980s. Back of store issues include labor reduction, space savings cleanliness / sanitation, speed of service. 200% labor turnover in QSR. Will grow 3X faster retail. New improved pacakaging focus and convenience.

Vending

More dedicated sports drinks (Gatorade®, Powerade®) and water vending…all about easy access, availability

e-Commerce

Dramatic year-over-growth but still a small percent of total retail. Amazon and e-Bay lead general merchandise. Grocery grew 40% in 2003, but still only 1% of retail food sales…2004, up 23.5% and now 1.9% of sales

QVC, Home Shopping, Delivery

P&G launches Swiffer Wetjet on QVC, and other companies use for strategic product launches.

Retail Channels 21

22 Retail Channels

CHANNEL TRENDS IMPACT RETAIL PACKAGING DECISIONS As retailers have developed new shopping destinations, retail marketers need differentiation in their product offerings. Store location, pricing, range of offering, store size, and layout are very important. Nothing can influence the shopper’s decision to purchase more than customized packaging. Products that are easy to locate, have a clear product message, are right sized for the category with good handling and easy open features attract target consumers. Bright graphics provide shelf impact and engage shoppers as they head down the aisle. Packaging delivers the right value message to make a retail destination stand apart.

Exhibit 10. Channel Trends Impacting Retail Packaging Decisions

As the number and choice of shopping destinations have changed, so have the shopping trips per household. People will choose a store before they choose a product, based on time available, urgency for purchase, and distance.

Major Channel Trends Impacting Retail Packaging Decisions

Grocers touting freshness – directing customers to fruit / vegetable aisles

- Want to differentiate from Wal-Mart – bakeries, fresh deli’s, home meal replacement options

Private Label Quality Increasing

Bigger competitive threat to CPG’s

Technology aids changing how consumers shop

- RFID

- Personal shopping assistants

- Online ordering

Portability / Convenience

Healthy Options / Portion Control

Channel Trends Impact Retail Packaging Decisions 23

Exhibit 11. Household Shopping Trips

Retail Channel

Household Shopping Trips - 2004

Mass Merchandise 16% drop since 2001, down from 24 trips per household(HH)

Supercenters Reached 27 trips per HH, up from 20 in 2001

Drug Average 15 trips per HH

Convenience & Gas Average 15 trips per HH

Club 10% Increase to 11 trips per HH in 2004

Dollar 15% Increase to 11 trips per HH in 2004

Grocery 8% drop to 69 trips per HH in 2004

Household shopping activity is flat in total, with average of 189 trips per year.

Grocery losing to value players, Dollar and Supercenters.

Dollar stores increased frequency and grew in penetration (>67%) with more consumers turning to these outlets for basic household items.

The biggest change in food retailing is the number of new places that are now selling and expanding food offerings. The majority of the largest global retailers are major players in food – with a wide range including discounters, grocery stores, discount grocery, and club stores. Many non-food retailers are adding food items. Growth continues at the largest retailers, who have added locations and new products.

24 Channel Trends Impact Retail Packaging Decisions

With the proliferation of food shopping destinations, conventional food retailers are facing this new reality. Shoppers no longer load up once a week at the local Safeway. They may head out to Wal-Mart for the “basics,” and then go upscale to Whole Foods or one of the Fresh Formats for specialty and gourmet items. The key word for consumers today is choice – an amazing number of products and locations to choose from. To successfully compete, the retailer must understand the consumer very well, offering the selection that will build loyalty, as well as build new business. The essential task is differentiation, with packaging playing a key role in this important task. Target has handled this challenge especially well, identified for basic value in many categories, but also providing new fashion designs, and exclusive, trendy household appliances and products.

Exhibit 12. The Well Curve


Exhibit 13. New Formats Help Traditional Supermarkets Compete

Supermarket Store Formats Changing

FRESH IS THE CONSUMER TREND. Supermarkets continue to call attention to their "fresh" perimeter departments, as shoppers tend to walk the perimeter and avoid the center aisles.

Why?

o Shoppers no longer have the time to walk up and down every aisle

o Supermarket shoppers are buying center-store items elsewhere, particularly as

alternative retail formats offer highly competitive prices on many similar goods

o Conventional supermarkets are highlighting and emphasizing their fresh perimeter departments as a key point of differentiation with competitors

Packaging needs to jump at a great opportunity for more smart displays.

Opportunity:

o Chance to differentiate from Wal-Mart with more “freshness” with better fruit

selection, bakeries, and a wide assortment of fresh meats that typically are not found in the mass merchandisers with groceries

o Also placing complimentary items in the perimeter to compensate for lost center aisle sales

Challenges:

o Other retail formats are also looking at ways to bring “fresher” items to their stores

o Supermarkets should not ignore the center area, but look for ways to counter other

retail formats that are taking their share

Look for products / packaging that can compliment “fresh” products; as a dual pack, or stand alone item (ex. Caramel dip cups located by apples). Work with retailers on center of store packaging and display opportunities


Exhibit 14. New Formats Compete Against Traditional Supermarkets

New Formats Compete Against Traditional Supermarkets

The future of supermarkets depends on how successful they are at re-inventing themselves and giving shoppers a compelling reason to shop

Additionally, supermarkets are seeing growth in the health / natural food areas

Willard Bishop Consulting also feels that we will see supermarkets pushing more

differentiation strategies from the mass merchandisers with less emphasis on products and prices

New format stores like Marsh in Fort Wayne, Indiana take a consumer

convenience approach – the bread is near the peanut butter and jelly

Supermarkets will look for packaging to play a part in differentiation – looking for packaging with more shelf presence and features. More shelf organizers for value and cost savings.


PACKAGING FOR THE RETAIL CHANNEL The net effect of these retail dynamics, as channels shift and change in the quest to build a loyal customer base, is a greater importance on packaging effective for the channel. Exhibit 15. Packaging Implications / News – Grocery

Trends: Grocery

Packaging Implication

Grocery stores touting “freshness” and directing consumers to fruit / vegetables aisles

Develop tie-ins / displays that work well in fresh sections – ex. salad dressings next to bagged salads. Windows, zippers, foil, and other materials and containers can signal freshness to consumers

Increased use of self checkouts Ensure its easy for consumer to find bar code – some won’t buy if they need interaction / help due to time constraints

Electronic Shopping Assistants / Technology aids

Need to make sure you are on shopper’s list – may be less likely to experiment with other products

Channel Blurring – stores encroaching on grocery stores

New handling / shipping / storage concerns – do non-traditional food stores know how to properly handle food items?

Private Label – high quality

Need to try and differentiate from private label, many which now have high quality products & packaging

Next steps for differentiation in the grocery sector are:

Value – adding products that save time (fish already seasoned, kabobs already skewered, variety of salad options) as well as Dollar Store type items.

Convenience – more one-stop options like a pharmacy, floral, health / beauty.

Extras – coin-counting machines, gift cards.

Diversity of options – more ethnic foods, wider produce selections, gourmet foods.

Home Meal Replacement (HMR) has become big business for grocery stores, and provided another way for them to differentiate from Wal-Mart.

Packaging for the Retail Channel 29

Sales of “dry” grocery items at grocery stores fell 8.3% from 2001-2005; deli sales have increased 22.1%.

Wegman’s Food Markets are expecting prepared meal sales to have tripled from 2001 – 2005.

Exhibit 16. Packaging Implications / News - Drug Stores

Trends: Drug Stores

Packaging Implications

New packaging features can help generate competitive advantage for drug stores

New Target pharmaceutical package helps them really stand out, while providing true consumer benefits – look for more drug stores to place an emphasis on “freshening up” traditional pharmaceutical packaging, including OTC packs

Convenience store, with larger beauty / health section

More focus on beauty / health packaging & convenient grab and go food items

Target gained a competitive advantage through packaging by touting its new pharmaceutical package that incorporates a number of features, including:

o Flat surface – for easier readability

o Colored Ring – different color for each family member to reduce confusion between family members

o Drug name at top and with color coding – easier for users to identify their prescription

o Integrated Patient Information Card – more details about the drug in an easy to access location on the bottle, rather than a paper pamphlet inside the carton

o Also backed up packaging with a large advertising campaign about package features

Look for other drug stores to seek ways to use packaging to create differentiation / competitive advantage. They do not want to lose customers to Target based on package features!

30 Packaging for the Retail Channel

According to a recent BusinessWeek article, Drug Store retailers are well positioned in the intermediate term. Five drugstore chains collectively account for 60% of this retail category - Walgreen, CVS, Rite-Aid, Eckerd, and Longs.

o As the American population continues to age, they will need more prescriptions to be filled. Prescriptions account for about 70% of drug store sales, and growing.

o Non-pharmaceutical sales are also growing in these stores, showing that consumers are increasingly happy with the service they receive in these outlets.

Use packaging focused on women target shoppers.

Longer term challenges include:

o Increased competition as other retail markets continue to add their own pharmacies as they see the customer draw and profitability from pharmaceutical sales

o More competition, lower margin payments from insurance carriers, and lower drug

o price inflation could all lead to lower profitability in the future

o Look for Drug Stores to increase their selection of health and beauty supplies, a growing area

o that supermarkets are trying to take over

o Increase in-and-out shopping convenience

Opportunity for makers of convenience food, health care, & personal care products to develop packaging tailored to drug stores such as small end aisle displays, small check out displays, etc.

Exhibit 17. Packaging Implications / News – Mass Merchandisers

Trends: Mass Merchandisers


Wal-Mart looking to go upscale Target = Trendy

More upscale packaging than traditionally required – fresher look in graphics and package.

Can displays be upgraded as well? Fewer brown box displays.

Successful companies compete with Wal-Mart by not competing on price

Can services be bundled with products? Can packaging move upscale and product not be as price sensitive?


Wal-Mart is starting to look for more affluent customers and upgrade its image so not to

cater solely to “budget conscious” shoppers. Affluent shoppers have more discretionary income and are less affected by rising fuel prices, which hurt Wal-Mart’s current customer base.

About 45% of Target’s sales are on discretionary items like sporting goods, apparel, electronics, and entertainment, to only 30% for Wal-Mart.

New changes include:

o New Marketing – advertising showing kids / young professionals in more hip / attractive clothing and gear

o Better Execution in Stores – more tidy stores & quicker checkouts

o Improved Store Design and Display – Try to make it easier for consumers to find merchandise, eliminate some of the end of aisle displays, which add clutter

o New Merchandise – look for more affluent opportunities like the George line of clothing, popular in the UK and originally designed for the retailer Asda (which Wal-Mart now owns)

o Committed to Value – Still maintaining focus on their core customer

Culture Change at Target: How Target Became Trendy

Power to Designers – previously, buyers made key design decisions, rather than designers themselves.

o 3 pronged growth model – trend right, customer focused, and design–driven

Target also believes that big market opportunities exist for companies that can bring Mass Customization to market or find luxury in everyday items (example, Whirlpool’s colorful washers & dryers) that combine beauty and functionality.

o Developers need to devote more thought to package design, not just functionality.

o Marketers need to stop taking lowest cost package option, and think of how packaging can enhance the product.

Target introduced Method cleaning products, sold only at Target. Results are impressive. The shapely containers were designed by Karim Rashid in 2002, and have clearly resonated with consumers. The product was designed to be totally biodegradeable and environmentally sound, as well as provide effective cleaning.

The bottle looks like a piece of sculpture more than a container for dish soap and looks great on kitchen counters. For use, lift the bottle, point, and squeeze.

A self-sealing valve releases the liquid, a nice solution for dispensing.


Target’s decision to offer Method cleaning products is based on distinctive packaging, environmental consideration – and a great product. It reinforces Target goals to become a clear shopper destination for trendy products.

Exhibit 18. Packaging Implications / News – Club Stores

Trends: Club Stores


Club Store shoppers are affluent and spending more money at club stores

Still want attractive packaging – not necessarily cheap, industrial look

Consumers expecting convenience – even though sizes are large

How can packaging be more consumer friendly? Can product be partitioned into smaller parts or print cooking instructions on primary packaging?

Balance size of product vs. expiration date – don’t want package so large that most consumers throw out a portion because product spoils before use

Club Stores are gaining more affluent customers – particularly Costco and Sam’s Club.

Most affluent shoppers still shop for personal items at Club Stores and spend about $148 / trip, versus $120 / trip for middle market shoppers.

Well-to-do shoppers also drawn by savings on big tickets items like flat panel televisions.

Affluent shoppers at club stores may not necessarily want “industrial” looking packaging. Adding better design can attract attention and increase sales.

While many say it's the value that keeps them coming back, more than half simply like stocking up on food.

Properly storing and preparing bulk foods is a big concern among these shoppers, with two out of three asking for advice.

Packaging that shrinks as product is consumed can be a huge benefit for food club shoppers – example: place cooking directions on primary packaging, not just secondary packaging.


Exhibit 19. Packaging Implications / News – Convenience Stores / Gas Stations

Trends: Convenience Stores / Gas Stations

Packaging Implication

More fresh & premium items

To showcase freshness (major barrier to non-snack foods at c-stores), need to let consumer see product – but also incorporate new features such as carry handles, include utensils, look for ways to reduce mess

Growing segment, especially for consumers on the go

Need to try and incorporate travel friendly features – cup holder convenience, one hand consumption, etc.

In an effort to appeal to more healthful / affluent consumers and shed its image for overcooked hot dogs, 7-Eleven is starting to roll out more healthy options for consumers, including:

o Formula 7 – The company’s own line of energy drinks and energy bars

o Cups of vegetable sticks, sushi (believe it or not), and wrapped chicken strip Caesar sandwiches

o Also more flavored coffee drinks

7-Eleven also announced that they would be launching in 2006, a new line of ‘Pick Smart’ products – fresh sandwiches and wraps that will have less than 10 grams of fat, and 440 calories each.

In order to make new products stand out and call attention to the fact they are fresh, packaging developers need to look for ways to grab consumers’ attention while still showing off product in clear packaging – brighter colors, innovative carry features, etc.

Circle K also recently launched line of pre-packaged salads and sandwich wraps.

In the convenience area, healthful and meal replacement options are a particular area of growth.

o Product categories that have shown particular growth are yogurt (drinkable and single-serve cups), granola bars, rice snack squares, and soups

Need new way of thinking for targeting convenience store consumers – need to think more “fresh,” portable, and highlight food product rather than hide it.

o Portability and portion control are primary drivers as well

o Portion control is a new packaging format that is just beginning to see benefits


Single-serve packaging, convenience features, fit in cup holders / water bottle holders, spill proof, one-hand consumption.

Exhibit 20. Packaging Implications / News – Dollar Stores

Trends: Dollar Stores


Growing market – but low margins Companies starting to look at marketing more toward dollar stores due to growth – need basic, no frills packaging.

Looking to add more food items since not discretionary items

Do dollar stores start to market their own Private Label brands? Do major manufacturers start to market more cost effective brands toward dollar stores?

May be an opportunity to try out trial size products / packages to get below the $1 price point

Dollar General is testing the concept of adding groceries in their new Dollar General Market stores, which are twice the size of a typical Dollar General Store.

o 30 stores are part of test, with an expansion of 700 stores planned in 2005

o Average consumer purchase in July 2005 was $8.77, up 12% from July 2004… but still very small compared to the $120 average bill per club store visit

With very small margins and spending per consumer visit, no frills packaging is required, but do not want to dilute brand equity by using cheap packaging.

A new study by Retail Forward says that the dollar store format will continue to grow over the next few years, but at a slower rate than seen recently.

o Dollar store sales were $31 billion in 1999, and $42 billion in 2004, but are expected to grow only 5.4% annually through 2009. One reason: high fuel prices are cutting into discretionary income for consumers shopping on a budget.

o Report believes that dollar stores will put more emphasis on food items in an effort to retain/ gain more customers, since food is not discretionary spending.

Look for more emphasis on food products in this area –stores may look to develop their own private labels.


Exhibit 21. Packaging Implications / News – e-Commerce

Trends: e-Commerce


Online grocery growing, but still very small percentage of overall market

For online ordering / customer delivery systems like Peapod, not much packaging impact. CPG’s could work with online retailers to try to get favorable positioning online, and potentially work on specific packs for online retailer. Could use packaging to give greater consumer confidence in freshness of produce.

For direct consumer shipment (bulk / case quantity direct to consumer), need to test for rough handling / potentially extreme temperature conditions and effect on product and consumer experience -- i.e., is case beat up, dirty looking when arrives at consumer?

Peapod, the online grocery service, is still growing at about 25% per year.

o New on-line customer interface has resulted in average order size growing from $100 to $145

o Reducing overhead through new customer interface, resulting in 33% fewer calls to customer service

o As of 2004, Peapod had approximately 150,000 active customers

o Currently operating in about a dozen markets

To date, market has been too small for CPG’s to devote much packaging resources to online grocery services, and online services have been too small to put much pressure on major CPG’s. There may be a new supplier opportunity here.

Online grocery sales of $2.4 billion in 2004 and expected to be $6.4 billion in 2008, a growth rate of 42%...but still only 1% of the total grocery market.

Trouble areas: Keeping costs down so delivery charge is not too high to justify using service, only works / appeals to consumers in large urban areas, and consumers do not like others picking out their produce.

One way to benefit from consumers’ fear of poor produce is to brand and package fruit / vegetables so they remain fresh. Rather than ordering peaches, consumers would order “Brand X Peaches,” knowing that the packaging would help deliver fresher produce. Maybe smart packaging or reusable packaging?


NATURAL AND ORGANIC FOODS – GROWTH DRIVING RETAIL It is clear that more Americans are intent not only on living healthier themselves, but on raising the next generation in a healthier way. As a result, the organic and natural foods sector has become an interesting mix of entrepreneurial leaders, legacy brands reinventing themselves to join the party with organic product lines, and emerging brands carving out a niche within the niche. The most prominent common denominator in determining success is a winning recipe of taste and trust. Consumers who purchase natural and organic foods are mindful of the foods they are eating and are feeding to their children. They trust the brands they are buying, and are relying on these brands to deliver taste and high quality. Building trust is essential in any organic and natural food brand strategy. Packaging plays an essential role in communicating that trust. Packaging is a key identifier in promotion of natural and organic products. Some forward thinking companies market natural, preservative-free cookies and snacks in barrier laminate pouches in a range of formats. Some will use Modified Atmospheres or oxygen absorbers to maintain freshness, but the package is matte finished to look like paper. Easy open and recloseable features are often included. The package is distinctive, with shelf life and product quality benefits while delivering a clear message of “natural and healthy” to interested consumers. Packaging guides consumers to products they perceive as better for them, by sharply contrasting with brighter packages that appeal to fun and convenience purchasers and clearly standing apart on the aisle shelf from the sweeter treats in bold and shiny formats. For retailers, developing new loyalties and appealing to changing consumers’ expectations, well defined packaging provides the roadmap for busy shoppers. A major challenge in marketing these products is the variability in certification and the widely used logos and terms. Many retail chains have developed their own identifiers for “better for you” products like Publix’ Green Wise and Loblaws’ “Blue Menu.” By using a very strong color and graphic across all the products in the store, consumers quickly recognize these products placed next to conventional and national brands. Organic association groups have indicated they believe retail private label in this category is the growth obstacle for their independent labels that are flourishing at specialty retailers like Wild Oats and Whole Foods.

Natural and Organic Foods- Growth Driving Retail 37

Retail packaging has been extremely valuable for retailers in this category – drawing in new consumers and delivering a clear powerful message. The opportunity for distinctive merchandising is recognized by retailers and used well to create profitable extensions. Natural and organic foods might cost consumers more money, and brand owners realize the importance of driving home the benefits. With the marked growth of this sector, specialized natural and organic foods retailers have emerged as a competitive market all their own. As the go-to locations for all of these brands, they are charged with building a brand that promotes the lifestyle. The Wild Oats retail chain was built, according to its website, "on the vision of enhancing the lives of our customers and our people with products and education that support health and well-being." In spite of the increased cost, Americans are flocking to these lifestyle retailers because they offer something for everyone. Consumers at Wild Oats are somewhere along the spectrum of health and wellness. For some, it’s the fresh prepared foods; for others, it's an organic diet, or somewhere in between. The emphasis is on freshness and high quality, strong service, and consumer information. Health and wellness seminars, cooking and nutrition classes are available. Environmental commitment is promoted, as well as community service. Exhibit 22. Packaging Implications / News – Natural / Organic

Trends: Natural/Organic


High prices / profit margins – affluent customers

Packaging needs to reflect healthy, but still attract attention – use of glass or clear bottles to show off product, or paper to give more natural look. Matte finish on flexible packaging can be used as well. Value equation is key.

More sustainable packaging options available

Organic / healthy stores present an excellent opportunity to align the product, package, and equity of a brand all together.

Natural / Organic like Whole Foods, Wild Oats, etc., are growing 20% per year over a 10 year period. 2003-2004 organic food sales show household penetration down from 38% to 30%. Supply issues are believed to be impeding growth in many regions.

38 Natural and Organic Foods- Growth Driving Retail

Organic Demand Greater Than Supply

According to The Natural Marketing Institute's 2005 Organic Consumer Trends Report, 30% of U.S. consumers use organic products.

Sales were up 18% in 2004, and one of the main issues impeding further growth may be a lack of available supply.

Recent study by Iowa State University showed that 40% of farmers are planning on increasing the acreage they allocate to organic farming.

Huge opportunity for growth – packaging often more simple, with a “wholesome” look. Glass is an important material due to clarity and barrier properties. Also more use of aseptic packaging. Movement towards biopolymers is beginning in Wild Oats and Wal-Mart.

Whole Foods differentiates itself from conventional grocery store with completely different shopping experience.

o Products you cannot find anywhere else

o Seating for dining

o Restaurant quality prepared meals

o High quality cheese / bread selection

o High prices will prevent runaway growth, but there are only 157 stores nationwide (as of July 2005)

o Squeezing traditional grocery chains on high end, while Wal-Mart competes at the lower price end

Higher priced products, higher margins – packaging needs to reflect consumer expectations of quality and taste.

Trader Joe’s has also built up a very loyal customer base, similar to Costco, focusing on retaining good employees who are happy, which then results in a more pleasant shopping experience for customers.

In his book about Trader Joe’s, Len Lewis lists some other initiatives Trader Joe’s offers to employees to foster retention.

o Leadership Development Program – empowers employees to make key decisions about store operations

o Average hourly wage of $21 / hour

o Health insurance and retirement benefits

o Shows employees a career path and opportunities for advancement

Natural and Organic Foods- Growth Driving Retail 39

From a packaging perspective, Trader Joe’s also looks for unique packaging like shaped cans, innovative glass packages, as well as simple labeling. They also focus on and deliver fresh in many ways.

Major opportunity for packagers and retailers to gain competitive advantage by using materials / displays perceived as “fresh.”

A 2005 report by the Hartman Group says that consumers go through 4 phases of adoption of organic foods, becoming more familiar with the term “organic” at each phase, and the quality of the products:

1. Gateway Products – dairy, soy, baby food – based mainly on avoiding hormones and pesticides in products

2. Child-focused / Low risk decisions – juices, cold cereals, snacks, pretzels

3. Convenience Products – pasta sauces, breads, hot tea, bulk foods

4. Core Consumers – Transitioned completely to organic style products – canned goods, personal care items, organic fabrics

Gateway products will allow company to build credibility, and get more trial.

The recent development of biopolymer plastic packaging products made from corn or sugar provides an extraordinary opportunity for consumer products groups to link organic food products with sustainable packaging material.

Polylactic Acid (PLA) is used to make clear trays, bottles, films, labels, resins, and even grocery bags.

o Naturally Iowa uses the tagline “We Milk the Cows and Grow the Bottles!” … A great tagline to merge product and packaging

o Wal-Mart will begin to substitute 114 million clear petroleum-based plastic clamshell containers with corn-based plastic packaging for cut fruit, herbs, strawberries, and Brussel sprouts

40 Natural and Organic Foods- Growth Driving Retail

PRIVATE LABEL – RETAILER CONTROLLED PACKAGING Packaging is playing a huge role in Private Label (PL) growth, providing retailers with means to differentiate their products from competitors.

Retailers understand and control Private Label Packaging – there is no doubt that almost 25% of the retail grocery and consumables sold in the U.S. are directly controlled by retailers.10 Retailers and their agencies manage package development and innovation here, as the CPG’s are in direct competition for sales and shelf space.

PL grew four times faster than branded CPG in all channels measured by Nielsen (52 wk., 4/19/03).

PL now competes in 75% of all categories measured by Nielsen.

PLis now the category leader in 25% of its categories (unit share).

PL is not just in conventional grocery, PL is growing in Mass/Superstores and Club.

Private Label is a complex industry that involves a host of marketing concepts. While many products are purchased frequently and represent mature markets, retailers are adding premium and luxury tiers, as well as creating new categories - particularly in fresh foods. Nearly one out of every four products purchased from a U.S. retail channel - mass merchandiser, drug chain, or supermarket - is a Private Label product. In some product categories, the Private Label market share exceeds 50% and the retailer is driving the segment. Private Label packaging is a huge driver for retailer growth. A 2003 Nielsen poll concluded that of U.S. consumers surveyed, 100% bought Private Label with the intention of future purchases. The industry's major dynamic is its complexity of detail, as evidenced by the vast number of stock keeping units (SKU’s). Product, package, graphic design, and size of orders are more variable in Private Label than for nationally advertised brands. Both private label manufacturers and CPG’s have increased the number of SKUs to provide more consumer choice and deflect competition. Recently, a growing number of retailers have adopted two- and three-tier store brands to differentiate choices. At the same time, some CPG’s are reducing SKUs to sharpen category management on crowded shelves. The competition for share is fierce. Retailers are struggling to maintain profitability as the landscape has shifted through the force of mass marketer growth and industry consolidation. Increased emphasis on lower prices for national brands has reduced tight margins even further. Private Label brands are viewed as an


Private Label- Retailer Controlled Packaging 41

important step to help retailers regain profitability. Margins may be 20% to 30% higher on store brands, a very attractive option. Many new organizations and supplier cooperatives have become prominent to service this growing business. According to PLMA (Private Label Manufacturers’ Association), American consumers view store brands like any other brand. In a nationwide Gallup study, 75% of consumers defined store brands as "brands" and ascribed to them the same degree of positive product qualities and characteristics - such as guarantee of satisfaction, packaging, value, taste, and performance - that they attribute to national brands. Moreover, more than 90% of all consumers polled were familiar with store brands, and 83% said that they purchase these products on a regular basis. Store brands are an integral part of the marketing strategies of many retailers. These private brands can make the store competitive in primary product categories as well as providing real differentiation. In today’s marketing battle, every retailer wants to become “the shopping destination.” Well-chosen store brands can build loyalty and be an important factor in the consumer’s choice of retail location. Today’s busy shoppers are looking for the retailer who best meets all of their needs – quickly. The true growth rate of Private Label should not be underestimated. In the past 10 years, the number of Private Label products has grown to a conservatively estimated 20% of products sold at retail. All indications are for continuing increases in category and product by retailers.

According to a 2004 article in Brand Packaging, retailers are no longer looking at Private Label items as cheap alternatives. They are using Private Labels to:

o Make their stores a destination – example: Costco and its Kirkland brand

o Market the store as a brand – example: Trader Joe’s (which claims to target the “overeducated and underpaid”) – 80% of the store is retailer branded products.

o Signal premium value – example: Target is using premium private label brands that cost nearly as much as national brands but are more premium in nature

Private label quality has increased, allowing consumers to have more confidence in buying private label products.

A new report released by ACNielsen, The Power of Private Label 2005, shows store brands are capturing a greater share of sales worldwide. Between 2003 and 2005, private label brands grew at a five percent rate compared to two percent for manufacturer brands.11

11 Retail Wire –Discussion By George Anderson Sept.28, 2005

42 Private Label- Retailer Controlled Packaging

Exhibit 23. Private Label Share by Category

Private Label Market Share

Product Area Private Label Share

Private Label Growth

1 Refrigerated Food 32% 9%

2 Paper, Plastic & Wraps (PPW) 31% 2%

3 Frozen Food 25% 3%

4 Pet Food 21% 11%

5 Shelf-Stable Food 19% 5%

6 Diapers & Feminine Hygiene 14% -1%

7 Health Care 14% 3%

8 Non-Alcoholic Beverages 12% 3%

9 Home Care 10% 2%

10 Snacks & Confectionery 9% 8%

11 Alcoholic Beverages 6% 3%

12 Personal Care 5% 3%

13 Cosmetics 2% 23%

14 Baby Food 2% 13% Strategically, retailers worldwide seem to be placing more and more of an emphasis on branding and marketing their private label wares to match the lifestyles and values of their shoppers. From the Tesco Healthy Living range of products to Loblaw's President's Choice expansion into organics and health-oriented lines, retailers are expanding their brands far beyond a singular focus on low price points. According to Jane Perrin, ACNielsen, “We are even seeing retailers leverage the equity of their private label brands outside of fast-moving consumer goods into areas such as personal finance, insurance and telecommunications.” The simple fact, supported by this research, is that consumers increasingly see private label as a viable and, in some cases, preferable alternative to manufacturer brands. Sixty-eight percent of consumers interviewed by

Source: ACNielsen, The Power of Private Label 2005


ACNielsen either slightly or strongly agreed with the statement: "Private Label brands are a good alternative to other brands."

There are many Private Label products on retail shelves:

o Publix has their private label brand on about 2,000 items

o Wal-Mart’s 1,650 private labels include Equate, Sam’s Choice, Great Value, and are growing to include a new range of organic products for adults and children

o The Food Lion brand has 2,600 items

o Harris Teeter offers over 3000 products under names such as Harris Teeter, Hunter Farms, Highland Crest and Premier Selection

o Over 7,500 Kroger private label items come with “try it, like it or get national brand free’’ guarantee

o Wegmans has over 5,000 private label SKU’s

o Loblaws, Canada, carries over 7,000 President’s Choice and other store brands, representing over 40% of product sales

o Top’s carries 6,000 – 7,000 private label items

o Albertsons stores average nearly 7,500 private label items

o Safeway stores carry close to 8,000 private label SKU’s

o Aldi’s carries over 90% private Label products in its U.S. stores

Many sources estimate the current penetration of private label at 20+%. All indications are that this number is increasing, particularly in health care, bottled drinks, beauty, vitamins, and a number of other areas. In the UK, store brands represent an estimated 38%. Most analysts suggest that 50% is the maximum level of private label that retailers would carry, as product mix with national brands is critical to keep customers. The marketplace is far too dynamic to reasonably suggest likely outcomes, but the battle will be fierce with profit differentials of 10% to 20% at stake for the retailer.

Many private label products are as good as, and sometimes even better than, branded products. Below are some of the top store-brand products the experts at Consumer Reports have tested in recent years. All were at least very good overall and are still being sold in the formulations their experts tested.


Exhibit 24. The Best Private Label Products, By Retailer

Cereal Wal-Mart, A&P, Kroger

Detergent Costco, ShopRite, Sears

Chocolate Ice cream Winn-Dixie

Peanut Butter Kroger, Wal-Mart, A&P

Frozen Pizza Kroger

Yogurt Stop & Shop, Wal-Mart

Paper Towel Costco

Private Label packaging is going upscale and becoming a brand in itself. It is a key enabler in the new upscale, and fresh format retailers across the country are positioning themselves in urban areas.

Retailers understand and control Private Label packaging – there is no doubt that almost 20% of the retail grocery and consumables sold in the U.S. are directly controlled by retailers. Retailers and their agencies manage package development and innovation here, as the CPG’s are in direct competition for sales and shelf space.

Source: Consumer Reports, August 2005 Issue

"I believe it's a wake-up call to the national brands. They need to take the products to the next level through innovations in products, packaging and presentation."

-Bruce Tominello at Tabletop Consulting says of Private Label products


MEGATRENDS: DRIVERS OF CHANGE AND THE IMPORTANCE OF PACKAGING The retail landscape has dramatically changed, driven by growth and consolidation, and it continues to reinvent itself to meet changing consumer needs and expectations. These trends impact and help shape products for new demographic directions in age, gender, lifestage, and income. Trends influence buying patterns in many significant ways.

Convenience: Busy parents/professionals welcome features that simplify living. Time saving products and 'quick fixes' are important to 82% of consumers. Prepared meal consumption is forecast to double in ten years, exceeding $40 billion by 2009, up from $29 billion in 1999, according to Datamonitor. Trend is to more fresh, increasing quality, and greater range of offering, including more ethnic products. Packaging must reflect new value equation and provide shelf impact as categories become crowded.

Health and Wellness: An overwhelming majority (90%) of U.S. consumers feel that improving health is important, and most important to the 40+ segment of the population. Confirming growing sales for food firms operating in the functional food domain, researchers claim that 64% of consumers actually took "steps" to improve their health in 2003-04. The health ‘megatrend' also continues to be a major driver towards preferences for all things natural and organic. Many U.S. retailers are developing new channels to feature these products from Food Lion (Bloom) to Giant Foods, following the impressive results achieved by Whole Foods, Inc. Quality appropriate packaging is key to draw these consumers.

Nutrition and Health Crossover: Strong opportunities for companies will also lie in the crossover trend between health and convenience (health on-the-go), an area that clearly bears high growth potential. Packaging is key to billboard and showcase key features.

Value: The value equation determines the purchase decision. Value is the fundamental that drives many repeat purchases. Consumers are smarter, having developed an expertise in considering the array of product choices available. Computer savvy consumers can easily comparison shop for almost any item through a range of internet sites like pricegrabber.com. Consumers search for quality features and benefits as well as the best deal where they shop.

Safety and Nutrition: Consumers demand assurance that foods are safe and healthful. Brand marketing of packaged produce by major companies like Dole and Birdseye is dominating in many areas. A decade ago, consumers believed only unwrapped products were “fresh” and demanded the right to touch and smell. Safety concerns and a new generation of shoppers depend on name brands for quality and reassurance. It’s all about the packaging here.

Taste and Sensory Experience: Consumers are looking for fresher, more flavorful foods as well as more intense experiences from products and are more willing to experiment. Datamonitor reported that in 2003-04, over 60% of consumers indulged in food and drinks that they had never tried before. Tapping into fascination with foreign cultures

Megatrends: Drivers of Change and the Importance of Packaging 47

and flavors cuts across age and income; expectations are high. Functional packaging is essential to guarantee the true taste experience, particularly oxygen barrier and absorber systems. Creating shelf impact with great shapes, features, and graphics is key to marketing these new products at retail.

Trading Up, Upscaling and Affordable Luxury: Reflecting opportunities in premium food products, lower income and mid-market consumers are increasingly seeking luxury on a budget, and are increasingly influenced by the availability of luxury items, thanks to mass customization in many cases. In recent years, the trend for 'accessible premium' brands has emerged, reducing the high entry barrier that the industry once maintained. This premium trend has been strongly adopted by retail Private Label brands. Leaders such as Costco and Target carry lower end and higher end store brand offerings. Packaging is essential to show the differentiating quality and lifestyle features.

Age and Consumerism: Younger consumers are constantly acquiring greater autonomous spending power and developing brand awareness and loyalty at a younger age. Young women are a big part of the group purchasing natural and organics, adopting healthier lifestyle regimens. Boomers and Matures respond to products that are aligned with the aspirational age of consumers, like a desire for younger appearance (“age defying” cosmetics are doing well). These consumers are healthier, more active, more vigorous, and influential than other group. They want Health + Convenience + Pleasure and will experiment with new products to achieve better results.

PTIS Retail Research: PTIS has conducted a series of retail audits across North America. These audits showed that a growing number of store managers understand Shelf Impact and are trying to provide a good assortment of what their customers want. Megatrends drive retailers to react or change. Lifestyle demands, individual preferences, demographics, and the desire for new products are all major drivers that influence what goods consumers purchase. In turn, retailers use various promotional and merchandising strategies to meet these needs and to draw consumers into their stores, as described below. In order to maintain profitability and meet the consumer expectations, retailers influence purchasing decisions through unique product offerings and promotional displays. The strongest example included private label and organic products discussed earlier, but consumer purchase decisions are influenced by multipacks and bundling, shoppable pallets, floor displays, and shelf popping advertising. Package display formats at retail will continue to drive consumer purchase.

48 Megatrends: Drivers of Change and the Importance of Packaging

Exhibit 25. Consumer Impact on Retailer Packaging To improve the overall profitability of the company, retailers also look at operational issues to promote efficiencies. Operational issues that impact a retailer’s bottom line include efficiencies in point-to-point handling, RFID and other tools to assist in tracking and inventory management, and global sourcing practices.

Megatrends: Drivers of Change and the Importance of Packaging 49

50 Megatrends: Drivers of Change and the Importance of Packaging

INDUSTRY PARTICIPANTS’ ROLES This report section describes the relationship/dynamics between consumers, retailers, consumer goods companies, and packaging manufacturers. Consumer is the ultimate decision maker and main driver of consumption based on needs, wants, and preferences. Retailers desire innovation and ”new news” to stay in the forefront of consumers’ minds. Through the power of purchasing, retailers have the final approval on packaging for graphics, image, and consistency of retailer message, and are exerting more influence on packaging size. Retailers may work directly with independent or contract manufacturers, but also through package design/ development houses at the retailers direction for private label brands. Another key area of retailer influence is packaging related to operations and shipping. Retailers are very motivated to be efficient and effective when it comes to this logistical issue, while still supporting their store image. Retailers realize that private label products are an extension of their image and are increasingly taking an interest in the actual packaging technology selection. Like other packaging decisions, private label packaging decisions are based on the retailer’s desired product position and pricing strategy. Exhibit 26. Industry Participant Influence

Industry Participants' Roles 51

“We expect innovations from our suppliers in the way of both products and packaging. We have the last call on what we will accept; however, we leave the actual packaging development to them.” -Structural Packaging Manager, major club store

Consumer Product Goods Company (CPG) In order to remain fresh in the eyes of both consumers and retailers, CPG’s work with packaging manufacturers for the development of innovative packaging. However, retailers exert a growing influence on packaging that is increasing the complexity of CPG’s typical operations. Retailers request and require changes in package offerings, and CPG’s are approached regularly for new ideas. The CPG’s marketing/procurement group and consumer packaging team typically get involved in developing new initiatives, supported by design agencies. These teams generally understand what packaging options are available to them but work collaboratively with packaging manufacturers for innovations in packaging technology. A retailer may want something specific and may work in collaboration with consumer goods companies to find solutions. Various retail segments also look for product size/weight (size) to be a differentiator for its offerings from single serve or portion packs to large formats and club sizes. Product vendors may not have the needed flexibility in their packaging lines. CPG’s usually prefer to run products and packaging at their own facility, but this is not always feasible. For example, promotions may require the CPG’s to hand pack items or use contract packagers. Contract packagers are increasingly being used by CPG’s to meet demands for product customization. Customized retailer packaging is and will continue to make CPG operations more complex in the future. Packaging Manufacturers Packaging manufacturers provide the R&D and investment for packaging innovation and influence end-user consumption and retailers’ operational efficiency through packaging designs. With long term investments in new materials, resins, manufacturing technology as well as packaging systems for the end-user, many suppliers have strong marketing groups that work interactively within the industry. Long term relationships have fostered innovations through cooperative effort leading to packaging innovations that improve shelf life, functionality, convenience, shelf appearance - a whole range of possible features and benefits.

52 Industry Participants' Roles

Source: Strategic Analysis Inc.

RETAILER DIRECT INFLUENCE IN PACKAGING In some instances, retailers have a direct involvement in packaging technologies and with suppliers. Three such examples of special requests are Wal-Mart’s insistence that its major suppliers participate in its RFID program, Wal-Mart’s request for more foil blister packaging for pharmaceutical packaging, and Wal-Mart’s request for sustainable packaging. Retailers have their greatest level of involvement/influence when it comes to their own private label brands. Retailers may ask for their private labels to be similar to the national brand, but this is changing. Some companies going for a premium package will develop the concept and select packaging technology. This practice will continue to grow. Packaging technology and capital constraints can become an issue at some point. In the past, mass merchandisers asked CPG’s to change product net weights at different times to meet certain targeted price points. Now, specific packaging designs/formats are selected and can become unique to the retailer. Custom case counts, display cartons to support flexible packaging, and a host of other options are increasingly part of the mix. Operational issues such as product handling and overall appearance on the retailer’s shelves (multipacks versus stocking trays): Overall, very few instances of problem packaging have been identified by the retailers interviewed for this study. However, retailers suggest a few key areas for improvement:

More effective easy open and reclosable features, particularly for fresh items

Reinforced seals and hole punches for peggable products

Stronger stretch film to decrease amount of waste for wrapping pallets

Stronger and more durable bag products for mulch and soil

Products with improved tear resistance and less leaking

Retailer Point-To-Point Handling -- Supply Chain and Display Efficiencies The retail buying agent is responsible for purchasing products that sell, and to do so in a way that optimizes how the retailer handles products. Retailers set shipping and operating standards to which CPG’s must strictly adhere. The shipping standards have an impact on primary, secondary, and tertiary packaging. However, the ultimate decision on the material to be used is dependent upon the product being packaged and the role the package is to fulfill within the retail store.

Exhibit 27. Retailer Direct Influence

Retailer Direct Influence in Packaging 53

An example is club stores that request the minimization of waste. Based on this request, CPG’s look to combine secondary and/or tertiary packaging to meet requirements for structural integrity, while creating a design where the consumer takes all packaging and shipping material out of the store with the purchase of the product. This type of design minimizes waste, clean-up time, and ultimately, cost. “There are over 2,000 SKUs on our shelves. High impact graphics and packaging impact are hands down the most important thing for selling drug store products in general.”

-Purchasing Manager, pharmacy chain

“Wal-Mart doesn’t demand anything unusual from us in the way of structural packaging such as a radically shaped or designed cereal box. What they do ask us to do, however, is to do things that make their life easier and/or reduce their costs. Functional things such as use less corrugated or make the cases smaller.”

-Director of Packaging Innovations, major snack food producer

Retailers, especially mass merchandisers, also look at packaging from a handling efficiency point of view. This includes all points from the CPG production facilities and distribution network, to the retailer’s warehouses, stores, and ultimately to the shelf. Minimizing “touch” at any point along the chain translates back into operating efficiencies and higher margins. Traceability is also important. A few efficient distribution practices include:

Just-in-time (JIT) delivery scheduling

o JIT scheduling is a standard procedure for all companies, but only Wal-Mart is currently implementating RFID technology for operating cost saving purposes

Shoppable pallets

o Key to club store strategy and sales, but also found at some mass merchandisers for high-volume promotional offerings

PDQ floor displays

o Free standing displays usually associated with corrugated box applications and used for small volume special promotions

Shelving trays

o Shelf readiness is an efficient form of shelf stocking, but not practiced by all retailers

Aisle hangers

o Display of promotional items hanging from shelf columns in the aisles

54 Retailer Direct Influence in Packaging

For example, Target has a conveyable case rule. Every product has to be in a case that is easily transferred and moved via conveyors within Target’s distribution network. Conveyable cases allow the retailer to efficiently and cost effectively break up cases as needed. Target has also moved away from shelving trays, stating that these displays portray a disheveled shelf appearance. This trend will cause an increase in standup pouches or other technologies that provide a similar “billboard effect.” Similarly, Target is moving toward smaller volume multipacks because they make the shelves look cleaner and increase the overall dollar ring for a single purchase. Historically, product sales to consumers have only been through the retail store itself. However, with the continued growth of internet sales, retailers have to take into account handling of products going through the mail and other third-party couriers. The packaging issues that actually developed are more associated with product protection and flexibility of packaging to handle the many variations of ordered items. Key developments have mainly focused on tertiary packaging that can be shipped via mail or third-party courier. Consumers’ Influence on Retailers Since only the consumer makes the purchase decision, retailers make an effort to understand consumer preferences, needs, and dynamics to refine their image, product mix, and subsequent packaging requirements. A retailer’s merchandising strategy has a direct impact on the products that are sold and the look of the store. Retailers also optimize their operations to minimize cost, but in a way that is being used to support their merchandising strategy and to maintain revenue. For example, retailers have typically made a conscious decision between:

Bulk vs. non-bulk product sales – which impacts their attitudes toward:

o Club-pack, multi-pack, bonus pack and/or bulk packaging versus single unit packaging

Clean floor vs. non-clean floor policy – which impacts their attitudes toward:

o End-caps and aisle hangers versus shoppable pallets and other floor displays

Target has a “clean floor policy” and does not allow shoppable pallets or PDQ floor displays in its stores.

Wal-Mart continues to promote: Shoppable pallets, PDQ floor displays, aisle hangers, and aisle end caps. The choice of flexible packaging and possible display cartons has to work with these practices. Similarly, Wal-Mart is always looking for ways to reduce shelf stocking time, so shipping cartons that can be used to display smaller items is important.


Exhibit 28. Retailer Positioning and Consumer Preferences


RETAIL GROWTH - FOREIGN SOURCES Imports of finished goods by retailers have increased and are expected to continue to grow, particularly from China and India. Exhibit 29. Global Sourcing by Retailers

Retailers explain their motivations to source from lower-cost overseas markets as vehicles to achieve long-term financial success and to offer their customers a broader selection of quality products.


“Global sourcing of the many products we sell is an important factor in our financial performance.”

-Wal-Mart 10K 2005 “We source from the global market to offer our customers who live paycheck to paycheck the greatest value for their money on many essential products. To do this, we buy, in addition to the United States, from many regions such as Africa, Asia, Europe and Latin America.”

-Wal-Mart web site “We maintain a global sourcing merchandise program to source high-quality products directly from manufacturers. This gives our customers a broader selection of innovative products and better products, while enhancing our gross margin.”

-Home Depot 10K 2005 “In the future, we expect purchases from our global sourcing offices to increase as a percentage of total purchases. We also believe that the expected increase in our global sourcing volumes will help drive gross profit rate improvements by lowering our overall product cost.”

-Best Buy 10K 2005 “Best Buy considers global sourcing to be a fundamental contributor to the sustained, long term success of the company.”

-Executive VP-Supply Chain and CIO, Best Buy

Wal-Mart’s largest foreign sources in 2004 were:

Rank Country Comment

1 China $18 billion ($9 billion direct, $9 billion indirect) in 2004

2 India

Its sourcing from India increased 30% CAGR between 2001-2004 and is expected to reach $300 million in 2005. Besides importing textiles (apparel, home furnishings), leather, and jewelry, it is exploring the food sector too.

3 Malaysia It plans to increase purchases of Malaysian goods by 20% in 2005 from $200 million in 2004.

- Other Brazil, Pakistan, Thailand, Italy, and Costa Rica


Wal-Mart reportedly plans to cut 20% from its procurement costs over the next five years. Only 10% of Wal-Mart’s purchases are currently sourced directly from factories. By buying direct and using its own distribution network, Wal-Mart bypasses purchases from traditional CPG’s and passes some savings on to the customer.

“Quite frankly, we’re late to the party. But we could easily double the 10% penetration rate (of purchase direct from the factory).”

-Senior Vice President for Global Procurement, Wal-Mart

Home Depot’s largest foreign sources in 2002 were:

Rank Country Comment

1 China 10 years of experience in China

- Other ~40 other countries

Home Depot intends to grow its imports to 10% of the sales in its stores. Target’s key foreign source is also China. “After achieving a 100% increase last year over the previous year, our procurement from the mainland (of China) is expected to double again this year (despite a larger base) by value. A 50% to 75% year-on-year growth can be expected in 2004.”

-Director-Sourcing Services, Target

JC Penney’s sourcing of apparel, including home textiles, from India is expected to increase three times to about $600 million in the next 2-3 years compared to the current (2004) level. Retailers with global sourcing offices in China, specifically, include:

Wal-Mart

Home Depot

Target

Best Buy

Other


Impact on domestic packaging manufacturers include:

1. Many historically domestic packaging opportunities have moved overseas. If the packaging supplier has not moved operations to exporting regions, it has lost the business.

2. Due to increased transportation distances, there is an increased requirement for protective packaging.

3. Flexible packaging which extends product life properties will have increased opportunities as imported food products continue to grow.

4. All imported products need Country Of Origin Labeling (COOL).

5. Imports are not just limited to textiles and durable goods. For example, U.S. imports of pharmaceutical products and select food products have all increased at double digit rates between 2002 and 2004. This is important to realize, because pharmaceuticals and food represent significant markets for flexible packaging. For example, food alone accounts for more than half of the consumption of flexible packaging consumed in retail applications in the United States.

As imported products increase in sales, so too does the need for flexible packaging. If packaging manufacturers have not moved with CPG’s that have gone overseas then these companies see decreasing revenues. Packaging manufacturers may also be losing out on potential packaging opportunities if they do not have established operations in major countries exporting to the United States. Issues Facing Packaging Suppliers One of the major issues facing packaging suppliers is sourcing of plastic materials that meet U.S. standards. Plasticizer and monomer levels, as well as print process, must be monitored to ensure compliance. Responsibility for packaging to meet regional and federal regulations remains with the packaging manufacturer.


IMPACT ON FLEXIBLE PACKAGING

This section considers the impact of key trends on flexible packaging use and growth. Outlined below are specific trends within general categories that promote the increased use of flexible packaging technology. Each of these specific trends is discussed on the following pages. Exhibit 30. Trend Analysis in Flexible Packaging Applications

“Trend Drivers” outline key drivers that have an influence on the market and invoke an action by retailers or consumer good companies (CGC’s).

“Trends” highlight actual trends being implemented in response to trend drivers, which help meet retailer and CGC needs. These actions are specific applications that directly influence packaging technology.

“Impact on Flexible Packaging” provides the packaging technologies that will be impacted by the identified trends.

The segment overview box identifies the retail segment affected by the trend, and the relative impact the trend will have on the noted retail segment (high, moderate, low).

Impact on Flexible Packaging 61

PACKAGING FORMAT BLISTER PACKAGING Exhibit 31. Blister Packaging Wal-Mart made a direct decision over the packaging technology used. It asked for more blister packaging to be used for prescription drugs because it provides:

Dosage compliance so the consumer is not confused about how much medication to take, and when to take it

Additional space for advertising the drug, and more room for product information on the package

A labor cost savings -- pharmacist does not have to count out pills, and therefore can fill more prescriptions in a shorter amount of time.

Blister packaging is for foil backing only, NOT with paperboard backing. The U.S. prescription and generic drug market is $225 billion and growing at 6% annually. With new drugs coming on the market and a change-over of some existing packaging to blister packaging, blister packaging applications are forecast to grow 10% to 15% per year. Since Wal-Mart has been successful in obtaining blister packaging, it is likely that use will spread more rapidly in other areas.

62 Impact on Flexible Packaging

MULTIPACKS Exhibit 32. Multipacks

There are many aspects to multipacks that will help fuel the increased use of shrink film and overwrap. Multipacks have traditionally been utilized in club stores but continue to move into mass merchandisers and grocery stores. Key attributes of multipacks include:

Decrease stocking cost:

o More products are placed on the shelves quicker than through individual product stocking, saving time and thus, labor cost

Increase dollar ring:

o Packaging provides a sense of perceived value and increases the individual dollar ring, as a consumer may walk out of the store with 6 individual units instead of only 2 or 3


Clean self-appearance

o Target has moved toward multipacks as a means to provide a neat shelf appearance, compared to the disheveled look of stocking trays. Target no longer allows stocking trays in its stores.

Billboard effect:

o Multipack overwrap and shrink film provide a large advertising area with shelf-popping graphics

Club stores continue to push larger unit multipacks but also provide smaller unit single serving

multipacks. Mass merchandisers and grocery stores are now using smaller unit multipacks as a

way to achieve the aforementioned packaging attributes.


BUNDLING- PREPARED FOOD Exhibit 33. Bundling -- Prepared Food

Bundling of products has traditionally been common at club stores but is becoming more commonplace in grocery stores and mass merchandisers. Product combinations include prepacked deli platters, vegetable platters, and assorted cheese and chip platters, to name a few items. Key reasons for bundling include:

Convenience for the on-the-go consumer who does not have time to shop

o Pre-packaged fruits and vegetables (e.g. apples, oranges, broccoli, tomatoes, etc.)

Positive perception among consumers who are looking for value-added product offerings

o Unique combination of product offerings fits with the consumer’s demand for convenience

In order to maintain product freshness and convenience, the following flexible packaging technologies will benefit from this trend of bundling prepared food:

Breathable films

Film lidding

Lay flat bags

Resealable bags

Mesh netting


BUNDLING- CLUB PACK Exhibit 34. Bundling -- Club Pack

Bundling in “clubpacks” are specific to club stores. Clubpacks are complimentary products bundled to provide the consumer with a sense of perceived value. Clubpacks include such complimentary products as a basting brush with the purchase of two jars of BBQ sauce. This format has been successful and will continue to grow. Bundling of clubpack products will mainly utilize shrink film and overwrap as the key secondary package form.


FOOD PACKAGING

PRE-PACKAGED MEAT Exhibit 35. Pre-Packaged Meat

Food is a major application for flexible packaging, and meat and poultry packaging is a strong growth area within the overall food market. Meat/poultry is the number one consumer spending grocery segment and is considered a key consumer destination point by many retailers. Growth in pre-packaged meat is driven by:

Consumer convenience where many households find value in the pre-marinated and pre-cut products. Pre-packaged meat and poultry decrease both shopping time and preparation time for cooking meals.

Retailers realize cost savings and increasing product quality since they do not have to employ as many butchers at individual retail locations. Decreasing the need for butchers is also advantageous because the grocery industry is experiencing a decreased level of skilled labor.

Offering case-ready meat also increases the number of SKU’s being offered to the consumer, which adds value.

Case ready meat will continue to grow based on convenience but will also grow as leading mass merchandisers without in-house butchers continue to sell meat products to consumers. For example, Wal-Mart, now the #1 grocer, only offers meat in case-ready format. Pre-packaged meat requires advanced multi-layered films with seal-through properties and barriers, combined with the need for superior toughness and puncture resistance.


PRODUCE Exhibit 36. Produce

Produce is one of the largest areas of consumer spending for food, and grocery stores still account for 81% of total retail produce sales. Over 90% of baby boomers claim that high-quality produce is the priority feature in an ideal grocery store. Furthermore, baby boomers control roughly 50% of total spending power in the United States. Retailers are investing heavily in the display merchandising of fresh and organic produce , a major growth area for flexible packaging and FPA members. These statistics, coupled with trends in portion control, dieting, organic produce offerings, and convenience, support growth in many differing packaging areas within the produce section of the store. Even the store benefits from cost savings resulting from increased shelf life and less spoilage and waste. Key flexible packaging technologies that will experience increased consumption include:

Breathable films

Resealable bags

Film and foil lidding

Lay flat bags


DAIRY Exhibit 37. Dairy

Dairy consumption actually decreased in volume in 2004, but grew in annual revenues due to increased pricing of products. Value-added product offerings, dietary trends, and on-the-go lifestyle demands have led to advancements in flexible packaging. Examples of growth applications for packaging include various forms of:

Milk-based smoothie products Dairy-based creamers Yogurt Cheese Prepackaged dairy products (e.g. shredded, cubed, sliced cheeses)

These trends will continue to push demand in the following packaging areas:

Resealable bags Shrink sleeves Foil lidding Quality barrier films Resealable, lay flat, peggable bags


FREEZER Exhibit 38. Freezer Section

The need for convenience is fueled by dual income families, longer working days, and longer commuting time to and from work, which causes less time for shopping and/or preparing meals. Need for consumer convenience in shopping and meal preparation is pushing growth in home meal replacements and on-the-go meal products from the freezer section of traditional food and convenience stores. Packaged freezer products are in the early stages of a surge back to flexible packaging. New products like meal kits in gourmet, value, ethnic, and lower calorie formats are increasing. Flexible packaging provides sharp graphics and protects against product loss during the normal cooling and thawing products go through before reaching the retailer. Key flexible packaging technologies benefiting from growth in this area include:

Metallized film bags Dual ovenable bags Resealable freezer bags Form-fill-seal pouches Microwaveable films


COFFEE, CHOCOLATE, CIGARETTES Exhibit 39. Essential Luxuries

Some products are too important to consumers for price to become a hurdle in their purchase decision. Coffee is one example of a product that is price inelastic. Consumers will pay the additional price, and therefore, pay for the value-added packaging for such products as coffee and other indulgent items like chocolate and cigarettes. Key flexible packaging materials associated with price inelastic products like coffee include:

Foil brick packs

Metallized films

Resealable packaging such as:

o Press-to-close

o Zipping solutions

o Dead fold products


SHELF STABLE FOODS Exhibit 40. Shelf Stable Foods In order to satisfy consumer convenience and on-the-go lifestyle needs, some non-traditional products are utilizing shelf stable packaging. Ready-to-eat bacon, microwaveable sandwiches, some dairy products, and beverages are being packaged in various shelf stable formats. Growth in these flexible packaging technologies is expected:

Aseptic packaging High quality barrier films Microwaveable films Retort packaging Stand- Up Pouches

Retailers look forward to more growth in retort pouches – the success of this packaging continues to impress. When the retort pouch for tuna was introduced, many shoppers and marketers questioned the much higher price point, almost double the price of the can. Once purchasers tried the new package, the pouch quickly became the preferred product. Consumers saw the value of eliminating problems with opening small cans and sharp edges. The retort pouch was far more portable for work or school, easy to open, and far less messy. The retort pouch easily became the category standard for tuna – with only basic generics remaining in the can format. Consumers noticed better taste and texture, due to shorter processing times. Many canned products benefit from the shorter processing times, particularly vegetables. In Europe most vegetables, soups, and sauces are available in a retort pouch or carton. Look to this growth area as one in heavy demand and high regard by retailers.


NON-FOOD PACKAGING

HEALTH AND BEAUTY Exhibit 41. Health and Beauty/Pharmaceutical Packaging

Health and beauty aids and pharmaceuticals are major revenue generators for drug stores, as well as mass, grocery, and convenience channels. All retailers are faced with the issues requiring strong shelf pop and the need for more clear product directions and other general product information. Some retail formats have more shelf space available than others, but shelf space is always an issue. Based on limited shelf space and the need to promote smaller size products, shrink sleeves and expandable labels are seen as strong packaging technologies moving forward. Film lidding is also an evolving technology. For example, one leading disposable razor is now packaged in PET trays with film lidding. Film lidding provides eight color graphics and product information. Film lidding also offers a clear view of the product inside.


HEALTH AND BEAUTY Exhibit 42. Health and Beauty/ Convenience Pharmaceutical Packaging

Consumption of single use (disposable) and travel size products is increasing due to consumers’ on-the-go lifestyle and traveling requirements and easy-to-use product options. Examples include:

Individually packaged whitening strips and night-time gel packets

Front of store displays carrying dollar bin sample/travel size hair products

Flexible packaging technologies utilized by single use and travel size products include:

Single use metalicized film packages

Film lidding

Lay flat, resealable bags


PETFOOD

Exhibit 43. Pet Food

Pet food is a growing area for many retailers, and various dynamics taking place impact the packaging that is used. Mass merchandisers have limited space for pet food, and some have decreased the retail space for pet food to allow for other more value-added pet products. Space constraints have led CGC to create more shelf impact with packaging, such as the billboard effect created though shrink film in smaller unit multipacks and standup pouches. Petco, PetSmart and other category killers that specialize in pet supply products carry higher-end pet food lines that are not available in other retail segments. Because consumers make a special trip to these stores to obtain specialty pet food, they will pay more for the product, including the higher-quality packaging. Category killer retail segments are a good area for the packaging manufacturer to obtain higher margins and to promote packaging materials. Flexible packaging materials experiencing growth in this segment include:

High quality barrier film bags Resealable pouches Shrink film More heavy duty material options Handles and carrier options for larger formats


LAWN AND GARDEN Exhibit 44. Lawn and Garden

As lawn and garden retailers continue to move more merchandise outside, their requirements for waterproofing films will increase. In addition, prevention of leaks and spills is a major issue in the lawn and garden center. However, most retail buyers are hesitant to increase the price of their product for value-added packaging, because they don’t know if the consumer is willing to pay extra when buying soil, mulch, etc. (This is a good example of where consumer research could play a role in pushing packaging technology.) Specialty lawn and garden centers are more likely to carry higher-quality packaging for basic products than larger chains or mass merchandising stores. Packaging materials experiencing growth in this segment include:

Stronger ply bags

Resealable pouches

Waterproof films


Promotion and Display

Exhibit 45. Dollar Bins

Dollar stores became popular during the economic down-turn in the 2001 time period but have continued to show strength as the U.S. economy recovers economically. The dollar store concept has now become a popular way for other retail segments to:

Introduce new products or samples and to create brand awareness with the consumer

Bring foot traffic into the store, in hopes that other purchases will be made

Because of the low cost nature of dollar products, packaging must be low cost. However, as use of the dollar format grows, so will the consumption of:

Lay flat bags

Light gauge shrink film

Wrappers

Blister packs


SHELF IMPACT Exhibit 46. Shelf Impact

Strong visual graphics is one key aspect that is required for successful product merchandising and sales. “Shelf popping” effects bring recognition to the product and are successful when targeting point-of-purchase sales to the impulse buyer. Successful graphics provide a visual impact with the consumer. The more product area that is visible to the consumer, the more the advertising can affect them. Therefore, packaging that helps promote a strong visible image is ideal. Almost all forms of flexible packaging have the potential to provide shelf-popping, vivid graphics, but good examples of flexible packaging with the good visual impact include:

Shrink films

Shrink sleeves

Standup pouches

These products help create the “billboard” effect and are typically used with freestanding products to create a large single area for promotional messages.


PROMOTIONAL DISPLAYS Exhibit 47. Promotional Displays Promotional displays include:

Shoppable pallets

End caps

Aisle hangers

Floor displays (PDQs)

Promotional displays are used in all retail segments but most notably at mass merchandisers and grocery stores. They can also be found in club stores and category killer stores but to a lesser extent. Only a few displays appear in drug and convenience stores. Store chains typically set their “floor policy” to mirror the company’s merchandising strategy. For example:

Wal-Mart’s everyday low price merchandising strategy is enhanced by promotional offerings throughout the store which are displayed in all forms including shoppable pallets and PDQs.

Target on the other hand promotes a “clean floor policy,” which fits its merchandising strategy of a more upscale image when compared to Wal-Mart. Target will not place pallets or PDQ’s on its floors. It will, however, promote products via aisle hangers and end cap displays.


Common promotion/packaging

Mass Merchandiser

U.S. Retail Sales 2004,

$ Billion

Merchandising Strategy/ Image

Clean Floor Policy

Shoppable Pallets

PDQ Floor Displays

Aisle Hangers

End Caps

RFID

Wal-Mart $192 “Everyday low

price”

No X X X X X

Target $47 Quality over price Create brand image

Yes-a - - X X -

Kmart $20

“High/Low” (higher everyday prices, but deeper cuts on promotional items)

No-b X X X X -

Meijer $12 “High/Low” No X X X X -

a- In keeping with its clean image, Target banned the use of shelf ready trays citing unnecessary additional clean-up and an overall disheveled look to shelves.

b- Company is currently changing its policy and moving toward a clean floor policy.

Use of these flexible packaging products will benefit from the increasing use of promotional displays overall:

Stretch film

Peggable lay-flat bags

Shrink Film

Stand Up Pouches


SUPPLY CHAIN EFFICIENCIES Exhibit 48. Supply Chain Efficiencies (RFID, etc.)

Radio Frequency Identification (RFID) is a new product tracking and inventory management tool. RFID is slated to revolutionize supply chain management in the retail sector. RFID will be used to better capture customer insights and to increase convenience at home and during shopping trips at the store. One of the expressed goals of RFID is to obtain better knowledge of consumer purchasing habits and to incorporate smart technology in home appliances and shopping devices that will interact with the product purchased by the consumer. However, front-of-store consumer analysis is currently being scrutinized in strong public privacy debates, as the technology would allow retailers to track products all the way back into the consumer’s home. Wal-Mart currently requires that its top 100 vendors provide cases and pallets tagged with RFID labels. In approximately 7 years, Wal-Mart believes its use of RFID will save the company $8 billion in annual cost. RFID is expected to provide more efficient production planning, reduce inventory, provide faster demand response, improve counterfeiting protection, and be able to more efficiently target recalls. RFID improves the traceability of the product throughout the entire distribution network. Source tagging is a form of anti-theft tag, similar to RFID, which can be remotely monitored and improves traceability. These tags are placed on furniture before being sent to the retail location, which saves time and money, as store personnel do not need to place individual tags on each piece of furniture when it is shipped to the store.


SHIPPING AND DISPLAY EFFICIENCIES

Exhibit 49. Shipping and Display Efficiencies

As supply chain dynamics and major operational cost savings come to the forefront of retailers attention, so too will the forms of packaging required to meet these demands. Efficiencies in point-to-point handing include:

Decreased handling cost as the number of times a product is handled decreases.

Speed of shipping and handling between the distribution centers (DCs), retailer stores, and shelf stocking. Examples include PDQs and shoppable pallets that are shipped in the same material and form as displayed for sale.

Some retailers demand conveyable cases to make sure pallets are quickly and efficiently broken down at the retailer’s DCs before being shipped to the individual stores; thus saving time and money.

Stretch film, shrink film, pouches and peggable lay flat bags are all examples of flexible packaging that will benefit from increased emphasis on point-to-point handling.


SUMMARY: RETAILER IMPACT ON PACKAGING DECISIONS

Flexible packaging is currently a strong and positive aid to retailers. Based on key growth markets across the retail channels, retailers will utilize more and more flexible packaging to provide better shelf impact, product differentiation, as well as improved consumer and product performance.

The retailer has become the ultimate product marketer at the expense of the CPG’s position. The reason is that 80% of consumer purchase decisions are made in-store and retailers have a strong new base in consumer understanding – UPC scanner data.

Package display formats at retail will continue to drive consumer purchase.

Packaging is a key enabler and driver for the retailer.

Consumer lifestyle demands, preferences, demographics, and the desire for new products influence what goods consumers expect and will ultimately purchase.

Successful retailers are looking for value added packaging solutions that do not compromise performance.

Packaging with Shelf Impact is valued by retailers and drives sales.

Health and wellness have driven impressive growth to fresh and organic retail channels and big changes in retailer thinking about packaging.

Convenience is driving retail packaging: portability, single portion, convenient to use, ready to eat or reheat, better opening and reclosability features.

More affluent consumers are heading to Costco and Target. Both retailers use a strong, differentiated packaging approach for target consumers.

Retailers have continued to increase their level of influence on packaging decisions. It’s not just about cost – it’s about finding value-added solutions.

Wal-Mart is asking suppliers to step outside current thinking and consider change in materials, formats, technology, or supply chain that can lead to better packaging solutions.

A growing number of retailers understand and control Private Label Packaging – nearly one out of every four products purchased from a U.S. retail channel ─ mass merchandiser, drug chain, or supermarket ─ is a Private Label product.

Private Label places CPG’s in direct competition with retailers for sales and shelf space.

Summary: Retailer Impact on Packaging Decisions 83

Retailers exert a growing influence on packaging that is increasing the complexity of CPG’s supply chain and packaging operations.

Wal-Mart currently requires that its top 100 vendors provide cases and pallets tagged with RFID labels. In approximately 7 years, Wal-Mart believes its use of RFID will save the company $8 billion in annual cost.

Wal-Mart’s largest foreign sources in 2004 were China for $18 billion dollars, and India for $300 million directly impacting flexible packaging sales.

84 Summary: Retailer Impact on Packaging Decisions

APPENDIX A: VERBATIM QUOTES “We dictate packaging needs to consumer goods companies all the time. We will select the size

we want and how many are in the pack, but we do not generally dictate packaging technology.” -Merchandise Manager, national pharmacy chain

“There are over 2,000 SKUs on our shelves. High impact graphics and packaging impact are

hands down the most important thing for selling drug store products in general.” -Purchasing Manager, pharmacy chain

“We maintain a global sourcing merchandise program to source high-quality products directly

from manufacturers. This gives our customers a broader selection of innovative products and better products, while enhancing our gross margin.”

-Home Depot 10K 2005 “In the future, we expect purchases from our global sourcing offices to increase as a percentage

of total purchases. We also believe that the expected increase in our global sourcing volumes will help drive gross profit rate improvements by lowering our overall product cost.”

-Best Buy 10K 2005 “Best Buy considers global sourcing to be a fundamental contributor to the sustained, long term

success of the company.” -Executive VP-Supply Chain and CIO, Best Buy

“We expect innovations from our suppliers in the way of both products and packaging. We have

the last call on what we will accept, however, we leave the actual packaging development to them.”

-Structural Packaging Manager, major club store “As far as packaging goes, I largely defer to what P&G, J&J, etc. decide. They are very smart at

making the right decisions regarding packaging.” -HBA and Personal Care Buyer, major club store

“The consumer goods companies dictate the packaging technologies used. Only in rare

occasions do we ask for special packaging to be designed.” -Senior Buyer -- Dry Groceries, major mass merchandiser

Appendix A: Verbatim Quotes 85

We don’t dictate a package’s design or material. The only time we dictate packaging (to the CGC) is to point out packaging defects or informational deficiencies on packaging.”

-Category Manager, major grocery chain

“Global sourcing of the many products we sell is an important factor in our financial performance.”

-Wal-Mart 10K 2005

“We source from the global market to offer our customers who live paycheck to paycheck the greatest value for their money on many essential products. To do this, we buy, in addition to the United States, from many regions such as Africa, Asia, Europe and Latin America.”

-Wal-Mart web site “Quite frankly, we’re late to the party. But we could easily double the 10% penetration rate (of

purchase direct from the factory).” -Senior Vice President for Global Procurement, Wal-Mart

“After achieving a 100% increase last year over the previous year, our procurement from the

mainland (of China) is expected to double again this year (despite a larger base) by value. A 50% to 75% year-on-year growth can be expected in 2004.”

-Director-Sourcing Services, Target

“With this change to (sustainable) packaging made from corn, we will save the equivalent of 800,000 gallons of gasoline and reduce more than 11 million pounds of greenhouse gas emissions."

-Vice President for Product Development and Private Brands, Wal-Mart “The club stores and mass merchandisers tell us what they want in packaging (overall), but they

don’t really know what they want (specifically). They expect us to come up with the innovations.”

-Packaging Purchasing Manager, major consumer goods (food) company “Wal-Mart doesn’t demand anything unusual from us in the way of structural packaging such as

a radically shaped or designed cereal box. What they do ask us to do, however, is to do things that make their life easier and/or reduce their costs. Functional things such as use less corrugated or make the cases smaller.”

-Director of Packaging Innovations, major snack food producer

86 Appendix A: Verbatim Quotes

APPENDIX B: REPORT PREPARATION This market research report on The Impact Retailers Have on Packaging Decisions prepared by Strategic Analysis Inc. in October 2005 was expanded for the Flexible Packaging Association (FPA) by Packaging & Technology Integrated Solutions, LLC (PTIS). At the request of FPA, this report was amended in April 2006, to focus on the new role of retailers and their significant impact in driving packaging decisions that meet consumer needs and expectations. The packaging and technology issues facing retailers, CPG’s, and packaging manufacturers have been studied comprehensively by PTIS, who provide a range of consulting expertise across the industry. PTIS is recognized globally for its understanding of the retail transformation at hand and its direct influencing on packaging and technology. PTIS prepared the first sections of the report, including discussion of the consumer purchase decision and moments of truth, as well as retail channel analysis, private label and natural/organic sections, trends influencing retailers, and trend packaging implications. The second sections of this report including packaging discussions of industry participants, retailer influence, global sourcing is based on information and research presented at the FPA 2005 Fall Executive Conference prepared by SAI, obtained using the methodology described below. The research information presented by SAI was edited by PTIS in preparation of this final report.

METHODOLOGY USED BY SAI The project objective was to examine and evaluate dynamics involving influences and demands of retailers and their impact on packaging decisions. Specifically, an objective is to determine the wants of the high-volume retailer categories and how they impact consumer products (packaging) based on the retailers’ policies/trends outlined on the following page:

Appendix B: Report Preparation 87

Scope Description

Product Flexible packaging as defined by FPA Trash and storage bags are excluded from the study

High-volume retailer (HVR) industry categories

1. Mass merchandisers/superstores 2. Grocery chains/stores 3. Club stores 4. Convenience stores 5. Drug stores

6. Specialty stores/“Category killers" (e.g. Big Box)

7. Department stores (overview only)

8. Internet (overview only)

Policy/Trend category examples

1. Sourcing strategies (both regional and global)

2. Global innovation and packaging trends

3. Imported consumer products 4. Private labels

5. Importance and functionality of packaging

6. Consumer shopping habits 7. Shelf organizers 8. Industry changes and trends

Geographic U.S. retailer industry However, influence of foreign markets on applicable trends will be addressed

as necessary

Time period Historical: 2002 to 2004 Future: 2005 to 2010

Unless stated otherwise, all figures in this document are U.S.$ in 2004 All retail figures are for U.S. retail sales only in 2004

88 Appendix B: Report Preparation

SAI’s Approach The Flexible Packaging Association (FPA) commissioned SAI to investigate the eight retail segments listed below. Note that FPA chartered SAI to only use secondary (published) data for two segments -- “department stores” and “internet”:

SAI’s information sources-a

Retail category High-volume retail segment

Secondary (published) data

Primary (field) research

Traditional Grocery (or supermarket) X X

Mass merchandiser (or superstore) X X

Category killer (or specialty store) X X

Drug store (or pharmacy) X X

Department store X -

Convenience store (or C-Store) X X

Club store (or warehouse club) X X

Non-traditional Internet X -

a- As commissioned by FPA As designed and agreed upon by FPA, SAI conducted no consumer interviews. Insights into consumer trends are drawn from secondary (published) data and interviews with individuals within organizations that conduct their own consumer research. To complete this assignment, SAI used a combination of:

Secondary (published) data

Ninety-nine interviews with key industry participants

Guidance from the FPA Task Force


Organizations Interviewed SAI interviewed an appropriate mix of business organizations throughout the value chain, including mostly retailers and consumer good companies (CPG’s) and a few government sources and packaging manufacturers, as detailed below.


SAI interviewed 75 individuals within 37 major retailers and 16 individuals within 11 leading consumer goods companies. Representative Functions Interviewed SAI reached an appropriate mix of functions within the organizations interviewed; as described below, individuals are key decision makers or influencers within their organizations when it comes to packaging and related issues.


retailer report packaging

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